10-K405

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

ý	Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001.
o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the the transition period from                          to                         .

Commission file number:  0-21088

VICAL INCORPORATED
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	93-0948554 (IRS Employer Identification No.)
9373 Towne Centre Drive, Suite 100 San Diego, CA 92121-3088 (858) 646-1100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

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

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

Title of Each Class Common Stock, $0.01 par value Name of Each Exchange on which Registered Nasdaq National Market

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock reported on the National Association of Securities Dealers Automated Quotation National Market System on March 15, 2002, was approximately $169,654,000.

        The number of shares of Common Stock outstanding as of March 15, 2002, was 20,071,344.

DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)

        Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the solicitation of proxies for the Registrant's 2002 Annual Meeting of Stockholders to be held on May 24, 2002, is hereby incorporated by reference in Part III of this report.

FORWARD-LOOKING STATEMENTS

        The statements incorporated by reference or contained in this report discuss our future expectations, contain projections of our results of operations or financial condition and include other "forward-looking" information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our actual results may differ significantly and materially from those expressed or implied in forward-looking statements made or incorporated by reference in this report. Forward-looking statements that express or imply our beliefs, plans, objectives, assumptions or future events or performance may involve estimates, assumptions, risks and uncertainties. Therefore, our actual results and performance may differ significantly and materially from those expressed in the forward-looking statements. Forward-looking statements often, although not always, include words or phrases such as the following, or the negative of such words or other comparable terminology:

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"will likely result,"



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"are expected to,"



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"will continue,"



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"is anticipated,"



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"estimate,"



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"believe,"



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"predict,"



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"potential,"



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"intends,"



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"plans,"



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"projection," and



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"outlook."

        You should not unduly rely on forward-looking statements contained or incorporated by reference in this report. Actual results or outcomes may differ significantly and materially from those predicted in our forward-looking statements due to the risks and uncertainties inherent in our business, including risks and uncertainties in:

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clinical trial results,



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obtaining and maintaining regulatory approval,



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market acceptance of and continuing demand for our products,



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the attainment of patent protection for any of these products,



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the impact of competitive products, pricing and reimbursement policies,

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our ability to obtain additional financing to support our operations,



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the continuation of our corporate collaborations, and



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changing market conditions and other risks detailed below.

        You should read and interpret any forward-looking statements together with the following documents:

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our Quarterly Reports on Form 10-Q,



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the risk factors contained in this report under the caption "Additional Business Risks," and



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our other filings with the Securities and Exchange Commission.

        Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made, unless required by law.

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PART I

ITEM 1. BUSINESS

Overview

        We are focused on the development of biopharmaceutical products based on our patented gene delivery technologies for the prevention and treatment of serious or life-threatening diseases. Potential applications of our gene delivery technology include:

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Gene therapies for cancer,



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DNA vaccines for infectious diseases or cancer, and



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DNA therapeutic protein delivery.

        Gene Therapies for Cancer.    We currently focus our development on innovative cancer therapies designed to induce an immune response against cancer cells without causing serious side effects. We have retained all rights to our internally developed cancer product candidates. Our lead immunotherapy product candidate, Allovectin-7®, completed enrollment in advanced clinical testing with a low dose in patients with metastatic melanoma. We expect to complete the collection and analysis of data from Phase II and Phase III registration trials, and determine in the second half of 2002 whether the data are sufficient to support the filing of a Biologic License Application, BLA, to seek marketing approval from the U.S. Food and Drug Administration, FDA. Allovectin-7® is also in Phase II clinical testing in patients with newly-diagnosed tumors of the head and neck and at a higher dose in patients with metastatic melanoma. The higher dose of Allovectin-7® may be considered for further development as those data become available. Our second immunotherapy product candidate, Leuvectin®, is in Phase II clinical trials for high-risk patients with locally confined prostate cancer. We expect to announce our future development plans for Leuvectin® in the second half of 2002.

        DNA Vaccines.    We believe DNA vaccines may have the distinguishing characteristic of combining a safe and cost-effective technique with preventive or therapeutic potential. DNA vaccines have been shown to induce a cellular immune response. These features make DNA vaccines a promising approach for the prevention and treatment of diseases caused by elusive pathogens such as the human immunodeficiency virus, HIV. Merck & Co., Inc. is using our naked DNA platform technology as part of a "prime-boost" vaccine regimen in preventive and therapeutic Phase I clinical trials for HIV. Prime-boost is an approach that seeks to optimize the immune response by using two different forms of vaccination in sequence, typically with naked DNA as the "prime" component. The prime-boost regimen used by Merck in these trials combines a naked DNA prime vaccine with Merck's non-replicating adenoviral vector boost vaccine. In a separate program, we have worked in conjunction with the U.S. Navy in efforts to develop a vaccine for preventing malaria. Preliminary results from a Phase I/II study showed the safety of a multi-gene DNA vaccine and the ability of the vaccine to prime cellular immune responses. Vical scientists, in cooperation with the U.S. government, are looking to apply new enhancing technologies to develop a preventive malaria vaccine that uses our DNA technologies to provide 6 to 9 months' protection. The initial indication for use will be aimed at adding a protective vaccine to the licensed malaria prophylaxis used by travelers and the military. We have licensed our technology to Aventis Pasteur, a division of Aventis S.A., and Centocor, Inc., a wholly-owned subsidiary of Johnson & Johnson, for the development of DNA vaccines against specific cancer targets.

        DNA Therapeutic Protein Delivery.    Our technology for the optimized delivery of therapeutic proteins has been licensed by Aventis Pharma and Vascular Genetics Inc., VGI, for the delivery of angiogenic growth factors. Any resulting therapeutics may help the body to grow blood vessels, typically where blood flow has been restricted, such as the heart in coronary artery disease and the limbs in peripheral vascular disease.

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        We have established relationships through licensing our technology to a number of corporate collaborators, including:

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Merck & Co., Inc.



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Two divisions of Aventis S.A.:

Aventis Pasteur

Aventis Pharma

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Merial



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Centocor, Inc., a wholly-owned subsidiary of Johnson & Johnson



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Boston Scientific Corporation



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Human Genome Sciences, Inc. and its affiliate, Vascular Genetics Inc.

        We have also established relationships to gain access to complementary technologies from corporate collaborators including:

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CytRx Corporation



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Ichor Medical Systems, Inc.

Background

        Pharmaceutical medicine traditionally focuses on the discovery and development of chemical compounds as therapeutics. More recently, biological agents such as therapeutic proteins and monoclonal antibodies have been developed as treatments. These agents typically act by enhancing or blocking biological activities, by obstructing or attacking infectious or malignant agents, or by restoring proper chemical balance within affected tissues. The effectiveness of chemical and biological agents is often limited by toxic side effects and the inability to maintain effective levels of the agent where it is needed.

        One possible answer to the weaknesses of previous approaches may be found in the novel therapeutics of gene therapy. "Gene therapy" refers to a collection of processes that add or alter genes, the basic units of heredity found inside living cells, in order to improve the body's natural ability to fight disease or to make a disorder more sensitive to other kinds of therapy.

        Genes themselves are sets of instructions, encoded by DNA, with each gene causing cells to produce, or express, one of the thousands of different proteins essential to cellular structure, growth, and function. The improper expression of even a single gene can severely alter a cell's normal function, frequently resulting in a disease. Gene therapy offers an approach to the treatment and prevention of disease by introducing genes into cells to direct the expression of specific proteins.

        Historically, gene therapy was accomplished by inserting the desired gene into a delivery vehicle, or vector. The most common vectors were viruses that had been genetically disabled so that they could not reproduce and infect other cells. Gene therapy approaches using viruses suffer several drawbacks that may limit their widespread usefulness, including adverse immune responses and inflammation that may inhibit the activity of the virus-based therapy and prevent repeated administration.

Our Gene Delivery Technology

        The key discovery leading to our patented naked DNA gene delivery technology was that muscle tissues can absorb genetic material directly, without the use of viral components, and subsequently express a desired protein for periods ranging from weeks to several months. Our gene delivery approach typically involves the design and construction of plasmids, DNA segments whose ends are

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attached together to form a highly stable closed loop. These plasmids contain the gene encoding the protein of interest, as well as short segments of DNA that control the rate and location of protein expression. Plasmids can be manufactured through straightforward fermentation and purification techniques.

        Since the initial discovery of our naked DNA technology, our researchers have improved the design of our plasmids to provide increases in efficiency of gene delivery, expression and immunogenicity. In addition, we are developing other formulation and delivery technologies, including the use of lipid molecules, synthetic polymers called poloxamers, and electrical stimulation called electroporation, to enhance gene delivery or increase the immune response in DNA vaccine applications. We call ourselves "The Naked DNA Company™" because our product candidates are based on these non-viral gene delivery methods, and because we own broad rights to certain non-viral gene delivery technologies through our series of core patents. Our gene delivery approach may offer novel treatment alternatives for diseases that are currently poorly addressed. Benefits of our gene delivery technology may include:

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Broad Applicability.  Our gene delivery technology may be useful in developing novel treatments for cancer, vaccines to prevent or treat infectious diseases and methods to efficiently deliver human and animal therapeutic proteins.



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Convenience.  Our gene therapies are intended to be administered like conventional pharmaceuticals on an outpatient basis.



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Safety.  Our product candidates contain no viral components that may cause unwanted immune responses, infections, or malignant and permanent changes in the cell's genetic makeup.



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Repeat Administration.  Our product candidates contain no viral components that may preclude multiple dosing with a single product or use in multiple products.



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Ease of Manufacturing.  Our product candidates are manufactured using straightforward fermentation and purification procedures.



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Cost-Effectiveness.  Our gene delivery technology may prove to be more cost-effective than therapies which require genetic modification and controlled propagation of viral vectors. Once introduced into the body, the DNA is intended to stimulate the production of a therapeutic protein over a prolonged period of time, which may be more cost-effective than administering the protein itself. It may also cause fewer potential side effects, which itself may reduce per patient treatment costs.

        Potential applications of our gene delivery technology include gene therapies for cancer, in which the expressed protein is an immune system stimulant or cancer-killing agent; DNA vaccines for infectious diseases or cancer, in which the expressed protein is an antigen; and DNA therapeutic protein delivery, in which the expressed protein is a therapeutic agent.

Business Strategy

        There are three basic elements to our business strategy:

Develop Products Independently

        We currently focus our resources on the independent development of cancer therapeutics and DNA vaccines for infectious diseases.

        Cancer.    We believe that the large and rapidly growing market for cancer products is poorly addressed by existing treatment alternatives. In addition, we believe that this market is attractive to Vical because:

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Clinical testing usually can be conducted in a small number of patients and benefits can be detected and verified in reasonably short periods of time.



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Clinical testing occurs in patients with advanced, life-threatening diseases with limited treatment alternatives, which may expedite the regulatory approval process.



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Product acceptance is supported by objective clinical data, potentially reducing marketing costs.



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Treatment decisions are made at regional cancer centers by oncologists who can be served by a small, specialized sales force.

        Vaccines.    According to the Plan for Preventing Emerging Infectious Diseases, published by the Centers for Disease Control and Prevention, CDC, "Vaccines are among the very best protections we have against infectious diseases." We believe our technology may lead to the development of novel preventive or therapeutic vaccines for infectious disease targets because:

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DNA vaccines may be applicable to diseases for which conventional vaccine methods have been unsuccessful.



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The safety of DNA vaccines may increase public acceptance of preventive care.



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Vaccines are perceived by government and medical communities as an extremely efficient and cost-effective means of healthcare.



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DNA vaccines use straightforward manufacturing processes, making them simple and cost-efficient to produce.

        We intend to retain significant participation in the commercialization of our proprietary cancer and DNA vaccine products, although we may choose to enlist the support of a marketing partner to accelerate market penetration.

Develop Future Product Opportunities

        We are actively pursuing the refinement of our plasmids and lipids, development of future products, evaluation of potential enhancements to our core technologies and exploration of alternative gene delivery technologies. We also seek to develop additional applications for our technologies by testing new approaches to disease control or prevention. These efforts could lead to further independent product development or additional licensing opportunities. In addition, we continually evaluate compatible technologies or products that may be of potential interest for in-licensing or acquisition. Our research and development costs for the year ended December 31, 2001, were approximately $22.1 million.

Expand the Applications of Our Technology Through Strategic Collaborations

        We collaborate with major pharmaceutical and biotechnology companies and government agencies, providing us access to complementary technologies or greater resources. These collaborations provide us with mutually beneficial opportunities to expand our product pipeline and serve significant unmet medical needs. We license intellectual property from companies holding complementary technologies in order to leverage the potential of our own gene delivery technology and to further the discovery of innovative new therapies for internal development. We license our intellectual property to other companies in order to leverage our technologies for applications that may not be appropriate for our independent product development efforts.

Product Development

        We are focused on the development of biopharmaceutical product candidates based on our patented gene delivery technology. A number of therapeutic protein and vaccine product candidates are

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currently under development for the prevention or treatment of cancer, infectious diseases and other disorders. The table below summarizes both our independent and collaborative product development programs. We are exploring various applications for poloxamer and electroporation technologies, and we are investigating several potential cancer and infectious disease vaccine targets. Our current clinical development focus is on the innovative cancer therapies, Allovectin-7® and Leuvectin®.

        Clinical trials are used to determine whether new drugs or treatments are both safe and effective. Traditionally, clinical trials are done in three phases. Phase I clinical trials mark the first time a new drug or treatment is administered to humans and are normally conducted to determine the safety profile of a new drug. Phase II clinical trials are conducted in order to determine preliminary effectiveness, or efficacy, optimal dosage, and to confirm the safety profile. Phase III clinical trials are often large scale, multi-center studies conducted to compare a new treatment with a currently approved therapy. At times, a single trial may incorporate elements from different phases of development. An example might be a trial designed to determine both safety and initial efficacy. Such a trial may be referred to as a Phase I/II clinical trial.

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Product Development Programs

Product Area	Project Target and Indication(s)	Development Status(1)	Development Rights
CANCER
Allogeneic therapeutic vaccine	Allovectin-7®     Melanoma—low dose     Melanoma—high dose     Head and neck cancer	Phase III Phase II Phase II	Vical Vical Vical
Immunotherapeutic protein	Leuvectin®     Kidney cancer(2)     Prostate cancer	Phase II Phase II	Vical Vical
Tumor-associated antigen therapeutic vaccine	Undisclosed Undisclosed Undisclosed	Preclinical/Phase I Research Research	Centocor Aventis Pasteur Vical
INFECTIOUS DISEASES
Preventive vaccine	Malaria Human immunodeficiency virus,     HIV Hepatitis B, hepatitis C, human     papilloma virus, herpes simplex,     tuberculosis, influenza Undisclosed	Phase I/II Phase I   Research     Research	Vical Merck   Merck     Vical
Therapeutic vaccine	HIV Hepatitis B, human papilloma virus	Phase I Research	Merck Merck
PROTEIN THERAPEUTICS
Cardiovascular therapeutic protein	VEGF-2 Undisclosed Catheter-based	Phase II Phase I Research	Vascular Genetics Aventis Pharma Boston Scientific
VETERINARY
Preventive vaccines	Various undisclosed	Research	Merial
Therapeutic protein	Undisclosed	Research	Vical

(1)

"Research" indicates laboratory studies to evaluate a potential product candidate in a nonclinical setting. "Preclinical" indicates that a specific product candidate has shown utility in meeting a targeted medical need in a nonclinical setting, and is undergoing toxicology testing in preparation for filing an Investigational New Drug application.

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This program is under reevaluation following discontinuation of the clinical trial on April 19, 2001.

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Gene Therapies for Cancer

        Cancer is a disease of uncontrolled cell growth. When detected early and still confined to a single location, surgery or irradiation can often be curative. However, neither surgery nor irradiation is considered curative for cancer that has spread throughout the body. Chemotherapy can sometimes treat cancer that has spread throughout the body; however, a number of non-cancerous cells, such as bone marrow cells, are also highly susceptible to chemotherapy. As a result, chemotherapy often has fairly significant side effects. Finally, because each of these treatments only acts for a short period of time, it is common to see cancer return after apparently successful treatment.

        Immunotherapy, using the patient's own immune system, may have advantages over surgery, irradiation, and chemotherapy in the treatment of cancer. It is generally believed that the immune system can recognize cancer cells and destroy them. Yet many cancers appear to have developed the ability to "hide" from the immune system. A treatment that can augment the immune response against tumor cells by making the cancer more "visible" to the immune system would likely represent a significant improvement in cancer therapy. Immune-enhancing proteins such as interleukin-2, IL-2, and interferon-alpha, IFN-alpha, have shown encouraging results. However, these agents often require large and frequent doses that regularly result in severe side effects.

        We have researched several delivery enhancements that may complement our core gene delivery technology. Our current clinical-stage gene therapy approach consists of injecting immune stimulating genes complexed with a cationic lipid delivery vehicle, DMRIE/DOPE, directly into malignant tumors.Following injection, the lipid delivery vehicle facilitates uptake of the gene product into tumor cells, where it directs the production of protein. Recent preclinical studies indicate that poloxamers, when combined with other enhancing technologies, can elicit tumor antigen responses in mice. Local expression of immune-stimulating proteins often results in the same local effect from the protein with fewer systemic toxicities. These and other findings are being pursued in additional preclinical studies.

        In addition, non-viral gene therapies may offer an added margin of safety compared to viral-based therapies, as no viral particles are contained in the formulation. The ease of manufacture, routine treatment administration performed in the clinic with minimal discomfort, and the excellent toxicity profile suggest that non-viral gene therapies may offer advantages over current modalities of therapy.

        Preclinical studies in animals have demonstrated the safety and potential efficacy of this approach. Subsequently, in early human studies, a low incidence of treatment related adverse events has been observed. Our two lead non-viral gene therapies being developed are reviewed below.

Allovectin-7®

        Allovectin-7® is a DNA/lipid complex containing the human gene encoding HLA-B7, which is found infrequently in the human population. Allovectin-7® is injected directly into tumors, and is designed to make malignant cells express HLA-B7. The treatment may trigger an immune response against tumor cells, both locally and systemically, by enabling the immune system to recognize other features of tumor cells.

        Metastatic Melanoma.    The American Cancer Society, ACS, estimates approximately 53,600 new diagnoses and 7,400 deaths from melanoma in 2002 in the United States. Currently, there are no consistently effective therapies for advanced cases of malignant melanoma. Treatment for these patients normally includes a combination of chemotherapy, radiation therapy, and surgery. In patients with metastatic melanoma, median survival typically ranges from six to eleven months. The toxicity associated with such FDA-approved treatments as IL-2 or IFN-alpha is often significant, resulting in serious or life-threatening side effects in the majority of patients treated.

        We believe immunotherapies such as Allovectin-7® represent an attractive approach for patients with advanced melanoma. In multi-center Phase I/II and Phase II clinical trials, Allovectin-7® was

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well-tolerated and several patients developed durable reductions in overall tumor burden or maintained stable disease. Unadjudicated results, combined from three clinical trials, were updated in December 1999 at the Eighth International Gene Therapy of Cancer Conference. "Adjudication" refers to the process by which important efficacy results reported by trial investigators are reviewed to determine whether they meet protocol-specific endpoints. These early clinical trials provided evidence of the excellent safety profile of Allovectin-7®. Side effects from Allovectin-7® were primarily mild. The most common complaint was temporary pain at the injection site. The side-effect profile for Allovectin-7® appears superior to those of FDA-approved treatments for metastatic melanoma.

        Based on the promising data from earlier clinical trials and discussions with the FDA, we began two concurrent registration trials, a Phase II clinical trial and a Phase III clinical trial, for Allovectin-7® in May 1998. Based on recommendations of an independent Data and Safety Review Board, we announced in May 2000 that we would continue to recruit patients as planned in our two ongoing registration trials with Allovectin-7®. Following a face-to-face status review meeting in March 2001, the FDA reconfirmed the acceptability of the company's registration program to support marketing approval if the Phase III data meet the study objectives, and if the company meets product manufacturing and other typical regulatory requirements. According to the FDA, a robust clinical outcome regarding improvement in time to disease progression would be sufficient to warrant consideration for marketing approval as long as there is no detriment in response rate. In March 2001, the FDA also reconfirmed that the Phase II registration trial could, on its own, provide a basis for marketing approval, if the data meet the clinical endpoints. The FDA further confirmed that data from the Phase II trial and prior trials with Allovectin-7® could support a submission based on Phase III trial results, assuming that the Phase III data are consistent with prior experience.

        At the May 2001 annual meeting of the American Society of Clinical Oncology, we presented unadjudicated, interim safety and efficacy data from our Phase II Allovectin-7® registration trial for patients with late-stage metastatic melanoma. The trial enrolled patients who had failed other treatments. We reported on 73 patients who received at least one injection of Allovectin-7®, the intent-to-treat patient population. The preliminary conclusions based on these unadjudicated data were that the median duration of response and response rate suggested clinical activity of Allovectin-7®, and that the safety profile of Allovectin-7® remained excellent compared with those of FDA-approved treatments for metastatic melanoma. The trial had endpoints of a 15 percent systemic clinical response rate, and a four-month median duration of response. Unadjudicated data from the investigation sites suggested that treatment with Allovectin-7® resulted in systemic clinical responses in 10.9 percent of the patients, with a median duration of response of 4.9 months, and an additional 19.2 percent were reported to have achieved stable disease. These Phase II data alone would likely not support accelerated FDA approval. Nearly all of the drug-related side effects were mild or moderate. Final data from the investigation sites may be reviewed independently, which could materially change the results.

        In September 2001, we completed enrollment of 200 patients in a randomized, controlled Phase III registration trial to evaluate the safety and efficacy of Allovectin-7® for the treatment of chemotherapy-naïve patients with metastatic melanoma. Half the patients received dacarbazine, the only chemotherapeutic agent currently approved by the FDA for metastatic melanoma. The other half received dacarbazine plus Allovectin-7®. The objective of the trial was to determine if Allovectin-7® treatment can increase the response rate or time to disease progression. The trial design allowed for as many as 280 patients. We chose to complete enrollment at 200 patients based on discussions with the FDA in March 2001 and a statistical analysis showing that this number would be sufficient to demonstrate the required robust clinical outcome in one of the trial's primary endpoints, improvement in time to disease progression.

        We expect to complete the collection, analysis and adjudication of data from the Phase III registration trial in the second half of 2002.

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        Based on preliminary data that injected tumors appear to respond more frequently than non-injected lesions, one strategy to increase the response rate to Allovectin-7® is to inject multiple tumors rather than single tumors as in prior studies. In addition, higher doses of Allovectin-7® may generate a stronger immune response. In February 2001, we initiated a Phase II clinical trial evaluating higher doses and different treatment regimens. The new clinical trial, which is not part of our registration program, combines escalating doses of up to a 200-fold increase compared with the registration trials. It also allows for the distribution of that increased dose into as many as five tumor lesions. We believe that the combination of higher dose and multiple tumor injections may provide a relevant increase in efficacy. Recruitment is progressing well, and we have now enrolled more than 50 patients in this 80-patient trial. As a result, we have successfully completed the dose-escalation phase of this trial and are now testing the full 2 mg. dose in multiple tumor injections.

        Head and Neck Cancer.    Head and neck cancer includes several types of localized tumors affecting the oral cavity, the larynx or pharynx. The ACS estimates approximately 37,800 new diagnoses and 11,100 deaths from these cancers in 2002 in the United States. When found early, head and neck cancers are often treated with surgery or irradiation therapy. Results of standard treatment depend on factors such as the number of tumors, their size, and their specific location.

        Unadjudicated results from three sequential Phase I and Phase II clinical trials testing Allovectin-7® in patients with advanced squamous cell carcinoma of the head and neck were published in the July 2001 issue of the Archives of Otolaryngology—Head and Neck Surgery.The data were compiled from a single-center, Phase I study and two multi-center, Phase II studies for patients with unresectable head and neck cancer who had failed to respond to conventional therapies. Of 69 patients who completed the first treatment cycle in the three clinical trials, 6 patients appeared to achieve clinical responses, with a 50 percent or greater reduction in tumor burden, and 14 were reported to have stable disease, with less than 50 percent reduction or less than 25 percent increase in tumor burden. The 20 responding or stable patients went on to a second treatment cycle. Upon completing the second treatment cycle, 5 patients appeared to have a partial response, and 6 patients were reported with stable disease. The reported duration of response for the 5 responding patients ranged from 20 to 79 weeks. The duration of response for the 6 stable patients appeared to range from 20 weeks and remaining stable to 34 weeks. Allovectin-7® was generally well-tolerated, with no serious drug-related side effects. We concluded that treatment with Allovectin-7® appeared to be safe and that further studies were warranted in patients with less-advanced head and neck cancer.

        Based on these conclusions, we initiated a multi-center Phase II clinical trial in February 2001 with Allovectin-7® in up to 25 patients scheduled for surgical treatment of early-stage cancer of the oral cavity and oropharynx. The primary goal in the clinical trial is reduction of the tumor prior to surgery. Additional objectives include assessment of the immune response to Allovectin-7®, evaluation of the treatment's toxicity, and analysis of the time to disease progression. Recruitment for this clinical trial has been very challenging, with one patient enrolled as of December 31, 2001.

Leuvectin®

        Leuvectin® is a DNA/lipid complex containing the gene encoding IL-2, a cytokine that plays a role in stimulating immune response. Systemic IL-2 protein therapy is currently approved by the FDA for treatment of certain cancers, but its administration is associated with serious toxicity in the majority of patients. We expect that Leuvectin®, when injected into tumors, will cause the malignant cells to produce IL-2. Local expression of IL-2 may then stimulate the patient's immune system to attack and destroy the tumor cells. Because Leuvectin® delivers IL-2 locally rather than throughout the body, it may provide efficacy comparable to the protein treatment with fewer side effects. Leuvectin® is being tested in Phase II clinical trials for patients with prostate cancer.

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        Kidney Cancer.    As announced in April 2001, we discontinued our Phase II clinical trial with Leuvectin® for patients with metastatic kidney cancer because the efficacy did not meet interim targets required to continue the trial. We have completed our investigation into this matter and have concluded that a change in the formulation likely resulted in reduced expression of IL-2. We expect to announce our future development plans for Leuvectin® in the second half of 2002.

        Prostate Cancer.    According to the ACS, prostate cancer is the second leading cause of cancer fatalities among men in the United States, with an estimated 189,000 new diagnoses and 30,200 deaths from prostate cancer in the United States in 2002.

        Preclinical studies demonstrate that Leuvectin® can stimulate an anti-tumor immune response against prostate cancer cells in the laboratory. In May 1997, we initiated a Phase I clinical trial at the University of California Los Angeles, UCLA, to evaluate the safety and efficacy of intraprostatic Leuvectin® in two groups of patients: those who are pre-prostatectomy or exhibiting rising prostate-specific antigen, PSA, following local irradiation therapy. Unadjudicated results of the trial were published in May 2001 by Dr Arie Belldegrun at UCLA (Human Gene Therapy, 12(8): 883-92). Dr. Belldegrun reported on 24 patients with locally advanced prostate cancer who were either scheduled to undergo surgical resection of their prostate or who had failed prior local therapy with irradiation therapy. Patients received 300, 750 or 1,500 µg of Leuvectin® administered intraprostatically under ultrasound guidance on days 1 and 8.

        There were no grade 3 or 4 toxicities reported. The most common side effect seen was small amounts of blood in the urine. Patients also reported mild to moderate temporary rectal bleeding and perineal discomfort. Of the 24 patients in the study, 16 (67 percent) demonstrated a temporary decrease in their PSA on day 1, and 14 (58 percent) continued to demonstrate a decrease in PSA on day 8. Prostate tumor samples were taken at the time of surgery or on day 15 in those patients who failed irradiation therapy. Analysis of the prostate biopsies demonstrated an increase in the number of infiltrating T cells following treatment.

        Based on these results, it was concluded that intraprostate injection of Leuvectin® is safe and well-tolerated in this patient population at doses up to 1,500 µg and that further study of Leuvectin® in this indication was warranted. On the basis of these data, we initiated two multi-center Phase II clinical trials in June 1999. These studies are ongoing. We expect to announce our future development plans for Leuvectin® in the second half of 2002.

Vaxid

        In collaboration with Stanford University Medical Center, we were developing a plasmid-based DNA vaccine, Vaxid, against low-grade, non-Hodgkin's, B-cell lymphoma. Vaxid contains a patient-specific gene encoding a characteristic molecule of cancerous B-cells. In March 2001, we announced positive safety and immunogenicity results in an initial Phase I/II clinical trial. The treatment appeared to have been well-tolerated by patients, and appeared to have generated both cellular and humoral immune responses. We have no immediate plans to pursue further development of Vaxid.

gp100 Vaccine

        In collaboration with the National Cancer Institute, we supported development efforts for a plasmid-based DNA vaccine, which may cause cells to produce a modified melanoma-related protein known as gp100. This protein was expected to trigger an immune response against melanoma tumor cells. Our funding of this program ended in October 2001. We have no immediate plans to pursue further development of this program.

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Outlicense of Cancer Targets

        See "Collaborations and Licensing Agreements—Corporate Collaborators—Outlicensing," for discussion of Centocor and Aventis Pasteur collaborations in cancer targets.

DNA Vaccines for Infectious Diseases

        Our infectious disease program is driven by three overarching criteria: the complexity of the product development program, competition, and commercial opportunities. Vaccines are generally recognized as the most cost-effective approach for infectious disease health care. However, the technical limitations of conventional vaccine approaches have constrained the development of effective vaccines for many diseases. We believe our potential vaccine products should be simpler to manufacture than vaccines made using cumbersome and labor-intensive techniques involving difficult tissue culture procedures and live viruses. In addition, our gene delivery technology has the potential to speed certain aspects of vaccine product development such as preclinical evaluation and manufacturing. It has demonstrated a favorable safety profile and contributes to a potent cellular immune response.

        Over the past decade, hundreds of scientific publications have documented the efficacy of DNA vaccines in contributing to potent immune responses in dozens of species from fish to nonhuman primates, and human volunteers. Among the most recent was a January 2002 report in the scientific journal, Nature, on a study conducted by Merck in which a prime-boost vaccine regimen employing our patented naked DNA non-viral gene delivery technology was used to elicit an immune response in monkeys against a hybrid form of HIV that can replicate and cause clinical disease in monkeys. Prime-boost is an approach that seeks to optimize the immune response by using two different forms of vaccination in sequence. In this study, Merck used our naked DNA plus adjuvant to prime the immune response with Merck's non-replicating adenoviral vector vaccine to boost the response. This vaccine combination was shown to provide potent cellular immune responses. In February 2002, Merck presented its initial human data from ongoing Phase I clinical trials at the 9^thConference on Retroviruses and Opportunistic Infections. Merck's preliminary analysis suggests that its HIV-1 gag vaccine candidates for the prevention and treatment of HIV-1 elicit specific antiviral cellular immune responses and are generally well-tolerated in the ongoing studies. The Retrovirus Conference presentation marked the first time Merck scientists have discussed data from human testing of Merck's two leading HIV-1 vaccine candidates—an HIV-1 gag DNA vaccine and an HIV-1 gag replication-defective adenovirus vaccine.

        In the Merck studies, the naked DNA prime vaccine was formulated in a solution containing CRL-1005, a poloxamer that Merck licensed from CytRx Corporation. A recent license agreement has also given us access to CytRx's technical expertise and large library of poloxamers, including CRL-1005, with the exception of four infectious disease targets licensed to Merck, plus a cancer target. We intend to use this technology to enhance our in-house vaccine development pipeline as we explore possible infectious disease targets.

        One of these targets is malaria. The U.S. Navy presented data on a collaborative Phase I/II clinical trial of a DNA vaccine to prevent infection with malaria. Further details on these and other relationships can be found in "Collaboration and Licensing Agreements—Corporate Collaborators—Outlicensing," and "—Research Institutions."

DNA Therapeutic Protein Delivery

        Therapeutic proteins are one of the mainstays of biotechnology. Although recombinant protein and antibody products have established successful markets, gene delivery techniques to produce these

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proteins in vivo are still under development. To be successful, gene-based delivery of protein therapeutics will need to meet the following criteria:

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Appropriate level of protein expression, with concentrations maintained within the therapeutic window offering the required efficacy without unacceptable toxicity;



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Absence of immune response to expressed self proteins, allowing repeat dosing if necessary;



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Adequate bio-distribution, delivering the protein to the right place in the appropriate amounts;



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Varying degrees of regulation depending upon specific applications.

        Significant technical hurdles may need to be overcome in the commercialization of this technology for protein therapeutic applications. The biggest hurdles include the inability to tightly regulate protein expression and, in some cases, to achieve adequate levels of protein expression. For regulated proteins, the greatest challenge is to combine an efficient promoter with a non-toxic small molecule. Protein therapeutics that have a narrow therapeutic window will almost certainly require tightly regulated expression of the gene delivered.

        Based on the performance characteristics of our current naked DNA technology, therapeutic proteins with a broad therapeutic window and cancer immunotherapeutics are the product franchise development areas with the highest probabilities for success. An example of a specific potential application can be found in the emerging field of angiogenesis, the therapeutic goal of which is inducing the growth of blood vessels to replace those blocked by disease. Angiogenesis has been shown to occur by the exogenous administration of angiogenic growth factors. We believe that the sustained delivery of these growth factors will be both safe and effective, and that the therapeutic window for local delivery will be broad. Thus, although several attempts to intermittently deliver recombinant specific angiogenic growth factors directly have been unsuccessful, we believe our approach to deliver locally genes that encode the desired growth factors is quite promising. Local delivery of angiogenic growth factor genes is in human trials. Other potential applications are still being tested in animal models. See "—Collaboration and Licensing Agreements—Corporate Collaborators—Outlicensing."

        See also "—Collaboration and Licensing Agreements—Research Institutions," for discussion of contract manufacturing and contract regulatory support for the National Institutes of Health Vaccine Research Center in Infectious Diseases, and the Institute for AIDS Vaccine Initiative.

Veterinary Applications

        Prior to its development for human therapy, our gene delivery technology was extensively tested in animals. Research scientists have published numerous papers detailing favorable results in many species and covering a broad range of disease indications. Animal health encompasses two distinct market segments: livestock, or animals bred and raised for food or other products; and companion animals, or pets. Serving the animal health markets requires highly efficient manufacturing and specialized distribution channels. Consequently, we have licensed our gene delivery technology for development and commercialization by others. We are independently conducting research on an undisclosed veterinary therapeutic protein application. See "—Collaboration and Licensing Agreements—Corporate Collaborators—Outlicensing."

Intellectual Property

        Patents and other proprietary rights are essential to our business. We file patent applications to protect our technology, inventions, and improvements to our inventions that we consider important to the development of our business. We believe that our patent portfolio is the most comprehensive of any company in the non-viral gene delivery sector.

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        We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. We have filed or participated as licensee in the filing of more than 40 patent applications in the United States and have made over 360 additional counterpart foreign filings in foreign countries relating to our technology. Our patents and patent applications cover, for example, naked DNA gene delivery for immunization and delivery of therapeutic proteins, specific DNA constructs and formulations of gene-based product candidates, methods for producing pharmaceutical-grade DNA, and several families of lipid molecules and their uses in gene delivery. Many of these patents have been issued by the U.S. Patent and Trademark Office, PTO. A number of patent applications are pending in the United States, and corresponding foreign applications have been filed.

        We and our exclusive licensors have received numerous U.S. and foreign patents covering various aspects of our proprietary technology. Most of these patents are recently issued and have considerable patent life remaining. These patents are described as follows:

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Core Gene Delivery Technology.  We own rights to issued U.S. patents covering our core gene delivery technology, including patents on methods of administering gene sequences for the purposes of expressing therapeutic proteins or for inducing immune responses. Other issued patents specifically cover the administration of genes into blood vessels and the heart.

In October 2001, we announced our intention to appeal the ruling by the Opposition Division of the European Patent Office revoking on formal grounds our patent covering the nonviral delivery of genetic material. According to European patent procedures, issued patents may be opposed by parties interested in challenging the issued claims. The patent covering our core DNA delivery technology was issued in 1998 and was subsequently opposed by seven companies. The Opposition Division ruled that, as a result of amendments to the claims made during the process of obtaining the European patent and during the opposition process, the claims did not comply with European patent laws. Our appeal, which we will file by the end of April 2002, will seek to overturn the revocation, and we may also use additional patent applications that are pending in Europe to secure patent protection for our core gene delivery technology. We intend to vigorously defend our patent position in the European opposition proceedings. If we are not successful in the appeal and opposition proceedings, we may lose part or all of our proprietary protection on our product candidates in Europe.

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Core Lipid Technology.  We have received issued U.S. patents covering numerous examples of cationic lipid compounds that are used to facilitate delivery of gene therapies to some tissues. These patented compounds include the lipids contained in our lead product candidates, Allovectin-7® and Leuvectin®. Patent protection of these key lipids also has been obtained in Europe and Japan.



•

Specific DNA Therapeutics.  We have supplemented the broad patent coverage described above with patents covering specific product applications of our technology. To date, we have received patents issued in the United States covering Allovectin-7® and Leuvectin® and other patents related to gene delivery to the heart, including delivery of a vascular endothelial growth factor, VEGF, for example.



•

DNA Process Technology.  As a result of our pioneering efforts to develop the use of pure DNA as a therapeutic agent, we have also led the development of manufacturing processes for producing pharmaceutical-grade DNA. We have received issued U.S. patents covering various steps involved in the process of economically producing pure plasmid DNA for pharmaceutical use.

        At the beginning of 2000, prosecution of two of our allowed U.S. patent applications and one U.S. patent application that we licensed were under suspension by the PTO pending resolution of possible

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interference proceedings with one or more parties unknown to us. For two of these three applications, the suspensions were lifted during 2000, and patents were issued in 2001. One of these patents was issued to us in April 2001, and expands our broad ownership of naked DNA gene delivery technologies by including the administration of naked DNA into any tissue for the purpose of inducing an immune response. The other patent, issued in October 2001, broadly covers direct injection of genetic material into tumors or surrounding tissue using viral, lipid-based or other non-viral gene delivery compositions. We have licensed exclusive commercial rights to this patent from the University of Michigan. The third patent application has been returned to active prosecution status.

        In addition, a patent was issued to us in May 2001 that covers naked DNA delivery of VEGF to the heart to promote angiogenesis.

        Some components of our gene-based product candidates are, or may become, patented by others. As a result, we may be required to obtain licenses to conduct research, to manufacture, or to market such products. Licenses may not be available on commercially reasonable terms, or at all.

        See "—Additional Business Risks—Our patents and proprietary rights may not provide us with any benefit and the patents of others may prevent us from commercializing our products," and "The legal proceedings to obtain patents and litigation of third-party claims of intellectual property infringement could require us to spend money and could impair our operations."

Commercialization and Manufacturing

        Because of the broad potential applications of our technology, we intend to develop and commercialize products both on our own and through corporate collaborators. We intend to develop and commercialize products to well-defined specialty markets, such as oncology, infectious diseases, and other life-threatening diseases. Where appropriate, we intend to rely on strategic marketing and distribution alliances for manufacturing and marketing products.

        We believe our plasmid DNA can be produced in commercial quantities through straightforward fermentation and purification techniques. The separation and purification of plasmid DNA is a relatively straightforward procedure because of the inherent biochemical differences between plasmid DNA and the majority of other bacterial components. In addition, our lipid formulations consist of components that are synthesized chemically using traditional, readily scaleable organic synthesis procedures.

        We produce and supply our own plasmid DNA for all of our research needs and clinical trials and intend to produce sufficient supplies for all foreseeable clinical investigations. In January 2002, we signed a 15-year lease on a facility that we believe will be sufficient for foreseeable commercial manufacturing requirements. We also engage in contract manufacturing of plasmid DNA investigational products for selected clients. We may also choose to have outside organizations manufacture our products.

Collaboration and Licensing Agreements

        We have entered into various arrangements with corporate, academic, and government collaborators, licensors, licensees, and others. In addition to the agreements summarized below, we conduct ongoing negotiations with potential corporate collaborators.

Corporate Collaborators—Outlicensing

        Merck & Co., Inc.    In May 1991, we entered into a research collaboration and license agreement with Merck to develop and commercialize vaccines utilizing our gene delivery technology to prevent infection and disease in humans. In connection with the 1991 agreement, we granted Merck a worldwide exclusive license to preventive vaccines using our technology against seven human infectious

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diseases including: influenza; HIV; herpes simplex; hepatitis B virus, HBV; hepatitis C virus, HCV; human papilloma virus, HPV; and tuberculosis. Merck has the right to terminate this agreement without cause on 90 days written notice.

        In addition, Merck has rights to therapeutic uses of preventive vaccines developed under the 1991 agreement. In December 1995 and November 1997, Merck acquired additional rights to develop and commercialize therapeutic vaccines against HPV, HIV and HBV. Under the November 1997 amendment, Merck made an investment in Vical of $5.0 million for approximately 262,000 shares of our common stock.

        In September 1997, we entered into an option and license agreement granting Merck the rights to use our technology to deliver certain growth factors. The agreement resulted in a payment to us of $2.0 million. Merck terminated this agreement in June 2000.

        In November 1999, we received a $2.0 million payment from Merck, which extends Merck's license to develop and commercialize therapeutic vaccines against HIV and HBV. In December 1999, Merck initiated a clinical trial with a naked DNA vaccine to prevent AIDS. In January 2000, Merck paid us a $1.0 million milestone payment for the start of this trial. In May 2000, Merck commenced the therapeutic vaccine trial.

        In November 2001, we received a $3.0 million payment from Merck in accordance with our licensing agreement. The payment extends the term of Merck's worldwide rights to use our naked DNA technology to develop and commercialize therapeutic vaccines against both HIV and HBV. We recognized this $3.0 million as license revenue in the fourth quarter of 2001. In connection with these agreements, Merck has paid us approximately $25.1 million, including the $5.0 million payment for the investment in our common stock, through December 31, 2001. Merck is obligated to pay additional fees if certain research milestones are achieved and royalties on net sales if any products are developed and commercialized. For some indications we may have an opportunity to co-promote product sales.

        Merck is currently testing naked DNA vaccines for HIV in human trials. Human testing began in December 1999 in uninfected volunteers and, in May 2000, in volunteers already infected with HIV and receiving highly active anti-retroviral therapy. At its annual business briefing in December 2000, Merck highlighted its investigational HIV vaccine program as a key research initiative. In April 2001, Merck highlighted the success to date of its HIV vaccine development program, which includes a vaccine based on our patented naked DNA gene delivery technology. Merck presented preclinical data from its HIV vaccine program and reviewed the status of clinical trials at the 2001 Keystone Symposium, AIDS Vaccines in the New Millennium, in Keystone, Colorado, and at AIDS Vaccine 2001 in Philadelphia, Pennsylvania. In January 2002, Merck's research results, published in the scientific journal Nature, described the use of our naked DNA technology in monkeys in the ongoing efforts to develop a vaccine to combat HIV.

        The report in Nature described studies conducted by Merck including a study in which a vaccine regimen employing Vical's patented naked DNA, non-viral, gene delivery technology was used in a prime-boost regimen with naked DNA plus adjuvant to prime and Merck's non-replicating adenoviral vector to boost. This vaccine combination was shown to provide potent cellular immune responses to a hybrid form of HIV that can replicate and cause clinical disease in monkeys. In February 2002, Merck presented its initial human data from ongoing Phase I clinical trials at the 9^th Conference on Retroviruses and Opportunistic Infections. Merck's preliminary analysis suggests that its HIV-1 gag vaccine candidates for the prevention and treatment of HIV-1 elicit specific antiviral cellular immune responses and are generally well-tolerated in the ongoing studies. The Retrovirus Conference presentation marked the first time Merck scientists have discussed data from human testing of the Merck's two leading HIV-1 vaccine candidates—an HIV-1 gag DNA vaccine and an HIV-1 gag replication-defective adenovirus vaccine.

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        Aventis.    In September 1994, we entered into a research, option, and license agreement with the vaccine manufacturer Aventis Pasteur, a division of Aventis S.A., granting them options to acquire licenses for the use of our proprietary gene delivery technology to develop and commercialize vaccines against specific infectious diseases. Subsequent option exercises and additions eventually led to licenses for a total of four preventive vaccine targets: cytomegalovirus, Helicobacter pylori, malaria and respiratory syncytial virus.

        In October 1997, we entered into an agreement granting Aventis Pharma, a division of Aventis S.A., an exclusive worldwide license to use our gene delivery technology to deliver certain neurologically active proteins for potential treatment of neurodegenerative diseases.

        In December 2001, we completed an agreement restructuring with Aventis Pasteur. Aventis Pasteur obtained rights to use our patented gene delivery technology for specific oncology applications. In exchange, Aventis Pasteur paid a small option fee and gave up rights to develop and commercialize the infectious disease vaccines. Aventis Pasteur has the right to terminate this agreement without cause on six months written notice.Simultaneously, we reacquired rights to gene therapies for neurodegenerative diseases that were previously licensed to Aventis Pharma.

        In 1999, Aventis Pharma began testing the naked DNA delivery of a gene encoding an angiogenic growth factor in patients with peripheral vascular disease, a severe loss of blood flow caused by blockage of arteries feeding the foot and lower leg. They licensed the rights to our gene delivery technology for cardiovascular applications using a specific angiogenic growth factor in June 2000. The angiogenic growth factor agreement, which remains in effect, resulted in an initial payment to us of $1.5 million and could generate milestone payments plus royalties if products advance through commercialization. Aventis Pharma has the right to terminate this agreement without cause on 60 days written notice.

        Through December 31, 2001, we had received approximately $10.3 million under all of the Aventis agreements. The restructured agreement provides for us to receive additional payments based upon achievement of certain defined milestones and royalty payments based on net product sales.

        Pfizer Inc.    In January 1999, we entered into a collaborative research and option agreement with Pfizer to develop and commercialize DNA-based delivery of therapeutic proteins for animal health applications. Pfizer had an option to obtain an exclusive royalty-bearing license to our technology for these applications. The option expired in January 2002. Under the agreement, Pfizer made an investment in Vical of $6.0 million for approximately 318,000 shares of our common stock. Pfizer also paid us a $1.0 million up-front option fee and $1.5 million for research and development over the life of the agreement.

        Merial.    We entered into a corporate collaboration in March 1995 relating to DNA vaccines in the animal health area with Merial, a joint venture between Merck and Aventis S.A. Merial has options to take exclusive licenses to our gene delivery technology to develop and commercialize DNA vaccines to prevent infectious diseases in domesticated animals. In December 1999, Merial paid us $1.6 million for the initial exercise of options and extension of options under the agreement. In March 2000, Merial made a payment to extend their option to March 31, 2001. In 2001, Merial further extended options under the 1995 agreement. Through December 31, 2001, we had received $6.0 million under this agreement. If Merial exercises additional license options and markets these vaccines, cash payments and royalties on sales would be due to us. Merial has the right to terminate this agreement without cause on 30 days written notice.

        Human Genome Sciences, Inc.    In February 2000, we signed a reciprocal, royalty-bearing license with Human Genome Sciences, Inc., HGS. Under the agreement, we have the option to exclusively license up to three genes from HGS for gene-based product development. HGS has the option to license our gene delivery technology for use in up to three gene-based products. Each party has until

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September 30, 2004, to exercise their respective options. As of December 31, 2001, neither party had exercised any of their options.

        Vascular Genetics Inc.    In February 2000, we granted an exclusive, royalty-bearing license to Vascular Genetics Inc., VGI, a company in which HGS is a major shareholder, for naked DNA delivery of a gene encoding Vascular Endothelial Growth Factor 2, VEGF-2. In exchange, we received a minority equity interest in VGI represented by preferred stock.

        VGI has conducted Phase I and Phase II clinical trials using naked DNA delivery of the VEGF-2 gene to promote the growth of blood vessels in patients with coronary artery disease or peripheral vascular disease. The FDA placed the VGI trials on a clinical hold in 2000. We learned from VGI in October 2001 that their Phase II development program is off clinical hold, and they have announced that they are advancing toward new clinical trials. See "Additional Business Risks—We may suffer a material financial loss due to dilution if additional shares of VGI stock are issued at a price below our issuance price, or due to permanent impairment if VGI is unable to successfully complete its development plans."

        Centocor, Inc.    In February 1998, we entered into an exclusive license and option agreement allowing Centocor, Inc., subsequently acquired by Johnson & Johnson, Inc., to use our gene delivery technology to develop and commercialize certain DNA vaccines for the potential treatment of some types of cancer. We received an initial payment of $2.0 million plus reimbursement of $0.2 million of patent costs. In 2001, we also received scheduled milestone payments of $1.0 million. We may receive additional payments based upon achievement of milestones and royalty payments on product sales. Centocor has the right to terminate this agreement without cause on 180 days written notice.

        Boston Scientific Corporation.    In April 1997, we entered into a sublicense agreement with Cardiogene Therapeutics, Inc., formerly known as Genocor, Inc., for the development of catheter-based intravascular gene delivery technology under our license agreement with the University of Michigan, described below. Boston Scientific Corporation has subsequently acquired Cardiogene Therapeutics' rights under this agreement. We received $1.1 million in October 1998 under this agreement. The agreement provides for us to receive royalty payments on any related product sales. Boston Scientific has the right to terminate this agreement without cause on 30 days written notice.

Corporate Collaborators—Inlicensing

        Ichor Medical Systems, Inc.    In October 2001, we entered into an exclusive agreement with Ichor Medical Systems, Inc. to develop products based on our gene delivery technology and delivered using Ichor's proprietary electroporation systems. Both companies are applying this innovative approach toward the initial development of selected products.

        CytRx Corporation.    In December 2001, we entered into an exclusive agreement with CytRx Corporation which grants to us the rights to use or sublicense CytRx's poloxamer technology to enhance viral or non-viral delivery of polynucleotides in all preventive and therapeutic human and animal health applications, except for four infectious disease vaccine targets licensed to Merck and prostate-specific membrane antigen. In addition, the agreement permits our use of CytRx's technology to enhance the delivery of proteins in prime-boost vaccine applications that involve the use of polynucleotides. As part of the agreement, we made a $3.8 million up-front payment and agreed to make potential future milestone and royalty payments. The license fee is being amortized to expense over the estimated ten-year average useful life of the technology.

        Under the Merck, Aventis, Merial, Centocor, HGS and VGI agreements, we would be required to pay up to 10 percent of some milestone payments and a small percentage of some royalty payments to Wisconsin Alumni Research Foundation, WARF. The CytRx and Ichor agreements would require us to make payments to CytRx and Ichor, respectively, and to WARF only if the results of our research

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resulted in the generation of revenue. Under the Boston Scientific agreement, if we were to receive milestone or royalty payments, we would be required to pay up to 25 percent of some of these payments to the University of Michigan. See "—Research Institutions—Wisconsin Alumni Research Foundation," and "—Research Institutions—The University of Michigan."

Research Institutions

        Office of Naval Research.    In September 1998, we entered into an agreement with the Office of Naval Research, ONR, for development work on a potential multi-gene DNA vaccine to prevent malaria. Malaria is a severe infectious disease characterized by fever, headache and joint pain, which if untreated can lead to death. Infection normally occurs when the parasite enters a victim's bloodstream during a mosquito bite. There is currently no effective vaccine against the disease.

        In August 2000, a Phase I/II clinical trial was initiated to test the safety and efficacy of a naked DNA vaccine to prevent infection by the malaria parasite. In November 2001, the U.S. Navy presented preliminary trial results at the 50th Annual Meeting of the American Society of Tropical Medicine and Hygiene. The preliminary results indicated that vaccination was safe and well-tolerated, and caused specific T-cell immune responses against encoded antigens. Although all volunteers contracted the disease, measurements after the challenge indicated specific antibody and T-cell immune responses, which were stronger in volunteers receiving the vaccine than in volunteers who did not receive the vaccine, suggesting a vaccine-induced prime and parasite-induced boost effect. Results of this trial provide the basis for planning further development toward a malaria vaccine product. Vical scientists, in cooperation with the U.S. government, are looking to apply several new enhancing technologies to develop a preventive malaria vaccine that uses our DNA technologies to provide 6 to 9 months' protection. The initial indication for use will be aimed at the travel and military markets, for which there are currently licensed medications that have limitations such as drug resistance, side effects and duration of treatment both before and after travel.

        The agreement with the ONR, as amended in January 2002, could provide us with up to $5.5 million in funding through April 30, 2002. Through December 31, 2001, we had recognized revenue of $5.0 million of the total contract amount. We intend to pursue additional agreements with ONR to continue funding for this development program, however, we may not be able to enter into any further agreements.

        The University of Michigan.    In October 1992, we entered into a license agreement with the University of Michigan and obtained the exclusive license to technology for delivering gene-based products into cancer cells and blood vessels by catheters. In April 1997, we entered into a sublicense agreement, the rights under which are currently held by Boston Scientific Corporation, for the development of catheter-based intravascular gene delivery technology.

        Wisconsin Alumni Research Foundation.    Under a 1989 research agreement, scientists at the University of Wisconsin, Madison, and our scientists co-invented a core technology related to intramuscular naked DNA administration. In 1991, we licensed from WARF its interest in that technology. We paid WARF an initial license fee and agreed to pay WARF a royalty on sales of any products incorporating the licensed technology and a percentage of up-front license payments from third parties.

Contract Manufacturing and Regulatory Support

National Institutes of Health,—National Institutes of Allergic and Infectious Disease/Division of AIDS. In 2001, we performed contract manufacturing of DNA for infectious disease vaccines under three contracts with the NIH. One of these contracts continues into 2002. Total revenue recognized under these contracts was $1.3 million in 2001. We also provided regulatory support to Division of AIDS under one contract. Total revenue recognized under this contract in 2001 was $0.3 million.

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        International AIDS Vaccine Initiative.    In 2002, we signed a contract with International AIDS Vaccine Initiative, IAVI, a not-for-profit entity, to provide clinical supplies. The initial term of this contract extends to December 31, 2002. Thereafter the term shall be renewed automatically for successive one-year periods unless either party gives at least 90 days prior notice to terminate. The Chairman of our Board of Directors, R. Gordon Douglas, M.D., serves on the Board of Directors of IAVI. Our President and Chief Executive Officer, Vijay B. Samant, serves on the Project Management Subcommittee of IAVI.

Scientific Advisory Board

        In September 2001, we named a Scientific Advisory Board, SAB, consisting of academic and industrial experts in such fields as gene therapy, vaccines, oncology, drug delivery and genomics. We intend to meet with members of the SAB twice per year to discuss research and development strategies, though certain members may communicate with our scientists more frequently to discuss the details of specific projects. All SAB members have been granted options to acquire shares of our common stock. Each SAB member has entered into a consulting agreement specifying the terms and scope of the advisory relationship with us, which provides that the consultant will not consult or otherwise provide services to any other company engaged in gene therapy without our prior consent. We do not believe that termination of any individual consulting agreement would materially affect our business. All of the SAB members are employed by employers other than us and may have other commitments to, or consulting or advisory contracts with, other entities which may conflict or compete with their obligations to us. See "—Scientific Advisory Board Members."

Competition

        The field of gene-based drug development is new and rapidly evolving, and it is expected to continue to undergo significant and rapid technological change. Rapid technological development could result in our product candidates or technologies becoming obsolete before we recover a significant portion of our related research, development, and capital expenditures. We may experience competition both from other companies in the field and from companies which have other forms of treatment for the diseases we are targeting.

        We are aware of several development-stage and established enterprises, including major pharmaceutical and biotechnology firms, which are exploring gene-based drugs or are actively engaged in gene delivery research and development. These include Avigen, Inc., Cell Genesys, Inc., Introgen Therapeutics, Inc., Targeted Genetics Corp., Transgene SA, and Valentis, Inc., among others. We may also experience competition from companies that have acquired or may acquire technology from companies, universities and other research institutions. As these companies develop their technologies, they may develop proprietary technologies which may materially and adversely affect our business.

        In addition, a number of companies are developing products to address the same diseases that we are targeting. For example, AVAX Technologies, Inc., Corixa Corp., Antigenics, Inc., CancerVax Corp., Maxim Pharmaceuticals, Inc. and Genta, Inc., among others, are conducting advanced clinical trials for the treatment of melanoma. In addition, Introgen Therapeutics, Inc., Onyx Pharmaceuticals, Inc., and ImClone Systems, Inc., among others, are conducting clinical trials of their products to treat head and neck cancer. If these or any other companies develop products with efficacy or safety profiles significantly better than our products, we may not be able to commercialize our products, and sales of any of our commercialized products could be harmed.

        Some of our competitors and potential competitors have substantially greater product development capabilities and financial, scientific, marketing and human resources than we do. Competitors may develop products earlier, obtain FDA approvals for products more rapidly, or develop products that are more effective than those under development by us. We will seek to expand our technological

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capabilities to remain competitive; however, research and development by others may render our technology or products obsolete or noncompetitive, or result in treatments or cures superior to ours.

        Regulatory agencies such as the FDA and other government agencies may expand current requirements for public disclosure of development information for gene-based product development data technology which may harm our competitive position with foreign companies and U.S. companies developing non-gene-based products for similar indications.

        Our competitive position will be affected by the disease indications addressed by our product candidates and those of our competitors, the timing of market introduction for these products and the stage of development of other technologies to address these disease indications. For us and our competitors, proprietary technologies, the ability to complete clinical trials on a timely basis and with the desired results, and the ability to obtain timely regulatory approvals to market these product candidates are likely to be significant competitive factors. Other important competitive factors will include the efficacy, safety, reliability, availability and price of products and the ability to fund operations during the period between technological conception and commercial sales.

Government Regulation

        Any products we develop will require regulatory clearances prior to clinical trials and additional regulatory clearances prior to commercialization. New human gene therapies are expected to be subject to extensive regulation by the FDA and comparable agencies in other countries. The precise regulatory requirements with which we will have to comply are uncertain at this time due to the novelty of the gene-based products and therapies currently under development. We believe that our potential products will be regulated either as biological products or as drugs. Drugs are subject to regulation under the Federal Food, Drug and Cosmetic Act; biological products, in addition to being subject to provisions of that Act, are regulated under the Public Health Service Act. Both statutes and related regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising, and other promotional practices. FDA approval or other clearances must be obtained before clinical testing, and before manufacturing and marketing of biologics or drugs.

        FDA approval is required prior to marketing a pharmaceutical product in the United States. To obtain this approval the FDA requires clinical trials to demonstrate the safety, efficacy and potency of the product candidates. Clinical trials are the means by which experimental drugs or treatments are tested in humans. New therapies typically advance from research through preclinical testing, and finally through several phases of clinical trials, or human testing. Clinical trials may be conducted within the United States or in foreign countries. If clinical trials are conducted in foreign countries, the products under development as well as the trials are subject to regulations of the FDA and/or its counterparts in the other countries. Upon successful completion of clinical trials, approval to market the therapy for a particular patient population may be requested from the FDA in the United States and/or its counterparts in other countries.

        Clinical trials are normally done in three phases. Phase I clinical trials are typically conducted with a small number of patients or healthy volunteers to determine the safety profile, the pattern of drug distribution and metabolism and early evidence on effectiveness. Phase II clinical trials are conducted with a larger group of patients afflicted with a target disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. Phase III clinical trials involve large scale, multi-center, comparative trials that are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of safety, efficacy, and potency required by the FDA and other regulatory authorities. For life-threatening diseases, initial human testing generally is done in patients rather than healthy volunteers. These studies may provide results traditionally obtained in Phase II trials and are referred to as "Phase I/II" trials.

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        Obtaining FDA approval is a costly and time-consuming process. Generally, in order to gain FDA pre-market approval, preclinical studies must be conducted in the laboratory and in animal model systems to gain preliminary information on an agent's efficacy and to identify any major safety concerns. The results of these studies are submitted as a part of an application for an Investigational New Drug, IND, which the FDA must review and allow before human clinical trials can start. The IND includes a detailed description of the clinical investigations.

        A company must sponsor and file an IND for each proposed product and must conduct clinical studies to demonstrate the safety, efficacy, and potency that are necessary to obtain FDA approval. The FDA receives reports on the progress of each phase of clinical testing and it may require the modification, suspension, or termination of clinical trials if an unwarranted risk is presented to patients. Human DNA therapeutics are a new category of therapeutics and the clinical trial period may be lengthy or the number of patients may be numerous in order to establish safety, efficacy, and potency.

        After completion of clinical trials of a new product, FDA marketing approval must be obtained. If the product is regulated as a biologic, a Biologic License Application, BLA, is required. If the product is classified as a new drug, a New Drug Application, NDA, is required. The NDA or BLA must include results of product development activities, preclinical studies, and clinical trials in addition to detailed manufacturing information.

        Applications submitted to the FDA are subject to an unpredictable and potentially prolonged approval process. The FDA may ultimately decide that the application does not satisfy its criteria for approval or require additional preclinical or clinical studies. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Before marketing clearance is secured, the manufacturing facility will be inspected for current compliance with Good Manufacturing Practices, GMP, by FDA inspectors. The manufacturing facility must satisfy current GMP requirements prior to marketing clearance. In addition, after marketing clearance is secured, the manufacturing facility will be inspected periodically for GMP compliance by FDA inspectors, and, if the facility is located in California, by inspectors from the Food and Drug Branch of the California Department of Health Services.

        In addition to the FDA requirements, the NIH has established guidelines for research involving human genetic materials, including recombinant DNA molecules. These guidelines apply to all recombinant DNA research that is conducted at facilities supported by the NIH, including proposals to conduct clinical research involving gene therapies. The NIH review of clinical trial proposals and safety information is a public process and often involves review and approval by the Recombinant DNA Advisory Committee of the NIH.

        In both domestic and foreign markets, sales of any approved products will depend on reimbursement from third-party payers, such as government and private insurance plans. Third-party payers are increasingly challenging the prices charged for medical products and services. If we succeed in bringing one or more products to market, these products may not be considered cost-effective, reimbursement may not be available, or reimbursement policies may adversely affect our ability to sell our products on a profitable basis.

        We also are subject to various federal, state and local laws, regulations, and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals, and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research. The extent of government regulation which might result from any future legislation or administrative action cannot be accurately predicted.

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Human Resources

        As of March 1, 2002, we had 152 full-time employees, 21 of whom hold degrees at the doctorate level. Of these employees, 121 are engaged in, or directly support, research and development activities, and 31 are in administrative and business development positions. A significant number of our management and professional employees have prior experience with pharmaceutical and biotechnology companies. None of our employees is covered by collective bargaining agreements, and our management considers relations with our employees to be good.

Facilities

        We lease approximately 51,000 square feet of manufacturing, research laboratory and office space in an established commercial neighborhood in northern San Diego, California, at three sites and with three leases. The leases terminate in 2004. We have the option to renew two of these three leases for an additional five-year period and can renew the third for two additional five-year periods.

        In January 2002, we signed a 15-year lease for a new building, in Sorrento Mesa, in northern San Diego. The new facility will hold approximately 68,400 square feet of manufacturing, research laboratory and office space. This site will allow us to join most of our personnel under one roof while also allowing us to increase our manufacturing capacity for both clinical and commercial production, with the planned addition of a 500-liter or larger fermenter and associated processing equipment. As this is a build-out process, phased-in occupancy should commence by the end of 2002. We will continue to hold the leases on our three existing facilities until they expire. We intend to sublease the majority of this space as it becomes available.

        Within our existing facilities, we have manufactured sufficient quantities of pharmaceutical-grade product to supply our previous and ongoing clinical trials, including the current registration trials. In addition, we have manufactured preclinical and clinical supplies of DNA for our corporate collaborators, for government agencies and for numerous academic researchers.

ADDITIONAL BUSINESS RISKS

You should carefully consider the risks described below, together with all of the other information included in this report, before deciding whether to invest in our common stock. In addition, the risks and uncertainties described below are not the only ones facing us because we are also subject to additional risks and uncertainties not presently known to us. If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be seriously harmed. This could cause the trading price of our common stock to decline, and you may lose all or part of your investment.

None of our products have been approved for sale. If we do not develop commercially successful products, we may be forced to curtail or cease operations.

        Very little data exists regarding the safety and efficacy of gene therapies. All of our potential products are either in research or development. We must conduct a substantial amount of additional research and development before any U.S. or foreign regulatory authority will approve any of our products. Results of our research and development activities may indicate that our potential products are unsafe or ineffective. In this case, regulatory authorities will not approve them. Even if approved, our products may not be commercially successful. If we fail to develop and commercialize our products, we may be forced to curtail or cease operations.

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We have a history of net losses. We expect to continue to incur net losses and we may not achieve or maintain profitability.

        To date, we have not sold any products and do not expect to sell any products for the next few years. Our net losses were approximately $9.2 million, $8.5 million and $6.9 million for 2001, 2000 and 1999, respectively. As of December 31, 2001, we have incurred cumulative net losses totaling approximately $62.4 million. Moreover, we expect that our negative cash flow and losses from operations will continue and increase for the foreseeable future. For 2002, we have forecast a net loss of between $28 million and $32 million. We may not be able to achieve the projected results. We may never generate sufficient product revenue to become profitable. We also expect to have quarter-to-quarter fluctuations in revenues, expenses, and losses, some of which could be significant.

We may need additional capital in the future. If additional capital is not available, we may have to curtail or cease operations.

        We may need to raise more money to continue the research and development necessary to bring our products to market and to establish manufacturing and marketing capabilities. We may seek additional funds through public and private stock offerings, arrangements with corporate collaborators, borrowings under lease lines of credit or other sources. We may not be able to raise additional funds on favorable terms, or at all. If we are unable to obtain additional funds, we may have to reduce our capital expenditures, scale back our development of new products, reduce our workforce and license to others products or technologies that we otherwise would seek to commercialize ourselves. The amount of money we may need will depend on many factors, including:

•

the progress of our research and development programs



•

the scope and results of our preclinical studies and clinical trials



•

the time and costs involved in:



•

obtaining necessary regulatory approvals,



•

filing, prosecuting and enforcing patent claims, and



•

scaling up our manufacturing capabilities.




•

the commercial arrangements we may establish

The regulatory approval process is expensive, time consuming and uncertain which may prevent us from obtaining required approvals for the commercialization of our products.

        Our product candidates under development and those of our collaborators are subject to extensive and rigorous regulations by numerous governmental authorities in the United States and other countries. The regulations are evolving and uncertain. The regulatory process can take many years and require us to expend substantial resources. For example:

•

The FDA has not established guidelines concerning the scope of clinical trials required for gene therapies.



•

The FDA has not indicated how many patients it will require to be enrolled in clinical trials to establish the safety and efficacy of gene therapies.



•

Current regulations are subject to substantial review by various governmental agencies.

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        Therefore, U.S. or foreign regulations could prevent or delay regulatory approval of our products or limit our ability to develop and commercialize our products. Delays could:

•

impose costly procedures on our activities;



•

diminish any competitive advantages that we attain; or



•

negatively affect our ability to receive royalties.

        We understand that both the FDA and NIH are considering rules and regulations that would require public disclosure of commercial development data that is presently confidential. This potential disclosure of commercial confidential information, if implemented, may result in loss of advantage of competitive secrets.

        We believe that the FDA and comparable foreign regulatory bodies will regulate separately each product containing a particular gene depending on its intended use. Presently, to commercialize any product we must sponsor and file a regulatory application for each proposed use. We then must conduct clinical studies to demonstrate the safety and efficacy of the product necessary to obtain FDA approval. The results obtained so far in our clinical trials may not be replicated in our on-going or future trials. This may prevent any of our potential products from receiving FDA approval.

        We use recombinant DNA molecules in our product candidates, and therefore we also must comply with guidelines instituted by the NIH and its Recombinant DNA Advisory Committee. The NIH could restrict or delay the development of our product candidates.

Adverse events in the field of gene therapy, or with respect to our product candidates, may negatively impact regulatory approval or public perception of our products.

        The death in 1999 of a patient undergoing a viral-based gene therapy at the University of Pennsylvania in an investigator-sponsored trial was widely publicized. This death and other adverse events in the field of gene therapy could result in greater governmental regulation of gene therapies, including our non-viral gene delivery technology, and potential regulatory delays relating to the testing or approval of our product candidates. In addition, the field of gene therapy is under increased scrutiny, which may affect our product development efforts or clinical trials.

        For example, one patient who had undergone treatment with Allovectin-7® for advanced metastatic melanoma died more than two months later of progressive disease and numerous other factors after receiving multiple other cancer therapies. The death was originally reported as unrelated to the treatment. Following an autopsy, the death was reclassified as "probably related" to the treatment because the possibility could not be ruled out. We do not believe Allovectin-7® was a significant factor in the patient's death.

        The commercial success of our product candidates will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapies are unsafe and our gene therapies may not gain the acceptance of the public or the medical community. Negative public reaction to adverse events in our trials or gene therapy in general could result in greater government regulation and stricter labeling requirements of gene therapies, including our gene therapies, and could cause a decrease in the demand for any products we may develop.

Our patents and proprietary rights may not provide us with any benefit and the patents of others may prevent us from commercializing our products.

        We may not receive any patents from our current applications. Moreover, if patents are issued to us, governmental authorities may not allow claims sufficient to protect our technology. Finally, others may challenge or seek to circumvent or invalidate our patents. In that event, the rights granted under

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our patents may be inadequate to protect our proprietary technology or to provide any commercial advantage.

        Our core gene delivery technology was covered by a patent issued in Europe, which was opposed by seven companies under European patent procedures. In October 2001, we announced our intention to appeal a ruling by the Opposition Division of the European Patent Office that revoked our patent on formal grounds. If we are not successful in the appeal and opposition proceedings we may lose part or all of our proprietary protection on our product candidates in Europe.

        Others may have or may receive patents which contain claims applicable to our products. These patents may impede our ability to commercialize our products.

The legal proceedings to obtain patents and litigation of third-party claims of intellectual property infringement could require us to spend money and could impair our operations.

        Our success will depend in part on our ability to obtain patent protection for our products and processes both in the United States and in other countries. The patent positions of biotechnology and pharmaceutical companies, however, can be highly uncertain and involve complex legal and factual questions. Therefore, it is difficult to predict the breadth of claims allowed in the biotechnology and pharmaceutical fields.

        We also rely on confidentiality agreements with our corporate collaborators, employees, consultants and certain contractors to protect our proprietary technology. However, these agreements may be breached and we may not have adequate remedies for such breaches. In addition, our trade secrets may otherwise become known or independently discovered by our competitors.

        Protecting intellectual property rights can be very expensive. Litigation will be necessary to enforce patents issued to us or to determine the scope and validity of third-party proprietary rights. Moreover, if a competitor were to file a patent application claiming technology also invented by us, we would have to participate in an interference proceeding before the PTO or in a foreign counterpart to determine the priority of the invention. We may be drawn into interferences with third parties or may have to provoke interferences ourselves to unblock third-party patent rights to allow us or our licensees to commercialize products based on our technology. Litigation could result in substantial costs and the diversion of management's efforts regardless of the results of the litigation. An unfavorable result in litigation could subject us to significant liabilities to third parties, require disputed rights to be licensed or require us to cease using some technology.

        Our products and processes may infringe, or be found to infringe on, patents not owned or controlled by us. Patents held by others may require us to alter our products or processes, obtain licenses, or stop activities. If relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in the patents, or may be required to obtain licenses or redesign our products or processes to avoid infringement. A number of genetic sequences or proteins encoded by genetic sequences that we are investigating are, or may become, patented by others. As a result, we may have to obtain licenses to test, use or market these products. Our business will suffer if we are not able to obtain licenses at all or on terms commercially reasonable to us and we may not be able to redesign our products or processes to avoid infringement.

Competition and technological change may make our product candidates and technologies less attractive or obsolete.

        We compete with companies, including major pharmaceutical and biotechnology firms, that are pursuing other forms of treatment or prevention for diseases that we target. We also may experience competition from companies that have acquired or may acquire technology from universities and other

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research institutions. As these companies develop their technologies, they may develop proprietary positions which may prevent us from successfully commercializing products.

        Some of our competitors are established companies with greater financial and other resources. Other companies may succeed in developing products and obtaining FDA approval faster than we do, or in developing products that are more effective than ours. While we will seek to expand our technological capabilities to remain competitive, research and development by others will seek to render our technology or products obsolete or noncompetitive or result in treatments or cures superior to any therapy developed by us. Additionally, even if our product development efforts are successful, and even if the requisite regulatory approvals are obtained, our product may not gain market acceptance among physicians, patients, healthcare payers and the medical communities. If any of our product candidates do not achieve market acceptance, we may lose our investment in that product, which may cause our stock price to decline.

The method of administration of some of our product candidates can cause adverse events in patients, including death.

        Some of our potential products are designed to be injected directly into malignant tumors. There are medical risks inherent in direct tumor injections. For example, in clinical trials of our potential products, attending physicians have punctured patients' lungs in less than one percent of procedures, requiring hospitalization. In addition, a physician administering our product in an investigator-sponsored clinical trial inadvertently damaged tissue near the heart of a patient, which may have precipitated the patient's death. These events are reported as adverse events in our clinical trials and illustrate the medical risks related to direct injection of tumors. These risks may adversely impact market acceptance of some of our product candidates.

Commercialization of some of our potential products depends on collaborations with others. If our collaborators are not successful or if we are unable to find collaborators in the future, we may not be able to develop these products.

        Our strategy for the research, development and commercialization of some of our product candidates requires us to enter into contractual arrangements with corporate collaborators, licensors, licensees and others. Our success depends upon the performance by these collaborators of their responsibilities under these arrangements. Some collaborators may not perform their obligations as we expect or we may not derive any revenue from these arrangements.

        We have collaborative agreements with several pharmaceutical companies. We do not know whether these companies will successfully develop and market any products under their respective agreements. Moreover, some of our collaborators are also researching competing technologies to treat the diseases targeted by our collaborative programs. We may be unsuccessful in entering into other collaborative arrangements to develop and commercialize our products.

We may suffer a material financial loss due to dilution if additional shares of VGI stock are issued at a price below our issuance price, or due to permanent impairment if VGI Is unable to successfully complete its development plans.

        In February 2000, we received Series B Preferred Stock in VGI in exchange for a license to our technology. This investment is recorded on our balance sheet at estimated fair value on the date of investment of $5.0 million. The preferred stock is convertible into common stock of VGI. If additional shares of VGI common or preferred stock are issued at a price below our issuance price, the conversion rate would change and the percentage of our equity ownership in VGI would decrease.

        VGI is a privately-held company developing gene-based delivery of the angiogenic growth factor VEGF-2 for cardiovascular applications. VGI has completed Phase I and Phase II trials. VGI still

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needs to raise substantial cash to complete its development plans, and there can be no assurance that the therapy will work or that the FDA will approve such a therapy. VGI, which currently has few employees and limited resources, may not be able to successfully commercialize a product even if it receives FDA approval. We do not believe there has been any permanent impairment to our investment to date, however, this may change depending on the funding and development status of VGI, which is beyond our control.

If we lose our key personnel or are unable to attract and retain additional personnel, we may not be able to pursue collaborations or develop our own products.

        We are highly dependent on the principal members of our scientific, manufacturing, clinical, regulatory and management personnel, the loss of whose services might significantly delay or prevent the achievement of our objectives. We depend on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We face competition for qualified individuals from other companies, academic institutions, government entities and other organizations in attracting and retaining personnel. To pursue our product development plans, we will need to hire additional management personnel and additional scientific personnel to perform research and development, as well as personnel with expertise in clinical trials, government regulation and manufacturing. We may not be successful in hiring or retaining qualified personnel.

We may not be able to manufacture products on a commercial scale.

        We have limited experience in manufacturing our product candidates in commercial quantities. We may be dependent initially on corporate collaborators, licensees or others to manufacture our products commercially. We also will be required to comply with extensive regulations applicable to manufacturing facilities. We may be unable to enter into any arrangement for the manufacture of our products.

We may not be able to sublease our existing manufacturing, research laboratory and office sites upon completion of our new facility.

        We currently hold three leases at three sites for our existing manufacturing, research laboratory and offices facilities. The leases do not terminate until 2004. These spaces will become progressively unnecessary during the scheduled phased-in occupancy of our new facility. We may be unable to sublease the sites as we vacate them.

We have no marketing or sales experience, and if we are unable to develop our own sales and marketing capability, we may not be successful in commercializing our products.

        Our current strategy is to market our proprietary cancer products directly in the United States, but we currently do not possess pharmaceutical marketing or sales capabilities. In order to market and sell our proprietary cancer products, we will need to develop a sales force and a marketing group with relevant pharmaceutical experience, or make appropriate arrangements with strategic partners to market and sell these products. Developing a marketing and sales force is expensive and time consuming and could delay any product launch. Our inability to successfully employ qualified marketing and sales personnel and develop our sales and marketing capabilities will harm our business.

Health care reform and restrictions on reimbursement may limit our returns on potential products.

        Our ability to earn sufficient returns on our products will depend in part on the extent to which reimbursement for our products and related treatments will be available from:

•

government health administration authorities,

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•

private health coverage insurers,



•

managed care organizations, and



•

other organizations.

        If we fail to obtain appropriate reimbursement, it could prevent us from successfully commercializing our potential products.

        There are efforts by governmental and third-party payers to contain or reduce the costs of health care through various means. We expect that there will continue to be a number of legislative proposals to implement government controls. The announcement of proposals or reforms could impair our ability to raise capital. The adoption of proposals or reforms could impair our business.

        Additionally third-party payers are increasingly challenging the price of medical products and services. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using our products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and whether adequate third-party coverage will be available.

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

        Our research and development processes involve the controlled storage, use and disposal of hazardous materials, biological hazardous materials and radioactive compounds. We are subject to federal, state and local regulations governing the use, manufacture, storage, handling and disposal of materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, or at all. We could be required to incur significant costs to comply with current or future environmental laws and regulations.

We may have significant product liability exposure.

        We face an inherent business risk of exposure to product liability and other claims in the event that our technologies or products are alleged to have caused harm. These risks are inherent in the development of chemical and pharmaceutical products. Although we currently maintain product liability insurance, we may not have sufficient insurance coverage and we may not be able to obtain sufficient coverage at a reasonable cost. Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of any products developed by us or our collaborators. We also have liability for products manufactured by us on a contract basis for third parties. If we are sued for any injury caused by our technology or products, our liability could exceed our total assets.

Our stock price could continue to be highly volatile and you may not be able to resell your shares at or above the price you paid for them.

        The market price of our common stock, like that of many other life sciences companies, has been highly volatile and is likely to continue to be highly volatile. The following factors, among others, could have a significant impact on the market price of our common stock:

•

the results of our preclinical studies and clinical trials or those of our collaborators or competitors or for gene therapies in general,

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•

evidence of the safety or efficacy of our potential products or the products of our competitors,



•

the announcement by us or our competitors of technological innovations or new products,



•

governmental regulatory actions,



•

changes or announcements in reimbursement policies,



•

developments with our collaborators,



•

developments concerning our patent or other proprietary rights or those of our competitors, including litigation,



•

concern as to the safety of our potential products,



•

period-to-period fluctuations in our operating results,



•

market conditions for life science stocks in general, and



•

changes in estimates of our performance by securities analysts.

We are at risk of securities class action litigation due to our expected stock price volatility.

        In the past, stockholders have often brought securities class action litigation against a company following a decline in the market price of its securities. This risk is especially acute for us because life science companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, and could seriously harm our business.

Our anti-takeover provisions could discourage potential takeover attempts and make attempts by stockholders to change management more difficult.

        The approval of two-thirds of our voting stock is required to approve some transactions and to take some stockholder actions, including the calling of a special meeting of stockholders and the amendment of any of the anti-takeover provisions contained in our certificate of incorporation. Further, pursuant to the terms of our stockholder rights plan adopted in March 1995, we have distributed a dividend of one right for each outstanding share of common stock. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our Board of Directors and may have the effect of deterring hostile takeover attempts.

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Executive Officers

        The executive officers of Vical are elected annually by the Board of Directors. Substantial changes were made in 2001 to our senior management ranks. Alan Dow joined us as Vice President and General Counsel, David C. Kaslow, M.D., was appointed to the newly created position of Chief Scientific Officer, Kevin R. Bracken was named Vice President, Manufacturing, and David J. Pyrce was appointed Vice President, Business Development. Our executive officers are as follows:

Name	Age(1)	Position
Vijay B. Samant	49	President, Chief Executive Officer and Director
David C. Kaslow, M.D.	43	Chief Scientific Officer
Martha J. Demski	49	Vice President, Chief Financial Officer, Treasurer and Secretary
Kevin R. Bracken	53	Vice President, Manufacturing
Alan E. Dow, J.D., Ph.D.	46	Vice President and General Counsel
Jon A. Norman, Ph.D.	53	Vice President, Research
David J. Pyrce	45	Vice President, Business Development

(1)

As of December 31, 2001

Vijay B. Samant joined us as President and Chief Executive Officer in November 2000. Mr. Samant has 23 years of diverse U.S. and international sales, marketing, operations, and business development experience with Merck. From 1998 to mid-2000, he was Chief Operating Officer of the Merck Vaccine Division. From 1990 to 1998, he served in the Merck Manufacturing Division as Vice President of Vaccine Operations, Vice President of Business Affairs, and Executive Director of Materials Management. Mr. Samant earned his M.B.A. from the Sloan School of Management at the Massachusetts Institute of Technology in 1983. He received a master's degree in chemical engineering from Columbia University in 1977 and a bachelor's degree in chemical engineering from the University of Bombay, University Department of Chemical Technology, UDCT, in 1975.

David C. Kaslow, M.D., joined us as Chief Scientific Officer in October 2001. Dr. Kaslow has more than 15 years of vaccine research experience, including the last two at Merck, most recently as Head of the Department of Vaccine Research and Technology. From 1986 to 1999, he held various senior research positions at the National Institutes of Health, including Head of the Recombinant Protein Development Unit and the Malaria Vaccine Development Unit at the Laboratory of Parasitic Diseases. Dr. Kaslow has been awarded numerous professional honors, including the U.S. Public Health Service Outstanding Service Medal. He has published some 122 scientific papers, and authored more than 20 review articles and book chapters. He holds or co-holds 13 patents. Dr. Kaslow received his bachelor's degree from the University of California, Davis, in 1979, and his M.D. from the School of Medicine at the University of California, San Francisco, in 1983.

Martha J. Demski joined us as Chief Financial Officer in December 1988 and currently serves as Vice President, Chief Financial Officer, Treasurer and Secretary. From August 1977 until joining us, Ms. Demski held various positions with Bank of America, lastly as Vice President/Section Head of the Technology Section. She also served as an adviser to Bank of America on a statewide basis regarding the biotechnology industry in California. Ms. Demski received a B.A. from Michigan State University in 1974 and an M.B.A. in Finance and Accounting from The University of Chicago Graduate School of Business in 1977.

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Kevin R. Bracken joined us as Vice President, Manufacturing in October 2001. From July 1998 to October 2001, Mr. Bracken was Vice President, Process Engineering and Manufacturing for Universal Preservation Technologies, Inc. and Director of Engineering for Molecular Biosystems, Inc. from November 1995 to July 1998. He brings experience in commercial scale-up of biopharmaceutical manufacturing facilities, process development and optimization, and direction of research, pre-clinical, clinical, production and contract manufacturing. Prior to November 1995, he held a variety of process and engineering positions with Gilead Sciences, Inc., and a predecessor company, Vestar, Inc., with Baxter International, and with E.I. duPont de Nemours and Company. Mr. Bracken earned his M.S. degree in chemical engineering from the University of Rochester in 1973, and his B.S. degree in chemical engineering from the University of Delaware in 1970.

Alan E. Dow, J.D., Ph.D., joined Vical in June 2001 as Vice President and General Counsel. Dr. Dow came to Vical from Pillsbury Winthrop LLP, where he was a Senior Attorney practicing general corporate and intellectual property law for clients in the United States and abroad. His focus was in the areas of biotechnology, genomics, pharmaceuticals, agricultural biotechnology and chemistry. From 1998 to 2000, Dr. Dow was Corporate Counsel, Intellectual Property, for Pharmacia Corporation, and from 1994 to 1998 he was an Associate Attorney with Klarquist, Sparkman, Campbell, Leigh & Whinston of Portland, Oregon. Dr. Dow earned his J.D. from Stanford Law School in 1994, his Ph.D. from Harvard University in 1992, and a B.S. degree in chemistry, with high distinction, from the University of Maine at Orono in 1977.

Jon A. Norman, Ph.D., joined us in January 1993 as Vice President, Research. From 1986 until joining us, Dr. Norman was the Group Leader/Section Head for the Departments of Pharmacology and Biochemistry at Bristol-Myers Squibb Corporation. He was a Senior Research Scientist at Ciba-Geigy Corporation from 1981 to 1986. Dr. Norman received his B.A. in 1970 and M.A. in 1972 from the University of California at Santa Barbara and his Ph.D. in Biochemistry from the University of Calgary in 1977, after which he was awarded a fellowship at the Friederich Miescher Institute in Basel, Switzerland.

David J. Pyrce joined us in October 2001 as Vice President, Business Development. Since 1993, Mr. Pyrce was a General Partner of Bear Creek Capital Management, a healthcare-based investment management firm. In addition, he served as Vice President and Senior Healthcare Analyst at First Security, Van Kasper & Company from 1993 to 1997 and as Vice President, Corporate Communications and Investor Relations, at Imagyn Medical Technologies from 1997 to 1999. He was Vice President of Diagnostic Products for Glyko Biomedical, Inc., from 1991 to 1993, and Director of Business Development at SmithKline Beecham from 1986 to 1991. From 1979 to 1986, he advanced through several sales and marketing positions at Baxter Healthcare, lastly as Vice President of Sales and Marketing. Mr. Pyrce received an M.B.A. in Financial Management and an M.S. in Financial Markets and Trading from the Stuart School of Business at the Illinois Institute of Technology in 1984. He received a B.S. degree in Biochemistry and Molecular Biology from Northern Illinois University in 1978. He is also an alumnus of the Advanced Executive Program at the Kellogg School of Business at Northwestern University.

Scientific Advisory Board Members

        Members of our Scientific Advisory Board, SAB, are selected by our executive officers. Our SAB members are as follows:

C. Thomas Caskey, M.D., F.A.C.P., a world-renowned leader in genomics and genetics, recently served as Senior Vice President of Research at Merck Research Laboratories and as Trustee and President of The Merck Genome Research Institute, Inc. He is President and Chief Operating Officer of Cogene BioTech Ventures, Ltd., Chairman of the Board of Lexicon Genetics, and a member of the Board of Directors of Athersys Inc., and currently serves as an adjunct professor at Baylor College of

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Medicine. In addition to his work in the pharmaceutical industry, Dr. Caskey has served as President of the American Society of Human Genetics and as a member of the advisory committees for the National Institutes of Health's Program Advisory Committee on the Human Genome, and the Department of Energy on Mapping the Human Genome. He was awarded the Distinguished Texas Geneticist in 1998 and the Presidency of the Human Genome Organization in 1993. A member of the National Academy of Sciences and the Institute of Medicine, he is the recipient of numerous research and teaching awards. Dr. Caskey is board certified in internal medicine, clinical genetics and biochemical and molecular genetics, and earned his medical doctorate from Duke University.

Phyllis Gardner, M.D., is a tenured associate professor in the Department of Medicine at Stanford University School of Medicine. She has conducted extensive research in cell biology, including gene therapy, with emphasis in the area of cystic fibrosis. She has received numerous national awards and honors, including the Faculty Development Award from the Pharmaceutical Research and Manufacturers Association Foundation and Burroughs Wellcome Faculty Scholar in Clinical Pharmacology. In 1998, Dr. Gardner co-founded Genomics Collaborative, Inc., a functional genomics company focused on developing target discovery and validation intellectual property. From 1996 to 1998, she also served as Vice President of Research and head of ALZA Technology Institute of ALZA Corporation, a pharmaceutical company specializing in drug delivery technologies. She currently serves on the Board of Directors of several companies, including Aronex, Health Hero Network, Pharmacyclics, and Aerogen Inc. Dr. Gardner received her medical doctorate from Harvard Medical School.

Paul A. Offit, M.D., is Chief of Infectious Diseases, the Henle Professor of Immunologic and Infectious Diseases, and Director of the Vaccine Education Center at the Children's Hospital of Philadelphia. He is also Professor of Pediatrics at the University of Pennsylvania School of Medicine. Dr. Offit is an internationally recognized expert in the fields of immunology and virology. He is a member of the Advisory Committee on Immunization Practices to the Center for Disease Control and Prevention, CDC. He has received numerous awards, including the J. Edmund Bradley Prize for Excellence in Pediatrics and the Young Investigator Award in vaccine development. Dr. Offit is the co-holder of a patent on a bovine human reassortant rotavirus vaccine and serves as a consultant to Merck on the vaccine's development. Dr. Offit has written two books, Vaccines: What Every Parent Should Know, with Louis Bell, M.D., and Breaking the Antibiotic Habit: A Parent's Guide to Coughs, Colds, Ear Infections, and Sore Throats, with Louis Bell, M.D., and Bonnie Fass-Offit. He received his medical doctorate from University of Maryland.

Eric N. Olson, Ph.D., is a world leader in scientific discovery and basic research into the workings of muscle cells. His research has defined the molecular events that control cell development, particularly discovering genes that control the development of heart muscle and skeletal muscle cells. Dr. Olson has been an Established Investigator of the American Heart Association, and his previous honors include the Edgar Haber Cardiovascular Research Award, the American Heart Association Basic Research Prize, and Gill Heart Institute Award for Outstanding Contributions to Cardiovascular Medicine. Dr. Olson is Director of the Hamon Center for Basic Cancer Research and Professor and Chairman of the Department of Molecular Biology at the University of Texas Southwestern Medical Center. He is also an elected member of the American Academy of Arts and Sciences and the National Academy of Sciences. Dr. Olson received his Ph.D. in biochemistry from the Bowman Gray School of Medicine of Wake Forest University, and completed postdoctoral fellowships at the American Heart Association and National Institutes of Health.

Douglas D. Richman, M.D., Professor of Pathology and Medicine, University of California, San Diego, UCSD, and VA Healthcare System, is a recognized expert in infectious diseases and medical virology. He is Director of the UCSD Center for AIDS Research. Dr. Richman is also a Fellow of the American Association for the Advancement of Science, the American Association of Physicians, and the Infectious Disease Society of America, and is a member of the NIH AIDS Vaccine Research

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Committee. Dr. Richman's laboratory is credited with the discovery of HIV drug resistance in 1988, and now is focused on several aspects of HIV infection: 1) the investigation of antiviral drugs and drug resistance; 2) the pathogenesis and immune responses of primary HIV infection; and 3) the mechanisms involved with latent HIV infection. Dr. Richman received his medical doctorate at Stanford University, where he completed his residency.

George W. Sledge, M.D., is the Ballvé-Lantero Professor of Oncology at Indiana University. Dr. Sledge specializes in the treatment of breast cancer, and is active in research involving monoclonal antibodies and anti-angiogenesis. In this role, he chaired the committee that developed the School of Medicine's first multi-disciplinary cancer program, the Breast Care and Research Center. Dr. Sledge has served as chairman of the Hoosier Oncology Group's Breast Cancer committee, as a member and vice-chairman of the Eastern Cooperative Oncology Group's Breast Cancer Committee, and as a member of the editorial board of The Breast Journal. He is editor-in-chief of Clinical Breast Cancer. He is an active member of the American Association for Cancer Research and the American Society for Clinical Oncology. Dr. Sledge received his medical degree from Tulane University.

ITEM 2. PROPERTIES

        We currently lease approximately 51,000 square feet of manufacturing, research laboratory and office space in northern San Diego, California, at three sites under three leases. The leases terminate in 2004. Total current monthly rental on the facilities, excluding common area maintenance costs, is approximately $135,000.

        In January 2002, we signed a 15-year lease for a new, 68,400 square foot facility in Sorrento Mesa, in northern San Diego. The projected level monthly rental on this facility, excluding estimated common area maintenance costs, is approximately $235,000. Under generally accepted accounting principles, we have to recognize level monthly rent expense over the entire lease period. This level monthly rent is calculated by adding the total rent payments over the entire lease period of fifteen years and then dividing the result by the 180 months of the lease. We have the option to renew this lease for three additional five-year periods beyond the expiration, and have a one-time purchase option at 110 percent of fair market value which we can exercise in year nine of the lease. We will continue to hold the leases on our three existing facilities until they expire. We intend to sublease the majority of this space as it becomes available.

ITEM 3. LEGAL PROCEEDINGS

        In October 2001, we announced our intention to appeal the ruling by the Opposition Division of the European Patent Office revoking on formal grounds our patent covering the nonviral delivery of genetic material. According to European patent procedures, issued patents may be opposed by parties interested in challenging the issued claims. The patent covering our core DNA delivery technology was issued in 1998 and was subsequently opposed by seven companies. The Opposition Division ruled that, as a result of amendments to the claims made during the process of obtaining the European patent and during the opposition process, the claims did not comply with European patent laws. Our appeal, which we plan to file by the end of April 2002, will seek to overturn the revocation, and we may also use additional patent applications that are pending in Europe to secure patent protection for our core gene delivery technology. We intend to vigorously defend our patent position in the European opposition proceedings.

        In the ordinary course of business, we are a party to lawsuits involving employee-related matters. We do not believe that an unfavorable outcome in any of these matters would have a material adverse effect on our financial condition or results of operations.

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

        Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our common stock is traded on the Nasdaq National Market under the symbol "VICL." The following table presents quarterly information on the price range of high and low sales prices for the common stock on the Nasdaq National Market for the periods indicated since January 1, 2000.

	High		Low
2000
First Quarter	$	73.50	$	25.00
Second Quarter		39.81		13.00
Third Quarter		29.88		15.50
Fourth Quarter		26.63		14.50
2001
First Quarter	$	20.50	$	8.53
Second Quarter		18.00		8.69
Third Quarter		14.10		8.35
Fourth Quarter		14.00		9.56

        As of March 15, 2002, there were approximately 469 stockholders of record of our common stock with 20,071,344 shares outstanding. We have never declared or paid any dividends and do not expect to pay any dividends in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

        The following table summarizes certain selected financial data for each of the five years ended December 31, 2001. The information presented should be read in conjunction with the financial statements and notes included elsewhere in this report.

			Year ended December 31,
			2001			2000			1999			1998			1997
			(in thousands, except per share amounts)
Statements of Operations Data:
	Revenues(1):
		License/royalty revenue	$	7,572		$	5,027		$	8,294		$	5,044		$	6,477
		Contract revenue		3,794			2,593			2,417			876			1,326
				11,366			7,620			10,711			5,920			7,803
	Operating expenses:
		Research and development		22,073			18,514			15,344			12,054			11,936
		General and administrative		6,522			5,265			4,376			3,650			3,733
		Total operating expenses		28,595			23,779			19,720			15,704			15,669
	Loss from operations			(17,229	)		(16,159	)		(9,009	)		(9,784	)		(7,866	)
	Investment income(2)(3)			8,286			9,357			2,229			2,465			2,447
	Interest expense			(297	)		(205	)		(129	)		(162	)		(192	)
	Net loss before cumulative effect of accounting change			(9,240	)		(7,007	)		(6,909	)		(7,481	)		(5,611	)
	Cumulative effect of accounting change(1)			—			(1,510	)		—			—			—
	Net loss		$	(9,240	)	$	(8,517	)	$	(6,909	)	$	(7,481	)	$	(5,611	)
	Net loss per share (basic and diluted)		$	(0.46	)	$	(0.43	)	$	(0.43	)	$	(0.47	)	$	(0.36	)
	Weighted average shares used in per share calculation2			20,032			19,689			16,136			15,798			15,485

		As of December 31,
		2001		2000		1999		1998		1997
		(in thousands)
Balance Sheets Data:
	Cash, cash equivalents and marketable securities	$	134,087	$	148,144	$	37,675	$	40,184	$	45,555
	Working capital		130,933		145,569		35,996		38,398		44,856
	Total assets		154,495		162,903		45,059		44,844		50,691
	Long-term obligations		4,545		5,121		740		801		1,232
	Stockholders' equity		142,159		150,794		38,669		40,824		47,194

(1)

In the fourth quarter of 2000, we changed our revenue recognition accounting policy to conform to the requirements of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," SAB 101, as more fully described in Note 2 of the notes to our financial statements.

(2)

In January 2000, we completed the sale of 3,450,000 shares of Vical common stock in a public offering, which raised net proceeds of approximately $117.5 million.

(3)

Investment income in 2001 included realized gains on the sale of marketable securities of $1.1 million. Realized gains were not material for previous years presented.

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

        The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. We used herein the words "may," "will," "expects," "anticipates," "estimates," "intends," "plan," "predicts," "potential," "believe," "should," and similar expressions intended to identify such forward-looking statements. Such statements are only predictions and our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Business" and "Additional Business Risks," as well as those discussed elsewhere in this report. This discussion and analysis should be read in conjunction with the financial statements and notes included elsewhere in this report.

Overview

        We are focused on the development of biopharmaceutical products based on our patented gene delivery technologies for the prevention and treatment of serious or life-threatening diseases. Potential applications of our gene delivery technology include:

•

Gene therapies for cancer,



•

DNA vaccines for infectious diseases or cancer, and



•

DNA therapeutic protein delivery.

        We are actively pursuing the refinement of our plasmids and lipids, development of future products, evaluation of potential enhancements to our core technologies, and exploration of alternative gene delivery technologies. We also seek to develop additional applications for our technologies by testing new approaches to disease control or prevention. These efforts could lead to further independent product development or additional licensing opportunities. In addition, we continually evaluate compatible technologies or products that may be of potential interest for in-licensing or acquisition.

        We collaborate with major pharmaceutical and biotechnology companies, and government agencies that give us access to complementary technologies or greater resources. These collaborations provide us with mutually beneficial opportunities to expand our product pipeline and serve significant unmet medical needs. We license intellectual property from companies holding complementary technologies in order to leverage the potential of our own gene delivery technology and to further the discovery of innovative new therapies for internal development. We license our intellectual property to other companies in order to leverage our technologies for applications that may not be appropriate for our independent product development efforts.

        We are developing vaccine product candidates for infectious diseases primarily in collaboration with our corporate collaborator, Merck. We have recently regained rights to develop and commercialize infectious disease vaccines and gene therapies for neurodegenerative diseases that were previously licensed to Aventis Pharma and Aventis Pasteur, two divisions of Aventis S.A. We have license agreements allowing Centocor and Aventis Pasteur to use our gene delivery technology to develop and commercialize DNA vaccines for the potential treatment of types of cancer. We have an agreement with Boston Scientific for the use of our technology in catheter-based intravascular gene delivery. We also have an agreement with Merial for use of our technology in DNA vaccines for animal infectious disease targets. We have a reciprocal, royalty-bearing license with HGS granting us the option to exclusively license up to three genes from HGS for gene-based product development. HGS also has the option to license our gene delivery technology for use in up to three gene-based products. In addition, we granted an exclusive, royalty-bearing license to VGI, a private company in which HGS is a major

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shareholder, for naked DNA delivery of a gene with potential use for angiogenesis. We also have an agreement with Aventis Pharma for naked DNA delivery of a separate angiogenic growth factor.

        We have an exclusive agreement with Ichor to develop products based on our gene delivery technology and delivered using Ichor's proprietary electroporation systems. Both companies are applying this innovative approach toward the initial development of selected products. We have also entered into an exclusive agreement with CytRx that grants to us rights to use or sublicense CytRx's poloxamer technology to enhance viral or non-viral delivery of polynucleotides in all preventive and therapeutic human and animal health applications, except for four infectious disease vaccine targets licensed to Merck and prostate-specific membrane antigen. In addition, the license agreement permits our use of CytRx's technology to enhance the delivery of proteins in prime-boost vaccine applications that involve the use of polynucleotides. As part of the agreement, we made a $3.8 million up-front payment in December 2001, and potentially may make future milestone and royalty payments. The license fee is being amortized to expense using the straight-line method over the estimated ten-year average useful life of the technology.

        To date, we have not received revenues from the sale of our products. We expect to incur substantial operating losses for at least the next few years, due primarily to the expansion of our research and development programs, the cost of preclinical studies and clinical trials, spending for outside services, costs related to maintaining our intellectual property portfolio, our relocation to a new facility, and possible advancement toward commercialization activities.

        Losses may fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and the revenues received from collaborative agreements. Such fluctuations may be significant. As of December 31, 2001, our accumulated deficit was approximately $62.4 million. We expect our net loss for 2002 to be between $28 million and $32 million. The anticipated increase in net loss compared with 2001 reflects the expected reductions in license and contract revenues, an anticipated decline in investment income, higher planned expenses related to preclinical research and development programs, and consolidation of our facilities in a new location.

Change in Accounting Principle

        In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or SAB 101. SAB 101 reflects the SEC's views on revenue recognition. Historically we recognized revenue from initial technology option and license fees in the period in which the agreement was signed, if there were no significant performance obligations remaining. Revenue from milestone payments was recognized as revenue as the collaborator achieved the milestones. SAB 101 requires that, when there has been no culmination of the earnings process, payments must be deferred and recognized over the period over which the revenue is deemed to have been earned. As such, we defer and recognize payments from technology option and license fees, and milestone payments over the period in which the revenue is deemed to have been earned.

        Under option and license agreements which do not require research to be performed by us and where the collaborator pays an upfront fee for an option to a license to our technology, we believe that SAB 101 would require us to recognize the revenue from the upfront payment over the option period. For those agreements which do not require research to be performed by us and where the collaborator pays an upfront fee for a license to our technology, or where the collaborator holds an option that is then exercised to get a license, we believe all significant performance obligations were met and the culmination of the earnings process occurred upon granting the license to the technology. For these types of transactions, our only remaining performance obligation after the grant is to maintain and defend the patents and patent applications. The collaborators do not receive access to any upgrades or enhancements to our technology.

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        Under certain agreements, we are paid to perform research and development services during the research period specified in the agreement. For these agreements, historically, we recognized the revenue on the research services as the services were provided. This accounting is unchanged under SAB 101. However, under SAB 101, we believe that any upfront option or license payment under this type of agreement would have to be deferred and recognized over the research period.

        In the fourth quarter of 2000, we completed our evaluation of payments we received under our various option and license agreements. We identified one agreement with Pfizer entered into in 1999, which we believe, under SAB 101, would require a change in accounting as of the implementation date of January 1, 2000. The amount of revenue recognized in 1999 that under SAB 101 was deferred as of January 1, 2000, was $1.5 million.

        We implemented SAB 101 in the fourth quarter of 2000, by restating the first three quarters of 2000 financial statements to apply SAB 101 effective January 1, 2000. The statement of operations for 2000 reflects a one-time charge to earnings of $1.5 million for the cumulative effect of the change in accounting principle as of January 1, 2000. In 2001 and 2000, we recognized approximately $0.7 million per year of this deferred license revenue under the new revenue recognition policy.

        On a pro forma basis, if the impact of SAB 101 had been implemented effective January 1, 1999, the pro forma net loss and the pro forma net loss per common share for the year ended December 31, 1999, would have been $8.4 million and $0.52, respectively, compared with the reported net loss and the reported net loss per common share of $6.9 million and $0.43, respectively.

Results of Operations

        We had revenues of $11.4 million for the year ended December 31, 2001, compared with $7.6 million in 2000. License revenue of $7.6 million in 2001 included scheduled milestone payments of $3.0 million from Merck and $1.0 million from Centocor, and royalty and other revenue of $1.0 million. License revenue in 2001 also included recognition of deferred license fees of $1.8 million from Merial and VGI, and of $0.8 million primarily from the Pfizer agreement as a result of applying the change in accounting principle discussed in the section above. Contract revenue of $3.8 million for 2001 included $1.5 million of revenues from the contract with the ONR for the development work on a potential DNA vaccine to prevent malaria, revenue from contracts and grants with NIH, and revenue from Pfizer and other agreements. The ONR agreement, as amended in January 2002, could provide up to $5.5 million in funding through April 30, 2002. Through December 31, 2001, we had recognized revenue of $5.0 million of the total contract amount. We intend to pursue additional agreements with ONR to continue funding for this development program; however, we may not be able to enter into any further agreements.

        We had revenues of $7.6 million for the year ended December 31, 2000, compared with $10.7 million in 1999. License revenue of $5.0 million in 2000 included $1.5 million of license fees from a June 2000 license agreement with Aventis Pharma and royalty and other revenue of $1.0 million. License revenue in 2000 also included recognition of deferred license fees of $1.8 million from Merial and VGI and of $0.7 million from the Pfizer agreement as a result of applying the change in accounting principle discussed in the section above. Contract revenue of $2.6 million for 2000 included $0.9 million of revenues from the contract with the ONR, revenue from contracts and grants with NIH, and revenue from Pfizer and other agreements.

        We had revenues of $10.7 million for the year ended December 31, 1999. License revenue in 1999 of $8.3 million included $2.0 million from Merck to extend an agreement covering therapeutic DNA vaccines and $1.0 million for the start of a Phase I clinical trial of a preventive DNA vaccine to protect against HIV infection, $1.0 million of option fees and $1.2 million of equity premium pursuant to January 1999 agreements with Pfizer, and $1.0 million from Merial for the initial exercise of options covering preventive DNA vaccines for animal health infectious diseases. The equity premium from

41

Pfizer was a result of Pfizer purchasing approximately 318,000 shares of Vical common stock for $6.0 million at $18.87 per share. The price per share reflected a twenty-five percent premium over the trading price of the common stock. The equity premium was recognized as license revenue in 1999. License revenue also included recognition of previously deferred license fees of $1.1 million from Merial, and royalty and other revenue of $1.0 million. Contract revenues for 1999 were $2.4 million, primarily from the ONR and payments under the January 1999 agreement with Pfizer.

        Our license revenues are expected to decrease in 2002, primarily as a result of scheduled milestone payments from Merck in 2001 which will not recur in 2002. We also expect that contract revenue will be lower in 2002, primarily as a result of our current contract with the ONR ending on April 30, 2002, and due to the expiration of our Pfizer collaboration in January 2002.

        Research and development expenses increased to $22.1 million in 2001 from $18.5 million in 2000 due to increased personnel, facilities, preclinical and intellectual property costs. Research and development expenses increased to $18.5 million in 2000 from $15.3 million in 1999. The increases in 2000 generally were due to expansion of our preclinical and clinical activities, but included increased costs in facilities and personnel. Clinical trials expense decreased to $3.2 million in 2001 from $4.1 million in 2000 due to the discontinuation of the Leuvectin® kidney cancer clinical trial. Clinical trials expense increased to $4.1 million in 2000 from $3.6 million in 1999 due to increased activity in the Leuvectin® kidney cancer clinical trial. As we move forward in 2002, we expect research and development expense to increase as we expand our preclinical programs to broaden our future pipeline. We further expect these efforts to drive increases in headcount, spending for outside services, and costs related to intellectual property. We also expect to incur increased costs as a result of relocation to a new facility and possible commencement of commercialization activities.

        General and administrative expenses increased to $6.5 million in 2001 from $5.3 million in 2000 and $4.4 million in 1999. The increase in 2001 is attributable primarily to increased costs for support personnel, travel, and increased consultant and professional fees. General and administrative expenses increased to $5.3 million in 2000 from $4.4 million in 1999. The increase in 2000 compared to 1999 is attributable primarily to increased costs for consultants, professional fees, support personnel, and recruiting and other expenses related to the hiring of a new CEO.

        Investment income decreased to $8.3 million in 2001 from $9.4 million in 2000. Investment income in 2001 included realized gains on sales of marketable securities of $1.1 million, compared with $0.1 million in 2000. Investment income, excluding the gains on the sale of investments, decreased in 2001 compared with 2000 due to significantly lower investment rates of return resulting from the Federal Reserve Board's repeated lowering of interest rates. Some of our investments were purchased prior to the reductions in interest rates and currently are yielding higher returns than we can expect when reinvesting the proceeds upon maturity. Thus, our interest yields and investment income are expected to be lower in 2002. Investment income increased to $9.4 million in 2000 from $2.2 million in 1999 as a result of higher investment balances due to the January 2000 sale of 3,450,000 shares of Vical common stock in a public offering. This sale raised net proceeds of approximately $117.5 million.

        Interest expense increased to $0.3 million in 2001 from $0.2 million in 2000, and from $0.1 million in 1999. The increase is due to higher average balances of capital lease obligations and bank notes payable. Interest expense is expected to increase in 2002 as the capital lease obligation increases due to increased capital spending.

        For the full year 2001, we reported a net loss of $9.2 million, or $0.46 per share, compared with a net loss of $8.5 million, or $0.43 per share, for 2000. The net loss for the year ended December 31, 2000, included a one-time charge to earnings of $1.5 million for the cumulative effect of a change in accounting principle as of January 1, 2000. This one-time charge was to reflect the impact of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition." We reported a loss before cumulative effect of change in accounting principle of $9.2 million for 2001, compared with $7.0 million for 2000. The

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increase in loss before the cumulative effect of the change in accounting principle was primarily a result of lower investment income and higher research and development spending. Net loss before cumulative change in accounting principle in 2000 was $7.0 million, or $0.36 per share, compared with $6.9 million or $0.43 per share in 1999. Revenues were lower and expenses were higher, in 2000 compared with 1999, as set forth above. The lower revenue and higher expenses were substantially offset by higher investment income as a result of the January 2000 sale of additional shares of Vical common stock.

Other Matters

        Since inception, we estimate that we have spent approximately $130 million on research and development of which approximately $54 million was for our two major programs, Allovectin-7® and Leuvectin®. The majority of this $54 million was for Allovectin-7®. Allovectin-7® is currently in Phase II and Phase III registration trials in melanoma. We do not know if the clinical trial data will be sufficient to support a BLA or whether further trials will be needed. Since we have never commercialized a product before we are unable to predict the costs of commercialization. Accordingly, we cannot predict when commercialization might occur or how much additional cost we may incur until a product is on the market. Leuvectin® is currently in Phase II clinical trials in prostate cancer. Additional clinical trials will be needed if we choose to advance toward commercialization. Accordingly, we are unable to estimate when this product candidate might be commercialized and how much additional spending will be required. See "Gene Therapies for Cancer—Allovectin-7®—Leuvectin®" for a more detailed explanation of the status of Allovectin-7® and Leuvectin®.

        We have several other product candidates in the research and preclinical stage. It takes many years from the initial decision to screen product candidates, perform preclinical and safety studies, and perform clinical trials leading up to possible FDA approval of a product. The outcome of the research is unknown until each stage of the testing is completed, up through and including the registration clinical trials. Accordingly, we are unable to predict which potential product candidates we may proceed with, the time and cost to complete development, and ultimately whether we will have a product approved by the FDA.

Liquidity and Capital Resources

        Since our inception, we have financed our operations primarily through private placements of common stock and preferred stock, public offerings of common stock, and revenues from collaborative agreements. As of December 31, 2001, we had working capital of approximately $130.9 million compared with $145.6 million at December 31, 2000. Cash and marketable securities totaled approximately $134.1 million at December 31, 2001, compared with $148.1 million at December 31, 2000. In January 2000, we sold 3,450,000 shares of common stock, including an over-allotment to the underwriters of 450,000 shares, in a public offering for $36.50 per share. Net proceeds were approximately $117.5 million after deducting underwriting fees and offering costs.

        Cash used in operating activities declined to $8.2 million in 2001 compared with $8.6 million in 2000, despite a higher net loss, because of increases in noncash charges such as depreciation and deferred compensation. Positive cash flow from the reduction in receivables together with increased accounts payable and accrued expenses more than offset the negative impact of the increase in deferred revenue. Cash used in operating activities in 2000 was $8.6 million in 2000 compared with $6.0 million in 1999. The increase in cash used in operating activities was due to an increased net loss, increased deferred revenue and increased receivables which more than offset the positive cash flow impact of an increase in accounts payable.

        Cash provided from investing activities was $35.4 million in 2001. Cash used in investing activities was $106.1 million in 2000. In 2001, we sold marketable securities and invested in cash equivalents of a shorter term. In 2001, we also paid $3.8 million for a license to certain technology. In 1999, cash used

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in investing activities was $0.7 million. The increase in cash used in investing activities in 2000 compared with 1999 was due to our use of the net proceeds from our follow-on stock offering to invest in marketable securities. Capital expenditures in 2001 and 2000 increased over the respective prior years.

        Cash provided from financing activities in 2001 was $0.1 million compared with $120.0 million in 2000. The decrease was a result of our January 2000 public offering of 3,450,000 shares of Vical common stock, which raised net proceeds of approximately $117.5 million. Cash provided from financing activities in 1999 was $4.3 million, consisting primarily of proceeds from stock option exercises. In both 2001 and 2000, payments on notes payable and capital leases increased over the respective prior year due to increased balances of notes payable and capital lease obligations.

        In 2002, we expect that our total net cash used will increase because of expected reductions in license and contract revenues, an anticipated decline in investment income, higher planned expenses related to preclinical research and development programs, and consolidation of our facilities in a new location. Annual rent expense, excluding common area maintenance, is expected to be approximately $2.8 million for the new facility compared with a $1.6 million rent expense incurred in 2001 for the existing facilities. The new lease has specified annual rent increases. Under generally accepted accounting principles, we have to recognize level monthly rent expense over the entire lease period. This level monthly rent is calculated by adding the total rent payments over the entire lease period of fifteen years and then dividing the result by the 180 months of the lease. Accordingly, this level rent per square foot is significantly higher than the actual base rent per square foot we will pay on the new facility in 2002. We will not begin paying rent on the new facility until September 2002.

        Capital equipment spending will be significantly higher due to the new facility. In January 2002, we renewed our capital equipment credit line and increased it to $4.3 million. This credit line will be used to finance laboratory and scientific equipment, and part of the equipment needed for the new facility. We expect to need approximately $4 million to $6 million in capital in excess of our current credit line and will seek to have the credit line increased or pursue additional financing with other parties. In the event we are unable to obtain this additional financing, we will need to use existing cash to fund the capital purchases.

44

        We will attempt to sublease the vacant space in existing facilities to recover our existing rent payments plus amortization of leasehold improvements. However, if we are unable to do so, our net loss and cash outlays will increase accordingly.

        To finance certain leasehold improvements we borrowed from a bank $1.0 million in 2001 and $1.2 million in 2000. These borrowings converted to term loans payable over 42 months in June, 2001 and June, 2000, respectively. The term loans bear interest approximating the bank's prime rate. At December 31, 2001, outstanding borrowings under the term loans were $1.6 million, and currently have interest rates of 4.75 percent and 4.50 percent, respectively.

        We expect to incur substantial additional research and development expenses and general and administrative expenses, including continued increases in personnel costs, costs related to preclinical testing and clinical trials, outside services, facilities, intellectual property and possible commercialization costs. Our future capital requirements will depend on many factors, including continued scientific progress in our research and development programs, the scope and results of preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, the impact of competing technological and market developments, the cost of manufacturing scale-up, and commercialization activities and arrangements. We may seek additional funding through research and development relationships with suitable potential corporate collaborators. We may also seek additional funding through public or private financings. We cannot assure that additional financing will be available on favorable terms or at all.

        If additional funding is not available, we anticipate that our available cash and existing sources of funding will be adequate to satisfy our operating needs through at least 2003.

Critical Accounting Policies

Use of estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Specifically, management must make estimates in the following areas:

        Investment, at cost.    In February 2000, we received an investment in Series B Preferred Stock in VGI in exchange for a license to our technology. The investment is recorded on our balance sheet at estimated fair value on the date of investment of $5.0 million. The preferred stock is convertible into common stock of VGI. If additional shares of VGI common or preferred stock are issued at a price below the price that the preferred shares of VGI were issued to us, the rate of conversion of the preferred shares into VGI common stock would change and the percentage of our equity ownership in VGI would decrease.

        VGI is a privately-held company developing gene-based delivery of the angiogenic growth factor VEGF-2 for cardiovascular applications. VGI has completed Phase I and Phase II trials. VGI still needs to raise substantial cash to complete its development plans, and there can be no assurance that the therapy will work or that the FDA will approve such a therapy. VGI, which currently has few employees and limited resources, may not be able to successfully commercialize a product even if it receives FDA approval. We do not believe there has been any permanent impairment to our investment to date, however, this may change depending on the funding and development status of VGI, which is beyond our control. If a change were to occur in any of the above-mentioned factors or estimates, a material change could occur to our reported results of operations.

45

        Intangible assets.    We capitalize the license fees we pay to acquire access to proprietary technology if the technology is expected to have alternative future use in multiple research and development projects. The cost of licensed technology rights is amortized to expense over the estimated average useful life of the technology (in this case, 10 years). We also capitalize certain costs related to patent applications. Accumulated costs are amortized over the estimated economic life of the patent, which is generally 20 years and usually commences at the time the patent application is filed. Costs related to patent applications are written off to expense at the time such costs are deemed to have no continuing value. Intangible assets are amortized using the straight-line method. We review long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the total amount of an asset may not be recoverable. An impairment loss is recognized when the estimated future cash flows expected from the use of the asset and the eventual disposition are less than its carrying amount. Loss of legal ownership or rights to patents or licensed technology, or significant changes in our strategic business objectives and utilization of the assets, among other things, could give rise to asset impairment.

        Clinical trial expenses.    We account for our clinical trial costs by estimating the total cost to treat a patient in each clinical trial and amortizing this total cost for the patient over the estimated treatment period, beginning when the patient enrolls in the clinical trial. This estimated cost includes payments to the trial site and patient-related costs, including lab costs, related to the conduct of the trial. Cost per patient varies based on the type of clinical trial, the site of the clinical trial, the method of administration of the treatment, and the length of treatment period for each patient. Treatment periods vary from one month to one year, depending on the clinical trial. As actual costs become known to us, we may need to make a material change in our estimated accrual, which could also materially affect our results of operations.

Revenue recognition

        We earn revenue from licensing access to our proprietary technology, and by performing services under research and development contracts and manufacturing service contracts. As more fully explained in Note 2, we changed our method of accounting for certain payments under collaborative agreements. Effective January 1, 2000, any initial license or option payment received under an agreement under which we also provide research and development services is recognized over the term of the research and development period. Payments for options on a license to our technology are recognized over the option period. Fees paid to extend an option are recognized over the option extension period. Upfront license payments are recognized upon contract signing if the fee is paid within 30 days, is nonrefundable and noncreditable, and if there are no significant performance obligations remaining. Revenue from milestones is recognized as the milestones are achieved and collection of payment is reasonably assured. Revenue under research and development contracts and manufacturing service contracts is recognized as the services are performed. Advance payments received in excess of amounts earned are classified as deferred revenue.

Recent Accounting Pronouncements

        In 2001, the Financial Accounting Standards Board, FASB, issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." To date we have not entered into any business combinations as defined in SFAS No. 141. We would have to adhere to SFAS 141 if we were to enter into any such business combinations in the future.

        The primary changes resulting from SFAS No. 142 consist of how goodwill and intangible assets will be segregated, amortized (or not amortized), reviewed for impairment (if any), and disclosed within the footnotes to financial statements. We do not currently have any goodwill and are continuing to assess the impact of adoption of SFAS No. 142 on other intangible assets and the respective results of operations, financial position and cash flows.

46

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business, as previously defined in that Opinion. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, with early application encouraged, and generally are to be applied prospectively. We do not anticipate that the adoption of SFAS No. 144 will have a material effect on our financial position or results of operations.

        The FASB has issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of FASB Statement No. 133." This statement amends SFAS No. 133. Our adoption of this pronouncement did not have a material effect on our results of operations or financial condition as we do not currently hold derivative financial instruments and do not engage in hedging activities.

ITEM 7.a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        We are subject to interest rate risk. Our investment portfolio is maintained in accordance with our investment policy which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. No investments in equity securities are made in our investment portfolio which consists of cash equivalents and marketable securities. As of December 31, 2001, 46 percent of the investments would mature within one year, and an additional 51 percent and 3 percent would mature within two and three years, respectively. The average maturity was nine months. Our investments are all classified as available-for-sale securities. To assess our interest rate risk, we performed a sensitivity analysis projecting an ending fair value of our cash equivalents and marketable securities using the following assumptions: a twelve-month time horizon, a nine-month average maturity and a 150-basis-point increase in interest rates. This pro forma fair value would have been $1.3 million lower than the reported fair value of our investments at December 31, 2001. Our rate of return on investments, excluding the realized gains on sales of investments, has decreased as the Federal Reserve Board has lowered interest rates. Some of our investments were purchased prior to the reductions, and are currently yielding higher returns than we could expect when reinvesting the proceeds upon sale or maturity. Thus, our interest yields and investment income are expected to be lower in 2002.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The consolidated financial statements and supplementary data of us required by this item are set forth at the pages indicated in Item 14(a)(1).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        Not applicable.

47

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Directors

        Our directors are as follows(1):

Name	Affiliation
R. Gordon Douglas, M.D.	Chairman of the Board, Vical Incorporated
Vijay B. Samant	President and CEO, Vical Incorporated
M. Blake Ingle	Inglewood Ventures
Patrick F. Latterell	Venrock Associates, and Latterell Venture Partners
Gary A. Lyons	Neurocrine Biosciences, Inc.
Robert C. Merton	Harvard University Graduate School of Business, and Hancock, Mendoza, Dachille & Merton, Ltd.

(1)

The following changes have occurred on our Board of Directors since our 2001 Annual Meeting: Mr. Dale Smith passed away in July 2001; Mr. Philip Young resigned in February 2002; and Dr. Robert Merton joined in March 2002.

        The information required by this item, with respect to directors, is incorporated by reference from the information under the caption "Election of Directors" contained in our 2002 Definitive Proxy Statement. The required information concerning our executive officers is contained in Part I of this report.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by this item is incorporated by reference from the information under the caption "Executive Compensation" contained in our 2002 Definitive Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated by reference from the information under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in our 2002 Definitive Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated by reference from the information contained under the caption "Certain Transactions" contained in our 2002 Definitive Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)

(1)    Financial Statements

48

        The financial statements required by this item are submitted in a separate section beginning on page F-1 of this report.

Report of Independent Public Accountants	F-1
Balance Sheets as of December 31, 2001 and 2000	F-2
Statements of Operations for the three years ended December 31, 2001	F-3
Statements of Stockholders' Equity for the three years ended December 31, 2001	F-4
Statements of Cash Flows for the three years ended December 31, 2001	F-5
Notes to Financial Statements	F-6

(2)

Financial Statement Schedules

        Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.

(3)

Exhibits

        Exhibits with each management contract or compensatory plan or arrangement required to be filed are identified. See paragraph (c) below.

(b)

Reports on Form 8-K

        No reports on Form 8-K were filed during the quarter ended December 31, 2001.

49

(c)

Exhibits

Exhibit Number		Description of Document
3.1	(i)(9)	Restated Certificate of Incorporation.
3.1	(ii)(9)	Amended and Restated Bylaws of the Company.
4.1	(9)	Specimen Common Stock Certificate.
4.2	(2)	Rights Agreement dated as of March 20, 1995, between the Company and First Interstate Bank of California.
4.3	(10)	Stock Purchase Agreement dated November 3, 1997, between the Company and Merck & Co., Inc.
4.4	(11)	Stock Purchase Agreement dated as of January 22, 1999, between the Company and Pfizer Inc.
10.1	(4)(a)	Stock Incentive Plan of Vical Incorporated.
10.2	(5)(a)	1992 Directors' Stock Option Plan of Vical Incorporated.
10.3	(3)	Form of Indemnity Agreement between the Company and its directors and officers.
10.5	(3)(a)	Employment Agreement dated August 20, 1992, between the Company and Mr. George J. Gray.
10.6	(3)(a)	Employment Agreement dated November 2, 1992, between the Company and Dr. Jon A. Norman.
10.7	(3)	Stock Purchase Agreement dated February 20, 1992.
10.8	(3)	Lease dated December 4, 1987, between the Company and Nexus/GADCo.-UTC, a California Joint Venture, as amended.
10.9	(6)(b)	Research Collaboration and License Agreement dated May 31, 1991, between the Company and Merck & Co., Inc.
10.12	(1)(b)	License Agreement dated January 1, 1991, between the Company and Wisconsin Alumni Research Foundation.
10.14	(1)(b)	License Agreement dated October 23, 1992, between the Company and the Regents of University of Michigan.
10.16	(7)	Research, Option and License Agreement dated September 29, 1994, between the Company and Pasteur Mérieux Sérums & Vaccins.
10.17	(8)	Amendment dated April 27, 1994, to Research Collaboration and License Agreement dated May 31, 1991, between the Company and Merck & Co., Inc.
10.19	(10)(b)	Amendment dated November 3, 1997, to Research Collaboration and License Agreement dated May 31, 1991, between the Company and Merck & Co., Inc.
10.20	(12)	Amendment No. 4 to the Lease dated December 4, 1987, between the Company and Nippon Landic (U.S.A.), Inc., a Delaware Corporation (as successor in interest to Nexus GADGO-UTC). License Agreement dated February 24, 2000, between the Company and Human Genome Sciences, Inc.
10.21	(13)(b)	License Agreement dated February 24, 2000, between the Company and Human Genome Sciences, Inc.
10.22	(13)(b)	License Agreement dated February 24, 2000, between the Company and Vascular Genetics Inc.
10.23	(14)(a)	Employment Agreement dated November 28, 2000, between the Company and Vijay B. Samant.
10.24	(15)(a)	Employment Agreement dated May 30, 2001, between the Company and Alan E. Dow.
10.25	(16)(a)	Employment Agreement dated September 13, 2001, between the Company and David C. Kaslow.
10.26	(c)	Amendment No. 4 dated December 7, 2001, to Research, Option and License Agreement between the Company and Aventis Pasteur (formerly Pasteur Mérieux Sérums & Vaccins).

50

10.27		Lease dated January 30, 2002, between the Company and Kilroy Realty, L.P. a Delaware Limited Partnership.
10.28	(a)	Amendment Dated February 5, 2002, to Employment Agreement dated November 28, 2000, between the Company and Vijay B. Samant.
23.1		Consent of Arthur Andersen LLP.
99.1		Letter to the U.S. Securities and Exchange Commission regarding representations from Arthur Andersen LLP.

(1)

Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-56830) filed on January 7, 1993.

(2)

Incorporated by reference to the exhibit of the same number to the Company's Report on Form 10-K for the fiscal year ended December 31, 1994 (No. 0-21088).

(3)

Incorporated by reference to the Exhibits of the same number filed with the Company's Registration Statement on Form S-1 (No. 33-56830) filed on January 7, 1993.

(4)

Incorporated by reference to Exhibit 10.1 filed with the Company's Registration Statement on Form S-8 (file No. 333-66254) filed on July 30, 2001.

(5)

Incorporated by reference to Exhibit 10.1 filed with the Company's Registration Statement on Form S-8 (No. 333-30181) filed on June 27, 1997.

(6)

Incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (No. 0-21088).

(7)

Incorporated by reference to Exhibit A of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.

(8)

Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (No. 0-21088).

(9)

Incorporated by reference to the exhibit of the same number filed with the Company's Registration Statement on Form S-3 (No. 33-95812) filed on August 15, 1995.

(10)

Incorporated by reference to the exhibit of the same number to the Company's Annual Report on Form 10-K for the year ended December 31, 1997.

(11)

Incorporated by reference to the exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.

(12)

Incorporated by reference to the exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.

(13)

Incorporated by reference to the exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.

(14)

Incorporated by reference to the exhibit of the same number to the Company's Annual Report on Form 10-K for the year ended December 31, 2000.

(15)

Incorporated by reference to the exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

(16)

Incorporated by reference to the exhibit of the same number to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

(a)

Indicates management contract or compensatory plan or arrangement.

51

(b)

The Company has received confidential treatment of certain portions of these agreements.



(c)

The Company has requested confidential treatment of certain portions of these agreements.

(d)

Financial Statement Schedules

        The financial statement schedules of Vical Incorporated required by this item are set forth at the pages indicated in Item 14(a)(2).

52

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 28, 2002.

VICAL INCORPORATED
By:	/s/  VIJAY B. SAMANT Vijay B. Samant President and Chief Executive Officer

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

/s/  VIJAY B. SAMANT Vijay B. Samant	President, Chief Executive Officer and Director	March 28, 2002
/s/  MARTHA J. DEMSKI Martha J. Demski	Vice President, Chief Financial Officer, Treasurer and Secretary	March 28, 2002
/s/  R. GORDON DOUGLAS, M.D. R. Gordon Douglas, M.D.	Chairman of the Board of Directors	March 28, 2002
/s/  M. BLAKE INGLE M. Blake Ingle	Director	March 28, 2002
/s/  PATRICK F. LATTERELL Patrick F. Latterell	Director	March 28, 2002
/s/  GARY A. LYONS Gary A. Lyons	Director	March 28, 2002
/s/  ROBERT C. MERTON Robert C. Merton	Director	March 28, 2002

53

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Vical Incorporated:

We have audited the accompanying balance sheets of Vical Incorporated, a Delaware corporation, as of December 31, 2001 and 2000, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vical Incorporated as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP
San Diego, California
February 1, 2002

F-1

VICAL INCORPORATED

BALANCE SHEETS

			December 31,
			2001			2000
ASSETS
Current Assets:
	Cash and cash equivalents		$	43,736,068		$	16,480,087
	Marketable securities — available-for-sale			90,351,409			131,663,766
	Receivables and other			4,635,534			4,413,077
		Total current assets		138,723,011			152,556,930
Investment, at cost				5,000,000			5,000,000
Property and Equipment:
	Equipment			8,225,632			6,978,906
	Leasehold improvements			4,800,503			3,062,779
				13,026,135			10,041,685
	Less — accumulated depreciation and amortization			(7,966,257	)		(6,504,640	)
				5,059,878			3,537,045
Intangible Assets, net				5,406,500			1,638,935
Other Assets				305,345			170,302
			$	154,494,734		$	162,903,212
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
	Accounts payable and accrued expenses		$	4,492,005		$	3,895,531
	Current portion of capital lease obligations			846,348			611,775
	Current portion of notes payable			657,143			317,764
	Current portion of deferred revenue			1,794,857			2,162,474
		Total current liabilities		7,790,353			6,987,544
Long-Term Obligations:
	Long-term obligations under capital leases			1,616,677			1,413,602
	Notes payable			973,810			707,869
	Deferred revenue			1,954,926			3,000,001
		Total long-term obligations		4,545,413			5,121,472
Commitments and contingencies
Stockholders' Equity:
	Preferred stock, $0.01 par value — 5,000,000 shares authorized —none outstanding			—			—
	Common stock, $0.01 par value — 40,000,000 shares authorized —20,056,344 and 20,011,244 shares issued and outstanding, respectively			200,563			200,112
	Additional paid-in capital			203,543,985			203,106,680
	Accumulated other comprehensive income			816,665			649,658
	Accumulated deficit			(62,402,245	)		(53,162,254	)
		Total stockholders' equity		142,158,968			150,794,196
			$	154,494,734		$	162,903,212

See accompanying notes.

F-2

VICAL INCORPORATED

STATEMENTS OF OPERATIONS

		Year ended December 31,
		2001			2000			1999
Revenues:
	License/royalty revenue	$	7,572,190		$	5,027,407		$	8,294,283
	Contract revenue		3,793,900			2,592,643			2,417,198
			11,366,090			7,620,050			10,711,481
Operating expenses:
	Research and development		22,073,096			18,513,744			15,343,586
	General and administrative		6,522,297			5,265,270			4,376,471
			28,595,393			23,779,014			19,720,057
Loss from operations			(17,229,303	)		(16,158,964	)		(9,008,576	)
Other income (expense):
	Investment income		8,285,889			9,356,722			2,229,181
	Interest expense		(296,577	)		(204,595	)		(129,822	)
			7,989,312			9,152,127			2,099,359
Loss before cumulative effect of change in accounting principle			(9,239,991	)		(7,006,837	)		(6,909,217	)
Cumulative effect of change in accounting principle			—			(1,510,036	)		—
Net loss		$	(9,239,991	)	$	(8,516,873	)	$	(6,909,217	)
Net loss per common share (basic and diluted):
	Loss per share before cumulative effect of change in accounting principle	$	(0.46	)	$	(0.36	)	$	(0.43	)
	Cumulative effect of change in accounting principle		—			(0.07	)		—
	Net loss per common share	$	(0.46	)	$	(0.43	)	$	(0.43	)
Weighted average shares used in computing net loss per common share			20,032,360			19,688,754			16,135,590

See accompanying notes.

F-3

VICAL INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2001

		Common Stock
					Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders' Equity			Total Comprehensive Loss
		Shares	Amount
BALANCE, December 31, 1998		15,866,544	$	158,665	$	78,332,483	$	69,440		$	(37,736,164	)	$	40,824,424		$	(7,435,095	)
	Issuance of common stock	317,969		3,180		4,790,461		—			—			4,793,641
	Stock option exercises	16,623		166		169,926		—			—			170,092
	Unrealized loss on marketable securities arising during holding period															$	(191,191	)
	Reclassification of realized gain included in net loss																(19,050	)
	Unrealized loss on marketable securities	—		—		—		(210,241	)		—			(210,241	)		(210,241	)
	Net loss	—		—		—		—			(6,909,217	)		(6,909,217	)		(6,909,217	)
BALANCE, December 31, 1999		16,201,136		162,011		83,292,870		(140,801	)		(44,645,381	)		38,668,699		$	(7,119,458	)
	Issuance of common stock	3,450,000		34,500		117,430,126		—			—			117,464,626
	Stock option exercises	360,108		3,601		2,383,684		—			—			2,387,285
	Unrealized gain on marketable securities arising during holding period															$	865,942
	Reclassification of realized gain included in net loss																(75,483	)
	Unrealized gain on marketable securities	—		—		—		790,459			—			790,459			790,459
	Net loss	—		—		—		—			(8,516,873	)		(8,516,873	)		(8,516,873	)
BALANCE, December 31, 2000		20,011,244		200,112		203,106,680		649,658			(53,162,254	)		150,794,196		$	(7,726,414	)
	Stock option exercises	45,100		451		281,889		—			—			282,340
	Non-cash compensation expense related to grant of stock options	—		—		155,416		—			—			155,416
	Unrealized gain on marketable securities arising during holding period															$	1,250,651
	Reclassification of realized gain included in net loss																(1,083,644	)
Unrealized gain on marketable securities		—		—		—		167,007			—			167,007			167,007
	Net loss	—		—		—		—			(9,239,991	)		(9,239,991	)		(9,239,991	)
BALANCE, December 31, 2001		20,056,344	$	200,563	$	203,543,985	$	816,665		$	(62,402,245	)	$	142,158,968		$	(9,072,984	)

See accompanying notes.

F-4

VICAL INCORPORATED

STATEMENTS OF CASH FLOWS

					Year Ended December 31,
					2001			2000			1999
OPERATING ACTIVITIES:
	Net loss				$	(9,239,991	)	$	(8,516,873	)	$	(6,909,217	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization				1,882,877			1,200,328			1,041,351
		Compensation expense related to grant of stock options				155,416			—			—
		Change in operating assets and liabilities:
			Receivables and other			(222,457	)		(441,456	)		(2,538,910	)
			Accounts payable and accrued expenses			596,474			55,889			1,558,390
			Deferred revenue			(1,412,692	)		(913,691	)		826,166
				Net cash used in operating activities		(8,240,373	)		(8,615,803	)		(6,022,220	)
INVESTING ACTIVITIES:
	Sales of marketable securities					188,382,838			69,433,851			28,135,862
	Purchases of marketable securities					(146,903,472	)		(173,781,977	)		(28,255,344	)
	Capital expenditures					(2,004,907	)		(1,317,547	)		(441,324	)
	Deposits and other					(135,043	)		(23,832	)		(13,086	)
	Licensed technology expenditures					(3,750,000	)		—			—
	Patent expenditures					(188,140	)		(364,232	)		(86,386	)
				Net cash provided from (used in) investing activities		35,401,276			(106,053,737	)		(660,278	)
FINANCING ACTIVITIES:
	Issuance of common stock, net					282,340			119,851,911			4,963,733
	Proceeds from notes payable					1,107,700			1,192,300			—
	Payments on notes payable					(502,380	)		(273,554	)		(160,329	)
	Principal payments under capital lease obligations					(792,582	)		(770,617	)		(539,136	)
				Net cash provided from financing activities		95,078			120,000,040			4,264,268
Net increase (decrease) in cash and cash equivalents						27,255,981			5,330,500			(2,418,230	)
Cash and cash equivalents at beginning of period						16,480,087			11,149,587			13,567,817
Cash and cash equivalents at end of period					$	43,736,068		$	16,480,087		$	11,149,587
Interest paid					$	326,704		$	196,384		$	128,411
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
	Investment in preferred stock of Vascular Genetics Inc. in exchange for grant of license				$	—		$	5,000,000		$	—
	Equipment acquired under capital lease financing				$	1,230,230		$	1,428,151		$	685,705
	Stock options exercised through swap of outstanding shares owned by optionee, which shares received by the Company were then retired				$	—		$	3,447,478		$	—

See accompanying notes.

F-5

VICAL INCORPORATED

NOTES TO FINANCIAL STATEMENTS

December 31, 2001

1. Summary of Significant Accounting Policies

Organization and Business Activity

        Vical Incorporated, the Company, a Delaware corporation, was incorporated in 1987 and has devoted substantially all of its resources since that time to its research and development programs. The Company is focusing its resources on the development of biopharmaceutical products based on its patented gene delivery technologies for the prevention and treatment of serious or life-threatening diseases.

        All of the Company's potential products are in research and development. No revenues have been generated from the sale of any such products, nor are any such revenues expected for at least the next few years. The products currently under development by the Company are in various stages of development. Most product candidates will require significant additional research and development efforts, including extensive preclinical and clinical testing. All product candidates that advance to clinical trial testing will require regulatory approval prior to commercial use, and will require significant costs for commercialization. There can be no assurance that the Company's research and development efforts will be successful and that any of the Company's potential products will prove to be safe and effective in clinical trials. Even if developed, these products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit the Company to operate profitably. The Company expects to continue to incur substantial losses and not generate positive cash flow from operations for at least the next few years. No assurance can be given that the Company can generate sufficient product revenue to become profitable or generate positive cash flow from operations at all or on a sustained basis.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property and Equipment

        Equipment is recorded at cost and depreciated over the estimated useful lives of the assets, 3 to 5 years, using the straight-line method. Leasehold improvements are recorded at cost and amortized over the shorter of the life of the remaining lease term or the remaining useful life of the asset using the straight-line method.

Intangible Assets

        The Company capitalizes license fees paid to acquire access to proprietary technology if the technology is expected to have alternative future use in multiple research and development projects. The cost of licensed technology rights is amortized to expense over the estimated average useful life of the technology, 10 years. The Company capitalizes certain costs related to patent applications. Accumulated costs are amortized over the estimated economic lives of the patents, generally 20 years, and generally commencing at the time the patent application is filed. Costs related to patent applications are written off to expense at the time such costs are deemed to have no continuing value. Intangible assets are being amortized using the straight-line method.

F-6

Asset Impairment

        The Company reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the total amount of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset and the eventual disposition are less than its carrying amount.

Research and Development Costs

        All research and development costs are expensed as incurred, including costs incurred to perform research and manufacturing service contracts. Research and development costs include salaries and personnel-related costs, supplies and materials, outside services, costs of conducting clinical trials, facilities costs and amortization of intangible assets consisting of intellectual property and licensed technology rights. The Company accounts for its clinical trial costs by estimating the total cost to treat a patient in each clinical trial, and amortizing this total cost for the patient over the estimated treatment period beginning when the patient enrolls in the clinical trial. This estimated cost includes payments to the site conducting the trial, and patient-related lab and other costs related to the conduct of the trial. Cost per patient varies based on the type of clinical trial, the site of the clinical trial, the method of administration of the treatment, and the length of treatment that a patient receives. Treatment periods vary from one month to one year, depending on the clinical trial.

Revenue Recognition

        The Company earns revenue from licensing access to its proprietary technology, and performing services under research and development contracts and manufacturing service contracts. As more fully explained in Note 2, in 2000 the Company changed its method of accounting for certain payments under its collaborative agreements. Effective January 1, 2000, any initial license or option payment received under an agreement under which the Company also provides research and development services is recognized over the term of the research and development period. Payments for options on a license to the Company's technology are recognized over the option period. Fees paid to extend an option are recognized over the option extension period. Upfront license payments are recognized upon contract signing if the fee is paid within 30 days, is nonrefundable, noncreditable, and there are no significant performance obligations remaining. Revenue from milestones is recognized as the milestones are achieved and collection of payment is reasonably assured. Revenue under research and development contracts and manufacturing service contracts is recognized as the services are performed. Advance payments received in excess of amounts earned are classified as deferred revenue.

Net Loss Per Common Share

        Basic and diluted net loss per common share for each of the three years in the period ended December 31, 2001, has been computed using the weighted average number of shares of common stock outstanding during the three periods ended December 31, 2001. Diluted loss per share does not include any stock options as the effect would be antidilutive.

F-7

Income Taxes

        Deferred tax liabilities and assets are determined based on the difference between the financial statements and the tax basis of assets and liabilities using the estimated enacted tax rate in effect given the provisions of the enacted tax laws. A valuation allowance has been recognized to offset the entire amount of the deferred tax asset, based on the weight of available evidence that it is more likely than not that some or all of the deferred tax asset will not be realized.

Fair Value of Financial Instruments

        The carrying amounts of financial instruments such as receivables, other assets, accounts payable and accrued expenses reasonably approximate fair value because of the short maturity of these items. The Company believes the carrying amounts of the Company's notes payable and obligations under capital leases approximate fair value because the interest rates on these instruments change with, or approximate, market interest rates. See Note 3 for fair value of cash equivalents and marketable securities.

Comprehensive Loss

        The Company has implemented Statement of Financial Accounting Standards, SFAS, No. 130, "Reporting Comprehensive Income." Accordingly, in addition to reporting net loss, the Company has displayed the impact of any unrealized gain or loss on marketable securities as a component of comprehensive loss and has displayed an amount representing total comprehensive loss for each period presented. The Company has presented the required information in the statements of stockholders' equity.

Business Segments

        The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and has determined that it operates in one business segment dedicated to research in gene delivery technology. The Company's operations are in the United States. All revenues are generated from the United States, and all long-lived assets are maintained in the United States.

Reclassifications

        Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board, FASB, issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." To date the Company has not entered into any such business combinations as defined in SFAS No. 141. The Company would have to adhere to SFAS No. 141 if it were to enter into any business combinations in the future.

        The primary changes resulting from SFAS No. 142 consist of how goodwill and intangible assets will be segregated, amortized (or not amortized), reviewed for impairment (if any), and disclosed within the footnotes to financial statements. The Company does not currently have any goodwill and is continuing to assess the impact of adoption of SFAS No. 142 on other intangible assets and the respective results of operations, financial position and cash flows.

F-8

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business, as previously defined in that Opinion. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, with early application encouraged, and generally are to be applied prospectively. The Company does not anticipate the adoption of SFAS No. 144 will have a material effect on the Company's financial position or results of operations.

        The FASB has issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of FASB Statement No. 133." This statement amends SFAS No. 133. The adoption of SFAS No. 138 did not have an impact on the Company's results of operations or financial condition as the Company does not currently hold derivative financial instruments and does not engage in hedging activities.

2. Change In Accounting Principle

        In December 1999, the Securities and Exchange Commission, SEC, issued Staff Accounting Bulletin No. 101—"Revenue Recognition in Financial Statements," or SAB 101. SAB 101 reflects the SEC's views on revenue recognition. Historically the Company recognized revenue from initial technology option and license fees in the period in which the agreement was signed if there were no significant performance obligations remaining. Revenue from milestone payments was recognized as revenue as the collaborator achieved the milestones. SAB 101 requires that when the earnings process has not been culminated, payments must be deferred and recognized over the period over which the revenue is deemed to have been earned. As such, the Company defers and recognizes payments from technology option and license fees, and milestone payments over the period in which the revenue is deemed to have been earned.

        Under option and license agreements which do not require research to be performed by the Company and under which the collaborator pays an upfront fee for an option to a license to the Company's technology, the Company believes that SAB 101 requires the Company to recognize the revenue from the upfront payment over the option period. For those agreements which do not require research to be performed by the Company and the collaborator pays an upfront fee for a license to the Company's technology, or the collaborator holds an option that is then exercised to get a license, the Company believes all significant performance obligations were met and the culmination of the earnings process occurred upon granting the license to the technology. For these types of transactions, the Company's only remaining performance obligation after that is to maintain and defend the patents and patent applications. The collaborators do not get access to any upgrades or enhancements to the Company's technology.

        Under certain agreements the Company was paid to perform required research and development services during the research period specified in the agreement. For these agreements, historically the Company recognized the revenue on the research services as the services were provided. This

F-9

accounting is unchanged under SAB 101. However, under SAB 101 the Company believes that any upfront option or license payment under this type of agreement would have to be deferred and recognized over the research period.

        In the fourth quarter of 2000, the Company completed its evaluation of payments the Company received under its various option and license agreements. The Company identified one agreement with Pfizer Inc entered into in 1999, which the Company believes under SAB 101 would require a change in accounting as of the implementation date of January 1, 2000. The amount of revenue recognized in 1999 that under SAB 101 was deferred as of January 1, 2000 was $1.5 million.

        The Company implemented SAB 101 in the fourth quarter of 2000 by restating the first three quarters of 2000 financial statements to apply SAB 101 effective January 1, 2000. The statement of operations for 2000 reflects a one-time charge to earnings for the cumulative effect of the change in accounting principle as of January 1, 2000, of $1.5 million. In 2001 and 2000, the Company recognized approximately $0.7 million per year of this deferred license revenue under the new revenue recognition policy.

        On a pro forma basis, if the impact of SAB 101 had been implemented effective January 1, 1999, the pro forma net loss and the pro forma net loss per common share for the year ended December 31, 1999, would have been $8.4 million and $0.52, respectively, compared with the reported net loss and the reported net loss per common share of $6.9 million and $0.43, respectively.

3. Cash Equivalents and Marketable Securities

        The Company invests its excess cash in debt instruments of financial institutions, of corporations with strong credit ratings, in U.S. government obligations, and in money market funds and certificates of deposit in financial institutions. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Cash equivalents are short-term, highly liquid investments with original maturities of less than three months. Cash equivalents of $43.0 million and $15.3 million at December 31, 2001 and 2000, respectively, are primarily in commercial paper, asset backed securities, federal agency discount notes and money market funds.

        The Company classifies its marketable securities as available-for-sale and records the unrealized holding gains or losses as a separate component of stockholders' equity. Net investment income in 2001 included realized gains on the sale of marketable securities of $1.1 million. Realized gains or losses are calculated based on the specific identification method. Realized gains or losses were not material for the years ended December 31, 2000 and 1999.

F-10

        At December 31, 2001, marketable securities consisted of the following:

	Amortized Cost		Market Value		Unrealized Gain
U.S. government obligations	$	50,508,042	$	50,649,391	$	141,349
Corporate bonds		22,370,293		22,760,558		390,265
Asset backed securities		11,622,369		11,819,260		196,891
Certificates of deposit		2,999,951		3,017,220		17,269
International bond		2,034,089		2,104,980		70,891
	$	89,534,744	$	90,351,409	$	816,665

        Approximately 46 percent of these securities mature within one year of December 31, 2001, and an additional 51 percent and 3 percent mature within the next two and three years, respectively.

        At December 31, 2000, marketable securities consisted of the following:

	Amortized Cost		Market Value		Unrealized Gain
U.S. government obligations	$	41,574,838	$	41,797,682	$	222,844
Corporate bonds		70,124,059		70,422,931		298,872
Asset backed securities		9,846,522		9,940,908		94,386
Certificates of deposit		6,491,499		6,512,625		21,126
International bond		2,977,190		2,989,620		12,430
	$	131,014,108	$	131,663,766	$	649,658

4. Intangible Assets

        At December 31, intangible assets consisted of the following:

	2001				2000
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Patents and patent applications	$	2,153,332	$	465,582	$	1,965,192	$	326,257
Licensed technology rights		3,750,000		31,250		—		—
	$	5,903,332	$	496,832	$	1,965,192	$	326,257

        Amortization expense is included in research and development expense in the accompanying statements of operations. Amortization expense was $0.2 million, $0.1 million, and $0.1 million, for the years ended December 31, 2001, 2000 and 1999, respectively.

5. Significant Contracts and License Agreements

Merck & Co., Inc.

        The Company has entered into three separate agreements in 1991, 1992 and 1997 with Merck & Co., Inc., Merck, which provide Merck with certain exclusive rights to develop and commercialize vaccines using the Company's gene delivery technology for certain disease targets. The 1991 and 1997

F-11

agreements are for human vaccine targets and the 1992 agreement is for animal vaccine targets. Merck has licensed seven preventive human infectious disease vaccines using the Company's gene delivery technology pursuant to the 1991 agreement and has licensed the rights to develop and market therapeutic vaccines against the human immunodeficiency virus, HIV, and hepatitis B virus, HBV. A September 1997 agreement between the Company and Merck, which granted Merck the rights to use the Company's gene delivery technology to deliver certain growth factors as potential treatments for a range of applications including revascularization, expired in June 2000.

        In November 1999, Merck paid the Company $2.0 million to extend an agreement covering therapeutic naked DNA vaccines. In December 1999, Merck started a Phase I clinical trial of a preventive naked DNA vaccine to protect against HIV infection. This event triggered a milestone payment of $1.0 million which the Company received in January 2000. The Company accrued the revenue for this milestone in December 1999. In November 2001, the Company received a $3.0 million payment from Merck in accordance with its licensing agreement. The payment extends the term of Merck's worldwide rights to use our naked DNA technology to develop and market therapeutic vaccines against both HIV and HBV. The Company recognized this $3.0 million as license revenue in the fourth quarter of 2001. Through December 31, 2001, the Company had received a total of $25.1 million under these agreements, including a payment of $5.0 million in 1997 for Merck's investment in the Company's common stock. License revenues recognized under these agreements were $3.0 million in 2001 and 1999, and none in 2000. The two remaining agreements provide for the Company to receive additional payments based upon achievement of certain defined milestones and royalty payments based on net product sales.

Pfizer Inc

        In January 1999, the Company and Pfizer Inc, Pfizer, entered into a collaborative and option agreement and a stock purchase agreement. Under the terms of the collaborative and option agreement, Pfizer paid the Company $1.0 million in option fees. In addition, the Company agreed to provide access to two full time equivalent employees to assist Pfizer in its research and development efforts for $0.5 million of research and development expenses annually for three years. Under the terms of the stock purchase agreement, Pfizer made an investment of $6.0 million for approximately 318,000 shares of the Company's common stock at $18.87 per share, reflecting a 25 percent premium. The $1.0 million option fee and the $1.2 million premium on the purchase of stock were recognized as revenue in 1999, and the balance of the common stock investment, net of costs to issue the shares of stock, was reflected in common stock and additional paid-in capital in 1999. The collaborative and option agreement was allowed to expire in January 2002.

        As explained in Note 2, the Company changed its method of accounting for these types of agreements in 2000. The accompanying 2000 statement of operations reflects a cumulative effect adjustment for approximately $1.5 million to defer the amount of revenue recognized in 1999 that under SAB 101 is required to be recognized over the contractual research period in 2001 and 2000. In 2001 and 2000, the Company recognized $0.7 million per year of the deferred license revenue under the new revenue recognition policy. Through December 31, 2001, the Company had received a total of $9.0 million under these agreements, including Pfizer's investment in the Company's common stock. The Company recognized $0.5 million, $0.6 million and $0.4 million of revenue in 2001, 2000 and 1999, respectively, for research and development work and $0.1 million for contract manufacturing in 2000.

F-12

Human Genome Sciences, Inc.

        In February 2000, the Company and Human Genome Sciences, Inc., HGS, entered into a reciprocal royalty-bearing license agreement. Under the agreement, the Company has the option to exclusively license up to three genes from HGS for gene-based product development. HGS has the option to license the Company's gene delivery technology for use in up to three gene-based products. Each party has until September 30, 2004 to exercise their respective options. At December 31, 2001, neither party has selected any gene for an initial option exercise.

Vascular Genetics Inc.

        Under a February 2000 license agreement, the Company granted an exclusive, royalty-bearing license to Vascular Genetics Inc., VGI, a privately held company in which HGS is a major shareholder, for naked DNA delivery of a gene with potential use for revascularization. In exchange, the Company received a minority equity interest in VGI, represented by preferred stock. The preferred stock is convertible into common stock of VGI. This investment was recorded at estimated fair value of $5.0 million on the date of investment, and is reflected as Investment, at cost, in the accompanying balance sheets. The investment is being accounted for using the cost method. The Company also recorded a liability for deferred revenue of $5.0 million at the date of investment. The deferred revenue balance at December 31, 2001 of $3.0 million from this agreement, is being recognized ratably each month through September 30, 2004. License revenue recognized under this agreement was $1.1 million and $0.9 million in 2001 and 2000, respectively. The VGI clinical trials were placed on clinical hold by the FDA in 2000. The Company learned from VGI in October 2001 that their Phase II development program is off clinical hold, and they have announced that they are advancing toward new clinical trials. VGI will need to raise substantial funding in order to continue these clinical trials. If additional shares of VGI common or preferred stock are issued at a price below the price that the preferred shares of VGI were issued to the Company, the rate of conversion of the preferred shares into VGI common stock would change and the percentage of the Company's equity ownership in VGI would decrease.

Merial

        In March 1995, the Company entered into a corporate alliance relating to DNA vaccines in the animal health area with Merial, a joint venture between Merck and Aventis S.A. Merial has options to acquire exclusive licenses to the Company's gene delivery technology to develop and commercialize DNA vaccines to prevent infectious diseases in domesticated animals. Merial made payments of $1.1 million in 1999, and $1.0 million in 1998 to extend the options under this agreement. Additionally, in December 1999, Merial paid the Company $1.6 million for the initial exercise of options and extension of options under the agreement. In March 2000, Merial paid an additional $0.2 million to extend the broad option to March 2001. In 2001, Merial paid $1.0 million to extend the options to March 31, 2002. Through December 31, 2001, the Company had received a total of $6.0 million under this agreement. License revenue recognized under this agreement was $0.7 million, $0.9 million, and $2.1 million in 2001, 2000 and 1999, respectively. If Merial exercises additional license options and markets these vaccines, cash payments and royalties on net product sales would be due to the Company.

F-13

Aventis Pasteur

        In September 1994, the Company and Aventis Pasteur entered into an agreement that included a research collaboration and options for Aventis Pasteur to take exclusive licenses to the Company's gene delivery technology for each of five infectious disease vaccine targets. Through 1996, Aventis Pasteur had exercised four options. In December 2001, Aventis Pasteur and the Company restructured this agreement. Aventis Pasteur obtained rights to use the Company's technology for specific oncology applications. In exchange, Aventis Pasteur agreed to pay a small option fee and gave up rights to the infectious disease targets. Through December 31, 2001, the Company had received $7.8 million under this agreement. No revenue was recognized in 2001, 2000 or 1999. The restructured agreement provides for the Company to receive additional payments based upon achievement of certain defined milestones and royalty payments based on net product sales.

Aventis Pharma

        In October 1997, the Company and Aventis Pharma entered into an agreement granting Aventis Pharma an exclusive worldwide license to use the Company's gene delivery technology to develop certain gene therapy products for potential treatment of neurodegenerative diseases. Under the terms of the agreement, the Company received $1.0 million, which was recognized as revenue in 1997. Simultaneously with the restructuring of the Aventis Pasteur agreement in December 2001, the Company reacquired rights to gene therapies for neurodegenerative diseases. In June 2000, the Company and Aventis Pharma entered into a license agreement granting Aventis Pharma rights to use the Company's technology to deliver a growth factor gene for which Aventis Pharma holds rights. The Company received $1.5 million, which was recognized as revenue in June 2000. This agreement provides for the Company to receive additional payments based upon achievement of certain defined milestones and royalty payments based on net product sales.

Centocor, Inc.

        In February 1998, the Company entered into an agreement allowing Centocor, Inc., Centocor, subsequently acquired by Johnson & Johnson, Inc., to use the Company's gene delivery technology to develop and market DNA vaccines for the potential treatment of certain types of cancer. The Company received a payment of $2.2 million under the agreement, which was recognized as revenue in 1998. In 2001, the Company recognized license revenue of $1.0 million from scheduled milestone payments from Centocor. The Company may receive further payments plus royalties if Centocor successfully develops products using the Company's technology.

Boston Scientific Corporation

        In September 1998, the Company and Boston Scientific Corporation entered into a license and option agreement for the development of catheter-based intravascular gene delivery technology. The agreement provides for the Company to receive royalty payments on net product sales.

Office of Naval Research

        In September 1998, the Company signed a cooperative agreement with the Office of Naval Research to develop a multi-gene malaria DNA vaccine and test its ability to protect humans against malaria. This agreement, as amended in January 2002 could provide up to approximately $5.5 million of funding to the Company through April 30, 2002, of which $1.5 million, $0.9 million, and $1.8 million of contract revenue was recognized under this agreement in 2001, 2000 and 1999, respectively.

F-14

Other Research and Licensing Agreements

        The Company also received revenue under research and licensing agreements and contract service agreements with other entities including the U.S. government of which approximately $2.8 million, $2.0 million and $1.3 million was recognized as revenue in 2001, 2000 and 1999, respectively.

        Ichor Medical Systems, Inc.    In October 2001, the Company and Ichor Medical Systems, Inc. entered into an exclusive agreement to develop products based on the Company's naked DNA technology and delivered using Ichor's proprietary electroporation systems. The two companies are applying this innovative approach toward the initial development of selected products.

        CytRx Corporation.    In December 2001, the Company entered into an exclusive agreement with CytRx Corporation granting the Company rights to use or sublicense CytRx's poloxamer technology to enhance viral or non-viral delivery of polynucleotides in all preventive and therapeutic human and animal health applications, except for four infectious disease vaccine targets licensed to Merck and prostate-specific membrane antigen. In addition, the license agreement permits the Company's use of CytRx's technology to enhance the delivery of proteins in prime-boost vaccine applications that involve the use of polynucleotides. As part of the agreement, the Company made a $3.8 million up-front payment in December 2001, and will potentially make future milestone and royalty payments. The license fee is being amortized to expense over the estimated ten-year average useful life of the technology.

        Wisconsin Alumni Research Foundation and University of Michigan License Agreements.    In 2001 and 2000, the Company continued research and exclusive license agreements with these organizations for continuing research and license rights to technology related to gene therapy. The agreements grant the Company the right to commercialize any product derived from specified technology. The fees paid by the Company are not material and are expensed as incurred.

        Under the Merck, Aventis Pasteur, Merial, Aventis Pharma, Centocor, HGS and VGI agreements, the Company would be required to pay up to 10 percent of some milestone payments and a small percentage of some royalty payments to Wisconsin Alumni Research Foundation, WARF. The CytRx and Ichor agreements would require the Company to make payments to the respective partners and to WARF if the results of the Company's research resulted in the generation of revenue. Under the Boston Scientific agreement, if the Company were to receive milestone or royalty payments, the Company would be required to pay up to 25 percent of some of these payments to the University of Michigan. Royalty expense for these agreements was $0.4 million in 2001 and 1999, and $0.2 million in 2000.

6. Accounts Payable and Accrued Expenses

        Accounts payable and accrued expenses consisted of the following at December 31:

	2001		2000
Accrued clinical trials cost	$	1,810,435	$	1,732,967
Employee compensation		1,410,226		932,540
Accounts payable		43,852		139,174
Other accrued liabilities		1,227,492		1,090,850
	$	4,492,005	$	3,895,531

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7. Commitments and Contingencies

Leases

        The Company leases its office and research facilities and certain equipment under operating and capital leases. The minimum annual rents on the office and research facilities are subject to increases specified in the lease or based on changes in the Consumer Price Index subject to certain minimum and maximum annual increases. The Company is also required to pay taxes, insurance and operating costs under the facilities leases. Two of the three facilities leases can be renewed for one additional five-year period and the third facility lease can be renewed for two additional five-year periods beyond their expiration in 2004. The equipment capital leases are secured by substantially all equipment of the Company.

		Operating Leases		Capital Leases
Years ending December 31,
2002		$	1,743,391	$	1,027,292
2003			1,793,863		948,736
2004			1,885,641		658,940
2005			—		157,556
Total minimum lease
	Payments	$	5,422,895		2,792,524
Less amount representing
	Interest				(329,499	)
Present value of capital lease payments					2,463,025
Less current portion					(846,348	)
Long-term obligations under capital leases				$	1,616,677

        Rent expense for the years ended December 31, 2001, 2000 and 1999, was $1.6 million, $1.4 million and $1.1 million, respectively.

        Cost and accumulated depreciation of equipment and software under capital leases were as follows:

	Cost		Accumulated Depreciation		Net
December 31, 2001	$	3,590,286	$	1,399,286	$	2,191,000
December 31, 2000	$	2,820,675	$	1,008,909	$	1,811,766

        In January 2002, the Company signed a 15-year lease for a new building in northern San Diego, California. The new facility has approximately 68,400 square feet of manufacturing, research laboratory and office space. The Company will continue to hold the leases on its three existing facilities until they expire. The Company intends to sublease the majority of this space as it becomes available. The new lease requires the Company to pay taxes, insurance and operating costs. The lease provides for specified scheduled rent increases annually. The Company has the option to renew this lease for three additional five-year periods beyond the expiration, and has a one-time purchase option at 110 percent of fair market value which the Company can exercise in year nine of the lease. Minimum lease obligations on the new facility are as follows: $1.0 million in 2002, $2.3 million in 2003, $2.4 million in 2004, $2.5 million in 2005 and 2006, $2.6 million in 2007, and $29.0 million thereafter until conclusion of the lease term in August 2017. Additionally, in January 2002, the Company renewed its capital

F-16

equipment credit line and increased it to $4.3 million. This credit line will be used to finance laboratory and scientific equipment, and part of the equipment needed for the new facility.

Notes Payable

        During 1999, the Company entered into a financing agreement with a bank which provided for maximum borrowings of $1.0 million for certain leasehold improvements at the bank's prime rate less 0.25 percentage points. Under the terms of this financing agreement, any outstanding borrowings at June 1, 2000 converted to a term loan payable over 42 months at the bank's prime rate minus 0.25 percentage points. As a result, on June 1, 2000, $1.0 million converted from the financing agreement to a note payable, see below. During 2000, the maximum borrowings on this financing agreement were $1.0 million, the weighted average borrowings were $0.6 million and the weighted average interest rate was 8.6%.

        During 2000, the Company entered into a similar financing agreement as noted above which provided for maximum borrowings of $1.3 million for certain leasehold improvements at the bank's prime rate. Under the terms of this financing agreement, any outstanding borrowings at June 1, 2001 converted to a term loan payable over 42 months at the bank's prime rate. As of December 31, 2000, the Company had used $0.2 million under this financing agreement. During 2001 and 2000, the maximum borrowings on this financing agreement were $1.3 million and $0.2 million, the weighted average borrowings were $0.6 million and $0.1 million and the weighted average interest rates were 8.2% and 9.3%, respectively. On June 1, 2001, $1.3 million converted from this financing agreement to a note payable, see below.

        Notes payable consist of the following at December 31:

	2001			2000
Note payable to bank, payable in monthly installments of $30,952 through 2004, plus interest at the bank's prime rate (4.75% at December 31, 2001)	$	1,083,333		$	—
Note payable to bank, payable in monthly installments of $23,810 through 2003, plus interest at the bank's prime rate less 0.25% (4.50% and 9.25% at December 31, 2001 and 2000, respectively)		547,619			833,333
Amounts payable to bank under unsecured financing agreement		—			192,300
		1,630,952			1,025,633
Less current portion		(657,143	)		(317,764	)
Notes payable	$	973,809		$	707,869
Annual maturities of debt are as follows:
2002	$	657,143
2003		633,334
2004		340,475
	$	1,630,952

        Financial covenants under the agreement require, among other things, that the ratio of liabilities to tangible net worth not exceed 0.3 to 1.0, and that the Company maintain liquid assets such as cash and certificates of deposit, U.S. treasury bills and other obligations of the federal government, and readily marketable securities of at least $20.0 million. The Company was in compliance with these covenants as of December 31, 2001.

F-17

Contingencies

        In the ordinary course of business, the Company is a party to lawsuits involving employee-related matters. Management of the Company does not believe that an unfavorable outcome in any of these matters would have a material adverse effect on the Company's financial condition or results of operations.

8. Stockholders' Equity

Preferred Stock

        The Company's certificate of incorporation, as amended, authorizes the issuance of up to 5,000,000 shares of preferred stock. The Board of Directors is authorized to fix the number of shares of any series of preferred stock and to determine the designation of such shares. However, the amended certificate of incorporation specifies the initial series and the rights of that series. No shares of preferred stock were outstanding at December 31, 2001 or 2000.

Common Stock

        The Company's certificate of incorporation, as amended, authorizes the issuance of up to 40,000,000 shares of common stock. On January 20, 2000, the Company completed a public offering of 3,450,000 shares of its common stock at a price of $36.50 per share. Proceeds to the Company, net of underwriting fees and offering expenses, were approximately $117.5 million.

Stock Plan and Directors Option Plan

        The Company has a stock incentive plan, under which 4,200,000 shares of common stock are reserved for issuance to employees, non-employee directors and consultants of the Company. The plan provides for the grant of incentive and nonstatutory stock options and the direct award or sale of shares. The exercise price of stock options must equal at least the fair market value on the date of grant. The maximum term of options granted under the plan is ten years. Except for annual grants to directors which vest at the next annual meeting, options generally vest 25 percent on the first anniversary of the date of grant, with the balance vesting quarterly over the remaining three years. The plan has also limited the number of options that may be granted to any plan participant in a single calendar year to 300,000 shares.

        The Company also has a directors stock option plan that provides for the issuance to non-employee directors of up to 210,000 shares of common stock, of which options for 202,500 shares have been granted through December 31, 2001. It is not anticipated that there will be any future grants under the directors plan.

F-18

        The following table summarizes stock option transactions for the Company's stock option plans for the years ended December 31, 2001, 2000 and 1999:

		Shares		Weighted Average Exercise Price		Weighted Average Fair Value of Grants
Outstanding
	December 31, 1998	1,815,045		$	13.39
	Granted	546,900		$	17.89	$	13.06
	Exercised	(16,623	)	$	10.23
	Forfeited	(50,057	)	$	15.19
Outstanding
	December 31, 1999	2,295,265		$	14.45
	Granted	783,675		$	21.18	$	15.62
	Exercised	(487,211	)	$	11.98
	Forfeited	(132,322	)	$	20.26
Outstanding
	December 31, 2000	2,459,407		$	16.77
	Granted	662,800		$	12.23	$	8.89
	Exercised	(45,100	)	$	6.26
	Forfeited	(439,038	)	$	17.09
Outstanding
	December 31, 2001	2,638,069		$	15.76

        The following table summarizes information about stock options outstanding under the Company's stock option plans at December 31, 2001:

Options Outstanding						Options Exercisable
Range of Exercise Prices		Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$	0.16 — $11.75	540,124	7.3	$	9.69	241,548	$	8.77
$	11.85 — $14.16	528,733	7.5	$	13.31	260,038	$	13.67
$	14.19 — $16.31	552,967	6.4	$	15.42	454,228	$	15.44
$	16.38 — $20.69	634,726	8.4	$	18.23	251,495	$	18.30
$	20.75 — $59.06	381,519	8.1	$	24.11	232,762	$	23.42
$	0.16 — $59.06	2,638,069	7.5	$	15.76	1,440,071	$	15.79

        The number of shares and weighted average price of options exercisable at December 31, 2001, 2000 and 1999 were 1,440,071 shares at $15.79, 1,191,609 shares at $14.01, and 1,219,839 shares at $12.65, respectively.

        The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recorded for the fair value of the stock options issued to employees or directors under the plans. Had compensation cost for the Company's stock option plans been

F-19

determined consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per common share would have increased to the pro forma amounts indicated below:

	2001			2000			1999
Net loss — as reported	$	(9,239,991	)	$	(8,516,873	)	$	(6,909,217	)
Net loss — pro forma	$	(15,446,908	)	$	(15,277,441	)	$	(11,591,993	)
Net loss per common share — as reported	$	(0.46	)	$	(0.43	)	$	(0.43	)
Net loss per common share — pro forma	$	(0.77	)	$	(0.78	)	$	(0.72	)

        The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants: risk free interest rates of 4.24% (2001), 5.79% (2000), and 5.70% (1999), and expected volatility of 81% (2001 and 2000) and 71% (1999). An expected option life of four (2001 and 2000) and five (1999) years and a dividend rate of zero are assumed for the years presented.

        The Company accounts for stock options granted to consultants in accordance with Emerging Issues Task Force, EITF, 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services." In September 2001, the Company created a Scientific Advisory Board composed of non-employee advisors. These advisors were issued 60,000 options under the stock incentive plan at an exercise price of $11.63. The options expire on September 4, 2011. In accordance with EITF 96-18, the estimated fair value of these options is being amortized to expense over the four-year vesting period of the options. Compensation expense of $0.2 million is reflected in research and development expense in the accompanying statement of operations for the year ended December 31, 2001. The estimated fair value of the options is remeasured at each quarter end during the vesting period and compensation expense is recognized based on the remeasured fair value.

9. Related Parties

        Included in other assets at December 31, 2001 and 2000, is the long-term portion of notes receivable, representing amounts due from officers and employees of the Company. Imputed interest is applied at the applicable federal rate. The loan agreements allow for the notes to be forgiven under certain circumstances over the next three or four years. The long-term portion is $0.2 million and $0.1 million at December 31 2001 and 2000, respectively. The current portion, included in receivables and other, is $0.1 million at December 31, 2001 and 2000. Receivables and other also includes $0.4 million due to the Company from a third party for the sale of the home of an executive officer as part of his employment agreement.

        The Company has employment agreements under which salary continuation payments could be required under certain circumstances for three current executive officers. Under the terms of these agreements, if the Company terminates the executive officer's employment without "cause," or the executive officer resigns for "good reason," as defined in the agreements, the Company will continue to pay base compensation, plus prior year cash bonus in the case of the CEO, for between six and twelve months depending on the agreement. These agreements also specify that any earnings from employment or consulting during this period will offset any salary continuation payments due from the Company.

        Two of the agreements also provide for certain relocation payments, for temporary living expenses and housing differentials to be paid for specified periods of time. In 2001, these payments totaled $0.2 million. Additionally, these agreements provide for future loans in an aggregate amount of $1.0 million for the purchase of residences by the executive officers. Imputed and payable interest will

F-20

be applied at the applicable federal rate. The future loan to the CEO would be secured by a second deed of trust on the residence. In December 2001, the Company purchased one executive officer's home at a loss of $0.2 million, and made a $0.3 million, interest free loan to this executive officer. This loan is forgivable over four years and interest is imputed at the applicable federal rate. In January 2002, the Company entered into another loan agreement with this same executive officer. The agreement provides for the loan in the amount of $0.2 million to be repaid after four years and to be secured by a second deed of trust on the residence. Interest, at the applicable federal rate, is due and payable monthly.

10. Income Taxes

        As of December 31, 2001, the Company has available net operating loss carryforwards of approximately $61.7 million and research and development credit carryforwards of approximately $5.5 million to reduce future federal income taxes, if any. These carryforwards expire through 2020 and are subject to review and possible adjustment by the Internal Revenue Service.

        In 1999, one of the Company's product candidates, Allovectin-7®, was granted orphan drug designation for the treatment of invasive and metastatic melanoma by the FDA's Office of Orphan Products Development. Orphan drug designation provides certain tax benefits for qualifying expenses. In 2000, another of the Company's product candidates, Leuvectin™, was granted orphan drug designation for treatment of renal cell carcinoma.

        The Tax Reform Act of 1986 limits a company's ability to utilize certain net operating loss and tax carryforwards in the event of cumulative change in ownership in excess of 50 percent, as defined. The Company has completed numerous financings that have resulted in a change in ownership in excess of 50 percent, as defined. The utilization of net operating loss and tax credit carryforwards may be limited due to these ownership changes.

        The Company has a deferred tax asset of approximately $36.3 million related primarily to its net operating loss and tax credit carryforwards. A valuation allowance has been recognized to offset the entire amount of the deferred tax asset as it is more likely than not that some or all of the deferred tax asset will not be realized.

11. Employee Benefit Plans

        The Company has a net defined contribution savings plan under section 401(k) of the Internal Revenue Code. The plan covers substantially all employees. The Company matches employee contributions made to the plan according to a specified formula. The Company's matching contributions totaled approximately $0.1 million in 2001, 2000 and 1999.

F-21

12. Summary of Unaudited Quarterly Financial Information

        The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2001 and 2000. The summary for the year ended December 31, 2000 reflects a change in accounting principle effective January 1, 2000, discussed in Note 2 (in thousands, except per share amounts):

	March 31,			June 30,			September 30,			December 31,
2001
Revenues	$	2,432		$	1,777		$	2,386		$	4,771
Research and development costs		5,215			5,274			5,321			6,263
Total operating expenses		6,970			7,192			6,903			7,529
Net loss	$	(1,978	)	$	(3,276	)	$	(2,557	)	$	(1,429	)
Net loss per common share (basic and diluted)	$	(0.10	)	$	(0.16	)	$	(0.13	)	$	(0.07	)
Weighted average shares used in per share calculation		20,014			20,021			20,040			20,054

	March 31,			June 30,			September 30,			December 31,
2000
Revenues	$	1,181		$	2,947		$	1,613		$	1,879
Research and development costs		4,317			4,710			4,524			4,963
Total operating expenses		5,647			6,020			5,787			6,325
Net loss before cumulative effect of accounting change		(2,728	)		(635	)		(1,687	)		(1,957	)
Effect of accounting change		(1,510	)		—			—			—
Net loss	$	(4,238	)	$	(635	)	$	(1,687	)	$	(1,957	)
Net loss per common share (basic and diluted):
Loss per share before cumulative effect of accounting change	$	(0.14	)	$	(0.03	)	$	(0.08	)	$	(0.10	)
Effect of accounting change		(0.08	)		—			—			—
Net loss per common share	$	(0.22	)	$	(0.03	)	$	(0.08	)	$	(0.10	)
Weighted average shares used in per share calculation		19,022			19,823			19,896			20,008

F-22

QuickLinks

DOCUMENTS INCORPORATED BY REFERENCE (To the Extent Indicated Herein)
FORWARD-LOOKING STATEMENTS
PART I
PART II
PART III
PART IV
SIGNATURES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
VICAL INCORPORATED BALANCE SHEETS
VICAL INCORPORATED STATEMENTS OF OPERATIONS
VICAL INCORPORATED STATEMENTS OF CASH FLOWS
VICAL INCORPORATED NOTES TO FINANCIAL STATEMENTS December 31, 2001

EX-10.26

                                                                   EXHIBIT 10.26

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

                                  AMENDMENT # 4
                  TO THE RESEARCH, OPTION AND LICENSE AGREEMENT
                             DATED DECEMBER 7, 2001

This Amendment, dated this 7th day of December, 2001, is by and between (1)
VICAL INCORPORATED, a Delaware Corporation ("VICAL"), having a place of business
located at 9373 Towne Centre Drive, Suite 100, San Diego, California 91212, USA,
(2) AVENTIS PASTEUR (formerly PASTEUR MERIEUX Serums & Vaccins), a French
SOCIETE ANONYME ("AVP"), having a registered head office located at 58 avenue
Leclerc, 69007 Lyon, France and (3) AVENTIS PASTEUR LIMITED (formerly Connaught
Laboratories Limited), a company organized and existing under the laws of the
Province of Ontario, Canada (AVP-Canada) and having its principal place of
business at Connaught Campus, 1755 Steeles Avenue West, Toronto, Ontario, Canada
M2R 3T4.

WHEREAS, VICAL and AvP entered into a Research, Option & License Agreement (the
AGREEMENT) as of September 29, 1994, as amended by Amendment #1 dated as of
September 29, 1994, by Amendment # 2 dated January 26, 1996 and by Amendment # 3
dated as of April 15, 1996 (the AMENDMENT #3 ), under which AvP is granted
Options with respect to certain Fields and during applicable Option Periods to
obtain exclusive licenses under certain Patent Rights and certain associated
technologies owned by or licensed to VICAL ; and

WHEREAS, AvP desires to modify the Field in which it may exercize Options, and
VICAL is willing to permit such modifications upon the terms and conditions set
forth in this Amendment;

NOW, THEREFORE, the parties agree to amend the Agreement as follows :

1. The definition of Field as set forth in Section 1.5. of the Agreement is
   hereby amended by deletion of all microorganisms listed in such Section 1.5
   as amended by Amendment # 3, Section 1, and the addition of

                                       [***]

2. The definition of Option Period as set forth in Section 1.11. of the
   Agreement as amended by Amendment # 3, Section 2, is hereby replaced with the
   following :

   1.11. "OPTION PERIOD" SHALL MEAN, WITH RESPECT TO [***] THE PERIOD COMMENCING
         ON THE DATE HEREOF AND CONTINUING FOR A[***] PERIOD UNTIL [***] UNLESS
         TERMINATED EARLIER PURSUANT TO THE PROVISIONS OF ARTICLE 12 BELOW.

- ----------

[***] Confidential material redacted and separately filed with the Commission.



3. Section 4.2.1. of the Agreement is hereby replaced with the following :

   4.2.1. GRANT OF THE OPTIONS. VICAL HEREBY GRANTS TO AVP AN OPTION WITH
          RESPECT TO [***] DURING THE APPLICABLE OPTION PERIOD, TO OBTAIN THE
          EXCLUSIVE, WORLDWIDE, ROYALTY-BEARING LICENSE FOR SUCH FIELD AS SET
          FORTH IN SECTION 4.3 BELOW. AVP MAY EXERCISE THE OPTION FOR SUCH FIELD
          AT ANY TIME ON OR BEFORE THE EXPIRATION OF THE OPTION PERIOD. AS SOON
          AS PRACTICABLE AFTER EXECUTION OF THIS AMENDMENT # 4, AVP SHALL PAY TO
          VICAL A NONREFUNDABLE, NONCREDITABLE LUMPSUM PAYMENT OF [***]. SUCH
          PAYMENT IS IN CONSIDERATION FOR PAST RESEARCH CONDUCTED BY VICAL
          RESULTING IN DIRECT INJECTION TECHNOLOGY OR CYTOFECTIN TECHNOLOGY AS
          IT MAY APPLY TO [***].

4. Section 4.2.2 of the Agreement as amended by Amendment # 3 is herby deleted
   in its entirety.

5. Section 4.2.3. of the Agreement is hereby replaced with the following :

   4.2.3. EXERCISE OF THE OPTION. AVP MAY EXERCIZE THE OPTION WITH RESPECT TO
          [***] (a) BY PROVIDING WRITTEN NOTICE OF EXERCISE TO VICAL ON OR
          BEFORE THE EXPIRATION OF THE APPLICABLE OPTION PERIOD, AND (b) BY
          PAYING TO VICAL, PRIOR TO THE EXPIRATION OF THE APPLICABLE OPTION
          PERIOD, A NON-REFUNDABLE, NON-CREDITABLE OPTION EXERCISE FEE IN THE
          AMOUNT OF [***].

6. AvP hereby declares that all obligations (including payment obligations)
   relating to [***] under the Agreement shall be assumed by AvP-Canada, an
   Affiliate of AvP, and that all rights relating to [***] under the Agreement
   shall benefit to AvP-Canada. AvP-Canada hereby appears as an additional party
   to the Agreement, a true copy of which is delivered to AvP-Canada along with
   an original counterpart of this Amendment # 4.

7. AvP hereby declares that it abandons, or hereby confirms previous abandonment
   of, the development and commercialization of Products in the following
   Fields : HERPES VIRUS VARICELLAE (herpes zoster) ; BORRELIA BURGDORFERI (Lyme
   disease) ; CYTOMEGALOVIRUS (CMV); HELICOBACTER PYLORI ; PLASMODIUM FALCIPARUM
   (Malaria) and Respiratory Syncitial Virus (RSV) and Section 5.3.1. of the
   Agreement applies to such abandonment.

8. AvP hereby declares that its letter to VICAL dated November 6, 2001 is deemed
   null and void and of no further effect.

9. VICAL hereby irrevocably waives any claim against and forever discharges AvP
   from any alleged breach of contract under the Agreement in relation to any
   alleged action or omission, including but not limited to any payment default,
   which would have occured prior to the date of this Amendment # 4. In
   particular, VICAL

- ----------

[***] Confidential material redacted and separately filed with the Commission.



   hereby withdraws its claim for alleged default of payment by AvP of a
   milestone payment under Section 6.3.2 of the Agreement as amended by
   Amendment # 3 ; VICAL hereby declares that its letter to AvP dated December
   15, 2000 is deemed null and void and of no further effect. VICAL shall
   promptly issue to AvP a credit note for the amount invoiced by VICAL to AvP
   under invoice N DEG. PMC005 dated September 7, 2000.

10.Any provision of the Agreement not modified by this Amendment shall remain
   unchanged. Capitalized terms in this Amendment shall have the meaning set
   forth in the Agreement.

IN WITNESS WHEREOF, the parties hereto have had this Amendment executed by their
authorized representatives as set forth below.

          VICAL INCORPORATED                                AVENTIS PASTEUR S.A.

By: /s/ VIJAY SAMANT                              By: /s/ MICHEL GRECO
- -------------------------                         ------------------------------
    Vijay Samant                                       Michel Greco
    President and C.E.O.                               President & COO/DIRECTEUR
                                                       GENERAL DELEGUE

Date :                                           Date :
     AVENTIS PASTEUR LIMITED

By: /s/ MARK LIEVONEN
- -------------------------
    Mark Lievonen
    President

By: /s/ PIERRE MEULIEN
- -------------------------
    Pierre Meulien
    Vice-President, R&D

Date :

EX-10.27

                                                                   EXHIBIT 10.27

                                      LEASE

                                  KILROY REALTY

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                              KILROY REALTY, L.P.,

                         a Delaware limited partnership,

                                  as Landlord,

                                       and

                               VICAL INCORPORATED,

                             a Delaware corporation,

                                   as Tenant.



                                TABLE OF CONTENTS



                                                                                  PAGE
                                                                                  ----
                                                                                 
ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS..............................5

ARTICLE 2 INITIAL LEASE TERM; OPTION TERM(S).........................................9

ARTICLE 3 BASE RENT; ABATED BASE RENT...............................................13

ARTICLE 4 ADDITIONAL RENT...........................................................14

ARTICLE 5 USE OF PREMISES...........................................................26

ARTICLE 6 SERVICES AND UTILITIES....................................................28

ARTICLE 7 REPAIRS.................................................................. 29

ARTICLE 8 ADDITIONS AND ALTERATIONS.................................................31

ARTICLE 9 COVENANT AGAINST LIENS....................................................33

ARTICLE 10 INSURANCE................................................................34

ARTICLE 11 DAMAGE AND DESTRUCTION...................................................37

ARTICLE 12 NONWAIVER................................................................39

ARTICLE 13 CONDEMNATION.............................................................40

ARTICLE 14 ASSIGNMENT AND SUBLETTING................................................41

ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND  REMOVAL OF TRADE FIXTURES..........44

ARTICLE 16 HOLDING OVER.............................................................45

ARTICLE 17 ESTOPPEL CERTIFICATES....................................................46

ARTICLE 18 SUBORDINATION............................................................46

ARTICLE 19 DEFAULTS; REMEDIES.......................................................47

ARTICLE 20 COVENANT OF QUIET ENJOYMENT..............................................50

ARTICLE 21 SECURITY DEPOSIT; LETTER OF CREDIT.......................................50

ARTICLE 22 TELECOMMUNICATIONS EQUIPMENT.............................................54

ARTICLE 23 SIGNS....................................................................54


                                      (ii)


                                                                                 
ARTICLE 24 COMPLIANCE WITH LAW......................................................57

ARTICLE 25 LATE CHARGES.............................................................58

ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT.....................58

ARTICLE 27 ENTRY BY LANDLORD........................................................58

ARTICLE 28 TENANT PARKING...........................................................59

ARTICLE 29 MISCELLANEOUS PROVISIONS.................................................60

ARTICLE 30 OPTION TO PURCHASE PREMISES..............................................70



EXHIBITS

EXHIBIT A:            OUTLINE OF BUILDING & PACIFIC CORPORATE CENTER

EXHIBIT A-1:          LEGAL DESCRIPTION OF PROJECT

EXHIBIT A-2:          LOT-LINE ADJUSTMENT DEPICTION

EXHIBIT A-3:          CURRENT COMMON AREAS

EXHIBIT A-4:          SUPERIOR RIGHTS HOLDERS' EXISTING POSSESSORY RIGHTS

EXHIBIT B:            TENANT WORK LETTER

EXHIBIT C:            NOTICE OF LEASE TERM DATES

EXHIBIT D:            RULES AND REGULATIONS

EXHIBIT E:            FORM OF TENANT'S ESTOPPEL CERTIFICATE

EXHIBIT F:            RECOGNITION OF COVENANTS, CONDITIONS, AND RESTRICTIONS

EXHIBIT G:            INTENTIONALLY OMITTED

EXHIBIT H:            FORM OF LETTER OF CREDIT

EXHIBIT I:            PURCHASE CONTRACT

EXHIBIT J:            PROJECT PARKING SPACES

EXHIBIT K:            PACIFIC CORPORATE CENTER COMMON AREA COSTS

                                      (iii)


EXHIBIT L:            PRE-APPROVED FORM OF TENANT'S SIGNAGE
                      (APPROVED SIGN SPECIFICATIONS)

EXHIBIT M:            SHORT FORM OF MEMORANDUM OF LEASE

                                      (iv)


                                      INDEX



                                                                       PAGE(s)
                                                                       -------
                                                                    
Abatement Event............................................................14
Accountant.................................................................26
Additional Non-Refundable Deposit..........................................70
Additional Rent............................................................14
Advocate Arbitrators.......................................................12
Affiliate..................................................................44
Alterations................................................................31
Applicable Laws............................................................57
Applicable Reassessment....................................................25
Award......................................................................12
Base Rent..................................................................13
Broker.....................................................................66
BS Exception...............................................................30
Building....................................................................5
Building Structure.........................................................29
Building Systems...........................................................28
CC&Rs......................................................................27
Closing Date...............................................................71
Common Areas................................................................6
Comparable Area............................................................11
Comparable Buildings.......................................................11
Comparable Deals...........................................................10
Comparable Term............................................................10
Control....................................................................44
Damage Termination Date....................................................39
Damage Termination Notice..................................................39
Direct Expenses............................................................14
Effective Date..............................................................9
Eligibility Period.........................................................14
Emergency..................................................................59
Emergency Generator........................................................67
Environmental Laws.........................................................68
Escrow Holder..............................................................70
Estimate...................................................................23
Estimate Statement.........................................................23
Estimated Direct Expenses..................................................23
Exercise Notice........................................................11, 70
Existing CC&Rs.............................................................27
Expense Year...............................................................15
Extraordinary Alterations..................................................33
First Offer Commencement Date...............................................8
First Offer Notice..........................................................7
First Offer Rent............................................................8
First Offer Space...........................................................7


                                       (v)




                                                                        PAGE(s)
                                                                        -------
                                                                     
First Offer Waiver Period...................................................8
FO Buildings................................................................7
Force Majeure..............................................................63
Hazardous Material(s)......................................................68
Holdover Notice............................................................45
HVAC.......................................................................28
Initial Abatement Period...................................................13
Initial Non-Refundable Deposit.............................................70
Landlord....................................................................1
Landlord Parties...........................................................34
Landlord Response Date.....................................................11
Landlord Response Notice...................................................11
Landlord's Option Rent Calculation.........................................11
L-C........................................................................51
L-C Amount.................................................................51
L-C Security Deposit.......................................................53
Lease.......................................................................1
Lease Commencement Date.....................................................9
Lease Expiration Date.......................................................9
Lease Term..................................................................9
Lease Year..................................................................9
Lines......................................................................68
Mail.......................................................................63
Market Capitalization......................................................51
Market Rent................................................................10
Net Worth..................................................................44
Neutral Arbitrator.........................................................12
Nondisturbance Agreement...................................................47
Non-Refundable Deposit.....................................................70
Notices....................................................................63
Objectionable Name.........................................................56
Opening of Escrow..........................................................70
Operating Expenses.........................................................15
Option Exercise Period.....................................................70
Option Premises.............................................................9
Option Rent................................................................10
Option Term.................................................................9
Option Term TI Allowance................................................8, 11
Original Improvements......................................................36
Original Tenant.............................................................7
Other Improvements.........................................................69
Outside Agreement Date.....................................................11
Outside Closing Date.......................................................71
Overpayment Amount.........................................................23
Pacific Corporate Center Common Area Costs.................................22


                                      (vi)




                                                                        PAGE(s)
                                                                        -------
                                                                        
PCC Common Areas............................................................6
Permitted Assignee..........................................................7
Permitted Holdover Term....................................................45
PID........................................................................27
Premises....................................................................5
Project.....................................................................5
Project Common Areas........................................................6
Project Monument Signs.....................................................55
Proposition 13.............................................................21
Proposition 13 Protection Amount...........................................25
Proposition 13 Purchase Price..............................................25
Purchase Contract..........................................................70
Purchase Option............................................................70
Reassessment...............................................................25
Reestablishment Notice.....................................................52
Rent Concessions...........................................................10
Rent.......................................................................14
Rentable Square Feet........................................................7
Required L-C Amount........................................................51
Required Thresholds........................................................51
Security Areas.............................................................59
Security Deposit...........................................................50
Sign Specifications........................................................55
Statement..................................................................23
Subject Space..............................................................41
Summary.....................................................................1
Superior Right Holders......................................................7
Supplemental Statement.....................................................23
Tax Expenses...............................................................20
Tax Increase...............................................................25
TCCs........................................................................5
Telecommunications Equipment...............................................54
Tenant......................................................................1
Tenant Parties.............................................................69
Tenant Repair Notice.......................................................37
Tenant Work Letter..........................................................5
Tenant's Election Notice....................................................7
Tenant's Option Rent Calculation...........................................11
Tenant's Share.............................................................22
Tenant's Signage...........................................................55
Transfer Notice............................................................41
Transfer Premium...........................................................43
Transferee.................................................................41
Transfers..................................................................41
Unusable Area..............................................................14


                                      (vii)


                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                                      LEASE

     This Lease (the "LEASE"), dated as of the date set forth in SECTION 1 of
the Summary of Basic Lease Information (the "SUMMARY"), below, is made by and
between KILROY REALTY, L.P., a Delaware limited partnership ("LANDLORD"), and
VICAL INCORPORATED, a Delaware corporation ("TENANT").

                       SUMMARY OF BASIC LEASE INFORMATION



     TERMS OF LEASE                              DESCRIPTION
     --------------                              -----------

                                     
1.   Date:                              January 30, 2002

2.   Premises

     2.1  Building:                     That certain  building  located at 10390 Pacific
                                        Center Court in the "Project" in Sorrento Mesa,
                                        which Building contains 68,400 rentable
                                        square feet of space.

     2.2  Premises:                     All of the Building, as more particularly
                                        identified in EXHIBIT A to this Lease, and 273
                                        parking spaces as more particularly set forth in
                                        Summary SECTION 9 below and ARTICLE 28 of
                                        this Lease.

     2.3  Project:                      The Building is part of a single building
                                        project known as the "PACIFIC CORPORATE
                                        CENTER LOT 25/27 PROJECT", as further set forth
                                        in SECTION 1.1.2  of this Lease, the legal
                                        description of which is set forth in EXHIBIT A-1
                                        to this Lease; provided, however, such legal
                                        description is subject to adjustment  in
                                        conjunction with the anticipated lot-line
                                        adjustment more particularly described in
                                        SECTION 1.1.2 of this Lease.

3.   Lease Term
     (ARTICLE 2).

     3.1  Length of Term:               Fifteen (15) years and three (3) months.

     3.2  Lease Commencement Date:      June 1, 2002, subject to extension due to
                                        "Lease Commencement Date Delays," as that
                                        term is set forth SECTION 5 of the Tenant Work




                                     
                                        Letter attached to this Lease as EXHIBIT B.

     3.3  Lease Expiration Date:        The last day of the one hundred eighty-third
                                        (183rd) calendar month after the Lease
                                        Commencement Date (which Lease Expiration
                                        Date is scheduled to occur on August 31, 2017
                                        to the extent the Lease Commencement Date is
                                        June 1, 2002).

     3.4  Option Term(s):               Three (3)five (5)-year options to renew, as
                                        more particularly set forth in SECTION 2.2 of this
                                        Lease.



4.   Base Rent (ARTICLE 3):



                                                                                                      Monthly
                                                                            Monthly                 Rental Rate
             Period of                          Annual                     Installment               per Rentable
            Lease Term                        Base Rent                  of Base Rent               Square Foot
            ----------                        ---------                  -------------              -------------
                                                                                              
           June 2002 to
           August 2002*                            n/a                         n/a                     $ 0.00
        September 2002 to
           August 2003                      $2,298,240.00                 $191,520.00                  $2.800
        September 2003 to
           August 2004**                    $2,367,192.00                 $197,266.00                  $2.884
        September 2004 to
           August 2005                      $2,438,208.00                 $203,184.00                  $2.971
        September 2005 to
           August 2006                      $2,511,348.00                 $209,279.00                  $3.060
        September 2006 to
           August 2007                      $2,586,684.00                 $215,557.00                  $3.151
        September 2007 to
           August 2008                      $2,664,288.00                 $222,024.00                  $3.246
        September 2008 to
           August 2009                      $2,744,220.00                 $228,685.00                  $3.343
        September 2009 to
           August 2010                      $2,826,540.00                 $235,545.00                  $3.444
        September 2010 to
           August 2011                      $2,911,344.00                 $242,612.00                  $3.547
        September 2011 to
           August 2012                      $2,998,680.00                 $249,890.00                  $3.653
        September 2012 to
           August 2013**                    $3,058,656.00                 $254,888.00                  $3.726
        September 2013 to
           August 2014                      $3,119,832.00                 $259,986.00                  $3.801
        September 2014 to
           August 2015                      $3,182,220.00                 $265,185.00                  $3.877
        September 2015 to


                                      -2-


                                                                                              
           August 2016                      $3,245,868.00                 $270,489.00                  $3.955
        September 2016 to
           August 2017                      $3,310,788.00                 $275,899.00                  $4.034



To the extent Tenant elects to increase the amount of the Tenant Improvement
Allowance pursuant to SECTION 2.2.2 of the Tenant Work Letter, such "TIA
Increase," as that term is defined in SECTION 2.2.2 of the Tenant Work Letter,
shall be amortized over the then-remaining initial Lease Term commencing on the
date on which the applicable portion of the TIA Increase is disbursed to Tenant
by Landlord (excluding any holdbacks relating to the "Final Retention," as that
term is set forth in Section 2.2.3.2 of the Tenant Work Letter), using an
amortization rate of twelve and one-half percent (12 1/2%) per annum, the
monthly payment of which shall be payable in the same place and in the same
manner as Base Rent for each month of the initial Lease Term occurring after
such applicable disbursement date as "Additional Rent," as that term is set
forth in SECTION 4.1 of the Lease. Accordingly, by way of example only, for each
dollar of TIA Increase utilized by Tenant prior to the Rent Commencement Date,
each year's Base Rent payable by Tenant, as set forth in SECTION 4 of the
Summary, shall be increased by an amount equal to $0.01233 per rentable square
foot of the Premises per month commencing on the Rent Commencement Date. Any
such Additional Rent shall not be subject to increase during the Term of the
Lease.

*   The date upon which Base Rent commences (the "Rent Commencement Date") shall
    be, pursuant to the terms of Section 3.2 of this Lease, the date occurring
    three (3) months following the Lease Commencement Date (following any
    adjustments to the Lease Commencement Date or the Rent Commencement Date due
    to any Lease Commencement Date Delays, as more particularly set forth in
    SECTION 5 of the Tenant Work Letter).

**  Annual Base Rent (and Monthly Installment of Base Rent/Monthly Rental Rate
    per Rentable Square Foot) was calculated (i) using three percent (3.0%)
    increases for each of Lease Years 2-10, and (ii) using two percent (2.0%)
    increases for each of Lease Years 11-15; provided, however, that in each
    instance, the resulting Monthly Installment of Base Rent was rounded up or
    down, as applicable, to the nearest dollar, and the Annual Base Rent is,
    therefore, an amount equal to twelve (12) times such rounded Monthly
    Installment of Base Rent amount.

                                                      
5.   Intentionally Omitted.

6.   Tenant's Share                                      One hundred  percent  (100%) of the Project,
     (ARTICLE 4):                                        subject to the adjustments set forth in
                                                         SECTION 4.3 of this Lease.

7.   Permitted Use                                       Tenant may only use the Premises  for office,
                                                         research and development, biotechnology labs,
     (ARTICLE 5):                                        drug manufacturing, warehousing, and any
                                                         other legally permitted uses pursuant to the
                                                         applicable zoning and the Pacific Corporate
                                                         Center P.I.D.



                                       -3-


                                                      
8.   Security Deposit                                    $191,520.00. In addition to the Security
     (ARTICLE 21):                                       Deposit, Tenant shall have additional security
                                                         obligations, in the form more particularly set
                                                         forth in SECTION 21.2, and subject to reductions
                                                         pursuant to the TCC's of SECTION 21.2.

9.   Parking Spaces                                      Two hundred seventy-three (273) parking
     (ARTICLE 28):                                       spaces within the Project in the location(s)
                                                         identified on Exhibit J, all of which shall be
                                                         designated as "reserved for Vical", all as more
                                                         particularly described in ARTICLE 28 of this
                                                         Lease. As more particularly set forth in
                                                         ARTICLE 28, such parking spaces shall be
                                                         provided at no additional charge to Tenant
                                                         throughout the initial Lease Term and any
                                                         Option Terms.

10.  Address of Tenant
     (SECTION 29.18):                                    See SECTION 29.18 of the Lease.

11.  Address of Landlord
     (SECTION 29.18):                                    See SECTION 29.18 of the Lease.

12.  Broker(s)                                           CB Richard Ellis
     (SECTION 29.24):                                    4365 Executive Drive, Suite 900
                                                         San Diego, California 92121
                                                         Attention: Mr.Rick Sparks

                                                         CB Richard Ellis
                                                         4365 Executive Drive, Suite 900
                                                         San Diego, California 92121
                                                         Attention: Mr.Rob Merkin

13.  Tenant Improvement Allowance                        $6,840,000.00 (which amount was calculated
     (SECTION 2 of EXHIBIT B):                           based upon $100.00 per Rentable Square Foot
                                                         for each of the 68,400 Rentable Square Feet of
                                                         space in the Building).



                                       -4-


                                    ARTICLE 1

                  PREMISES, BUILDING, PROJECT, AND COMMON AREAS

     1.1    PREMISES, BUILDING, PROJECT AND COMMON AREAS.

          1.1.1     THE PREMISES. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord the premises set forth in SECTION 2.2 of the Summary
(the "PREMISES"). The outline of the Building constituting a portion of the
Premises is set forth in EXHIBIT A attached hereto. The parties hereto agree
that the lease of the Premises is upon and subject to the terms, covenants and
conditions (the "TCCs") herein set forth, and Landlord and Tenant each covenant
as a material part of the consideration for this Lease to keep and perform each
and all of such TCCs by it to be kept and performed and that this Lease is made
upon the condition of such performance. The parties hereto hereby acknowledge
that the purpose of EXHIBIT A is to show the approximate location of the
Building in the "Project," as that term is defined in SECTION 1.1.2, below,
only, and such Exhibit is not meant to constitute an agreement, representation
or warranty as to the construction of the Building, the precise area thereof or
the specific location of the "Common Areas," as that term is defined in
SECTION 1.1.3, below, or the elements thereof or of the accessways to the
Premises or the "Building," as that term is defined in SECTION 1.1.2, below.
Except as specifically set forth in this Lease and in the Tenant Work Letter
attached hereto as EXHIBIT B (the "TENANT WORK LETTER"), Landlord shall not be
obligated to provide or pay for any improvement work or services related to the
improvement of the Premises. Tenant also acknowledges that neither Landlord nor
any agent of Landlord has made any representation or warranty regarding the
condition of the Premises, the Building or the Project or with respect to the
suitability of any of the foregoing for the conduct of Tenant's business, except
as specifically set forth in this Lease and the Tenant Work Letter.

          1.1.2     THE BUILDING AND THE PROJECT. The Premises consists of the
entire building set forth in SECTION 2.1 of the Summary (the "BUILDING"), as
well as the parking spaces more particularly identified in SECTION 9 of the
Summary and ARTICLE 28 of this Lease. The Building is part of a single-building
project known as the "Pacific Corporate Center Lot 25/27 Project." The term
"PROJECT," as used in this Lease, shall mean (i) the Building and the Project
Common Areas, and (ii) the land (which is improved with landscaping, parking
facilities and other improvements) upon which the Building and the Project
Common Areas are located (which land is commonly referred to as Lots 25 and 27).
The legal description for such land (as of the date of this Lease) is attached
as EXHIBIT A-1 to this Lease; provided, however, Landlord and Tenant hereby
acknowledge that such initial legal description includes, in addition to the
land underlying the Project, the land underlying the remainder of the "Pacific
Corporate Center," as that term is set forth in SECTION 1.1.3, below; provided
further, however, Landlord and Tenant hereby acknowledge that a lot-line
adjustment is anticipated, which will result in a modification to such legal
description, with the resulting description materially conforming to the
depiction of the land identified on EXHIBIT A-2 attached to this Lease (at which
time the term "Premises" shall be modified so as to refer to the land
constituting the applicable, modified (post lot-line adjustment) parcel);
provided further, however, that Tenant agrees (at no additional cost or expense
to Tenant) to reasonably cooperate with Landlord to effectuate such lot-line
adjustment; provided further, however, Landlord shall use commercially
reasonable efforts to (A) conclude such lot-line adjustment on or before
December 31, 2002, and (B) in connection therewith, cause

                                       -5-


the related cross-easement and access agreements to be completed and recorded,
the form of which shall be subject to Tenant's reasonable approval.

          1.1.3     COMMON AREAS. Tenant shall have the non-exclusive right to
use, in common with other tenants in the "Pacific Corporate Center," and subject
to the rules and regulations referred to in ARTICLE 5 of this Lease, those
portions of the Project (the "PROJECT COMMON AREAS") which are external to the
Building and which are provided, from time to time, for use in common by
Landlord, Tenant and any other tenants of the property adjacent to the Project
which areas are owned or controlled by Landlord and which areas are generally
referred to globally as the "PACIFIC CORPORATE CENTER" (such Project Common
Areas, together with such other portions of the Pacific Corporate Center (the
"PCC COMMON AREAS") designated by Landlord, in its reasonable discretion,
including certain areas designated for the exclusive use of certain such
tenants, or to be shared by Landlord and certain tenants, are collectively
referred to herein as the "COMMON AREAS"; provided, however, Landlord and Tenant
hereby acknowledge that (i) the term "Pacific Corporate Center," generally
refers to that certain three-building project containing the Building and the
"FO Buildings" as that term is set forth in SECTION 1.3, below and as identified
on EXHIBIT A attached hereto, and (ii) in no event shall the term "Pacific
Corporate Center" relate to an area greater than that for which the legal
description is attached as EXHIBIT A-1). The areas designated as Common Areas as
of the date of this Lease are more particularly identified on EXHIBIT A-3 to
this Lease. The manner in which the Common Areas are maintained and operated
shall be at the reasonable discretion of Landlord (provided Tenant's use or
occupancy of the Premises is not adversely materially impacted thereby) and the
use thereof shall be subject to the "Rules and Regulations" set forth on
EXHIBIT D, attached hereto, provided that Landlord shall at all times maintain
and operate the Common Areas in a first-class manner consistent with the
"Comparable Buildings," as such term is defined in SECTION 2.2.2 of this Lease.
Subject to SECTION 1.1.4 below, Landlord reserves the right to close
temporarily, make alterations or additions to, or change the location of
elements of that portion of the Project Common Areas constituting parking areas
allocated to the remaining portion of the Pacific Corporate Center and/or the
cross-easement and access areas; provided, however, that such right shall apply
to the remainder of the Project Common Areas to the extent mandated by
applicable governmental entities.

          1.1.4     ALTERATIONS AND ADDITIONS. Landlord shall not change the
nature of the Project or the Project Common Areas to something other than a
first-class office/lab/manufacturing building project, establish any rules or
regulations which materially or adversely affect Tenant's use of the Premises,
the Project or the Project Common Areas for the Permitted Use, as set forth in
SECTION 7 of the Summary, or Tenant's ingress to or egress from the Project,
Building, the Premises or the parking areas servicing the same; provided,
however, Landlord shall provide Tenant with advance written notice of any change
to the Rules and Regulations. In connection with the foregoing, Tenant hereby
acknowledges that Landlord is considering and may during the Lease Term, in
Landlord's sole discretion, construct other improvements and PCC Common Areas
within the Pacific Corporate Center. Except when and where Tenant's right of
access is specifically excluded as the result of (i) an emergency, (ii) a
requirement by law, or (iii) a specific provision set forth in this Lease,
Tenant shall have the right of ingress and egress to the Premises, the Building
and the Pacific Corporate Center parking areas twenty-four (24) hours per day,
seven (7) days per week, commencing on the date upon

                                       -6-


which this Lease is fully executed and delivered between the parties, and
continuing until the date this Lease terminates.

     1.2    STIPULATION OF RENTABLE SQUARE FEET. For purposes of this Lease,
Landlord and Tenant hereby stipulate that the Building shall be deemed to
contain 68,400 "RENTABLE SQUARE FEET", which Rentable Square Footage shall not
be subject to any verification or remeasurement.

     1.3    RIGHT OF FIRST OFFER. To the extent that the Landlord (or its
"Affiliates" which definition of Landlord Affiliates shall be consistent with
the definition of "Affiliates" as it relates to Tenant pursuant to SECTION 14.8
of this Lease) continues to own either of the two adjoining buildings in the
Pacific Corporate Center currently leased by Nanogen and CN Biosciences (Nanogen
and CN Biosciences, along with their successors-in-interest, to be referred to
herein as the "SUPERIOR RIGHT HOLDERS") and generally referred to within the
Pacific Corporate Center as "10398 Pacific Center Court" and "10394 Pacific
Center Court" respectively (the "FO BUILDINGS"), Landlord hereby grants to the
Tenant originally named in this Lease (the "ORIGINAL TENANT"), its Affiliates
and any assignee of the Original Tenant's interest in this Lease pursuant to the
TCCs of Article 14 of this Lease (each, a "PERMITTED ASSIGNEE"), an ongoing
right of first offer contained herein with respect to each of the entire FO
Buildings (the "FIRST OFFER SPACE"). Notwithstanding the foregoing, such ongoing
first offer right of Tenant shall be subordinate to all currently-existing
rights which are set forth in leases of space with the Superior Right Holders,
including any renewal, extension or expansion rights set forth in such leases,
regardless of whether such renewal, extension or expansion rights are executed
strictly in accordance with their terms, or pursuant to a lease amendment or a
new lease. Such possessory rights of the Superior Right Holders are set forth in
EXHIBIT A-4 attached to this Lease. Tenant's right of first offer shall be on
the TCCs set forth in this SECTION 1.3. Tenant hereby acknowledges that the
rights contained in this SECTION 1.3 shall terminate to the extent a subsequent
non-Affiliate owner (specifically including, but not limited to, a lender who
takes ownership, whether by foreclosure, a deed-in-lieu of foreclosure, or
otherwise) takes ownership of the Building or either of the FO Buildings.

          1.3.1     PROCEDURE FOR OFFER. Landlord shall notify Tenant (the
"FIRST OFFER NOTICE") from time to time when the First Offer Space or any
portion thereof becomes available for lease to third parties, provided that no
Superior Right Holder wishes to lease such space pursuant to a
currently-existing right set forth in EXHIBIT A-4. Pursuant to such First Offer
Notice, Landlord shall offer to lease to Tenant the then available First Offer
Space. The First Offer Notice shall describe the space so offered to Tenant and
shall set forth the "First Offer Rent," as that term is defined in SECTION 1.3.3
below, and the other economic terms upon which Landlord is willing to lease such
space to Tenant.

          1.3.2     PROCEDURE FOR ACCEPTANCE. If Tenant wishes to exercise
Tenant's right of first offer with respect to all of the space described in the
First Offer Notice, then within twenty (20) days following Tenant's receipt of
such First Offer Notice, Tenant shall deliver written notice to Landlord
("TENANT'S ELECTION NOTICE"), pursuant to which Tenant shall elect either to (i)
lease the entire First Offer Space at the First Offer Rent and upon the other
TCCs contained in Landlord's First Offer Notice, (ii) lease the entire First
Offer Space, but specifying that Tenant objects to Landlord's determination of
the First Offer Rent, in which case the First Offer Rent shall be determined in
accordance with SECTIONS 1.3.3, 2.2.2 AND 2.2.4 of this Lease, or (iii) not

                                       -7-


lease such First Offer Space, in which event Landlord shall be free to lease the
space described in the First Offer Notice to anyone to whom Landlord desires on
any terms Landlord desires during the six (6) month period following the date of
Landlord's receipt of Tenant's Election Notice (the "FIRST OFFER WAIVER
PERIOD"). If Tenant does not notify Landlord of its election of any of the
options in clauses (i) or (ii) hereinabove, Tenant shall be deemed to have
elected the option in clause (ii). If Landlord does not execute a lease with a
third party for any portion of the First Offer Space during the First Offer
Waiver Period (or if a third party lease is executed by Landlord within such
First Offer Waiver Period, then when, and if, such First Offer Space again
becomes available for lease following the expiration or earlier termination of
such third party lease), Tenant shall again have a right of first offer for such
space pursuant to the provisions of this Section 1.3, which provisions shall
again become applicable in their entirety.

          1.3.3     FIRST OFFER SPACE RENT. The Rent payable by Tenant for the
First Offer Space (the "FIRST OFFER RENT") shall be equal to the "Market Rent,"
as that term is set forth in SECTION 2.2.2 of this Lease, for such First Offer
Space. Concurrently with Tenant's delivery of Tenant's Election Notice
exercising such right of first offer, and pursuant to the terms of
SECTION 1.3.2(II), Tenant may object in writing to Landlord's determination of
the Market Rent set forth in Landlord's First Offer Notice, in which case the
Market Rent shall be determined pursuant to the TCCs of Section 2.2.4.

          1.3.4     CONSTRUCTION IN FIRST OFFER SPACE. Tenant shall take the
First Offer Space in its "as is" condition, and the construction of improvements
in the First Offer Space shall comply with the TCCs of ARTICLE 8 of this Lease;
provided, however, if in determining the Market Rent for such First Offer Space,
Tenant is entitled to a tenant improvement or comparable allowance for the
improvement of the First Offer Space (a "FO TI ALLOWANCE"), Tenant shall not be
entitled to any such FO TI Allowance, but Landlord shall reduce the rental rate
component of the First Offer Rent to be an effective rental rate which takes
into consideration that Tenant will not receive any such FO TI Allowance.

          1.3.5     AMENDMENT TO LEASE. If Tenant timely exercises Tenant's
right to lease the First Offer Space as set forth herein, Landlord and Tenant
shall within twenty (20) business days thereafter execute an amendment to this
Lease, memorializing Tenant's lease for the applicable First Offer Space upon
the TCCs as set forth in this SECTION 1.3. Tenant shall commence payment of Rent
for the First Offer Space, and the term of the First Offer Space shall commence
upon the date of delivery of the First Offer Space to Tenant (the "FIRST OFFER
COMMENCEMENT DATE") and terminate on the date set forth in the First Offer
Notice. If in determining the Market Rent for such First Offer Space, Tenant is
entitled to rental abatement concessions or build-out periods being granted
tenants in connection with Comparable Deals, while Tenant shall not be entitled
to any such abatement concessions or build-out periods, an applicable adjustment
shall be made to the First Offer Rent taking into consideration that Tenant will
not receive any such abatement concessions or build-out periods.

          1.3.6     TERMINATION OF RIGHT OF FIRST OFFER. The rights contained in
this SECTION 1.3 shall be personal to the Original Tenant, and may only be
exercised by the Original Tenant, its Affiliates and any Permitted Assignee (and
not any other assignee, sublessee or other transferee of the Original Tenant's
interest in this Lease). The right of first offer granted herein shall terminate
as to particular First Offer Space upon (i) a subsequent non-Affiliate owner

                                       -8-


(specifically including, but not limited to, a lender who takes ownership,
whether by foreclosure, a deed-in-lieu of foreclosure, or otherwise) taking
ownership of the Building or either of the FO Buildings, or (ii) the failure by
Tenant to exercise its right of first offer with respect to such First Offer
Space as offered by Landlord. Tenant shall not have the right to lease First
Offer Space, as provided in this SECTION 1.3, if, as of the date of the
attempted exercise of any right of first offer by Tenant, or as of the scheduled
date of delivery of such First Offer Space to Tenant, Tenant is in default under
this Lease (beyond any applicable notice and cure periods) or Tenant has
previously been in economic default under this Lease (beyond any applicable
notice and cure periods) more than twice during the previous nine (9) month
period.

                                    ARTICLE 2

                       INITIAL LEASE TERM; OPTION TERM(S)

     2.1    INITIAL LEASE TERM. The TCC's of this Lease shall be effective as of
the date of this Lease as set forth in SECTION 1 of the Summary (the "EFFECTIVE
DATE"). The term of this Lease (the "LEASE TERM") shall be as set forth in
SECTION 3.1 of the Summary, shall commence on the date set forth in SECTION 3.2
of the Summary (the "LEASE COMMENCEMENT DATE"), and shall terminate on the date
set forth in SECTION 3.3 of the Summary (the "LEASE EXPIRATION DATE") unless
this Lease is sooner terminated as hereinafter provided. For purposes of this
Lease, the term "LEASE YEAR" shall mean each consecutive twelve (12) month
period during the Lease Term; provided, however, that the first Lease Year shall
commence on the Lease Commencement Date and end on the last day of the eleventh
month thereafter and the second and each succeeding Lease Year shall commence on
the first day of the next calendar month; and further provided that the last
Lease Year shall end on the Lease Expiration Date. At any time during the Lease
Term, Landlord may deliver to Tenant a notice in the form as set forth in
EXHIBIT C, attached hereto, as a confirmation only of the information set forth
therein, which Tenant shall, if accurate, execute and return to Landlord within
ten (10) days of receipt thereof.

     2.2    OPTION TERM.

          2.2.1     OPTION RIGHT. Landlord hereby grants the Original Tenant,
its Affiliates and any Permitted Assignee three (3) options to extend the Lease
Term for the entire initial Premises (and, to the extent identified in the
"Exercise Notice" the entirety of each of the FO Buildings to the extent Tenant
had previously exercised its right of first offer with respect thereto (the
total of such identified space shall be, collectively, the "OPTION PREMISES"),
each by a period of five (5) years (each, an "OPTION TERM"); provided, however,
that to the extent Tenant has, at the time of exercise of an Option Term, a
remaining option to elect an additional Option Term thereafter, Tenant may elect
that the such two (2) Option Terms (the present and the subsequent) be exercised
at the same time for an effective Option Term of ten (10) years; provided
further, however, that to the extent Tenant so elects to concurrently exercise
two (2) such Option Terms, then all references in this SECTION 2.2 to five (5)
years, shall instead be deemed to refer to ten (10) years. Such option shall be
exercisable only by Notice delivered by Tenant to Landlord as provided below,
provided that, as of the date of delivery of such Notice, Tenant is not in
Default under this Lease (with all applicable cure periods having expired). Upon
the proper exercise of such option to extend, and provided that, as of the end
of the then applicable Lease Term, Tenant is not in Default under this Lease
(with all applicable cure

                                       -9-


periods having expired), the Lease Term, as it applies to the entire
then-existing Option Premises, shall be extended for a period of five (5) years.
The rights contained in this SECTION 2.2 shall only be exercised by the Original
Tenant, its Affiliates and any Permitted Assignee (and not any other assignee,
sublesee or other transferee of the Original Tenant's interest in this Lease).

          2.2.2     OPTION RENT. The Rent payable by Tenant during the Option
Term (the "OPTION RENT") shall be equal to ninety-five percent (95%) of the
Market Rent as set forth below. For purposes of this Lease, the term "MARKET
RENT" shall mean rent (including additional rent and considering any "base year"
or "expense stop" applicable thereto), including all escalations, at which new
tenants (as opposed to renewing tenants), as of the commencement of the
applicable term are, pursuant to transactions completed within the eighteen (18)
months prior to the date of the applicable Exercise Notice (or First Offer
Notice, if applicable), leasing non-sublease, non-encumbered, non-synthetic,
non-equity, non-renewal space (unless such space was leased pursuant to a
definition of "fair market" comparable to the definition of Market Rent)
comparable in size, location and quality to the Premises for a "Comparable
Term," as that term is defined in this SECTION 2.2.2 (the "COMPARABLE DEALS"),
which comparable space is located in the "Comparable Buildings," as that term is
defined in this SECTION 2.2.2, giving appropriate consideration to the annual
rental rates per rentable square foot (adjusting the base rent component of such
rate to reflect a net value after accounting for whether or not utility expenses
are directly paid by the tenant such as Tenant's direct utility payments
provided for in SECTION 6.1 of this Lease), the standard of measurement by which
the rentable square footage is measured, the ratio of rentable square feet to
usable square feet, and taking into consideration only, and granting only, the
following concessions (provided that the rent payable in Comparable Deals in
which the terms of such Comparable Deals are determined by use of a discounted
fair market rate formula shall be equitably increased in order that such
Comparable Deals will not reflect a discounted rate) (collectively, the "RENT
CONCESSIONS"): (a) rental abatement concessions or build-out periods, if any,
being granted such tenants in connection with such comparable spaces; (b) tenant
improvements or allowances provided or to be provided for such comparable space,
taking into account the value of the existing improvements in the Option
Premises, such value to be based upon the age, quality and layout of the
improvements and the extent to which the same could be utilized by general
office users as contrasted with this specific Tenant, (c) Proposition 13
protection, and (d) all other monetary concessions, if any, being granted such
tenants in connection with such comparable space; provided, however, that
notwithstanding anything to the contrary herein, no consideration shall be given
to the fact that Landlord is or is not required to pay a real estate brokerage
commission in connection with the applicable term or the fact that the
Comparable Deals do or do not involve the payment of real estate brokerage
commissions. The term "COMPARABLE TERM" shall refer to the length of the lease
term, without consideration of options to extend such term, for the space in
question. In addition, the determination of the Market Rent shall include a
determination as to whether, and if so to what extent, Tenant must provide
Landlord with financial security, such as a letter of credit or guaranty, for
Tenant's rent obligations during any Option Term. Such determination shall be
made by reviewing the extent of financial security then generally being imposed
in Comparable Transactions upon tenants of comparable financial condition and
credit history to the then existing financial condition and credit history of
Tenant (with appropriate adjustments to account for differences in the
then-existing financial condition of Tenant and such other tenants) If in
determining the Market Rent, Tenant is entitled to a tenant improvement or
comparable allowance for the improvement of the

                                      -10-


Option Premises (the "OPTION TERM TI ALLOWANCE"), Landlord may, at Landlord's
sole option, elect any or a portion of the following: (A) to grant some or all
of the Option Term TI Allowance to Tenant in the form as described above (i.e.,
as an improvement allowance), and/or (B) to reduce the rental rate component of
the Market Rent to be an effective rental rate which takes into consideration
(including the application of the appropriate interest rate to any such unfunded
Option Term TI Allowance) that Tenant will not receive the total dollar value of
such excess Option Term TI Allowance (in which case the Option Term TI Allowance
evidenced in the effective rental rate shall not be granted to Tenant). The term
"COMPARABLE BUILDINGS" shall mean the Building and other first-class
office/lab/manufacturing buildings which are comparable to the Building in terms
of age (based upon the date of completion of construction or major renovation as
to the building containing the portion of the Premises in question), quality of
construction, level of services and amenities, size and appearance, and are
located in the Sorrento Mesa and University Town Center areas (the ("COMPARABLE
AREA"); provided, however, that to the extent the Option Premises includes
either or both of the FO Buildings, the Comparable Building shall also include
such FO Buildings and buildings comparable thereto.

          2.2.3     EXERCISE OF OPTION. The option contained in this SECTION 2.2
shall be exercised by Tenant, if at all, only in the manner set forth in this
SECTION 2.2.3. Tenant shall deliver notice (the "EXERCISE NOTICE") to Landlord
not more than fifteen (15) months nor less than nine (9) months prior to the
expiration of the then Lease Term, stating that Tenant is exercising its option
(which notice shall include, if available and if elected, Tenant's election to
concurrently exercise two Option Terms for a combined Option Term of ten (10)
years). Concurrently with such Exercise Notice, Tenant shall deliver to Landlord
Tenant's calculation of the Market Rent (the "TENANT'S OPTION RENT
CALCULATION"). Landlord shall deliver notice (the "LANDLORD RESPONSE NOTICE") to
Tenant on or before the date which is thirty (30) days after Landlord's receipt
of the Exercise Notice and Tenant's Option Rent Calculation (the "LANDLORD
RESPONSE DATE"), stating that (A) Landlord is accepting Tenant's Option Rent
Calculation as the Market Rent, or (B) rejecting Tenant's Option Rent
Calculation and setting forth Landlord's calculation of the Market Rent (the
"LANDLORD'S OPTION RENT CALCULATION"). Within fifteen (15) business days of its
receipt of the Landlord Response Notice, Tenant may, at its option, accept the
Market Rent contained in the Landlord's Option Rent Calculation. If Tenant does
not affirmatively accept or Tenant rejects the Market Rent specified in the
Landlord's Option Rent Calculation, the parties shall follow the procedure, and
the Market Rent shall be determined as set forth in SECTION 2.2.4.

          2.2.4     DETERMINATION OF MARKET RENT. In the event Tenant objects or
is deemed to have objected to the Market Rent, Landlord and Tenant shall attempt
to agree upon the Market Rent using reasonable good-faith efforts. If Landlord
and Tenant fail to reach agreement within sixty (60) days following Tenant's
objection or deemed objection to the Landlord's Option Rent Calculation (the
"OUTSIDE AGREEMENT DATE"), then the issue of Option Rent shall be submitted to
arbitration pursuant to the TCCs of this SECTION 2.2.4, but subject to the
conditions, when appropriate, of SECTIONS 2.2.2 AND 2.2.3; provided, however,
Landlord and Tenant may each amend, respectively, Landlord's Option Rent
Calculation and Tenant's Option Rent Calculation, prior to such submittal to
arbitration; provided further, however, that with regard to the determination of
Option Rent only (as opposed to First Offer Rent), Tenant may elect to rescind
its Exercise Notice by delivery written notice thereof to Landlord on or before
the later to occur of (i) the Outside Agreement Date, or (ii) the date which is
two (2) business

                                      -11-


days following Landlord's submittal to Tenant of its final (post-amended, if
applicable) Landlord's Option Rent Calculation.

                    2.2.4.1   Landlord and Tenant shall each appoint one
arbitrator who shall by profession be a real estate broker who shall have been
active over the five (5) year period ending on the date of such appointment in
the leasing of first-class office/lab/manufacturing properties in the Comparable
Area. The determination of the arbitrators shall be limited solely to the issue
of whether Landlord's Option Rent Calculation or Tenant's Option Rent
Calculation, is the closest to the actual Market Rent as determined by the
arbitrators, taking into account the requirements of SECTION 2.2.2 of this
Lease. Each such arbitrator shall be appointed within fifteen (15) days after
the applicable Outside Agreement Date. Landlord and Tenant may consult with
their selected arbitrators prior to appointment and may select an arbitrator who
is favorable to their respective positions. The arbitrators so selected by
Landlord and Tenant shall be deemed ("ADVOCATE ARBITRATORS").

                    2.2.4.2   The two Advocate Arbitrators so appointed shall be
specifically required pursuant to an engagement letter within ten (10) days of
the date of the appointment of the last appointed Advocate Arbitrator to agree
upon and appoint a third arbitrator ("NEUTRAL ARBITRATOR") who shall be
qualified under the same criteria set forth hereinabove for qualification of the
two Advocate Arbitrators except that neither the Landlord or Tenant or either
party's Advocate Arbitrator may, directly or indirectly, consult with the
Neutral Arbitrator prior to, or subsequent to, his or her appearance. The
Neutral Arbitrator shall be retained via an engagement letter jointly prepared
by Landlord's counsel and Tenant's counsel.

                    2.2.4.3   The three arbitrators shall within thirty (30)
days of the appointment of the Neutral Arbitrator reach a decision as to Market
Rent and determine whether the Landlord's Option Rent Calculation or Tenant's
Option Rent Calculation as submitted pursuant to SECTION 2.2.4 of this Lease is
closest to Market Rent as determined by the arbitrators and simultaneously
publish a ruling ("AWARD") indicating whether Landlord's Option Rent Calculation
or Tenant's Option Rent Calculation is closest to the Market Rent as determined
by the arbitrators. Following notification of the Award, the Landlord's Option
Rent Calculation or Tenant's Option Rent Calculation, whichever is selected by
the arbitrators as being closest to Market Rent shall become the then applicable
Market Rent.

                    2.2.4.4   The Award issued by the majority of the three
arbitrators shall be binding upon Landlord and Tenant.

                    2.2.4.5   If either Landlord or Tenant fail to appoint an
Advocate Arbitrator within fifteen (15) days after the applicable Outside
Agreement Date, either party may petition the presiding judge of the Superior
Court of San Diego County to appoint such Advocate Arbitrator subject to the
criteria in SECTION 2.2.4.1 of this Lease, or if he or she refuses to act,
either party may petition any judge having jurisdiction over the parties to
appoint such Advocate Arbitrator.

                    2.2.4.6   If the two Advocate Arbitrators fail to agree upon
and appoint the Neutral Arbitrator, then either party may petition the presiding
judge of the Superior Court of San Diego County to appoint the Neutral
Arbitrator, subject to criteria in SECTION 2.2.4.1 of this

                                      -12-


Lease, or if he or she refuses to act, either party may petition any judge
having jurisdiction over the parties to appoint such arbitrator.

                    2.2.4.7   The cost of arbitration shall be paid by Landlord
and Tenant equally.

                                    ARTICLE 3

                           BASE RENT; ABATED BASE RENT

     3.1    BASE RENT. Tenant shall pay, without prior notice or demand, to
Landlord or Landlord's agent at the management office of the Project, or, at
Landlord's option, at such other place as Landlord may from time to time
designate in writing, by a check for currency which, at the time of payment, is
legal tender for private or public debts in the United States of America, base
rent ("BASE RENT") as set forth in SECTION 4 of the Summary, payable in equal
monthly installments as set forth in SECTION 4 of the Summary in advance on or
before the first day of each and every calendar month during the Lease Term,
without any setoff or deduction whatsoever. The Base Rent for the first full
month of the Lease Term which occurs after the expiration of any free rent
period shall be paid at the time of Tenant's execution of this Lease. If any
Rent payment date (including the Lease Commencement Date) falls on a day of the
month other than the first day of such month or if any payment of Rent is for a
period which is shorter than one month, the Rent for any fractional month shall
accrue on a daily basis for the period from the date such payment is due to the
end of such calendar month or to the end of the Lease Term at a rate per day
which is equal to 1/365 of the applicable annual Rent. All other payments or
adjustments required to be made under the TCCs of this Lease that require
proration on a time basis shall be prorated on the same basis.

     3.2    ABATED BASE RENT. Provided that the Original Tenant is not then in
Default (after expiration of any applicable notice and cure periods), then for
the first three (3) months, subject to extension due to any Lease Commencement
Date Delays, immediately following the Lease Commencement Date (the "INITIAL
ABATEMENT PERIOD"), Tenant shall have no obligation to pay any Base Rent (or
"Additional Rent," as that term is set forth in SECTION 4.1 of this Lease)
otherwise attributable to such Initial Abatement Period. Such Initial Abatement
Period has been factored into the schedule of Base Rent set forth in SECTION 4
of the Summary.

     3.3    ABATEMENT OF RENT. In the event that Tenant is prevented from using,
and does not use, the Premises or any portion thereof, as a result of (i) any
repair, maintenance or alteration performed by Landlord, or which Landlord
failed to perform, after the Lease Commencement Date and required by this Lease,
which substantially interferes with Tenant's use of or ingress to or egress from
the Building, Project (including the Project Common Areas), or Premises
(including the Project parking areas to the extent reasonable replacement spaces
are not provided); or (ii) any failure by Landlord to provide services,
utilities or ingress to and egress from the Building, Project (including the
Project Common Areas), or Premises as required pursuant to the TCCs of this
Lease; or (iii) the presence of Hazardous Materials not brought on the Premises
by "Tenant Parties," as that term is set forth in SECTION 29.35 of this Lease to
the extent such presence substantially interferes with Tenant's use of or
ingress to or egress from the Building, Project (including the Project Common
Areas), or Premises (including the Project

                                      -13-


parking areas to the extent reasonable replacement spaces are not provided) (any
such set of circumstances as set forth in items (i) through (iii), above, to be
known as an "ABATEMENT EVENT"), then Tenant shall give Landlord Notice of such
Abatement Event, and if such Abatement Event continues for five (5) consecutive
business days after Landlord's receipt of any such Notice (the "ELIGIBILITY
PERIOD"), then, as Tenant's sole remedy vis-a-vis such Abatement Event, the Base
Rent and Tenant's Share of Direct Expenses shall be abated or reduced, as the
case may be, after expiration of the Eligibility Period for such time that
Tenant continues to be so prevented from using, and does not use, the Premises,
or a portion thereof, in the proportion that the rentable area of the portion of
the Premises that Tenant is prevented from using, and does not use ("UNUSABLE
AREA"), bears to the total rentable area of the Premises. Notwithstanding the
foregoing, in the event that Tenant is prevented (from an objective, general
pharmaceutical tenant perspective) from conducting, and does not conduct, its
business in more than fifty percent (50%) of the lab/manufacturing portion (as
opposed to office/warehouse portions) of the Premises for a period of time in
excess of the Eligibility Period, and the remaining lab/manufacturing portion of
the Premises is not sufficient to allow Tenant to effectively conduct its
business therein, and if Tenant does not conduct its business from such
remaining portion, then for such time after expiration of the Eligibility Period
during which Tenant is so prevented (again, from an objective, general
pharmaceutical tenant perspective) from effectively conducting its business
therein, the Base Rent and Tenant's Share of Direct Expenses for the entire
lab/manufacturing portion of the Premises shall be abated. Landlord and Tenant
hereby acknowledge that, in addition to the abatement rights set forth in this
SECTION 3.3, Tenant's abatement rights following an event of damage and
destruction or condemnation is provided pursuant to the TCCs of ARTICLES 11 AND
13 of this Lease.

                                    ARTICLE 4

                                 ADDITIONAL RENT

     4.1    GENERAL TERMS. In addition to paying the Base Rent specified in
ARTICLE 3 of this Lease, Tenant shall pay "Tenant's Share" of the annual "Direct
Expenses," as those terms are defined in SECTIONS 4.2.6 AND 4.2.2 of this Lease,
respectively. Such payments by Tenant, together with any and all other amounts
payable by Tenant to Landlord pursuant to the TCCs of this Lease, are
hereinafter collectively referred to as the "ADDITIONAL RENT", and the Base Rent
and the Additional Rent are herein collectively referred to as "RENT." All
amounts due under this ARTICLE 4 as Additional Rent shall be payable for the
same periods and in the same manner as the Base Rent. Without limitation on
other obligations of Tenant which survive the expiration of the Lease Term, the
obligations of Tenant to pay the Additional Rent provided for in this ARTICLE 4
shall survive the expiration of the Lease Term.

     4.2    DEFINITIONS OF KEY TERMS RELATING TO ADDITIONAL RENT. As used in
this ARTICLE 4, the following terms shall have the meanings hereinafter set
forth:

          4.2.1     Intentionally Omitted.

          4.2.2     "DIRECT EXPENSES" shall mean "Operating Expenses" and "Tax
Expenses";

                                      -14-


          4.2.3     "EXPENSE YEAR" shall mean each calendar year in which any
portion of the Lease Term falls, through and including the calendar year in
which the Lease Term expires, provided that Landlord, upon notice to Tenant, may
change the Expense Year from time to time to any other twelve (12) consecutive
month period, and, in the event of any such change, Tenant's Share of Direct
Expenses shall be equitably adjusted for any Expense Year involved in any such
change.

          4.2.4     "OPERATING EXPENSES" shall mean, except as otherwise
provided in this SECTION 4.2.4 or otherwise in this Lease, all expenses, costs
and amounts of every kind and nature which Landlord pays or accrues during any
Expense Year because of or in connection with the ownership, management,
maintenance, security, repair, replacement, restoration or operation of the
Project, or any portion thereof, subject to the adjustments set forth in
SECTION 4.3, below. Without limiting the generality of the foregoing, Operating
Expenses shall specifically include any and all of the following: (i) the cost
of supplying all utilities, the cost of operating, repairing, maintaining, and
renovating the utility, telephone, mechanical, sanitary, storm drainage, and
elevator systems, and the cost of maintenance and service contracts in
connection therewith; (ii) the cost of licenses, certificates, permits and
inspections and the cost of contesting any governmental enactments which may
affect Operating Expenses, and the costs incurred in connection with a
governmentally mandated transportation system management program or similar
program; (iii) the cost of all insurance carried by Landlord in connection with
the Project (subject to Tenant's reasonable approval of any earthquake insurance
carried by Landlord with respect to the Building; provided, however, it shall be
deemed unreasonable for Tenant to withhold such consent to the extent (A) such
earthquake insurance is mandated by applicable governmental entities, or (B)
landlords of Comparable Buildings are requiring such earthquake insurance
policies be maintained and Landlord's earthquake insurance policy is
commercially reasonably vis-a-vis such third party policies); (iv) the cost of
landscaping, relamping, and all supplies, tools, equipment and materials used in
the operation, repair and maintenance of the Project, or any portion thereof;
(v) costs incurred in connection with the parking areas servicing the Project;
(vi) fees and other costs, including management fees (not to exceed two percent
(2.0%) of Base Rent), consulting fees, legal fees and accounting fees, of all
contractors and consultants in connection with the management, operation,
maintenance and repair of the Project; (vii) payments under any equipment rental
agreements; (viii) wages, salaries and other compensation and benefits,
including taxes levied thereon, of all persons (other than persons generally
considered to be higher in rank than the position of Project manager) engaged in
the operation, maintenance and security of the Project; (ix) costs under any
instrument pertaining to the sharing of costs by the Project; (x) operation,
repair, maintenance and replacement of all systems and equipment and components
thereof of the Building; (xi) the cost of janitorial, alarm, security and other
services, replacement of wall and floor coverings, ceiling tiles and fixtures in
common areas, maintenance and replacement of curbs and walkways, repair to roofs
and re-roofing; (xii) amortization (including interest on the unamortized cost)
of the cost of acquiring or the rental expense of personal property used in the
maintenance, operation and repair of the Project, or any portion thereof, to the
extent of cost savings reasonably anticipated by Landlord at the time of such
expenditure to be incurred in connection therewith; (xiii) the cost of capital
repairs, replacements or other improvements incurred in connection with the
Project to the extent the same (A) are intended to effect economies in the
operation or maintenance of the Project, or any portion thereof, to the extent
of cost savings reasonably anticipated by Landlord at the time of such
expenditure to be incurred in connection therewith, or (B) that are required
under any

                                      -15-


governmental law or regulation enacted after the Lease Commencement
Date; provided, however, that any capital expenditure shall be amortized with
interest over its useful life as Landlord shall reasonably determine pursuant to
sound real estate management and accounting principles; (xiv) costs, fees,
charges or assessments imposed by, or resulting from any mandate imposed on
Landlord by, any federal, state or local government for fire and police
protection, trash removal, community services, or other services which do not
constitute "Tax Expenses" as that term is defined in SECTION 4.2.5, below; and
(xv) payments under any easement, license, operating agreement, declaration,
restrictive covenant, or instrument pertaining to the sharing of costs by the
Building.

     Notwithstanding anything in this SECTION 4.2.4 to the contrary, for
purposes of this Lease, Operating Expenses shall not, however, include the
following:

          (A)  marketing costs, costs of leasing commissions, attorneys' fees
     and other costs and expenses incurred in connection with negotiations or
     disputes with present or prospective tenants or other occupants of the
     Project;

          (B)  costs incurred by Landlord in the repairs, capital additions,
     alterations or replacements made or incurred to rectify or correct defects
     in design, materials or workmanship in connection with the "Base and Shell"
     (as that term is set forth in the Tenant Work Letter) portions of the
     Project;

          (C)  costs (including permit, license and inspection costs) incurred
     in renovating or otherwise improving, decorating or redecorating rentable
     space for other tenants or vacant rentable space;

          (D)  cost of utilities or services sold to Tenant or others for which
     Landlord is entitled to and actually receives reimbursement (other than
     through any operating cost reimbursement provision identical or
     substantially similar to the provisions set forth in this Lease;

          (E)  except as otherwise specifically provided in this SECTION
     4.2.4(XIII), costs incurred by landlord for capital repairs, improvements,
     equipment and alterations to the Project which are considered capital
     improvements and replacements under generally accepted accounting
     principles, consistently applied;

          (F)  costs of services or other benefits which are either not offered
     to Tenant or for which Tenant is charged directly, but which are provided
     to other tenants of the Project without a separate charge;

          (G)  costs incurred due to the violation by Landlord or any other
     tenant of the TCCs of any lease of space in the Pacific Corporate Center;

          (H)  costs of general overhead and general administrative expenses,
     not including management fees and building office expenses which are
     included in operating expenses by landlords of Comparable Buildings;

                                      -16-


          (I)  costs of any compensation and employee benefits paid to clerks,
     attendants or other persons in a commercial concession operated by
     Landlord, including the Pacific Corporate Center's parking areas.

          (J)  marketing costs, legal fees, space planner's fees, and
     advertising and promotional expenses and brokerage fees incurred in
     connection with the original development, subsequent improvement, or
     original or future leasing of the Project;

          (K)  costs of electrical power for which Tenant directly contracts
     with and pays a local public service company;

          (L)  any bad debt loss, rent loss, or reserves for bad debts or rent
     loss;

          (M)  costs associated with the operation of the business of the
     partnership or entity which constitutes the Landlord, as the same are
     distinguished from the costs of operation of the Project (which shall
     specifically include, but not be limited to, accounting costs associated
     with the operation of the Project, costs of partnership accounting and
     legal matters, costs of defending any lawsuits with any mortgagee (except
     as the actions of the Tenant may be in issue), costs of selling,
     syndicating, financing, mortgaging or hypothecating any of the Landlord's
     interest in the Project, and costs incurred in connection with any disputes
     between Landlord and its employees, between Landlord and Project
     management, or between Landlord and other tenants or occupants, and
     Landlord's general corporate overhead and general and administrative
     expenses);

          (N)  the wages and benefits of any employee who does not devote
     substantially all of his or her employed time to the Project unless such
     wages and benefits are prorated to reflect time spent on operating and
     managing the Project vis-a-vis time spent on matters unrelated to operating
     and managing the Project; provided, that in no event shall Operating
     Expenses for purposes of this Lease include wages and/or benefits
     attributable to personnel above the level of Project manager or Project
     engineer;

          (O)  amounts paid as ground rental for the real property underlying
     the Project by the Landlord;

          (P)  costs for sculpture, paintings, fountains or other objects of
     art, other than those incurred in ordinary maintenance and repair;

          (Q)  any costs expressly excluded from Operating Expenses elsewhere in
     this Lease;

          (R)  costs arising from Landlord's charitable or political
     contributions;

          (S)  any gifts provided to any entity whatsoever, including, but not
     limited to, Tenant, other tenants, employees, vendors, contractors,
     prospective tenants and agents;

          (T)  any costs covered by any warranty, rebate, guarantee or service
     contract which are actually collected by Landlord (which shall not prohibit
     Landlord from passing

                                      -17-


     through the costs of any such service contract if otherwise includable in
     Operating Expenses);

          (U)  interest, late charges and tax penalties incurred as a result of
     Landlord's gross negligence, inability or unwillingness to make payments or
     file returns when due;

          (V)  all items and services for which Tenant or any other tenant in
     the Pacific Corporate Center reimburses Landlord or which Landlord provides
     selectively to one or more tenants (other than Tenant) without
     reimbursement;

          (W) any costs included as a Tax Expense pursuant to SECTION 4.2.5
     below;

          (X)  any expense resulting from the gross negligence of Landlord, its
     agents, contractors or employees, or, to the extent landlord is entitled to
     reimbursement for such costs, to remedy damage caused by or resulting from
     the gross negligence of any other tenant(s) in the Center, including their
     agents, contractors and employees;

          (Y)  reserves for anticipated future expenses;

          (Z)  costs or repairs or other work occasioned by fire, casualty or
     other risk covered by insurance maintained (or obligated to be maintained
     pursuant to ARTICLE 10 of this Lease) by Landlord;

          (AA) costs, fines, or fees incurred by Landlord due to Landlord's
     violations of any federal, state or local law, statute or ordinance, or any
     rule, regulation, judgment or decree of any governmental rule or authority;

          (BB) any costs representing an amount paid to a person, firm,
     corporation or other entity related to Landlord which is in excess of the
     amount which would have been paid in the absence of such relationship;

          (CC) rentals for items (except when needed in connection with normal
     repairs and maintenance of permanent systems) which if purchased, rather
     than rented, would constitute a capital item which is specifically excluded
     in this Lease (excluding, however, equipment not affixed to the Building
     which is used in providing janitorial or similar services);

          (DD) costs incurred by Landlord for the repair of damage to the
     Building, to the extent that Landlord is reimbursed by insurance proceeds,
     and costs of all capital repairs (except to the extent allowed pursuant to
     SECTION 4.2.4(XIII) above), regardless of whether such repairs are covered
     by insurance;

          (EE) depreciation, amortization and interest payments, except as
     provided herein and except on materials, tools, supplies and vendor-type
     equipment purchased by Landlord to enable Landlord to supply services
     Landlord might otherwise contract for with a third party where such
     depreciation, amortization and interest payments would otherwise have been
     included in the charge for such third party's services, all as determined
     in accordance with generally accepted accounting principles, consistently

                                      -18-


     applied, and when depreciation or amortization is permitted or required,
     the item shall be amortized over its reasonably anticipated useful life;

          (FF) overhead and profit increment paid to Landlord or to subsidiaries
     or affiliates of Landlord for goods and/or services in or to the Building
     to the extent the same exceeds the costs of such goods and/or services
     rendered by unaffiliated third parties on a competitive basis;

          (GG) interest, principal, points and fees on debts or amortization on
     any mortgage or mortgages or any other debt instrument encumbering the
     Building or the Project (except as permitted in SECTION 4.2.4(ii) above);

          (HH) rentals and other related expenses incurred in leasing HVAC
     systems, elevators or other equipment ordinarily considered to be capital
     items, except for (1) expenses in connection with making minor repairs on
     or keeping Building Systems in operation while minor repairs are being
     made, and (2) costs of equipment not affixed to the Building which is used
     in provided janitorial or similar services;

          (II) advertising and promotional expenditures, and costs of signs in
     or on the Building identifying the owner of the Building or other tenants'
     signs;

          (JJ) electric power costs for which Tenant directly contracts with the
     local public service company or of which Tenant is separately metered or
     submetered and pays Landlord directly;

          (KK) services and utilities provided, taxes attributable to, and costs
     incurred in connection with the operation of the retail and restaurant
     operations in the Building, if any, except to the extent the square footage
     of such operations are included in the rentable square feet of the Building
     and do not exceed the services, utility and tax costs which would have been
     incurred had the retail and/or restaurant space been used for general
     office purposes;

          (LL) costs incurred in connection with upgrading the Building to
     comply with disability, life, fire and safety codes, ordinances, statutes,
     or other laws in effect prior to the Lease Commencement Date, including,
     without limitation, the ADA, including penalties or damages incurred due to
     such non-compliance;

          (MM) costs incurred to comply with applicable laws with respect to
     "Hazardous Material," as that term is defined in SECTION 29.33 of this
     Lease, which was in existence in the Building or on the Project prior to
     the Lease Commencement Date, and was of such a nature that a federal, state
     or municipal governmental or quasi-governmental authority, if it had then
     had knowledge of the presence of such Hazardous Material, in the state, and
     under the conditions that it then existed in the Building or on the
     Project, would have then required the removal, remediation or other action
     with respect to such Hazardous Material; and the costs incurred with
     respect to Hazardous Material, which Hazardous Material is brought into the
     Building or onto the Project after the date hereof by Landlord or any other
     tenant of the Project or by anyone other than Tenant or Tenant Parties and
     is of such a nature, at that time, that a federal, state or municipal

                                      -19-


     governmental or quasi-governmental authority, if it had then had knowledge
     of the presence of such Hazardous Material, in the state, and under the
     conditions that it then existed in the Building or on the Project, would
     have then required the removal, remediation or other action with respect to
     such Hazardous Material;

          (NN) costs arising from latent defects in the base and shell of the
     Building or improvements installed by Landlord;

          (OO) costs (including in connection therewith all attorneys' fees and
     costs of settlement judgments and payments in lieu thereof) arising from
     claims, disputes or potential disputes in connection with potential or
     actual claims litigation or arbitrations pertaining to Landlord and/or the
     Building and/or the Project;

          (PP) intentionally omitted;

          (QQ) any expenses incurred by Landlord for use of any portions of the
     Building to accommodate events including, but not limited to shows,
     promotions, kiosks, displays, filming, photography, private events or
     parties, ceremonies, and advertising beyond the normal expenses otherwise
     attributable to providing Building services, such as lighting and HVAC to
     such public portions of the Building in normal Building operations during
     standard Building hours of operation;

          (RR) any entertainment, dining or travel expenses for any purpose;

          (SS) any flowers, gifts, balloons, etc., provided to any entity
     whatsoever, to include, but not limited to, Tenant, other tenants,
     employees, vendors, contractors, prospective tenants and agents;

          (TT) any "validated" parking for any entity;

          (UU) any "finders fees," brokerage commissions, job placement costs or
     job advertising cost, other than with respect to a receptionist or
     secretary in the Building office, once per year;

          (VV) the cost of any janitorial services provided by Landlord;

          (WW) the cost of any "tenant relations" parties, events or promotions
     not consented to by Tenant's Chief Financial Officer; and

          (XX) "in-house" legal and/or accounting fees.

          4.2.5     TAXES.

                    4.2.5.1  "TAX EXPENSES" shall mean all federal, state,
county, or local governmental or municipal taxes, fees, charges or other
impositions of every kind and nature, whether general, special, ordinary or
extraordinary, (including, without limitation, real estate taxes, general and
special assessments, transit taxes, leasehold taxes or taxes based upon the
receipt of rent, including gross receipts or sales taxes applicable to the
receipt of rent, unless

                                      -20-


required to be paid by Tenant, personal property taxes imposed upon the
fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances,
furniture and other personal property used in connection with the Project, or
any portion thereof), which shall be paid or accrued during any Expense Year
(without regard to any different fiscal year used by such governmental or
municipal authority) because of or in connection with the ownership, leasing and
operation of the Project, or any portion thereof.

                    4.2.5.2   Tax Expenses shall include, without limitation:
(i) any tax on the rent, right to rent or other income from the Project, or any
portion thereof, or as against the business of leasing the Project, or any
portion thereof; (ii) subject to SECTION 4.6 of this Lease, and any assessment,
tax, fee, levy or charge in addition to, or in substitution, partially or
totally, of any assessment, tax, fee, levy or charge previously included within
the definition of real property tax, it being acknowledged by Tenant and
Landlord that Proposition 13 was adopted by the voters of the State of
California in the June 1978 election ("PROPOSITION 13") and that assessments,
taxes, fees, levies and charges may be imposed by governmental agencies for such
services as fire protection, street, sidewalk and road maintenance, refuse
removal and for other governmental services formerly provided without charge to
property owners or occupants, and, in further recognition of the decrease in the
level and quality of governmental services and amenities as a result of
Proposition 13, Tax Expenses shall also include any governmental or private
assessments or the Project's contribution towards a governmental or private
cost-sharing agreement for the purpose of augmenting or improving the quality of
services and amenities normally provided by governmental agencies; (iii) Any
assessment, tax, fee, levy, or charge allocable to or measured by the area of
the Premises or the Rent payable hereunder, including, without limitation, any
business or gross income tax or excise tax with respect to the receipt of such
rent, or upon or with respect to the possession, leasing, operating, management,
maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or
any portion thereof; and (iv) Any assessment, tax, fee, levy or charge, upon
this transaction or any document to which Tenant is a party, creating or
transferring an interest or an estate in the Premises.

                    4.2.5.3   Any costs and expenses (including, without
limitation, reasonable attorneys' fees) incurred in attempting to protest,
reduce or minimize Tax Expenses shall be included in Tax Expenses in the Expense
Year such expenses are paid. Except as set forth in SECTION 4.2.5.4, below,
refunds of Tax Expenses shall be credited against Tax Expenses and refunded to
Tenant regardless of when received, based on the Expense Year to which the
refund is applicable, provided that in no event shall the amount to be refunded
to Tenant for any such Expense Year exceed the total amount paid by Tenant as
Additional Rent under this ARTICLE 4 for such Expense Year. If Tax Expenses for
any period during the Lease Term or any extension thereof are increased after
payment thereof for any reason, including, without limitation, error or
reassessment by applicable governmental or municipal authorities, Tenant shall
pay Landlord upon demand Tenant's Share of any such increased Tax Expenses
included by Landlord as Building Tax Expenses pursuant to the TCCs of this
Lease. Notwithstanding anything to the contrary contained in this SECTION 4.2.8
(except as set forth in SECTION 4.2.8.1, above), there shall be excluded from
Tax Expenses (i) all excess profits taxes, franchise taxes, gift taxes, capital
stock taxes, inheritance and succession taxes, estate taxes, federal and state
income taxes, and other taxes to the extent applicable to Landlord's general or
net income (as opposed to rents, receipts or income attributable to operations
at the Project), (ii) any items included as Operating Expenses, (iii) any items
paid by Tenant under SECTION 4.5 of this Lease, and (iv) costs arising

                                      -21-


from any voluntary special assessment on the Building or the Site by any transit
district authority or any other governmental entity having the authority to
impose such assessment.

                    4.2.5.4   Tenant may, at its sole cost and expense and upon
prior written notice to Landlord, contest the amount or validity of any of the
Tax Expenses with respect to the Building and the Project by appropriate
proceedings; provided, however, that Tenant shall promptly pay such Tax Expenses
unless such proceeding shall operate to prevent or stay the collection of the
Tax Expenses so contested. Landlord shall join in any such proceedings to the
extent required by applicable law; provided, however, that Tenant shall
indemnify Landlord against any liability, cost or expense in connection
therewith (including, without limitation, actual attorneys' fees and costs).

          4.2.6     "TENANT'S SHARE" shall mean the percentage set forth
in SECTION 6 of the Summary.

     4.3    ALLOCATION OF CERTAIN PACIFIC CORPORATE CENTER COSTS. The parties
acknowledge that the Building and Project is a part of the Pacific Corporate
Center, a multi-building project, and that those certain costs and expenses
incurred in connection with the Pacific Corporate Center more particularly
identified on EXHIBIT K attached to this Lease (collectively, the "PACIFIC
CORPORATE CENTER COMMON AREA COSTS") shall be equitably allocated between Tenant
as the sole tenant of the Building and Project and the tenants of the other
buildings in the Pacific Corporate Center as more particularly set forth in this
SECTION 4.3. Accordingly, as set forth in SECTION 4.2 above, (i) to the extent
the Pacific Corporate Center Common Area Costs (and the Operating Expenses
relating thereto) are determined annually for the entire Pacific Corporate
Center as a whole, the pro-rata split between the Project and the remaining
portions of the Pacific Corporate Center (accounting for all adjustments based
upon the cross easement and access areas as well as those parking spaces within
the Project which are allocated to the other buildings of the Pacific Corporate
Center) is 39.60% allocation to the Project and 60.40% allocation to the
remaining portions of the Pacific Corporate Center, and (ii) to the extent that
the Pacific Corporate Center Common Area Costs are determined annually for the
Project, the pro-rata split of such costs between the Project and the remaining
portions of the Pacific Corporate Center (to account for the cross easement,
access and parking area portion of the Project allocated to the remaining
portion of the Pacific Corporate Center) is 90.95% allocated to the Project and
9.05% allocated to the remaining portion of the Pacific Corporate Center. Only
the categories of costs and expenses expressly identified on Exhibit K shall
constitute Pacific Corporate Center Common Area Costs. Pursuant to the
foregoing, following the completion of the lot-line adjustment identified in
SECTION 1.1.2 of this Lease, to the extent Tenant directly pays the Taxes
relating to such resulting tax parcel underlying the Project, Tenant shall
receive a credit against its pro-rata share of the Pacific Corporate Center
Common Area Costs in an amount equal to 9.05% of the portion of such Taxes
relating to the land underlying (as opposed to the improvements upon) the
Project. With regard to the pro-rata percentages set forth in this SECTION 4.3,
as the same were determined based upon the anticipated lot-line adjustment and
the related cross easement, access and parking area portion of the Project
allocated to the remaining portion of the Pacific Corporate Center, to the
extent that there are modifications to the same in conjunction with the
recordation of the lot-line adjustment and the underlying cross easement and
access agreements, such percentages shall be appropriately and correspondingly
adjusted.

                                      -22-


     4.4    CALCULATION AND PAYMENT OF ADDITIONAL RENT. Tenant shall pay to
Landlord, in the manner set forth in SECTION 4.4.1, below, and as Additional
Rent, Tenant's Share of Direct Expenses for each Expense Year.

          4.4.1     STATEMENT OF ACTUAL DIRECT EXPENSES AND PAYMENT BY TENANT.
Landlord shall use commercially reasonable efforts (but in no event later than
the date which is one hundred fifty (150) days after the applicable Expense
Year) to give to Tenant following the end of each Expense Year, a statement (the
"STATEMENT") which shall state in general major categories the Direct Expenses
incurred or accrued for such preceding Expense Year, and which shall indicate
the amount of the Tenant's Share of Direct Expenses. Upon receipt of the
Statement for each Expense Year commencing or ending during the Lease Term,
Tenant shall pay, with its next installment of Base Rent due, the full amount of
Tenant's Share of Direct Expenses for such Expense Year, less the amounts, if
any, paid during such Expense Year as "Estimated Direct Expenses," as that term
is defined in SECTION 4.4.2 of this Lease. In the event the Statement (or a
revised Statement following an audit pursuant to SECTION 4.7 below) shows that
the amount paid by Tenant under SECTION 4.4.2, below, exceeded Tenant's Share of
Direct Expenses for the Expense Year in question (the "OVERPAYMENT AMOUNT"),
then Landlord shall credit the Overpayment Amount against the next due
installments of Base Rent and Additional Rent; provided, however, that (i) with
respect to the final Expense Year of the Lease Term, or (ii) upon Tenant's
written request, Landlord shall pay to Tenant the Overpayment Amount, on or
before Landlord's next regularly scheduled check-cutting date following the date
which is five (5) business days after the later to occur of (A) Tenant's receipt
of such Statement, and (B) Landlord's receipt of such written request. The
failure of Landlord to timely furnish the Statement for any Expense Year shall
not prejudice Landlord or Tenant from enforcing its rights under this ARTICLE 4.
Even though the Lease Term has expired and Tenant has vacated the Premises, when
the final determination is made of Tenant's Share of Direct Expenses for the
Expense Year in which this Lease terminates, if an Excess is present, Tenant
shall, within thirty (30) days after receipt of the Statement, pay to Landlord
such amount, and if Tenant paid more as Estimated Direct Expenses than the
actual Tenant's Share of Direct Expenses, Landlord shall, within thirty (30)
days, deliver a check payable to Tenant in the amount of the overpayment. The
provisions of this SECTION 4.4.1 shall survive the expiration or earlier
termination of the Lease Term. Notwithstanding the immediately preceding
sentence, Tenant shall not be responsible for Tenant's Share of any Direct
Expenses attributable to any Expense Year which are first billed to Tenant more
than two (2) calendar years after the earlier of the expiration of the
applicable Expense Year or the Lease Expiration Date, provided that in any event
Tenant shall be responsible for Tenant's Share of Direct Expenses levied by any
governmental authority or by any public utility companies at any time following
the Lease Expiration Date which are attributable to any Expense Year (provided
that Landlord delivers Tenant a bill (a "SUPPLEMENTAL STATEMENT") for such
amounts within two (2) years following Landlord's receipt of the bill therefor).

          4.4.2     STATEMENT OF ESTIMATED DIRECT EXPENSES. In addition,
Landlord shall give Tenant a yearly expense estimate statement (the "ESTIMATE
STATEMENT") which shall set forth in general major categories Landlord's
reasonable estimate (the "ESTIMATE") of what the total amount of Direct Expenses
for the then-current Expense Year shall be and the estimated Tenant's Share of
Direct Expenses (the "ESTIMATED DIRECT EXPENSES"). Landlord shall use
commercially reasonable efforts to deliver such Estimate Statement to Tenant on
or before May

                                      -23-


1 following the end of the Expense Year to which such Estimate Statement
relates. The failure of Landlord to timely furnish the Estimate Statement for
any Expense Year shall not preclude Landlord from enforcing its rights to
collect any Additional Rent under this ARTICLE 4, nor shall Landlord be
prohibited from revising any Estimate Statement or Estimated Direct Expenses
theretofore delivered to the extent necessary. Thereafter, Tenant shall pay,
within thirty (30) days after receipt of the Estimate Statement, a fraction of
the Estimated Direct Expenses for the then-current Expense Year (reduced by any
amounts paid pursuant to the last sentence of this SECTION 4.4.2). Such fraction
shall have as its numerator the number of months which have elapsed in such
current Expense Year, including the month of such payment, and twelve (12) as
its denominator. Until a new Estimate Statement is furnished (which Landlord
shall have the right to deliver to Tenant at any time), Tenant shall pay
monthly, with the monthly Base Rent installments, an amount equal to one-twelfth
(1/12) of the total Estimated Direct Expenses set forth in the previous Estimate
Statement delivered by Landlord to Tenant. Throughout the Lease Term Landlord
shall maintain books and records with respect to Direct Expenses in accordance
with generally accepted real estate accounting and management practices,
consistently applied.

     4.5  TAXES AND OTHER CHARGES FOR WHICH TENANT IS DIRECTLY RESPONSIBLE.

          4.5.1     Tenant shall be liable for and shall pay before delinquency,
taxes levied against Tenant's equipment, furniture, fixtures and any other
personal property located in or about the Premises; provided, however, that
following the lot-line adjustment set forth in SECTION 1.1.2 of this Lease
(i.e., once the Project constitutes a separate tax parcel), Tenant shall be
liable for and shall directly pay before delinquency, all such Taxes and Tax
Expenses attributable to the Project (except to the extent expressly set forth
to the contrary in this Lease). If any such taxes on Tenant's equipment,
furniture, fixtures and any other personal property are levied against Landlord
or Landlord's property or if the assessed value of Landlord's property is
increased by the inclusion therein of a value placed upon such equipment,
furniture, fixtures or any other personal property and if Landlord pays any
properly assessed taxes based upon such increased assessment, which Landlord
shall have the right to do upon fifteen (15) days prior written notice to
Tenant, Tenant shall upon five (5) business days notice to Tenant repay to
Landlord the taxes so levied against Landlord or the proportion of such taxes
resulting from such increase in the assessment, as the case may be.

          4.5.2     Intentionally Omitted.

          4.5.3     Notwithstanding any contrary provision herein, Tenant shall
pay prior to delinquency any (i) rent tax or sales tax, service tax, transfer
tax or value added tax, or any other applicable tax on the rent or services
herein or otherwise respecting this Lease, (ii) taxes assessed upon or with
respect to the possession, leasing, operation, management, maintenance,
alteration, repair, use or occupancy by Tenant of the Premises or any portion of
the Project, including the Project parking areas; or (iii) taxes assessed upon
this transaction or any document to which Tenant is a party creating or
transferring an interest or an estate in the Premises.

     4.6    TENANT'S PAYMENT OF CERTAIN TAX EXPENSES. Notwithstanding anything
to the contrary contained in this lease, in the event that, at any time during
the Lease Term, any sale, refinancing, or change in ownership of the Building or
Project is consummated (specifically excluding, however, a change in ownership
to a lender resulting from a foreclosure or a deed-in-

                                      -24-


lieu of foreclosure), and as a result thereof, and to the extent that in
connection therewith, the Building or Project is reassessed (the "REASSESSMENT")
for real estate tax purposes by the appropriate governmental authority pursuant
to the terms of Proposition 13, then the TCCs of this SECTION 4.6 shall apply to
such Reassessment of the Building or Project.

          4.6.1     THE TAX INCREASE. For purposes of this ARTICLE 4, the term
"TAX INCREASE" shall mean that portion of the Tax Expenses, as calculated
immediately following the Reassessment, which is attributable solely to the
Reassessment. Accordingly, the term Tax Increase shall not include any portion
of the Tax Expenses, as calculated immediately following the Reassessment, which
(i) is attributable to the initial assessment of the value of the Project, the
base and shall of the Building or the tenant improvements located in the
Building; (ii) is attributable to assessments which were pending immediately
prior to the Reassessment which assessments were conducted during, and included
in, such Reassessment, or which assessments were otherwise rendered unnecessary
following the Reassessment; or (iii) is attributable to the annual inflationary
increase of real estate taxes, but not in excess of two percent (2.0%) per
annum.

          4.6.2     PROTECTION. During the initial Lease Term, Tenant shall not
be obligated to pay any portion of the Tax Increase relating to any Reassessment
of the Building or Project which occurs after the first (1st) such Reassessment
(i.e., such protection applies to the second (2nd) and each following
Reassessment during the initial Lease Term). During the entire Option Term
(whether one, two or all three such Option Terms is exercised pursuant to
Section 2.2 of this Lease), Tenant shall not be obligated to pay any portion of
the Tax Increase relating to any Reassessment of the Building or Project which
occurs after the first (1st) such Reassessment (i.e., such protection applies to
the second (2nd) and each following Reassessment occurring during the entire
Option Term).

          4.6.3     LANDLORD'S RIGHT TO PURCHASE THE PROPOSITION 13 PROTECTION
AMOUNT ATTRIBUTABLE TO A PARTICULAR REASSESSMENT. The amount of Tax Expenses
which Tenant is not obligated to pay or will not be obligated to pay during the
Lease Term in connection with a particular Reassessment pursuant to the TCCs of
this SECTION 4.6, shall be sometimes referred to hereafter as a "PROPOSITION 13
PROTECTION AMOUNT." If the occurrence of a Reassessment is reasonably
foreseeable by Landlord and the Proposition 13 Protection Amount attributable to
such Reassessment can be reasonably quantified or estimated for each Lease Year
commencing with the Lease Year in which the Reassessment will occur, the TCCs of
this SECTION 4.6.3 shall apply to each such Reassessment. Upon Notice to Tenant,
Landlord shall have the right to purchase the Proposition 13 Protection Amount
relating to the applicable Reassessment (the "APPLICABLE REASSESSMENT"), at any
time during the Lease Term, by paying to Tenant an amount equal to the
"Proposition 13 Purchase Price," as that term is defined in this SECTION 4.6.3,
provided that the right of any successor of Landlord to exercise its right of
repurchase hereunder shall not apply to any Reassessment which results from the
event pursuant to which such successor of Landlord became the Landlord under
this Lease. As used herein, "PROPOSITION 13 PURCHASE PRICE" shall mean the
present value of the Proposition 13 Protection Amount remaining during the Lease
Term, as of the date of payment of the Proposition 13 Purchase Price by
Landlord. Such present value shall be calculated (i) by using the portion of the
Proposition 13 Protection Amount attributable to each remaining Lease Year (as
though the portion of such Proposition 13 Protection Amount benefited Tenant at
the end of each Lease Year), as the

                                      -25-


amounts to be discounted, and (ii) by using discount rates for each amount to be
discounted equal to (A) the average rates of yield for United States Treasury
Obligations with maturity dates as close as reasonably possible to the end of
each Lease Year during which the portions of the Proposition 13 Protection
Amount would have benefited Tenant, which rates shall be those in effect as of
Landlord's exercise of its right to purchase, as set forth in this
SECTION 4.6.3, plus (B) two percent (2%) per annum. Upon such payment of the
Proposition 13 Purchase Price, the provisions of SECTION 4.6.2 of this Lease
shall not apply to any Tax Increase attributable to the Applicable Reassessment.
Since Landlord is estimating the Proposition 13 Purchase Price because a
Reassessment has not yet occurred, then when such Reassessment occurs, if
Landlord has underestimated the Proposition 13 Purchase Price, then upon Notice
by Landlord to Tenant, Landlord shall promptly pay to Tenant the amount of such
underestimation, and if Landlord overestimates the Proposition 13 Purchase
Price, then upon Notice by Landlord to Tenant, Rent next due shall be increased
by the amount of such overestimation.

     4.7    LANDLORD'S BOOKS AND RECORDS. Within two (2) years after receipt of
a Statement by Tenant, if Tenant disputes the amount of Additional Rent set
forth in the Statement, an employee of Tenant or an independent certified public
accountant (which accountant is not working on a contingency fee basis),
designated and paid for by Tenant, may, after reasonable Notice to Landlord and
at reasonable times, inspect Landlord's records with respect to the Statement at
Landlord's offices, provided that Tenant is not then in Default under this Lease
and Tenant has paid all amounts required to be paid under the applicable
Estimate Statement and Statement, as the case may be. In connection with such
inspection, Tenant and Tenant's agents must agree in advance to follow
Landlord's reasonable rules and procedures regarding inspections of Landlord's
records, and shall execute a commercially reasonable confidentiality agreement
regarding such inspection. Tenant's failure to dispute the amount of Additional
Rent set forth in any Statement within two (2) years of Tenant's receipt of such
Statement shall be deemed to be Tenant's approval of such Statement and Tenant,
thereafter, waives the right or ability to dispute the amounts set forth in such
Statement. If after such inspection, Tenant still disputes such Additional Rent,
a determination as to the proper amount shall be made, at Tenant's expense, by
an independent certified public accountant (the "ACCOUNTANT") selected by
Landlord and subject to Tenant's reasonable approval; provided that if such
determination by the Accountant proves that Direct Expenses were overstated by
more than five percent (5%), then the cost of the Accountant and the cost of
such determination shall be paid for by Landlord. Tenant hereby acknowledges
that Tenant's sole right to inspect Landlord's books and records and to contest
the amount of Direct Expenses payable by Tenant shall be as set forth in this
SECTION 4.7, and Tenant hereby waives any and all other rights pursuant to
Applicable Law to inspect such books and records and/or to contest the amount of
Direct Expenses payable by Tenant.

                                    ARTICLE 5

                                 USE OF PREMISES

     5.1    PERMITTED USE. Tenant shall use the Premises solely for the
Permitted Use set forth in SECTION 7 of the Summary and Tenant shall not use or
permit the Premises or the Project to be used for any other purpose or purposes
whatsoever without the prior written consent of Landlord, which may be withheld
in Landlord's sole discretion.

                                      -26-


     5.2    PROHIBITED USES. The uses prohibited under this Lease shall include,
without limitation, use of the Premises or a portion thereof for (i) offices of
any agency or bureau of the United States or any state or political subdivision
thereof; (ii) offices or agencies of any foreign governmental or political
subdivision thereof; and (iii) schools or other training facilities which are
not ancillary to corporate, executive or professional office use. Tenant shall
not allow occupancy density of use of the Premises which is greater than the
density permitted under applicable laws. Tenant further covenants and agrees
that Tenant shall not use, or suffer or permit any person or persons to use, the
Premises or any part thereof for any use or purpose contrary to the provisions
of the Rules and Regulations set forth in EXHIBIT D, attached hereto, or in
violation of the laws of the United States of America, the State of California,
or the ordinances, regulations or requirements of the local municipal or county
governing body or other lawful authorities having jurisdiction over the Project)
including, without limitation, any such laws, ordinances, regulations or
requirements relating to hazardous materials or substances, as those terms are
defined by applicable laws now or hereafter in effect; provided, however,
Landlord shall not enforce, change or modify the Rules and Regulations in a
discriminatory manner and Landlord agrees that the Rules and Regulations shall
not be unreasonably modified or enforced in a manner which will unreasonably
interfere with the normal and customary conduct of Tenant's business. Tenant
shall not do or permit anything to be done in or about the Premises which will
in any material way interfere with the rights of other tenants or occupants of
the Pacific Corporate Center, or injure or annoy them or use or allow the
Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain
or permit any nuisance in, on or about the Premises. Tenant shall comply with
all recorded covenants, conditions, and restrictions now or hereafter affecting
the Project.

     5.3    CC&Rs. Tenant shall comply with all recorded covenants, conditions,
and restrictions currently affecting the Project of which Landlord has provided
copies to Tenant, namely the following: (i) that certain "Declaration of
Covenant's Conditions and Restrictions For Units 2, 3, 4 and 6 of Pacific
Corporate Center dated October 24, 1986 (the "EXISTING CC&Rs"), (ii) that
certain "Planned Industrial Development for Pacific Corporate Center" last dated
August 1988 (the "PID"), and (iii) evidence of the existing assessment against
the Project. Additionally, Tenant acknowledges that the Project may be subject
to any future covenants, conditions, and restrictions (the "CC&RS") which
Landlord, in Landlord's reasonable discretion, deems reasonably necessary, and
Tenant agrees that this Lease shall be subject and subordinate to such CC&Rs ;
provided, however, such future CC&R's do not materially adversely affect
Tenant's use or occupancy of the Premises nor any of its rights hereunder,
including, without limitation, the "Purchase Option" set forth in ARTICLE 30,
nor materially increase Tenant's cost. Landlord shall have the right to require
Tenant to execute and acknowledge, within fifteen (15) business days of a
request by Landlord, a "Recognition of Covenants, Conditions, and Restriction,"
in a form substantially similar to that attached hereto as EXHIBIT F, agreeing
to and acknowledging the CC&Rs, provided such CC&Rs do not materially adversely
affect Tenant's use or occupancy of the Premises nor any of its rights
hereunder, including, without limitation, the Purchase Option.

                                      -27-


                                     ARTICLE 6

                             SERVICES AND UTILITIES

     6.1    STANDARD TENANT SERVICES. Landlord shall maintain and operate the
Building in a first-class manner consistent with the Comparable Buildings, and
keep the Building Structure in first-class condition and repair consistent with
the Comparable Buildings. In addition, Landlord shall provide, as part of the
Building Structure, (i) adequate electrical wiring to subpanel facilities for
the Building for Tenant's connection with a minimum capacity of 4,000 Amps at
277/480 Volts (three (3)-phase, four (4) wire), and (ii) city water and sewer
stubbed to the Premises.

     Notwithstanding the foregoing, Tenant shall pay for all utilities
(including without limitation, electricity, gas, sewer and water) attributable
to its use of the entire Premises and shall also provide its own janitorial and
security services for the Building. Such utility use shall include electricity
and gas used for lighting, incidental use and "HVAC," as that term is defined
below. All such utility, janitorial and security payments shall be excluded from
Operating Expenses and shall be paid directly by Tenant prior to the date on
which the same are due to the utility provider, janitorial company and/or
security company, as applicable. Tenant shall, at Tenant's cost (subject to
reimbursement from the Tenant Improvement Allowance pursuant to SECTION 2.2.1 of
the Tenant Work Letter), separately meter the Premises.

     Landlord shall not be required to provide any services other than with
regard to its maintenance and repair obligation relating to the Building
Structure, the Project Common Areas, the PCC Common Areas and for Pacific
Corporate Center (subject to the TCCs of SECTION 4.3 above).

     6.2    TENANT MAINTAINED BUILDING SYSTEMS; HVAC. Tenant shall, at Tenant's
sole cost and expense, (i) maintain the Building's mechanical, electrical, life
safety, plumbing, fire-sprinkler systems (except to the extent Landlord retains
repair and maintenance responsibility for the portion of such fire-sprinkler
system contained in the Building Structure), (ii) subject to limitations imposed
by all governmental rules, regulations and guidelines applicable thereto,
maintain (itself or through a service provider) heating and air conditioning to
the Premises ("HVAC") (items identified in (i) and (ii) collectively, the
"BUILDING SYSTEMS"), and (iii) maintain the remaining portions of the Premises
which are not part of the "Building Structure," as that term is set forth in
ARTICLE 7 of this Lease to the extent such Building Structure is to be
maintained and repaired by Landlord. Such repair and maintenance costs and
expenses for the other buildings of the Pacific Corporate Center shall be the
responsibility of Landlord or the tenants thereof and shall not be included in
Direct Expenses payable by Tenant.

     6.3    TENANT MAINTAINED SECURITY. Tenant hereby acknowledges that Landlord
shall have no obligation to provide guard service or other security measures for
the benefit of the Premises, the Building or the Project. Any such security
measures for the benefit of the Premises, the Building or the Project shall be
provided by Tenant, at Tenant's sole cost and expense. Tenant hereby assumes all
responsibility for the protection of Tenant and its agents, employees,
contractors, invitees and guests, and the property thereof, from acts of third
parties, including keeping doors locked and other means of entry to the Premises
closed.

                                      -28-


     6.4    TENANT MAINTENANCE STANDARDS. All Tenant maintained Building
Systems, including HVAC, shall be maintained in accordance with manufacturer
specifications by Tenant in a commercially reasonable condition. In addition,
upon request from Landlord, Tenant shall provide to Landlord copies of any
service contracts and records of Tenant's maintenance of such Building Systems.

     6.5    INTERRUPTION OF USE. Except as otherwise provided in this Lease,
Tenant agrees that Landlord shall not be liable for damages, by abatement of
Rent or otherwise, for failure to furnish or delay in furnishing any service
(including telephone and telecommunication services), or for any diminution in
the quality or quantity thereof, when such failure or delay or diminution is
occasioned, in whole or in part, by breakage, repairs, replacements, or
improvements, by any strike, lockout or other labor trouble, by inability to
secure electricity, gas, water, or other fuel at the Building or Project after
reasonable effort to do so, by any riot or other dangerous condition, emergency,
accident or casualty whatsoever, by act or default of Tenant or other parties,
or by any other cause beyond Landlord's reasonable control; and such failures or
delays or diminution shall never be deemed to constitute an eviction or
disturbance of Tenant's use and possession of the Premises or relieve Tenant
(except with regard to damage to Tenant's personal property and the amount of
any physical injury, but only to the extent caused by the negligence or willful
misconduct of Landlord) from paying Rent or performing any of its obligations
under this Lease, except as otherwise provided in this Lease. Furthermore,
Landlord shall not be liable under any circumstances for a loss of, or injury
to, property or for injury to, or interference with, Tenant's business,
including, without limitation, loss of profits, however occurring, through or in
connection with or incidental to a failure to furnish any of the services or
utilities as set forth in this ARTICLE 6. Landlord may comply with voluntary
controls or guidelines promulgated by any governmental entity relating to the
use or conservation of energy, water, gas, light or electricity or the reduction
of automobile or other emissions without creating any liability of Landlord to
Tenant under this Lease, provided that (i) the Premises are not thereby rendered
untenantable, and (ii) the same does not materially adversely interfere with
Tenant's Permitted Use of the Premises.

                                    ARTICLE 7

                                     REPAIRS

     7.1    IN GENERAL. Landlord shall maintain in first-class condition and
operating order and keep in good repair and condition the structural portions of
the Building, including the foundation, floor/ceiling slabs, roof, roof membrane
(to the extent not penetrated by Tenant), curtain wall, exterior glass and
mullions, columns, beams, shafts (including elevator shafts), stairs, parking
areas, landscaping, exterior Project signage and stairwells (collectively,
"BUILDING STRUCTURE") and the base fire-sprinkler systems which were not
constructed by Tenant Parties, and the Common Areas; provided, however, that to
the extent (i) such fire-sprinkler system as constructed by Landlord is altered
by Tenant, and/or (ii) the roof membrane is penetrated by Tenant, Tenant shall
thereafter be responsible therefor (at which time any warranties relating to
such systems shall be transferred to Tenant); provided further, however, that
until such time as Tenant becomes responsible for the base fire-sprinkler
systems pursuant to the foregoing clause, all references to Building Structure
shall be deemed to include such base fire-sprinkler system. Notwithstanding
anything in this Lease to the contrary, Tenant shall be required to repair the

                                      -29-


Building Structure to the extent caused due to Tenant's use of the Premises for
other than normal and customary implementation of the Permitted Use, unless and
to the extent such damage is covered by insurance carried or required to be
carried by Landlord pursuant to ARTICLE 10 and to which the waiver of
subrogation is applicable (such obligation to the extent applicable to Tenant as
qualified and conditioned will hereinafter be defined as the "BS EXCEPTION").
Tenant shall, at Tenant's own expense, pursuant to the TCCs of this Lease,
including, without limitation ARTICLE 8 hereof, keep the Premises, including all
Tenant Improvements, "Alterations," as that term is defined in SECTION 8.1 of
this Lease, fixtures and the floor or floors of the Building on which the
Premises are located, in good order, repair and condition at all times during
the Lease Term (but such obligation shall not extend to the Building Structure
except pursuant to the BS Exception). In addition, except as provided as part of
Landlord's repair obligations set forth above or elsewhere in this Lease, Tenant
shall, at Tenant's own expense (but under the supervision and subject to the
prior approval of Landlord to the extent the Building Structure is affected),
and within any reasonable period of time specified by Landlord, pursuant to the
TCCs of this Lease, including without limitation Article 8 hereof, promptly and
adequately repair all damage to the Premises and replace or repair all damaged,
broken, or worn fixtures and appurtenances (but such obligation shall not extend
to the Building Structure except pursuant to the BS Exception), except for
damage caused by ordinary wear and tear; provided however, that, at Landlord's
option, but only if Tenant fails to make such repairs, Landlord may, after
written notice to Tenant and Tenant's failure to repair (or failure to commence
to repair and thereafter diligently prosecute the same to completion) within ten
(10) days thereafter, but need not, make such repairs and replacements (ordinary
wear and tear excepted), and Tenant shall pay Landlord the cost thereof.
Landlord may, but shall not be required to, enter the Premises during normal
business hours, when accompanied by a representative of Tenant and upon an
additional forty-eight (48) hours prior written notice to make such repairs,
alterations, improvements or additions to the Premises or to the Project or to
any equipment located in the Project as Landlord shall be required or permitted
to perform pursuant to the TCCs of this Lease or as Landlord may be required to
do by governmental or quasi-governmental authority or court order or decree.
Except as specifically set forth in SECTION 7.2 of this Lease, below, Tenant
hereby waives any and all rights under and benefits of subsection 1 of Section
1932 and Sections 1941 and 1942 of the California Civil Code or under any
similar law, statute, or ordinance now or hereafter in effect.

     7.2    TENANT'S RIGHT TO MAKE REPAIRS. Notwithstanding the provisions of
SECTION 7.1, above, if Tenant provides notice to Landlord of an event or
circumstance which requires the action of Landlord with respect to repair and/or
maintenance as set forth in SECTION 7.1, above and Landlord fails to provide
such action within (30) days after receipt of such notice, then Tenant may
proceed to take the required action upon delivery of an additional ten (10)
business days notice to Landlord specifying that Tenant is taking such required
action, and if such action was required under the TCCs of this Lease to be taken
by Landlord, then Tenant shall be entitled to prompt reimbursement by Landlord
of Tenant's reasonable costs and expenses in taking such action; provided,
however, notwithstanding such thirty (30) day period, Landlord shall use
commercially reasonable efforts to expedite such repairs to ensure completion as
soon as reasonably practicable. In the event Tenant takes such action, Tenant
shall use only those contractors used by Landlord in the Building for similar
work unless such contractors are unwilling or unable to perform such work, in
which event Tenant may utilize the services of any other qualified contractor
which normally and regularly performs similar work in the Comparable Buildings.
Further, if Landlord does not deliver a detailed written objection to

                                      -30-


Tenant, within thirty (30) days after receipt of an invoice by Tenant of its
costs of taking action which Tenant claims should have been taken by Landlord,
and if such invoice from Tenant sets forth a reasonably particularized breakdown
of its costs and expenses in connection with taking such action on behalf of
Landlord, then Tenant shall be entitled to deduct from Rent payable by Tenant
under this Lease, the amount set forth in such invoice. If, however, Landlord
delivers to Tenant within thirty (30) days after receipt of Tenant's invoice, a
written objection to the payment of such invoice, setting forth with reasonable
particularity Landlord's reasons for its claim that such action did not have to
be taken by Landlord pursuant to the TCCs of this Lease or that the charges are
excessive (in which case Landlord shall pay the amount it contends would not
have been excessive), then Tenant shall not be entitled to such deduction from
Rent, but as Tenant's sole remedy, Tenant may proceed to institute legal
proceedings against Landlord to collect the amount set forth in the subject
invoice; provided that under no circumstances shall Tenant be allowed to
terminate this Lease based upon a such default by Landlord; provided further,
however, the notice and cure periods otherwise required pursuant to SECTION 19.6
of this Lease shall be deemed to have been satisfied upon completion of the
procedure specified in this SECTION 7.2. If Tenant receives a non-appealable
final judgment against Landlord in connection with such legal proceedings,
Tenant may deduct the amount of the judgment, not to exceed the amount of the
unpaid portion of the relevant invoice, from the Base Rent next due and owing
under this Lease; provided, however, Tenant may not deduct the amount of the
judgment against more than fifty percent (50%) of Base Rent next due and owing
(until such time as the entire amount of such judgment is deducted) to the
extent following a foreclosure or a deed-in-lieu of foreclosure.

                                    ARTICLE 8

                            ADDITIONS AND ALTERATIONS

     8.1    LANDLORD'S CONSENT TO ALTERATIONS. After the completion of
construction of Tenant's initial Tenant Improvements in the Premises pursuant to
the TCCs of the Tenant Work Letter (which construction may extend over a three
(3)-year period), Tenant may not make any improvements, alterations, additions
or changes to the Premises or any mechanical, plumbing or HVAC facilities or
systems pertaining to the Premises which affect the Building Structure or
exterior appearance of the Building (collectively, the "Alterations") without
first procuring the prior written consent of Landlord to such Alterations, which
consent shall be requested by Tenant not less than ten (10) days prior to the
commencement thereof, and which consent shall not be unreasonably withheld by
Landlord, provided it shall be deemed reasonable for Landlord to withhold its
consent to any Alteration which materially or adversely affects the Building
Structure or exterior appearance of the Building; provided, however, that
regardless of whether Landlord's consent is required pursuant to this Section
8.1, Tenant shall give Landlord notice of any Alterations to the extent the
anticipated cost of such Alteration exceeds $100,000.00. The construction of the
initial Tenant Improvements to the Premises shall be governed by the TCCs of the
Tenant Work Letter and not the TCCs of this ARTICLE 8.

     8.2    MANNER OF CONSTRUCTION. Tenant shall utilize only competent
contractors, subcontractors, materials, mechanics and materialmen reasonably
approved by Landlord, for the construction of any Alterations. Upon Landlord's
request (unless Landlord waived, at the time of Landlord's approval of any
Alterations pursuant to the provisions of SECTION 8.5, below, its right

                                      -31-


to make such request), Tenant shall, at Tenant's expense, remove such
Alterations upon the expiration or any early termination of the Lease Term;
provided, however, that in no event shall Tenant be required to remove any
Alterations which are normal and customary improvements vis-a-vis the general
implementation of the Permitted Use. If such Alterations will involve the use of
or disturb hazardous materials or substances existing in the Premises, Tenant
shall comply with Landlord's rules and regulations concerning, and all
applicable laws pertaining to, hazardous materials or substances with respect to
such Alterations. Tenant shall construct such Alterations and perform such
repairs in a good and workmanlike manner, in conformance with any and all
applicable federal, state, county or municipal laws, rules and regulations and
pursuant to a valid building permit, issued by the City of San Diego, all in
conformance with Landlord's reasonable construction rules and regulations;
provided, however, that prior to commencing to construct any Alteration, Tenant
shall meet with Landlord to discuss Landlord's design parameters and code
compliance issues to the extent the nature and/or scope of such Alterations
reasonably warrant such meeting. In the event Tenant performs any Alterations in
the Premises which require or give rise to governmentally required changes to
the Building Structure, then Landlord shall, at Tenant's expense, make such
changes to the Building Structure. Tenant shall not use (and upon notice from
Landlord shall cease using) contractors, services, workmen, labor, materials or
equipment that, in Landlord's reasonable judgment, would disturb labor harmony
with the workforce or trades engaged in performing other work, labor or services
in or about the Building or the Common Areas. In addition to Tenant's
obligations under ARTICLE 9 of this Lease, upon completion of any Alterations
which affect the Building Structures, Tenant agrees to cause a Notice of
Completion to be recorded in the office of the Recorder of the County of San
Diego in accordance with Section 3093 of the Civil Code of the State of
California or any successor statute, and Tenant shall deliver to the Project
construction manager a reproducible copy of the "as built" drawings of the
Alterations, to the extent applicable, as well as all permits, approvals and
other documents issued by any governmental agency in connection with the
Alterations.

     8.3    PAYMENT FOR IMPROVEMENTS. If payment is made directly to
contractors, Tenant shall comply with all applicable laws relating to final lien
releases and waivers in connection with Tenant's payment for work to
contractors. Whether or not Tenant orders any work directly from Landlord,
Tenant shall reimburse Landlord for Landlord's reasonable out-of-pocket costs
and expenses reasonably incurred in connection with Landlord's review of any
Alterations.

     8.4    CONSTRUCTION INSURANCE. In addition to the requirements of ARTICLE
10 of this Lease, in the event that Tenant makes any Alterations, prior to the
commencement of such Alterations, Tenant shall provide Landlord with evidence
that Tenant carries "Builder's All Risk" insurance in an amount reasonably
related to the value of such Alterations, it being understood and agreed that
all of such Alterations shall be insured by Tenant pursuant to ARTICLE 10 of
this Lease immediately upon completion thereof. In addition, to the extent (i)
Tenant's financial condition does not satisfied the "Required Thresholds", as
that term is set forth in SECTION 21.2.2.2, AND (ii) the cost of such
Alterations exceeds $500,000.00, Landlord may require Tenant to obtain a lien
and completion bond or any other commercially reasonable alternate form of
security in connection with Tenant's construction and completion of any such
Alterations.

     8.5    LANDLORD'S PROPERTY. All Alterations, improvements, fixtures,
equipment and/or appurtenances (other than Tenant's trade fixtures and
equipment) which may be installed or placed in or about the Premises, from time
to time, shall be and become the property of Landlord

                                      -32-


upon the expiration of this Lease; provided, however, that due to the foregoing,
Tenant hereby agrees to provide Landlord with copies of "as-built" plans
relating to the Building Systems to the extent the same have been materially
modified as a result of such Alterations. In addition to its trade fixtures and
equipment, Tenant may also remove any Alterations, improvements, fixtures and/or
equipment which Tenant can substantiate to Landlord have not been paid for with
any Tenant Improvement Allowance funds provided to Tenant by Landlord, provided
Tenant repairs any damage to the Premises and Building caused by such removal
and returns the affected portion of the Premises to a building standard tenant
improved condition as determined by Landlord. Furthermore, Landlord may, by
written notice to Tenant prior to the end of the Lease Term, or given following
any earlier termination of this Lease, require Tenant, at Tenant's expense, to
(i) remove any Alterations or improvements in the Premises; provided, however,
in no event shall Tenant be required to remove any Alterations which are normal
and customary improvements vis-a-vis the general implementation of the Permitted
Use, and/or (ii) remove any initial Tenant Improvements in the lab/manufacturing
portion of the Premises identified in advance as removal items pursuant to
SECTION 2.2.2.3 of the Tenant Work Letter by Landlord (collectively, the
"EXTRAORDINARY ALTERATIONS"), and to repair any damage to the Premises and
Building caused by such removal (reasonable wear and tear excepted); provided,
however, if, in connection with its request for Landlord's approval for any such
Extraordinary Alterations, (1) Tenant requests Landlord's decision with regard
to the removal of such Extraordinary Alterations, and (2) Landlord thereafter
agrees in writing to waive the removal requirement when approving such
Extraordinary Alterations, then Tenant shall not be required to so remove such
Alterations; provided further, however, that if Tenant requests such a
determination from Landlord and Landlord, in its approval of any Extraordinary
Alterations, fails to address the removal requirement with regard to such
Extraordinary Alterations, Landlord shall be deemed to have agreed to waive the
removal requirement with regard to such Extraordinary Alterations. If Tenant
fails to complete such removal and/or to repair any damage caused by the removal
of any Extraordinary Alterations or improvements in the Premises and to repair
any damage to the Premises and Building caused by such removal (reasonable wear
and tear excepted), and such failure continues for five (5) business days after
written notice from Landlord, then (A) Landlord may do so and may charge the
actual cost thereof to Tenant, and (B) to the extent reasonable time required to
complete such removal/restoration exceeds the date which is thirty (30) days
following the expiration or earlier termination of this Lease, Tenant shall be
deemed to be holding over in the Premises and Rent shall continue to accrue in
accordance with the TCCs of ARTICLE 16, below. Tenant hereby protects, defends,
indemnifies and holds Landlord harmless from any liability, cost, obligation,
expense or claim of lien in any manner relating to the installation, placement,
removal or financing of any such Alterations, improvements, fixtures and/or
equipment in, on or about the Premises, which obligations of Tenant shall
survive the expiration or earlier termination of this Lease for one (1) year
following such expiration or earlier termination. At all times during the Term
of this Lease, Tenant shall be entitled to remove, and Landlord shall have no
interest in, Tenant's trade fixtures and equipment.

                                    ARTICLE 9

                             COVENANT AGAINST LIENS

     Tenant shall keep the Project and Premises free from any liens or
encumbrances arising out of the work performed, materials furnished or
obligations incurred by or on behalf of Tenant,

                                      -33-


and shall protect, defend, indemnify and hold Landlord harmless from and against
any claims, liabilities, judgments or costs (including, without limitation,
reasonable attorneys' fees and costs) arising out of same or in connection
therewith. Tenant shall give Landlord notice at least ten (10) business days
prior to the commencement of any such work on the Premises (or such additional
time as may be necessary under applicable laws) to afford Landlord the
opportunity of posting and recording appropriate notices of non-responsibility.
Tenant shall remove any such lien or encumbrance by bond or otherwise within
five (5) business days after notice by Landlord, and if Tenant shall fail to do
so, Landlord may pay the amount necessary to remove such lien or encumbrance,
without being responsible for investigating the validity thereof. The amount so
paid shall be deemed Additional Rent under this Lease payable upon demand,
without limitation as to other remedies available to Landlord under this Lease.
Nothing contained in this Lease shall authorize Tenant to do any act which shall
subject Landlord's title to the Building or Premises to any liens or
encumbrances whether claimed by operation of law or express or implied contract.
Any claim to a lien or encumbrance upon the Building or Premises arising in
connection with any such work or respecting the Premises which was performed by
or at the request of Tenant shall be null and void, or at Landlord's option
shall attach only against Tenant's interest in the Premises and shall in all
respects be subordinate to Landlord's title to the Project, Building and
Premises.

                                   ARTICLE 10

                                    INSURANCE

     10.1   INDEMNIFICATION AND WAIVER. Tenant hereby assumes all risk of damage
to property or injury to persons in, upon or about the Premises from any cause
whatsoever and agrees that Landlord, its partners, subpartners and their
respective officers, agents, servants, employees, and independent contractors
(collectively, "LANDLORD PARTIES") shall not be liable for, and are hereby
released from any responsibility for, any damage either to person or property or
resulting from the loss of use thereof, which damage is sustained by Tenant or
by other persons claiming through Tenant. Tenant shall indemnify, defend,
protect, and hold harmless the Landlord Parties from any and all loss, cost,
damage, expense and liability (including without limitation court costs and
reasonable attorneys' fees) incurred in connection with or arising from any
cause in, on or about the Premises, any acts, omissions or negligence of Tenant
or of any person claiming by, through or under Tenant, or of the contractors,
agents, servants, employees, invitees, guests or licensees of Tenant or any such
person, in, on or about the Project or any breach of the TCCs of this Lease,
either prior to, during, or after the expiration of the Lease Term, provided
that the TCCs of the foregoing indemnity shall not apply to the negligence or
willful misconduct of Landlord. Should Landlord be named as a defendant in any
suit brought against Tenant in connection with or arising out of Tenant's
occupancy of the Premises, Tenant shall pay to Landlord its costs and expenses
incurred in such suit, including without limitation, its actual professional
fees such as appraisers', accountants' and attorneys' fees. Further, Tenant's
agreement to indemnify Landlord pursuant to this SECTION 10.1 is not intended
and shall not relieve any insurance carrier of its obligations under policies
required to be carried by Tenant pursuant to the provisions of this Lease, to
the extent such policies cover the matters subject to Tenant's indemnification
obligations; nor shall they supersede any inconsistent agreement of the parties
set forth in any other provision of this Lease. The provisions of this
SECTION 10.1 shall survive the expiration or sooner termination of this Lease
with respect to any claims or liability

                                      -34-


arising in connection with any event occurring prior to such expiration or
termination. Notwithstanding anything to the contrary contained in this Lease,
nothing in this Lease shall impose any obligations on Tenant or Landlord to be
responsible or liable for, and each hereby releases the other from all liability
for, consequential damages other than those consequential damages (i) incurred
by Landlord in connection with a holdover of the Premises by Tenant after the
expiration or earlier termination of this Lease or (ii) incurred by Landlord in
connection with any repair, physical construction or improvement work performed
by or on behalf of Tenant in the Project, but Tenant shall not be responsible
for any direct or consequential damages resulting from Landlord's or
contractor's acts in connection with the completion by Landlord of the Tenant
Improvements in the Premises pursuant to the Tenant Work Letter.

     10.2   LANDLORD'S FIRE, CASUALTY AND LIABILITY INSURANCE. Landlord shall
carry commercial general liability insurance with respect to the Building, the
Project and the remainder of the Pacific Corporate Center (to the extent the
same continues to be owned by Landlord or its Affiliates) during the Lease Term
covering the insured against claims of bodily injury and personal injury, for
limits of liability not initially less than $3,000,000 each occurrence and
$3,000,000 annual aggregate for each of bodily injury and personal injury, and
shall further insure the Building (including the Building Structure), and the
Project during the Lease Term against loss or damage due to fire and other
casualties covered within the classification of fire and extended coverage,
vandalism coverage and malicious mischief, sprinkler leakage, water damage and
special extended coverage. Such coverage shall be in such amounts, from such
companies, and on such other TCCs, as Landlord may from time to time reasonably
determine; provided, however, that to the extent consistent with the practices
of landlords of Comparable Buildings, such coverage shall be (i) for the full
replacement value of the Building and the Project in compliance with all
then-existing Applicable Law, and (ii) with companies and have policies meeting
the criteria set forth in Section 10.4(iii) of this Lease. Additionally, at the
option of Landlord, such insurance coverage may include the risks of earthquakes
and/or flood damage and additional hazards, a rental loss endorsement and one or
more loss payee endorsements in favor of the holders of any mortgages or deeds
of trust encumbering the interest of Landlord in the Building or the ground or
underlying lessors of the Building, or any portion thereof; provided, however,
any such earthquake insurance shall be subject to Tenant's reasonable approval
of any earthquake insurance carried by Landlord with respect to the Building;
provided further, however, it shall be deemed unreasonable for Tenant to
withhold such consent to the extent (A) such earthquake insurance is mandated by
applicable governmental entities, or (B) landlords of Comparable Buildings are
requiring such earthquake insurance policies be maintained and Landlord's
earthquake insurance policy is commercially reasonably vis-a-vis such third
party policies. Notwithstanding the foregoing provisions of this SECTION 10.2,
the coverage and amounts of insurance carried by Landlord in connection with the
Building shall, at a minimum, be comparable to the coverage and amounts of
insurance which are carried by reasonably prudent landlords of Comparable
Buildings, and Worker's Compensation and Employer's Liability coverage as
required by applicable law. Tenant shall, at Tenant's expense, comply with all
insurance company requirements pertaining to the use of the Premises for other
than normal and customary implementation of the Permitted Use. If Tenant's
conduct or use of the Premises causes any increase in the premium for such
insurance policies then Tenant shall reimburse Landlord for any such increase to
the extent caused by Tenant's use of the Premises for other than normal and
customary implementation of the Permitted Use. Tenant, at Tenant's expense,
shall comply with all rules, orders, regulations or requirements of

                                      -35-


the American Insurance Association (formerly the National Board of Fire
Underwriters) and with any similar body.

     10.3   TENANT'S INSURANCE. Tenant shall, to the extent available at
commercially reasonable rates, maintain the following coverages in the following
amounts.

          10.3.1    Commercial General Liability Insurance covering the insured
against claims of bodily injury, personal injury and property damage (including
loss of use thereof) arising out of Tenant's operations, and contractual
liabilities (covering the performance by Tenant of its indemnity agreements)
including a Broad Form endorsement covering the insuring provisions of this
Lease and the performance by Tenant of the indemnity agreements set forth in
SECTION 10.1 of this Lease, for limits of liability not less than:

                                                

          Bodily Injury and                        $3,000,000 each occurrence
          Property Damage Liability                $3,000,000 annual aggregate

          Personal Injury Liability                $3,000,000 each occurrence
                                                   $3,000,000 annual aggregate
                                                   0% Insured's participation



          10.3.2    Physical Damage Insurance covering (i) all office furniture,
business and trade fixtures, office equipment, free-standing cabinet work,
movable partitions, merchandise and all other items of Tenant's property on the
Premises installed by, for, or at the expense of Tenant, (ii) the "Tenant
Improvements," as that term is defined in SECTION 2.1 of the Tenant Work Letter,
and any other improvements which exist in the Premises as of the Lease
Commencement Date (excluding the Base and Shell) (the "ORIGINAL Improvements"),
and (iii) all other Alterations to the Premises. Such insurance shall be written
on an "all risks" of physical loss or damage basis, for the full replacement
cost value (subject to reasonable deductible amounts) new without deduction for
depreciation of the covered items and in amounts that meet any co-insurance
clauses of the policies of insurance and shall include coverage for damage or
other loss caused by fire or other peril including, but not limited to,
vandalism and malicious mischief, theft, water damage of any type, including
sprinkler leakage, bursting or stoppage of pipes, and explosion, and providing
business interruption coverage for a period of one year.

          10.3.3    Worker's Compensation and Employer's Liability or other
similar insurance pursuant to all applicable state and local statutes and
regulations.

     10.4   FORM OF POLICIES. The minimum limits of policies of insurance
required of Tenant under this Lease shall in no event limit the liability of
Tenant under this Lease. Such insurance shall (i) name Landlord, and any other
party the Landlord so specifies that has a material financial interest in the
Project, as an additional insured, including Landlord's managing agent, if any;
(ii) specifically cover the liability assumed by Tenant under this Lease,
including, but not limited to, Tenant's obligations under SECTION 10.1 of this
Lease; (iii) be issued by an insurance company having a rating of not less than
A-:VIII in Best's Insurance Guide or which is otherwise acceptable to Landlord
and licensed to do business in the State of California; (iv) be primary
insurance as to all claims thereunder and provide that any insurance carried by
Landlord

                                      -36-


is excess and is non-contributing with any insurance requirement of Tenant; and
(v) provide that said insurance shall not be canceled or coverage changed unless
ten (10) days' prior written notice shall have been given to Landlord and any
mortgagee of Landlord, the identity of whom has been provided to Tenant in
writing. Tenant shall deliver said policy or policies or certificates thereof to
Landlord on or before the Lease Commencement Date and at least thirty (30) days
before the expiration dates thereof. In the event Tenant shall fail to procure
such insurance, or to deliver such policies or certificate, Landlord may, at its
option, after written notice to Tenant and Tenant's failure to obtain such
insurance within ten (10) days thereafter, procure such policies for the account
of Tenant, and the cost thereof shall be paid to Landlord within thirty (30)
days after delivery to Tenant of bills therefor.

     10.5   SUBROGATION. Landlord and Tenant intend that their respective
property loss risks shall be borne by reasonable insurance carriers to the
extent above provided, and Landlord and Tenant hereby agree to look solely to,
and seek recovery only from, their respective insurance carriers in the event of
a property loss to the extent that such coverage is agreed to be provided
hereunder. The parties each hereby waive all rights and claims against each
other for such losses, and waive all rights of subrogation of their respective
insurers. The parties agree that their respective insurance policies are now, or
shall be, endorsed such that the waiver of subrogation shall not affect the
right of the insured to recover thereunder, so long as no material additional
premium is charged therefor.

     10.6   ADDITIONAL INSURANCE OBLIGATIONS. Tenant shall carry and maintain
during the entire Lease Term, at Tenant's sole cost and expense, increased
amounts of the insurance required to be carried by Tenant pursuant to this
ARTICLE 10 and such other reasonable types of insurance coverage and in such
reasonable amounts covering the Premises and Tenant's operations therein, as may
be reasonably requested by Landlord, but in no event in excess of the amounts
and types of insurance then being required by landlords of other Comparable
Buildings.

                                   ARTICLE 11

                             DAMAGE AND DESTRUCTION

     11.1   REPAIR OF DAMAGE TO PREMISES BY LANDLORD. Tenant shall promptly
notify Landlord of any damage to, or affecting, the Premises resulting from fire
or any other casualty. If the Premises, the Project or any Common Areas serving
or providing access to the Premises shall be damaged by fire or other casualty,
Landlord shall promptly and diligently, subject to reasonable delays for
insurance adjustment or other matters beyond Landlord's reasonable control, and
subject to all other TCCs of this ARTICLE 11, restore the Base and Shell (but
excluding the Tenant Improvements constructed by Tenant pursuant to the Tenant
Work Letter) and such Common Areas. Such restoration shall be to substantially
the same condition of the Base and Shell (but excluding the Tenant Improvements
constructed by Tenant pursuant to the Tenant Work Letter) and the Common Areas
prior to the casualty, except for modifications required by zoning and building
codes and other laws, provided that access to the Premises and any common
restrooms serving the Premises and Tenant's use of shall not be materially
impaired. Upon the occurrence of any damage to the Premises, upon notice (the
"TENANT REPAIR NOTICE") to Landlord from Tenant, Tenant shall assign to Landlord
(or to any party designated by Landlord) all insurance proceeds payable to
Tenant under Tenant's insurance

                                      -37-


required under SECTION 10.3.2 of this Lease, and Landlord shall repair any
injury or damage to the Tenant Improvements and the Original Improvements
installed in the Premises and shall return such Tenant Improvements and Original
Improvements to their original condition; provided that if the cost of such
repair by Landlord exceeds the greater of (a) the amount of insurance proceeds
received by Landlord from Tenant's insurance carrier, as assigned by Tenant, or
(b) the amount of insurance required to be maintained hereunder (whether by
Landlord or Tenant), the cost of such repairs shall be paid by Tenant to
Landlord prior to Landlord's commencement of repair of the damage. Following
delivery of a Tenant Repair Notice, prior to the commencement of construction,
Tenant shall submit to Landlord, for Landlord's review and approval, all plans,
specifications and working drawings relating thereto, and Landlord shall select
(with Tenant's reasonable approval) the contractors to perform such improvement
work. Landlord shall not be liable for any inconvenience or annoyance to Tenant
or its visitors, or injury to Tenant's business resulting in any way from such
damage or the repair thereof; provided however, that if such fire or other
casualty shall have damaged the Premises or Common Areas necessary to Tenant's
occupancy, Landlord shall allow Tenant a proportionate abatement of Rent to the
extent the Premises and/or Common Areas are unavailable for Tenant's use and
occupancy regardless of whether Landlord is reimbursed from the proceeds of
rental interruption insurance purchased or required to be purchased by Landlord
as part of Operating Expenses, during the time and to the extent the Premises
are unfit for occupancy for the purposes permitted under this Lease, and not
occupied by Tenant as a result thereof.

     11.2   OPTIONS TO REPAIR AND/OR TERMINATE.

          11.2.1    LANDLORD'S OPTION TO REPAIR. Notwithstanding the TCCs of
SECTION 11.1 of this Lease, Landlord may elect not to rebuild and/or restore the
Premises, Building and/or Project, and instead terminate this Lease (or the
applicable portion thereof), by notifying Tenant in writing of such termination
within forty-five (45) days after the date of discovery of the damage, such
notice to include a termination date giving Tenant sixty (60) days to vacate the
Premises, but Landlord may so elect only if the Building or Project shall be
damaged by fire or other casualty or cause, if one or more of the following
conditions is present: (i) in Landlord's reasonable judgment, repairs cannot
reasonably be completed within fifteen (15) months after the date of discovery
of the damage (when such repairs are made without the payment of overtime or
other premiums); (ii) the damage to the Building (but excluding the Tenant
Improvements constructed by Tenant pursuant to the Tenant Work Letter) is not
fully covered by Landlord's insurance policies (provided Landlord shall be
deemed to have carried (except with regard to any applicable deductibles) one
hundred percent (100%) replacement cost fire/casualty insurance); or (iii) the
damage occurs during the last twelve (12) months of the Lease Term.

          11.2.2    TENANT'S OPTIONS TO TERMINATE. If Landlord's initial
estimate of the rebuilding/reconstruction period is longer than fifteen (15)
months, yet Landlord does not elect to terminate this Lease pursuant to
Landlord's termination right, Tenant shall have the right to terminate this
Lease in writing within twenty (20) business days following its receipt of such
initial estimate. If Landlord does not elect to terminate this Lease pursuant to
Landlord's termination right as provided above, and Tenant does not elect, if
applicable, to terminate this Lease pursuant to the foregoing sentence, and if
the repairs to be made by Landlord are not actually completed within the longer
of (X) fifteen (15) months of the date of discovery of the

                                      -38-


damage, or (Y) such longer period to the extent Landlord's initial estimate of
the rebuilding/reconstruction period was longer than fifteen (15) months, Tenant
shall have the right to terminate this Lease during the first five (5) business
days of each calendar month following the end of such period until such time as
the repairs to be made by Landlord are complete, by notice to Landlord (the
"DAMAGE TERMINATION NOTICE"), effective as of a date set forth in the Damage
Termination Notice (the "DAMAGE TERMINATION DATE"), which Damage Termination
Date shall not be less than five (5) business days following Landlord's receipt
of the Damage Termination Notice. Notwithstanding the foregoing, if Tenant
delivers a Damage Termination Notice to Landlord, then Landlord shall have the
right to suspend the occurrence of the Damage Termination Date for a period of
thirty (30) days after the Damage Termination Date set forth in the Damage
Termination Notice by delivering to Tenant, within five (5) business days of
Landlord's receipt of the Damage Termination Notice, a certificate of Landlord's
contractor responsible for the repair of the damage certifying that it is such
contractor's good faith judgment that the repairs to be made by Landlord shall
be substantially completed within thirty (30) days after the Damage Termination
Date. If such repairs shall be substantially completed prior to the expiration
of such thirty-day period, then the Damage Termination Notice shall be of no
force or effect, but if such repairs shall not be substantially completed within
such thirty-day period, then this Lease shall termination upon the expiration of
such thirty-day period.

     11.3   WAIVER OF STATUTORY PROVISIONS. The provisions of this Lease,
including this ARTICLE 11, constitute an express agreement between Landlord and
Tenant with respect to any and all damage to, or destruction of, all or any part
of the Premises, the Building or the Project, and any statute or regulation of
the State of California, including, without limitation, Sections 1932(2) and
1933(4) of the California Civil Code, with respect to any rights or obligations
concerning damage or destruction in the absence of an express agreement between
the parties, and any other statute or regulation, now or hereafter in effect,
shall have no application to this Lease or any damage or destruction to all or
any part of the Premises, the Building or the Project.

                                   ARTICLE 12

                                    NONWAIVER

     No provision of this Lease shall be deemed waived by either party hereto
unless expressly waived in writing signed thereby. The waiver by either party
hereto of any breach of any term, covenant or condition herein contained shall
not be deemed to be a waiver of any subsequent breach of same or any other term,
covenant or condition herein contained. The subsequent acceptance of Rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular Rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
Rent. No acceptance of a lesser amount than the Rent herein stipulated shall be
deemed a waiver of Landlord's right to receive the full amount due, nor shall
any endorsement or statement on any check or payment or any letter accompanying
such check or payment be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the full amount due. No receipt of monies by Landlord from Tenant after the
termination of this Lease shall in any way alter the length of the Lease Term or
of Tenant's right of possession hereunder, or after the giving of any notice
shall reinstate, continue or extend the Lease Term or affect any notice

                                      -39-


given Tenant prior to the receipt of such monies, it being agreed that after the
service of notice or the commencement of a suit, or after final judgment for
possession of the Premises, Landlord may receive and collect any Rent due, and
the payment of said Rent shall not waive or affect said notice, suit or
judgment.

                                   ARTICLE 13

                                  CONDEMNATION

     13.1   CONDEMNATION. If the whole or any part of the Premises, Building or
Project shall be taken by power of eminent domain or condemned by any competent
authority for any public or quasi-public use or purpose, or if any adjacent
property or street shall be so taken or condemned, or reconfigured or vacated by
such authority in such manner as to require the use, reconstruction or
remodeling of any part of the Premises, Building or Project, and if as a result
thereof Tenant cannot conduct its business operations in substantially the same
manner such business operations were conducted prior to such taking while still
retaining substantially the same material rights and benefits it bargained to
receive under this Lease, or if Landlord shall grant a deed or other instrument
in lieu of such taking by eminent domain or condemnation as a result thereof,
Landlord and Tenant shall each have the option to terminate this Lease on ninety
(90) days Notice to the other party effective as of the date possession is
required to be surrendered to the authority. Subject to SECTION 13.2 below,
Tenant shall not because of such taking assert any claim against Landlord or the
authority for any compensation because of such taking and Landlord shall be
entitled to the entire award or payment in connection therewith, except that
Tenant shall have the right to file any separate claim available to Tenant for
any taking of Tenant's personal property and fixtures belonging to Tenant and
removable by Tenant upon expiration of the Lease Term pursuant to the TCCs of
this Lease, and for moving expenses, so long as such claims do not diminish the
award available to Landlord, its ground lessor with respect to the Building or
Project or its mortgagee, and such claim is payable separately to Tenant. All
Rent shall be apportioned as of the date of such termination. If any part of the
Premises shall be taken, and this Lease shall not be so terminated, the Rent
shall be proportionately abated. Tenant hereby waives any and all rights it
might otherwise have pursuant to Section 1265.130 of The California Code of
Civil Procedure. Notwithstanding anything to the contrary contained in this
ARTICLE 13, in the event of a temporary taking of all or any portion of the
Premises for a period of ninety (90) days or less, then this Lease shall not
terminate but the Base Rent and the Additional Rent shall be abated for the
period of such taking in proportion to the ratio that the amount of rentable
square feet of the Premises taken bears to the total rentable square feet of the
Premises. Subject to SECTION 13.2 below, Landlord shall be entitled to receive
the entire award made in connection with any such temporary taking.

     13.2   TENANT'S RIGHT TO AWARD. Notwithstanding anything to the contrary
set forth in SECTION 13.1 above, Tenant shall have the right to claim and
recover and Landlord hereby assigns to Tenant from the award, (i) the fair
market value of Tenant Improvements and Alterations to the extent paid for
solely by Tenant, (ii) fifty percent (50%) of any sum attributable to a
diminution of the present value (at the date of such taking) of the fair market
rental value of portions of the Premises not condemned for the remainder of the
term and any extensions, (iii) fifty percent (50%) of any sum attributable to an
excess of the present value (at the date of taking) of the fair market rental
value of the condemned portion of the Premises for the

                                      -40-


remainder of the term and any extensions over the present value at the date of
taking of the actual Base Rent for the remainder of the Lease Term and any
Option Term, (iv) any sum awarded to Tenant for damages to or loss of Tenant's
business, and (v) such compensation as may be separately awarded or recoverable
by Tenant on account of any and all costs or losses related to removing Tenant's
merchandise, furniture, fixtures, leasehold improvements, and equipment to a new
location.

                                   ARTICLE 14

                            ASSIGNMENT AND SUBLETTING

     14.1   TRANSFERS. Tenant shall not, without the prior written consent
(except as otherwise provided in SECTION 14.8 below) of Landlord, which consent
will not be unreasonably withheld, conditioned or delayed, assign, mortgage,
pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise
transfer, this Lease or any interest hereunder, permit any assignment, or other
transfer of this Lease or any interest hereunder by operation of law, sublet the
Premises or any part thereof, or enter into any license or concession agreements
or otherwise permit the occupancy or use of the Premises or any part thereof by
any persons other than Tenant and its employees and contractors (all of the
foregoing are hereinafter sometimes referred to collectively as "TRANSFERS" and
any person to whom any Transfer is made or sought to be made is hereinafter
sometimes referred to as a "TRANSFEREE"). If Tenant desires Landlord's consent
to any Transfer, Tenant shall notify Landlord in writing, which notice (the
"TRANSFER NOTICE") shall include (i) the proposed effective date of the
Transfer, which shall not be less than thirty (30) days nor more than one
hundred eighty (180) days after the date of delivery of the Transfer Notice,
(ii) a description of the portion of the Premises to be transferred (the
"SUBJECT SPACE"), (iii) all of the terms of the proposed Transfer and the
consideration therefor, including calculation of the "Transfer Premium", as that
term is defined in SECTION 14.3 below, in connection with such Transfer, the
name and address of the proposed Transferee, and a copy of all existing executed
and/or proposed documentation pertaining to the proposed Transfer, including all
existing operative documents to be executed to evidence such Transfer or the
agreements incidental or related to such Transfer, provided that Landlord shall
have the right to require Tenant to utilize Landlord's standard consent
documents in connection with the documentation of Landlord's consent to such
Transfer, (iv) to the extent reasonably necessary for Landlord to make its
consent determination, current financial statements of the proposed Transferee
certified by an officer, partner or owner thereof, business credit and personal
references and history of the proposed Transferee and any other information
required by Landlord which will enable Landlord to determine the financial
responsibility, character, and reputation of the proposed Transferee, nature of
such Transferee's business and proposed use of the Subject Space and (v) an
executed estoppel certificate from Tenant in the form attached hereto as
EXHIBIT E. Any Transfer made without Landlord's prior written consent shall, at
Landlord's option, be null, void and of no effect, and shall, at Landlord's
option (to the extent not cured within the applicable notice and cure period),
constitute a default by Tenant under this Lease. Whether or not Landlord
consents to any proposed Transfer, Tenant shall, within thirty (30) days after
written request by Landlord, reimburse Landlord for all reasonable and actual
out-of-pocket third-party costs and expenses incurred by Landlord in connection
with its review of a proposed Transfer; provided that such costs and expenses
shall not exceed One Thousand and No/100 Dollars ($1,000.00) for a Transfer in
the ordinary course of business.

                                      -41-


     14.2   LANDLORD'S CONSENT. Landlord shall not unreasonably withhold its
consent to any proposed Transfer of the Subject Space to the Transferee on the
terms specified in the Transfer Notice. Without limitation as to other
reasonable grounds for withholding consent, the parties hereby agree that it
shall be reasonable under this Lease and under any applicable law for Landlord
to withhold consent to any proposed Transfer where one or more of the following
apply:

          14.2.1    The Transferee is of a character or reputation or engaged in
a business which is not consistent with the quality of the Building or the
Project;

          14.2.2    The Transferee intends to use the Subject Space for purposes
which are not permitted under this Lease;

          14.2.3    The Transferee is either a governmental agency or
instrumentality thereof;

          14.2.4    Intentionally Omitted;

          14.2.5    Transferee's financial worth and/or financial stability is
insufficient to meet the proposed financial obligations on the date consent is
requested;

          14.2.6    The proposed Transfer would cause a violation of another
lease for space in the Project, or would give an occupant of the Project a right
to cancel its lease; or

          14.2.7    The terms of the proposed Transfer will allow the Transferee
(other than a an Affiliate or Permitted Transferee; i.e., any other assignee,
sublessee or other transferee of the Original Tenant's interest in this Lease)
to exercise a right of renewal, right of expansion, right of first offer, or
other similar right held by Tenant (or will allow the Transferee to occupy space
leased by Tenant pursuant to any such right).

     If Landlord consents to any Transfer pursuant to the TCCs of this
SECTION 14.2, Tenant may within six (6) months after Landlord's consent, but not
later than the expiration of said six-month period, enter into such Transfer of
the Premises or portion thereof, upon substantially the same TCCs as are set
forth in the Transfer Notice furnished by Tenant to Landlord pursuant to SECTION
14.1 of this Lease, provided that if there are any material changes in the TCCs
from those specified in the Transfer Notice such that Landlord would initially
have been entitled to refuse its consent to such Transfer under this SECTION
14.2, Tenant shall again submit the Transfer to Landlord for its approval and
other action under this ARTICLE 14 (including Landlord's right of recapture, if
any, under SECTION 14.4 of this Lease). Notwithstanding anything to the contrary
in this Lease, if Tenant or any proposed Transferee claims that Landlord has
unreasonably withheld or delayed its consent under SECTION 14.2 or otherwise has
breached or acted unreasonably under this ARTICLE 14, they shall have the
remedies available to them at law or equity. In the event Tenant requests
Landlord's consent to a proposed Transfer, Tenant shall indemnify, defend and
hold harmless Landlord from any and all liability, losses, claims, damages,
costs, expenses, causes of action and proceedings involving any third party or
parties (including without limitation Tenant's proposed subtenant or assignee)
who claim they were damaged by Landlord's wrongful withholding or conditioning
of Landlord's consent, unless a court of competent jurisdiction determines that
Landlord unreasonably withheld, delayed or

                                      -42-


conditioned its consent or was otherwise wrongful in its withholding, delaying
or conditioning of its consent.

     14.3   TRANSFER PREMIUM. If Landlord consents to a Transfer, as a condition
thereto which the parties hereby agree is reasonable, Tenant shall pay to
Landlord forty percent (40%) of any "Transfer Premium," as that term is defined
in this SECTION 14.3, received by Tenant from such Transferee. "TRANSFER
PREMIUM" shall mean all rent, additional rent or other consideration payable by
such Transferee in connection with the Transfer in excess of the Rent and
Additional Rent payable by Tenant under this Lease during the term of the
Transfer on a per rentable square foot basis if less than all of the Premises is
transferred, after deducting all expenses incurred by Tenant for (i) any
changes, alterations and improvements to the Premises in connection with the
Transfer, (ii) any free base rent provided to the Transferee, (iii) any
brokerage commissions in connection with the Transfer, and (iv) any marketing
costs and legal fees, and (v) any other costs or concessions incurred or granted
in connection with the Transfer. "Transfer Premium" shall also include, but not
be limited to, key money, bonus money or other cash consideration paid by
Transferee to Tenant in connection with such Transfer, and any payment in excess
of fair market value for goods or services transferred or rendered by Tenant to
Transferee to the extent the same is a subterfuge by Tenant to avoid its
obligations under this Lease. In the calculations of the Rent (as it relates to
the Transfer Premium calculated under this SECTION 14.3), and the Transferee's
Rent and Quoted Rent under SECTION 14.2 of this Lease, the Rent paid during each
annual period for the Subject Space, and the Transferee's Rent and the Quoted
Rent, shall be computed after adjusting such rent to the actual effective rent
to be paid, taking into consideration any and all leasehold concessions granted
in connection therewith, including, but not limited to, any rent credit and
tenant improvement allowance. For purposes of calculating any such effective
rent all such concessions shall be amortized on a straight-line basis over the
relevant term.

     14.4   INTENTIONALLY OMITTED.

     14.5   EFFECT OF TRANSFER. If Landlord consents to a Transfer, (i) the TCCs
of this Lease shall in no way be deemed to have been waived or modified, (ii)
such consent shall not be deemed consent to any further Transfer by either
Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after
execution, an original executed copy of all documentation pertaining to the
Transfer, and (iv) no Transfer relating to this Lease or agreement entered into
with respect thereto, whether with or without Landlord's consent, shall relieve
Tenant from any liability under this Lease, including, without limitation, in
connection with the Subject Space. Landlord or its authorized representatives
shall have the right at all reasonable times and upon reasonable prior notice to
audit the books, records and papers of Tenant relating to any Transfer, and
shall have the right to make copies thereof. If the Transfer Premium respecting
any Transfer shall be found understated, Tenant shall, within thirty (30) days
after demand, pay the deficiency, and if understated by more than five percent
(5%), Tenant shall pay Landlord's costs of such audit.

     14.6   INTENTIONALLY OMITTED.

     14.7   OCCURRENCE OF DEFAULT. Any Transfer hereunder shall be subordinate
and subject to the provisions of this Lease, and if this Lease shall be
terminated during the term of any

                                      -43-


Transfer, Landlord shall have the right to: (i) treat such Transfer as cancelled
and repossess the Subject Space by any lawful means, or (ii) require that such
Transferee attorn to and recognize Landlord as its landlord under any such
Transfer. If Tenant shall be in default under this Lease (beyond any applicable
notice and cure periods), Landlord is hereby authorized to direct any Transferee
to make all payments under or in connection with the Transfer directly to
Landlord (which Landlord shall apply towards Tenant's obligations under this
Lease) until such default is cured. Such Transferee shall rely on any
representation by Landlord that Tenant is in default hereunder, without any need
for confirmation thereof by Tenant. Upon any assignment, the assignee shall
assume in writing all obligations and covenants of Tenant thereafter to be
performed or observed under this Lease. No collection or acceptance of rent by
Landlord from any Transferee shall be deemed a waiver of any provision of this
ARTICLE 14 or the approval of any Transferee or a release of Tenant from any
obligation under this Lease, whether theretofore or thereafter accruing. In no
event shall Landlord's enforcement of any provision of this Lease against any
Transferee be deemed a waiver of Landlord's right to enforce any term of this
Lease against Tenant or any other person.

     14.8   NON-TRANSFERS. Notwithstanding anything to the contrary contained in
this ARTICLE 14, an assignment or subletting of all or a portion of the Premises
to any entity which acquires all or a part of Tenant, or which is acquired in
whole or in part by Tenant, or which is controlled directly or indirectly by
Tenant, or which entity controls, directly or indirectly, Tenant or which
acquires all or substantially all of the stock or assets of Tenant (in each such
case, an "AFFILIATE"), or any entity which owns or is owned by an Affiliate,
shall not be deemed a Transfer under this ARTICLE 14, provided that at least
thirty (30) days prior to such assignment or sublease (i) Tenant provides
Landlord with reasonable evidence that any such entity maintains a net worth,
calculated in accordance with generally accepted accounting principals,
consistently applied ("NET WORTH"), sufficient to meet the financial obligation
hereunder; (ii) Tenant notifies Landlord of any such assignment or sublease; and
(iii) such assignment or sublease is not a subterfuge by Tenant to avoid its
obligations under this Lease. In the event an assignment or sublease to an
Affiliate is made pursuant to the TCCs of this SECTION 14.8, Tenant shall be
relieved of its obligations under this Lease to the extent the same become the
TCCs of such Affiliate pursuant to such assignment or sublease. In no event
shall an offering of stock to third parties by means of a public or private
offering constitute a "Transfer." "CONTROL," as used in this SECTION 14.8, shall
mean the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a person or entity, whether by
ownership of voting securities, by contract or otherwise.

                                   ARTICLE 15

                      SURRENDER OF PREMISES; OWNERSHIP AND
                            REMOVAL OF TRADE FIXTURES

     15.1   SURRENDER OF PREMISES. No act or thing done by Landlord or any agent
or employee of Landlord during the Lease Term shall be deemed to constitute an
acceptance by Landlord of a surrender of the Premises unless such intent is
specifically acknowledged in writing by Landlord. The delivery of keys to the
Premises to Landlord or any agent or employee of Landlord shall not constitute a
surrender of the Premises or effect a termination of this Lease, whether or not
the keys are thereafter retained by Landlord, and notwithstanding such delivery

                                      -44-


Tenant shall be entitled to the return of such keys at any reasonable time upon
request until this Lease shall have been properly terminated. The voluntary or
other surrender of this Lease by Tenant, whether accepted by Landlord or not, or
a mutual termination hereof, shall not work a merger, and at the option of
Landlord shall operate as an assignment to Landlord of all subleases or
subtenancies affecting the Premises or terminate any or all such sublessees or
subtenancies.

     15.2   REMOVAL OF TENANT PROPERTY BY TENANT. Upon the expiration of the
Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject
to the provisions of this ARTICLE 15, quit and surrender possession of the
Premises to Landlord in as good order and condition as when Tenant took
possession and as thereafter improved by Landlord and/or Tenant, reasonable wear
and tear, casualty damage and repairs which are specifically made the
responsibility of Landlord hereunder excepted. Upon such expiration or
termination, Tenant shall, without expense to Landlord, remove or cause to be
removed from the Premises all debris and rubbish, and such items of furniture,
equipment, business and trade fixtures, free-standing cabinet work, movable
partitions and other articles of personal property owned by Tenant or installed
or placed by Tenant at its expense in the Premises (excluding, however, the
initial Tenant Improvements), and Tenant shall repair at its own expense all
damage to the Premises and Building resulting from such removal.

                                   ARTICLE 16

                                  HOLDING OVER

     If Tenant holds over after the expiration of the Lease Term or earlier
termination thereof, with or without the express or implied consent of Landlord,
such tenancy shall be from month-to-month only, and shall not, except as set
forth below, constitute a renewal hereof or an extension for any further term,
and in such case Rent shall be payable at a monthly rate equal to the product of
(i) the Rent applicable during the last rental period of the Lease Term under
this Lease, and (ii) one hundred twenty-five percent (125%) for the first two
months of any such holdover and one hundred fifty percent (150%) thereafter.
Such month-to-month tenancy shall be subject to every other applicable TCCs
contained herein. Notwithstanding the foregoing, Tenant shall have the one-time
right, upon notice (the "HOLDOVER NOTICE") to Landlord not less than nine (9)
months prior to the expiration of the then Lease Term, to extend the Lease Term
for a total period of up to six (6) months (the "PERMITTED HOLDOVER TERM"), in
which case the Rent payable by Tenant throughout such Permitted Holdover Term
(as opposed to only the first two (2) months pursuant to the first sentence of
this ARTICLE 16) shall equal the product of (a) the Rent applicable during the
last rental period of the Lease Term under this Lease, and (b) one hundred
twenty-five percent (125%). For purposes of this ARTICLE 16, a holding over
shall include Tenant's remaining in the Premises more than thirty (30) days
after the expiration or earlier termination of the Lease Term, as expressly
required pursuant to the TCCs of SECTION 8.5, above, to remove any Extraordinary
Alterations located within the Premises and to repair any damage to the Premises
and Building caused by such removal (reasonable wear and tear excepted). Except
with respect to the Permitted Holdover Term, nothing contained in this
ARTICLE 16 shall be construed as consent by Landlord to any holding over by
Tenant, and Landlord expressly reserves the right to require Tenant to surrender
possession of the Premises to Landlord as provided in this Lease upon the
expiration or other termination of this Lease. The provisions of this ARTICLE 16
shall not be deemed to limit or constitute a waiver of any other rights or
remedies

                                      -45-


of Landlord provided herein or at law. Except as otherwise specifically provided
for in this ARTICLE 16 with regard to a Permitted Holdover Term, if Tenant fails
to surrender the Premises upon the termination or expiration of this Lease (or
the expiration of the Permitted Holdover Term, if any), in addition to any other
liabilities to Landlord accruing therefrom, Tenant shall protect, defend,
indemnify and hold Landlord harmless from all loss, costs (including reasonable
attorneys' fees) and liability resulting from such failure, including, without
limiting the generality of the foregoing, any claims made by any succeeding
tenant founded upon such failure to surrender and any lost profits to Landlord
resulting therefrom.

                                   ARTICLE 17

                              ESTOPPEL CERTIFICATES

     Within fifteen (15) business days following a request in writing by
Landlord, Tenant shall execute, acknowledge and deliver to Landlord an estoppel
certificate, which, as submitted by Landlord, shall be substantially in the form
of EXHIBIT E, attached hereto (or such other substantially similar form as may
be required by any prospective mortgagee or purchaser of the Project, or any
portion thereof), indicating therein any exceptions thereto that may exist at
that time, and shall also contain any other information reasonably requested by
Landlord or Landlord's mortgagee or prospective mortgagee. Any such certificate
may be relied upon by any prospective mortgagee or purchaser of all or any
portion of the Project. At any time during the Lease Term, but in no event on
more than two (2) occasions during any twelve (12) consecutive month period,
Landlord may require Tenant to provide Landlord with a current financial
statement and financial statements of the two (2) years prior to the current
financial statement year. Such statements shall be prepared in accordance with
generally accepted accounting principles and, if such is the normal practice of
Tenant, shall be audited by an independent certified public accountant. Such
statements shall be subject to the confidentiality requirements set forth in
SECTION 29.28 of this Lease. Landlord hereby agrees to provide to Tenant an
estoppel certificate signed by Landlord containing the same types of information
and within the same periods of time as are set forth above, except for such
changes as are reasonably necessary to reflect that the estoppel certificate is
being granted and signed by Landlord to Tenant or Tenant's lender, assignee or
sublessee, rather than from Tenant to Landlord or to Landlord's lender or
potential purchaser.

                                   ARTICLE 18

                                  SUBORDINATION

     Subject to Tenant's receipt of an appropriate non-disturbance agreement(s)
as set forth below, this Lease shall be subject and subordinate to all present
and future ground or underlying leases of the Building or Project and to the
lien of any mortgage, trust deed or other encumbrances now or hereafter in force
against the Building or Project or any part thereof, if any, and to all
renewals, extensions, modifications, consolidations and replacements thereof,
and to all advances made or hereafter to be made upon the security of such
mortgages or trust deeds, unless the holders of such mortgages, trust deeds or
other encumbrances, or the lessors under such ground lease or underlying leases,
require in writing that this Lease be superior thereto. As of the date of this
Lease, Landlord covenants that no deed of trust or ground or underlying lease

                                      -46-


encumbers the Building or Project. Landlord's delivery to Tenant of
commercially reasonable non-disturbance agreement(s) (the "NONDISTURBANCE
AGREEMENT") in favor of Tenant from any ground lessor, mortgage holders or lien
holders of Landlord who later come into existence at any time prior to the
expiration of the Lease Term shall be in consideration of, and a condition
precedent to, Tenant's agreement to be bound by the TCCs of this ARTICLE 18.
With regard to such Nondisturbance Agreement, Tenant's only cost in connection
therewith shall be its internal review costs (including any legal fees incurred
in connection therewith, whether internally or externally sourced). Such
commercially reasonable Nondisturbance Agreements shall include the obligation
of any such successor ground lessor, mortgage holder or lien holder to (i)
recognize Tenant's rights to offset certain amounts against Base Rent due
hereunder to the extent expressly permitted pursuant to the TCCs of this Lease,
(ii) recognize Landlord's obligations to comply with the TCCs of this Lease,
(iii) recognize Tenant's rights to otherwise receive certain credits against
Rent as set forth in this Lease, and (iv) recognize Tenant's option to purchase
the Premises pursuant to the TCCs of ARTICLE 30. Subject to Tenant's receipt of
such a Nondisturbance Agreement, Tenant covenants and agrees in the event any
proceedings are brought for the foreclosure of any such mortgage or deed in lieu
thereof (or if any ground lease is terminated), to attorn, without any
deductions or set-offs whatsoever, to the lienholder or purchaser or any
successors thereto upon any such foreclosure sale or deed in lieu thereof (or to
the ground lessor), if so requested to do so by such purchaser or lienholder or
ground lessor, and to recognize such purchaser or lienholder or ground lessor as
the lessor under this Lease, provided such lienholder or purchaser or ground
lessor shall agree to accept this Lease and not disturb Tenant's occupancy, so
long as Tenant timely pays the rent and observes and performs the TCCs of this
Lease to be observed and performed by Tenant. Landlord's interest herein may be
assigned as security at any time to any lienholder. Tenant shall, within fifteen
(15) business days of request by Landlord, execute such further instruments or
assurances as Landlord may reasonably deem necessary to evidence or confirm the
subordination or superiority of this Lease to any such mortgages, trust deeds,
ground leases or underlying leases in accordance with the TCCs of this
ARTICLE 18. Subject to Tenant's receipt of the Nondisturbance Agreement
described herein, Tenant waives the provisions of any current or future statute,
rule or law which may give or purport to give Tenant any right or election to
terminate or otherwise adversely affect this Lease and the obligations of the
Tenant hereunder in the event of any foreclosure proceeding or sale.

                                   ARTICLE 19

                               DEFAULTS; REMEDIES

     19.1   EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute a default of this Lease by Tenant:

          19.1.1    Any failure by Tenant to pay any Rent or any other charge
required to be paid under this Lease, or any part thereof, within five (5)
business days after Tenant's receipt from Landlord of written notice that the
same was not paid when due; or

          19.1.2    Any failure by Tenant to observe or perform any other
provision, covenant or condition of this Lease to be observed or performed by
Tenant where such failure continues for thirty (30) days after written notice
thereof from Landlord to Tenant; provided that if the

                                      -47-


nature of such default is such that the same cannot reasonably be cured within a
thirty (30) day period, Tenant shall not be deemed to be in default if it
diligently commences such cure within such period and thereafter diligently
proceeds to rectify and cure such default; or

          19.1.3    To the extent permitted by law, a general assignment by
Tenant or any guarantor of this Lease for the benefit of creditors, or the
taking of any corporate action in furtherance of bankruptcy or dissolution
whether or not there exists any proceeding under an insolvency or bankruptcy
law, or the filing by or against Tenant or any guarantor of any proceeding under
an insolvency or bankruptcy law, unless in the case of a proceeding filed
against Tenant or any guarantor the same is dismissed within sixty (60) days, or
the appointment of a trustee or receiver to take possession of all or
substantially all of the assets of Tenant or any guarantor, unless possession is
restored to Tenant or such guarantor within thirty (30) days, or any execution
or other judicially authorized seizure of all or substantially all of Tenant's
assets located upon the Premises or of Tenant's interest in this Lease, unless
such seizure is discharged within thirty (30) days; or

          19.1.4    Intentionally omitted; or

          19.1.5    The failure by Tenant to observe or perform according to the
provisions of ARTICLES 5, 14, 17 OR 18 of this Lease where such failure
continues for more than ten (10) business days after notice from Landlord.

     The notice periods provided herein are in lieu of, and not in addition to,
any notice periods provided by law.

     19.2   REMEDIES UPON DEFAULT. Upon the occurrence of any event of default
by Tenant, Landlord shall have, in addition to any other remedies available to
Landlord at law or in equity (all of which remedies shall be distinct, separate
and cumulative), the option to pursue any one or more of the following remedies,
each and all of which shall be cumulative and nonexclusive, without any notice
or demand whatsoever.

          19.2.1    Terminate this Lease, in which event Tenant shall
immediately surrender the Premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in rent, enter upon and take possession of the Premises
and expel or remove Tenant and any other person who may be occupying the
Premises or any part thereof, without being liable for prosecution or any claim
or damages therefor; and Landlord may recover from Tenant the following:

                    (a) The worth at the time of any unpaid rent which has been
earned at the time of such termination; plus

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

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

                                      -48-


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

                    (e) 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
applicable law.

     The term "RENT" as used in this SECTION 19.2 shall be deemed to be and to
mean all sums of every nature required to be paid by Tenant pursuant to the TCCs
of this Lease, whether to Landlord or to others. As used in Paragraphs 19.2.1(i)
and (ii), above, the "worth at the time of award" shall be computed by allowing
interest at the rate set forth in ARTICLE 25 of this Lease, but in no case
greater than the maximum amount of such interest permitted by law. As used in
Paragraph 19.2.1(iii) above, the "worth at the time of award" shall be computed
by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%).

          19.2.2    Landlord shall have the remedy described in California Civil
Code Section 1951.4 (lessor may continue lease in effect after lessee's breach
and abandonment and recover rent as it becomes due, if lessee has the right to
sublet or assign, subject only to reasonable limitations). Accordingly, if
Landlord does not elect to terminate this Lease on account of any default by
Tenant, Landlord may, from time to time, without terminating this Lease, enforce
all of its rights and remedies under this Lease, including the right to recover
all rent as it becomes due.

          19.2.3    Landlord shall at all times have the rights and remedies
(which shall be cumulative with each other and cumulative and in addition to
those rights and remedies available under SECTIONS 19.2.1 AND 19.2.2, above, or
any law or other provision of this Lease), without prior demand or notice except
as required by applicable law, to seek any declaratory, injunctive or other
equitable relief, and specifically enforce this Lease, or restrain or enjoin a
violation or breach of any provision hereof.

     19.3   SUBLEASES OF TENANT. Whether or not Landlord elects to terminate
this Lease on account of any default by Tenant, as set forth in this ARTICLE 19,
Landlord shall have the right to terminate any and all subleases, licenses,
concessions or other consensual arrangements for possession entered into by
Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed
to Tenant's interest in such subleases, licenses, concessions or arrangements.
In the event of Landlord's election to succeed to Tenant's interest in any such
subleases, licenses, concessions or arrangements, Tenant shall, as of the date
of notice by Landlord of such election, have no further right to or interest in
the rent or other consideration receivable thereunder.

     19.4   FORM OF PAYMENT AFTER DEFAULT. Following the occurrence of three (3)
financial events of default by Tenant in any twelve (12) consecutive month
period, Landlord shall have the right to require that any or all subsequent
amounts paid by Tenant to Landlord hereunder, whether to cure the default in
question or otherwise, be paid in the form of cash, money order, cashier's or
certified check drawn on an institution acceptable to Landlord, or by other
means approved by Landlord, notwithstanding any prior practice of accepting
payments in any different form.

                                      -49-


     19.5   EFFORTS TO RELET. No re-entry or repossession, repairs, maintenance,
changes, alterations and additions, reletting, appointment of a receiver to
protect Landlord's interests hereunder, or any other action or omission by
Landlord shall be construed as an election by Landlord to terminate this Lease
or Tenant's right to possession, or to accept a surrender of the Premises, nor
shall same operate to release Tenant in whole or in part from any of Tenant's
obligations hereunder, unless express written notice of such intention is sent
by Landlord to Tenant. Tenant hereby irrevocably waives any right otherwise
available under any law to redeem or reinstate this Lease.

     19.6   LANDLORD DEFAULT. Notwithstanding anything to the contrary set forth
in this Lease, Landlord shall be in default in the performance of any obligation
required to be performed by Landlord pursuant to this Lease if Landlord fails to
perform such obligation within thirty (30) days after the receipt of notice from
Tenant specifying in detail Landlord's failure to perform; provided, however, if
the nature of Landlord's obligation is such that more than thirty (30) days are
required for its performance, then Landlord shall not be in default under this
Lease if it shall commence such performance within such thirty (30) day period
and thereafter diligently pursues the same to completion. Upon any such default
by Landlord under this Lease, Tenant may, except as otherwise specifically
provided in this Lease to the contrary, exercise any of its rights provided at
law or in equity. Any award from a court or arbitrator in favor of Tenant
requiring payment by Landlord which is not paid by Landlord within the time
period directed by such award, may be offset by Tenant from Rent next due and
payable under this Lease; provided, however, Tenant may not deduct the amount of
the award against more than fifty percent (50%) of Base Rent next due and owing
(until such time as the entire amount of such judgment is deducted) to the
extent following a foreclosure or a deed-in-lieu of foreclosure.

                                   ARTICLE 20

                           COVENANT OF QUIET ENJOYMENT

     Landlord covenants that Tenant shall, during the Lease Term, peaceably and
quietly have, hold and enjoy the Premises subject to the TCCs, provisions and
agreements hereof without interference by any persons lawfully claiming by or
through Landlord. The foregoing covenant is in lieu of any other covenant
express or implied.

                                   ARTICLE 21

                       SECURITY DEPOSIT; LETTER OF CREDIT

     21.1   SECURITY DEPOSIT. Concurrent with Tenant's execution of this Lease,
Tenant shall deposit with Landlord a security deposit (the "SECURITY DEPOSIT")
in the amount set forth in SECTION 8 of the Summary, as security for the
faithful performance by Tenant of all of its obligations under this Lease. If
Tenant defaults with respect to any provisions of this Lease, including, but not
limited to, the provisions relating to the payment of Rent, the removal of
property and the repair of resultant damage, Landlord may, without notice to
Tenant, but shall not be required to apply all or any part of the Security
Deposit for the payment of any Rent or any other sum in default and Tenant
shall, upon demand therefor, restore the Security Deposit to its original
amount. Any unapplied portion of the Security Deposit shall be returned to
Tenant,

                                      -50-


or, at Landlord's option, to the last assignee of Tenant's interest hereunder,
within sixty (60) days following the expiration of the Lease Term. Tenant shall
not be entitled to any interest on the Security Deposit. Tenant hereby waives
the provisions of Section 1950.7 of the California Civil Code, or any successor
statute.

     21.2   LETTER OF CREDIT.

          21.2.1    DELIVERY OF LETTER OF CREDIT. Unless the conditions of
SECTION 21.2.2.2 below are then being satisfied, Tenant shall deliver to
Landlord, concurrently with the mutual execution of this Lease, an
unconditional, clean, irrevocable letter of credit (the "L-C") in an amount as
set forth in SECTION 21.2.2, below (the "L-C AMOUNT"), which L-C shall be issued
by a money-center bank (a bank which accepts deposits, maintains accounts, has a
local San Diego office which will negotiate a letter of credit, and whose
deposits are insured by the FDIC) reasonably acceptable to Landlord, and which
L-C shall be in the form of EXHIBIT H, attached hereto. Tenant shall pay all
expenses, points and/or fees incurred by Tenant in obtaining the L-C. Landlord
acknowledges that the conditions of SECTION 21.2.2.2 are, as of the date of this
Lease, initially being satisfied and, accordingly, Tenant is not initially
obligated to deliver the L-C concurrently with the mutual execution of this
Lease.

          21.2.2    L-C AMOUNT.

                    21.2.2.1 CALCULATION OF L-C AMOUNT. For purposes of this
Lease, the "L-C Amount" shall be, at any and all times during the Lease Term, an
amount equal to twelve (12) months of the then-current Monthly Installment of
Base Rent.

                    21.2.2.2 CONDITIONAL INCREASE/REDUCTION OF L-C AMOUNT.
Landlord and Tenant hereby acknowledge and agree that the L-C Amount is subject
to increase and reduction throughout the Lease Term at the end of each financial
quarter as set forth in this SECTION 21.2.2.2. The starting L-C Amount shall be
determined pursuant to the calculation set forth in SECTION 21.2.2.1, above, as
of the close of the financial quarter ended December 31, 2001; provided,
however, Tenant shall not be required to initially deliver such L-C to the
extent (A) Tenant has cash and cash equivalents (collectively, "CASH") in
excess, in the aggregate, of Sixty Million Dollars ($60,000,000.00), and (B)
Tenant has Market Capitalization in excess of One Hundred Fifty Million Dollars
($150,000,000.00) (such thresholds to be, collectively, the "REQUIRED
THRESHOLDS"). "MARKET CAPITALIZATION" means the product of (1) the number of
outstanding shares of Tenant on the last day of the applicable financial quarter
(i.e., the most recently completed quarter), and (2) the average closing share
price during the last thirty (30) calendar days of the applicable financial
quarter. Thereafter, (i) to the extent that Tenant continues to maintain the
Required Thresholds for four (4) consecutive financial quarters, the
then-determined L-C Amount shall be reduced by fifty percent (50%), (ii) to the
extent that Tenant continues to maintain the Required Thresholds for eight (8)
consecutive financial quarters, the then-determined L-C Amount shall be reduced
to $0.00, and (iii) to the extent that Tenant is no longer maintaining the
Required Thresholds, the L-C Amount shall be recalculated pursuant to
SECTION 21.2.2.1 based on the Market Capitalization and Cash as of the
completion of such quarter and the L-C shall immediately be reissued in the
"Required L-C Amount". In the event that such recalculated L-C Amount (at any
given time during the Lease Term, the "REQUIRED L-C AMOUNT"), is less than the
then-current L-C Amount, Tenant shall have the right

                                      -51-


to cause the L-C Amount to be reduced to the Required L-C Amount, and Landlord
shall timely execute and deliver such commercially reasonable documents to the
issuer(s) of the L-C as are presented to Landlord by such issuer(s) and as may
be reasonably necessary to effectuate the change to the Required L-C Amount.
Likewise, following the completion of each financial quarter throughout the
Lease Term, in the event that the Required L-C Amount is greater than the
then-current L-C Amount, Tenant shall upon its receipt of written notice from
Landlord (the "REESTABLISHMENT NOTICE"), cause the L-C Amount to be increased to
equal the Required L-C Amount.

                    21.2.2.3 FAILURE TO REINSTATE; LIQUIDATED DAMAGES. IN THE
EVENT THAT TENANT FAILS, WITHIN THIRTY (30) DAYS FOLLOWING TENANT'S RECEIPT OF A
REESTABLISHMENT NOTICE WITH REGARD TO THIS LEASE, THEN TENANT'S MONTHLY
INSTALLMENT OF BASE RENT SHALL BE INCREASED BY ONE HUNDRED TEN (110%) OF ITS
THEN EXISTING LEVEL DURING THE PERIOD COMMENCING ON THE DATE WHICH IS THIRTY
(30) DAYS AFTER SUCH REESTABLISHMENT NOTICE AND ENDING ON THE EARLIER TO OCCUR
OF (I) THE DATE SUCH L-C IS REESTABLISHED PURSUANT TO THE TERMS OF THIS
SECTION 21.2, OR (II) THE DATE WHICH IS NINETY (90) DAYS AFTER THE DATE OF SUCH
REESTABLISHMENT NOTICE. IN THE EVENT THAT TENANT FAILS, DURING SUCH THREE (3)
MONTH PERIOD FOLLOWING THE DATE OF THE REESTABLISHMENT NOTICE, TO CAUSE THE L-C
TO BE REESTABLISHED, THEN TENANT'S MONTHLY INSTALLMENT OF BASE RENT SHALL BE
INCREASED BY ONE HUNDRED TWENTY-FIVE PERCENT (125%) OF ITS THEN EXISTING LEVEL
DURING THE PERIOD COMMENCING ON THE DATE WHICH IS NINETY (90) DAYS AFTER THE
DATE OF SUCH REESTABLISHMENT NOTICE AND ENDING ON THE DATE SUCH L-C IS
RE-ISSUED/REESTABLISHED PURSUANT TO THE TERMS OF THIS SECTION 21.2. THE PARTIES
AGREE THAT IT WOULD BE IMPRACTICABLE AND EXTREMELY DIFFICULT TO ASCERTAIN THE
ACTUAL DAMAGES SUFFERED BY LANDLORD AS A RESULT OF TENANT'S FAILURE TO TIMELY
REESTABLISH THE L-C FOLLOWING THE REESTABLISHMENT NOTICE AS REQUIRED IN THIS
SECTION 21.2, AND THAT UNDER THE CIRCUMSTANCES EXISTING AS OF THE DATE OF THIS
LEASE, THE LIQUIDATED DAMAGES PROVIDED FOR IN THIS SECTION 21.2.3 REPRESENT A
REASONABLE ESTIMATE OF THE DAMAGES WHICH LANDLORD WILL INCUR AS A RESULT OF SUCH
FAILURE, PROVIDED, HOWEVER, THAT THIS PROVISION SHALL NOT WAIVE OR AFFECT
LANDLORD'S RIGHTS AND TENANT'S INDEMNITY OBLIGATIONS UNDER OTHER SECTIONS OF
THIS LEASE (EXCEPT THAT THE PARTIES SPECIFICALLY AGREE THAT THE FOREGOING
PROVISION WAS AGREED TO IN LIEU OF MAKING FAILURE TO RE-ESTABLISH THE L-C A
DEFAULT UNDER THE LEASE). THE PARTIES ACKNOWLEDGE THAT THE PAYMENT OF SUCH
LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY WITHIN THE MEANING
OF CALIFORNIA CIVIL CODE SECTION 3275 OR 3369, BUT IS INTENDED TO CONSTITUTE
LIQUIDATED DAMAGES TO LANDLORD PURSUANT TO CALIFORNIA CIVIL CODE SECTION 1671.
THE PARTIES HAVE SET FORTH THEIR INITIALS BELOW TO INDICATE THEIR AGREEMENT WITH
THE LIQUIDATED DAMAGES PROVISION CONTAINED IN THIS SECTION 21.2.3.

                                      -52-


     /s/   SS     JCH                 /s/   MJD     VBS
     -----------------                -----------------
     LANDLORD'S INITIALS              TENANT'S INITIALS

          21.2.3    APPLICATION OF LETTER OF CREDIT. The L-C shall be held by
Landlord as security for the faithful performance by Tenant of all the TCC's of
this Lease to be kept and performed by Tenant during the Lease Term. The L-C
shall not be mortgaged, assigned or encumbered in any manner whatsoever by
Tenant without the prior written consent of Landlord. If Tenant defaults with
respect to any provisions of this Lease, including, but not limited to, the
provisions relating to the payment of Rent, or if Tenant fails to renew the L-C
at least thirty (30) days before its expiration, Landlord may, but shall not be
required to, draw upon all or any portion of the L-C for payment of any Rent or
any other sum in default, or for the payment of any amount that Landlord may
reasonably spend or may become obligated to spend by reason of Tenant's default,
or to compensate Landlord for any other loss or damage that Landlord may suffer
by reason of Tenant's default. The use, application or retention of the L-C, or
any portion thereof, by Landlord shall not prevent Landlord from exercising any
other right or remedy provided by this Lease or by law, it being intended that
Landlord shall not first be required to proceed against the L-C and shall not
operate as a limitation on any recovery to which Landlord may otherwise be
entitled. Any amount of the L-C which is drawn upon by Landlord, but is not used
or applied by Landlord, shall be held by Landlord and deemed a security deposit
(the "L-C SECURITY DEPOSIT"). If any portion of the L-C is drawn upon, Tenant
shall, within ten (10) days after written demand therefor, either (i) deposit
cash with Landlord (which cash shall be applied by Landlord to the L-C Security
Deposit) in an amount sufficient to cause the sum of the L-C Security Deposit
and the amount of the remaining L-C to be equivalent to the amount of the L-C
then required under this Lease or (ii) reinstate the L-C to the amount then
required under this Lease, and if any portion of the L-C Security Deposit is
used or applied, Tenant shall, within ten (10) days after written demand
therefor, deposit cash with Landlord (which cash shall be applied by Landlord to
the L-C Security Deposit) in an amount sufficient to restore the L-C Security
Deposit to the amount then required under this Lease, and Tenant's failure to do
so shall be a default under this Lease; provided, however, that upon Tenant's
satisfaction of its economic obligations and restoration of the L-C Security
Deposit pursuant to this sentence, any unused portion of the drawn upon funds
shall be returned to Tenant. Tenant acknowledges that Landlord has the right to
transfer or mortgage its interest in the Real Property and the Center and in
this Lease and Tenant agrees that in the event of any such transfer or mortgage,
Landlord shall have the right to transfer or assign the L-C Security Deposit
and/or the L-C to the transferee or mortgagee, and in the event of such
transfer, Tenant shall look solely to such transferee or mortgagee for the
return of the L-C Security Deposit and/or the L-C. Landlord shall pay all costs
associated with the transfer or re-issuance of the L-C due to Landlord's
transfer or assignment. Tenant shall, within five (5) days of request by
Landlord, execute such further instruments or assurances as Landlord may
reasonably deem necessary to evidence or confirm Landlord's transfer or
assignment of the L-C Security Deposit and/or the L-C to such transferee or
mortgagee. If Tenant is not then in default under this Lease, the L-C Security
Deposit and/or the L-C, or any balance thereof, shall be returned to Tenant
within thirty (30) days following the expiration of the Lease Term.

                                      -53-


                                   ARTICLE 22

                          TELECOMMUNICATIONS EQUIPMENT

     At any time during the Lease Term, subject to the TCCs of this ARTICLE 22
and ARTICLE 8 of this Lease, Tenant may install, at Tenant's sole cost and
expense, but without the payment of any Rent or a license or similar fee or
charge, one or more satellite dishes and/or microwave dishes or other
communications, HVAC or other equipment servicing the business conducted by
Tenant from within the Premises (all such equipment, including
non-telecommunication equipment is, for the sake of convenience, defined
collectively as the "TELECOMMUNICATIONS EQUIPMENT") upon the roof of the
Building. The physical appearance and the size of the Telecommunications
Equipment shall be subject to Landlord's reasonable approval, the location of
any such installation of the Telecommunications Equipment shall be designated by
Tenant subject to Landlord's reasonable approval and Landlord may require Tenant
to install screening around such Telecommunications Equipment, at Tenant's sole
cost and expense, as reasonably designated by Landlord. Tenant shall maintain
such Telecommunications Equipment, at Tenant's sole cost and expense. In the
event Tenant elects to exercise its right to install the Telecommunication
Equipment, then Tenant shall give Landlord prior notice thereof. Tenant shall
reimburse to Landlord the Actual Costs as defined in SECTION 6.2 reasonably
incurred by Landlord in approving such Telecommunications Equipment, provided,
however, such reimbursement shall not exceed Five Hundred and No/100 Dollars
($500.00) per approval. Tenant shall remove such Telecommunications Equipment
upon the expiration or earlier termination of this Lease and shall return the
affected portion of the rooftop and the Building to the condition the rooftop
and the Building would have been in had no such Telecommunications Equipment
been installed (reasonable wear and tear accepted). Such Telecommunications
Equipment shall be installed pursuant to plans and specifications approved by
Landlord, which approval will not be unreasonably withheld, conditioned, or
delayed. Such Telecommunications Equipment shall, in all instances, comply with
applicable governmental laws, codes, rules and regulations. Tenant's rooftop
rights with regard to the Telecommunications Equipment shall be exclusive and
complete; provided, however, such exclusive and complete use of the rooftop
shall be personal to the Original Tenant, its Affiliates and/or any Permitted
Transferee.

                                   ARTICLE 23

                                      SIGNS

     23.1   INTERNAL TO PREMISES. Tenant, at its sole cost and expense, may
install identification signage anywhere in the Premises including in the
elevator lobby and corridors of the Premises.

     23.2   INTENTIONALLY OMITTED.

     23.3   PROHIBITED SIGNAGE AND OTHER ITEMS. Any signs, notices, logos,
pictures, names or advertisements which require Landlord's approval pursuant to
this Lease which are installed and that have not been separately approved by
Landlord may be removed upon notice by Landlord at the sole expense of Tenant.
Tenant may not install any signs on the exterior or roof of the Project or the
Project Common Areas. Any signs (subject to the TCCs of SECTION 23.4 of

                                      -54-


this Lease), window coverings, or blinds (even if the same are located behind
the Landlord-approved window coverings for the Building), or other items visible
from the exterior of the Premises or Building, shall be subject to the prior
approval of Landlord, which shall not be unreasonably withheld, conditioned or
delayed and shall not be denied merely because it affects the appearance of the
Building; provided, however, Landlord may require that a uniform exterior
appearance of the Building be maintained.

     23.4   TENANT'S SIGNAGE. Tenant shall be entitled to install the following
signage in connection with Tenant's lease of the Premises (collectively, the
"TENANT'S SIGNAGE"):

                         (i) One (1) building sign identifying Tenant's name and
                         logo located at the top of the Building; and

                         (ii) Exclusive signage on (x) a monument to be located
                         on the Project at the main entrance point to the
                         Project, and (y) to the extent any requisite
                         permits/approvals from applicable governmental entities
                         is secured by Tenant, a monument to be located adjacent
                         to the entrance of the Building, both locations as set
                         forth on the "Pre-Approved Form of Tenant's Signage"
                         attached hereto as EXHIBIT L (the "PROJECT MONUMENT
                         SIGNS") or other location(s) mutually and reasonably
                         agreed to between the parties; provided, however,
                         Landlord shall not install any other signage on the
                         Project except that Landlord may, subject to Tenant's
                         reasonable approval and at Landlord's sole cost and
                         expense, place a standard "owned and managed" sign at a
                         location on the Project reasonably approved by Tenant.
                         In no event shall such Landlord identification sign be
                         larger or more prominent than any of Tenant's Signage.
                         Landlord may also, subject to Tenant's reasonable
                         approval and at Landlord's sole cost and expense,
                         install a small sign indicating its ownership and
                         management of the Building in the interior of the
                         Building lobby in a location and of a size reasonably
                         approved by Tenant.

          23.4.1    SPECIFICATIONS AND PERMITS. Tenant's Signage shall set forth
Tenant's name and logo (or that of its Affiliates, Permitted Assignee or
applicable subtenant, as the case may be) as determined by Tenant in its sole
discretion; provided, however, in no event shall Tenant's Signage include an
"Objectionable Name," as that term is defined in SECTION 23.4.2, of this Lease;
provided further, however, in no event shall any single sign contain the
names/logos for more than three (3) separate entities. The graphics, materials,
color, design, lettering, lighting, size, illumination, specifications and exact
location of Tenant's Signage (collectively, the "SIGN SPECIFICATIONS") shall be
subject to the prior written approval of Landlord, which approval shall not be
unreasonably withheld, conditioned or delayed, and shall be consistent and
compatible with the quality and nature of the Pacific Corporate Center. Landlord
hereby pre-approves the depiction of Tenant's Project Signage (and the Sign
Specifications contained therein) set forth in EXHIBIT L attached to this Lease.
For purposes of this SECTION 23.4.1, the reference to "name" shall mean name
and/or logo. In addition, Tenant's Signage shall be subject to Tenant's receipt
of all required governmental permits and approvals and shall be subject to all
Applicable Law and to any covenants, conditions and restrictions affecting the
Project. Landlord

                                      -55-


shall use commercially reasonable efforts to assist Tenant in obtaining all
necessary governmental permits and approvals for Tenant's Signage. Tenant hereby
acknowledges that, notwithstanding Landlord's approval of Tenant's Signage,
Landlord has made no representation or warranty to Tenant with respect to the
probability of obtaining all necessary governmental approvals and permits for
Tenant's Signage. In the event Tenant does not receive the necessary
governmental approvals and permits for Tenant's Signage, Tenant's and Landlord's
rights and obligations under the remaining TCCs of this Lease shall be
unaffected.

          23.4.2    OBJECTIONABLE NAME. To the extent Original Tenant, its
Affiliates and/or Permitted Assignee desires to change the name and/or logo set
forth on Tenant's Signage, such name and/or logo shall not have a name which
relates to an entity which is of a character or reputation, or is associated
with a political faction or orientation, which is inconsistent with the quality
of the Project, or which would otherwise reasonably offend a landlord of the
Comparable Buildings (an "OBJECTIONABLE NAME"). The parties hereby agree that
the name "Vical Incorporated," or any reasonable derivation thereof (including
"Vical Incorporated - the Naked DNA Company"), shall not be deemed an
Objectionable Name.

          23.4.3    TERMINATION OF RIGHT TO TENANT'S SIGNAGE. The rights
contained in this SECTION 23.4 shall be personal to the Original Tenant, and may
only be exercised by the Original Tenant, its Affiliates, any Permitted Assignee
and any sublessee approved pursuant to the TCCs of ARTICLE 14 (and not any other
assignee, sublessee or other transferee of the Original Tenant's interest in
this Lease).

          23.4.4    COST AND MAINTENANCE. The costs of the actual signs
comprising Tenant's Signage and the installation, design, construction, and any
and all other costs associated with Tenant's Signage, including, without
limitation, utility charges and hook-up fees, permits, and maintenance and
repairs, shall be the sole responsibility of Tenant; provided, however, the
actual costs of such initial installation, design and construction shall be
subject to reimbursement from the Tenant Improvement Allowance pursuant to
SECTION 2.2.1 of the Tenant Work Letter. Should Tenant's Signage require repairs
and/or maintenance, as determined in Landlord's reasonable judgment, Landlord
shall have the right to provide Notice thereof to Tenant and Tenant shall cause
such repairs and/or maintenance to be performed within thirty (30) days after
receipt of such Notice from Landlord, at Tenant's sole cost and expense;
provided, however, if such repairs and/or maintenance are reasonably expected to
require longer than thirty (30) days to perform, Tenant shall commence such
repairs and/or maintenance within such thirty (30) day period and shall
diligently prosecute such repairs and maintenance to completion. Should Tenant
fail to perform such repairs and/or maintenance within the periods described in
the immediately preceding sentence, Landlord shall, upon the delivery of an
additional ten (10) business days' prior written notice, have the right to cause
such work to be performed and to charge Tenant as Additional Rent for the Actual
Cost of such work. Upon the expiration or earlier termination of this Lease,
Tenant shall, at Tenant's sole cost and expense, cause Tenant's Signage to be
removed and shall cause the areas in which such Tenant's Signage was located to
be restored to the condition existing immediately prior to the placement of such
Tenant's Signage except for ordinary wear and tear. If Tenant fails to timely
remove such Tenant's Signage or to restore the areas in which such Tenant's
Signage was located, as provided in the immediately preceding sentence, then
Landlord may perform such work, and all Actual Costs incurred by Landlord in so
performing shall be reimbursed by Tenant to Landlord within thirty (30) days
after Tenant's

                                      -56-


receipt of an invoice therefor. The TCCs of this SECTION 23.4.4 shall survive
the expiration or earlier termination of this Lease.

                                   ARTICLE 24

                               COMPLIANCE WITH LAW

     Tenant shall not do anything or suffer anything to be done in or about the
Premises or the Project which will in any way conflict with any law, statute,
ordinance, decrees, codes, common law, judgments, orders, rulings, awards or
other governmental or quasi-governmental rule, regulation or requirement now in
force or which may hereafter be enacted or promulgated including any
"Environmental Laws," as that term is set forth in SECTION 29.33 of this Lease
(collectively, "APPLICABLE LAWS"). At its sole cost and expense, Tenant shall
promptly comply with all such Applicable Laws which relate to (i) Tenant's use
of the Premises for non-general office use, (ii) the Alterations or Tenant
Improvements in the Premises, or (iii) the Base and Shell, but, as to the Base
and Shell, only to the extent such obligations are triggered by Tenant's
Alterations, the Tenant Improvements, or use of the Premises for other than
normal and customary implementation of the Permitted Use. Should any standard or
regulation now or hereafter be imposed on Landlord or Tenant by a state, federal
or local governmental body charged with the establishment, regulation and
enforcement of occupational, health or safety standards for employers,
employees, landlords or tenants, then Tenant agrees, at its sole cost and
expense, to comply promptly with such standards or regulations to the extent
such standards or regulations relate to Tenant's particular manner of use of the
Premises for other than general office purposes, the Tenant Improvements located
in the Premises, or any Alterations thereof; provided that Landlord shall comply
with any standards or regulations which relate to the Base and Shell (but
excluding the Tenant Improvements constructed by Tenant pursuant to the Tenant
Work Letter), unless such compliance obligations are triggered by the Tenant
Improvements or the Alterations in the Premises, in which event such compliance
obligations shall be at Tenant's sole cost and expense; provided further, and
notwithstanding the foregoing, that Tenant shall not be required to make any
repair to, modification of, or addition to the Base and Shell (but excluding the
Tenant Improvements constructed by Tenant pursuant to the Tenant Work Letter)
except and to the extent required because of Tenant's use of the Premises for
other than normal and customary implementation of the Permitted Use. The
judgment of any court of competent jurisdiction or the admission by either party
hereto in any judicial action, regardless of whether this other party is a party
thereto, that such party has violated any of said governmental measures, shall
be conclusive of that fact as between Landlord and Tenant. Landlord shall comply
with all Applicable Laws relating to the Project and Base and Shell, provided
that compliance with such Applicable Laws is not the responsibility of Tenant
under this Lease, and provided further that Landlord's failure to comply
therewith would prohibit Tenant from obtaining or maintaining a certificate of
occupancy for the Premises, or would unreasonably and materially affect the
safety of Tenant's Parties or create a significant health hazard for Tenant's
Parties or otherwise materially interfere with or materially affect Tenant's
Permitted Use and enjoyment of the Premises. Landlord shall be permitted to
include in Operating Expenses any costs or expenses incurred by Landlord under
this ARTICLE 24 to the extent consistent with, and amortized to the extent
required by, the TCCs of SECTION 4.2.4 of this Lease.

                                      -57-


                                   ARTICLE 25

                                  LATE CHARGES

     If any installment of Rent or any other sum due from Tenant shall not be
received by Landlord or Landlord's designee within five (5) business days
following written notice that said amount was not paid when due, then Tenant
shall pay to Landlord a late charge equal to three percent (3%) of the overdue
amount. The late charge shall be deemed Additional Rent and the right to require
it shall be in addition to all of Landlord's other rights and remedies hereunder
or at law and shall not be construed as liquidated damages or as limiting
Landlord's remedies in any manner. In addition to the late charge described
above, any Rent or other amounts owing hereunder which are not paid within five
(5) business days following written notice that such amount was not paid when
due shall bear interest from the date when due until paid at an annual interest
rate equal to the Prime Rate (as stated under the column "Money Rates" in THE
WALL STREET JOURNAL) plus two percent (2%); provided, however, in no event shall
such annual interest rate exceed the highest annual interest rate permitted by
applicable law.

                                   ARTICLE 26

              LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT

     26.1   LANDLORD'S CURE. All covenants and agreements to be kept or
performed by Tenant under this Lease shall be performed by Tenant at Tenant's
sole cost and expense and without any reduction of Rent, except to the extent,
if any, otherwise expressly provided herein. If Tenant shall fail to perform any
obligation under this Lease, and such failure shall continue in excess of the
time allowed under SECTION 19.1.2, above, Landlord may, but shall not be
obligated to, make any such payment or perform any such act on Tenant's part
without waiving its rights based upon any default of Tenant and without
releasing Tenant from any obligations hereunder.

     26.2   TENANT'S REIMBURSEMENT. Except as may be specifically provided to
the contrary in this Lease, Tenant shall pay to Landlord, within thirty (30)
days following delivery by Landlord to Tenant of receipts therefor: (i) sums
equal to expenditures reasonably made and obligations incurred by Landlord in
connection with the remedying by Landlord of Tenant's defaults pursuant to the
provisions of SECTION 26.1; and (ii) sums equal to all losses, costs,
liabilities, damages and expenses referred to in ARTICLE 10 of this Lease.
Tenant's obligations under this SECTION 26.2 shall survive the expiration or
sooner termination of the Lease Term.

                                   ARTICLE 27

                                ENTRY BY LANDLORD

     Landlord reserves the right during normal business hours, when accompanied
by a representative of Tenant and upon no less than forty-eight (48) hours prior
notice to Tenant (except in the case of an "Emergency," as that term is defined
hereinbelow), and in compliance with Tenant's reasonable security measures and
any applicable FDA rules and regulations, to enter the Premises to (i) inspect
them; (ii) show the Premises to prospective purchasers, mortgagees or, during
the last nine (9) months of the Lease Term, tenants, or to current or

                                      -58-


prospective mortgagees, ground or underlying lessors or insurers; (iii) post
notices of nonresponsibility; or (iv) improve or repair the Premises or the
Building, or for structural alterations, repairs or improvements to the Building
Structure. Notwithstanding anything to the contrary contained in this
 ARTICLE 27, Landlord may enter the Premises at any time to (A) perform services
expressly required of Landlord pursuant to the TCCs of this Lease; (B) take
possession due to any breach of this Lease in the manner provided herein; and
(C) during normal business hours, when accompanied by a representative of Tenant
and upon forty-eight (48) hours prior notice, perform any covenants of Tenant
which Tenant fails to perform. Landlord may make any such entries without the
abatement of Rent (except as otherwise expressly set forth in this Lease to the
contrary) and may take such reasonable steps as required to accomplish the
stated purposes. Tenant hereby waives any claims for damages or for any injuries
or inconvenience to or interference with Tenant's business, lost profits, any
loss of occupancy or quiet enjoyment of the Premises, and any other loss
occasioned thereby, except with respect to damage to Tenant's personal property
or the amount of any physical injury, but only to the extent caused by the gross
negligence or willful misconduct of Landlord. For each of the above purposes,
Landlord shall at all times have a key with which to unlock all the doors in the
Premises, excluding Tenant's vaults, safes and special security areas designated
in advance by Tenant (the "SECURITY AREAS"). Notwithstanding anything set forth
in this ARTICLE 27 to the contrary, Landlord shall have no access or inspection
rights as to the Security Areas, except in the event of an Emergency where such
entry is reasonably required. In an Emergency, Landlord shall have the right to
use any means that Landlord may deem proper to open the doors in and to the
Premises, provided Landlord has reasonably attempted, but to no avail, to obtain
Tenant's immediate cooperation in connection therewith. Any entry into the
Premises by Landlord in the manner hereinbefore described shall not be deemed to
be a forcible or unlawful entry into, or a detainer of, the Premises, or an
actual or constructive eviction of Tenant from any portion of the Premises. No
provision of this Lease shall be construed as obligating Landlord to perform any
repairs, alterations or decorations except as otherwise expressly agreed to be
performed by Landlord herein. For purposes of this Lease, and "EMERGENCY" shall
mean a situation which entails imminent material danger or damage to persons or
to property.

                                   ARTICLE 28

                                 TENANT PARKING

     Tenant and the Tenant's parties (including Tenant's visitors) shall be
entitled to utilize, without charge, commencing on the date this Lease if fully
executed and delivered between Landlord and Tenant, the amount of parking spaces
set forth in SECTION 9 of the Summary, on a monthly basis throughout the Lease
Term, which parking spaces shall be located in the Project parking areas. Each
parking space shall be for a single, non-tandem space. Included in such
allotment of parking spaces provided in the Summary shall be the number of
handicapped parking spaces required by Applicable Law. The location of Tenant's
parking spaces shall be as set forth on EXHIBIT J, attached hereto. Tenant may
cause all of such parking spaces to be marked "reserved for Vical" or otherwise
denoted to be reserved for its use; provided, however, in connection therewith,
Tenant shall additionally be responsible for posting any governmentally required
notices. In addition, Tenant may establish a sticker or other identification
system; provided, however, the enforcement of Tenant's parking areas only for
such stickered or otherwise identified Tenant visitors/guests shall be
reasonably conducted by Landlord; provided

                                      -59-


further, however, that to the extent Landlord fails to reasonably enforce such
system, Tenant may (following written notice thereof to Landlord) itself take
reasonable actions to enforce such system. Tenant shall cooperate with Landlord
to attempt to require that Tenant Parties comply with the Rules and Regulations
which are prescribed from time to time by Landlord for the orderly operation and
use of the parking areas where the parking spaces are located Tenant's
cooperation in seeing that Tenant's employees and visitors also comply with such
rules and regulations and Tenant not being in default under this Lease. Landlord
specifically reserves the right to change the size, configuration, design,
layout and all other aspects of that portion of the Project Common Areas
relating to parking areas and improvements allocated to the other buildings
within the Pacific Corporate Center, and Tenant acknowledges and agrees that
Landlord may, at any time upon thirty (30) days' prior written notice to Tenant,
without incurring any liability to Tenant and without any abatement of Rent
under this Lease, from time to time, temporarily close-off or restrict access to
the Project parking areas only for purposes of permitting or facilitating any
such construction, alteration or improvements, not to exceed, without Tenant's
reasonable approval, three (3) business days for any single occasion or seven
(7) business days in any calendar year; provided, however, that to the extent it
is practicable for such work to be conducted (and completed) on weekends and/or
national holidays, Landlord shall take commercially reasonable steps to do so.
Landlord may delegate its responsibilities hereunder to a parking operator in
which case such parking operator shall have all the rights of control attributed
hereby to the Landlord. The parking spaces provided to Tenant pursuant to this
ARTICLE 28 are provided to Tenant solely for use by Tenant's own personnel,
visitors and Tenant's occupants and such spaces may not be transferred,
assigned, subleased or otherwise alienated by Tenant, except on a pro-rata basis
in connection with an assignment or subletting of the Premises permitted or
approved in accordance with the TCCs of ARTICLE 14.

                                   ARTICLE 29

                            MISCELLANEOUS PROVISIONS

     29.1   TERMS; CAPTIONS. The words "Landlord" and "Tenant" as used herein
shall include the plural as well as the singular. The necessary grammatical
changes required to make the provisions hereof apply either to corporations or
partnerships or individuals, men or women, as the case may require, shall in all
cases be assumed as though in each case fully expressed. The captions of
Articles and Sections are for convenience only and shall not be deemed to limit,
construe, affect or alter the meaning of such Articles and Sections.

     29.2   BINDING EFFECT. Subject to all other provisions of this Lease, each
of the TCCs and provisions of this Lease shall extend to and shall, as the case
may require, bind or inure to the benefit not only of Landlord and of Tenant,
but also of their respective heirs, personal representatives, successors or
assigns, provided this clause shall not permit any assignment by Tenant contrary
to the provisions of ARTICLE 14 of this Lease.

     29.3   NO AIR RIGHTS. Except for Tenant's rights regarding
Telecommunications Equipment set forth in ARTICLE 22, no rights to any view or
to light or air over any property, whether belonging to Landlord or any other
person, are granted to Tenant by this Lease. If at any time any windows of the
Premises are temporarily darkened or the light or view therefrom is obstructed
by reason of any repairs, improvements, maintenance or cleaning in or about the

                                      -60-


Project, the same shall be without liability to Landlord and without any
reduction or diminution of Tenant's obligations under this Lease.

     29.4   REASONABLENESS AND GOOD FAITH. Except for determinations expressly
described as being in the "absolute discretion" of the applicable party, neither
Landlord nor Tenant shall unreasonably withhold or delay any consent, approval
or other determination provided for hereunder, and determinations subject to
absolute discretion shall not be unreasonably delayed. In the event that either
Landlord or Tenant disagrees with any determination made by the other hereunder
(other than a determination in the absolute discretion of the determining party)
and reasonably requests the reasons for such determination, the determining
party shall furnish its reasons in writing and in reasonable detail within ten
(10) business days following such request.

     29.5   TRANSFER OF LANDLORD'S INTEREST. Tenant acknowledges that Landlord
has the right to transfer all or any portion of its interest in the Project or
Building and in this Lease so long as such transfer is not a subterfuge to avoid
Landlord's obligations under this Lease, and Tenant agrees that in the event of
any such transfer, and if the transferee assumes the applicable obligations
Landlord shall automatically be released from all liability (to the extent such
obligations are assumed by the transferee) under this Lease not accrued as of
the date of the transfer and Tenant agrees to look solely to such transferee for
the performance of Landlord's obligations hereunder for events occurring after
the date of transfer upon agreement by such transferee to fully assume and be
liable for all obligations of this Lease to be performed by Landlord which first
accrue or arise after the date of the conveyance (and including the return of
any Security Deposit), and Tenant shall attorn to such transferee. Tenant
further acknowledges that Landlord may assign its interest in this Lease to a
mortgage lender as additional security. Such transfer shall not release Landlord
from its obligations hereunder and that Tenant shall continue to look to
Landlord for the performance of its obligations hereunder. Landlord acknowledges
that to the extent any Landlord obligation or liability under this Lease is
accrued prior to the date of such transfer which is not specifically assumed by
the transferee, the same shall remain an obligation/liability of Landlord.

     29.6   RECORDING. A "Memorandum of Lease," substantially in the form
attached hereto as EXHIBIT M, shall be executed and acknowledged by Landlord and
Tenant concurrently with the execution of this Lease and either Landlord or
Tenant may, at such party's sole cost and expense, record such Memorandum of
Lease.

     29.7   LANDLORD'S TITLE. Landlord's title is and always shall be paramount
to the title of Tenant. Nothing herein contained shall empower Tenant to do any
act which can, shall or may encumber the title of Landlord.

     29.8   RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall be
deemed or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant.

     29.9   APPLICATION OF PAYMENTS. Landlord shall have the right to apply
payments received from Tenant pursuant to this Lease, regardless of Tenant's
designation of such payments, to satisfy any obligations of Tenant hereunder, in
such order and amounts as Landlord, in its sole discretion, may elect.

                                      -61-


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

     29.11  PARTIAL INVALIDITY. If any term, provision or condition contained in
this Lease shall, to any extent, be invalid or unenforceable, the remainder of
this Lease, or the application of such term, provision or condition to persons
or circumstances other than those with respect to which it is invalid or
unenforceable, shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.

     29.12  NO WARRANTY. In executing and delivering this Lease, Tenant has not
relied on any representations (except as specifically set forth in this Lease),
including, but not limited to, any representation as to the amount of any item
comprising Additional Rent or the amount of the Additional Rent in the aggregate
or that Landlord is furnishing the same services to other tenants, at all, on
the same level or on the same basis, or any warranty or any statement of
Landlord which is not set forth herein or in one or more of the exhibits
attached hereto.

     29.13  LANDLORD EXCULPATION. The liability of Landlord or the Landlord
Parties to Tenant for any default by Landlord under this Lease or arising in
connection herewith or with Landlord's operation, management, leasing, repair,
renovation, alteration or any other matter relating to the Project or the
Premises shall be limited solely and exclusively to an amount which is equal to
the net interest of Landlord (following payment of any outstanding liens and/or
mortgages, whether attributable to sales or insurance proceeds or otherwise) in
the Project (including any insurance proceeds which Landlord receives). Neither
Landlord, nor any of the Landlord Parties shall have any personal liability
therefor, and Tenant hereby expressly waives and releases such personal
liability on behalf of itself and all persons claiming by, through or under
Tenant. The limitations of liability contained in this SECTION 29.13 shall inure
to the benefit of Landlord's and the Landlord Parties' present and future
partners, beneficiaries, officers, directors, trustees, shareholders, agents and
employees, and their respective partners, heirs, successors and assigns. Under
no circumstances shall any present or future partner of Landlord (if Landlord is
a partnership), or trustee or beneficiary (if Landlord or any partner of
Landlord is a trust), have any liability for the performance of Landlord's
obligations under this Lease. Notwithstanding any contrary provision herein,
neither Landlord nor the Landlord Parties shall be liable under any
circumstances for injury or damage to, or interference with, Tenant's business,
including but not limited to, loss of profits, loss of rents or other revenues,
loss of business opportunity, loss of goodwill or loss of use, in each case,
however occurring.

     29.14  ENTIRE AGREEMENT. It is understood and acknowledged that there are
no oral agreements between the parties hereto affecting this Lease and this
Lease constitutes the parties' entire agreement with respect to the leasing of
the Premises and supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between the
parties hereto or displayed by Landlord to Tenant with respect to the subject
matter thereof, and none thereof shall be used to interpret or construe this
Lease. None of the TCCs or provisions of this Lease can be modified, deleted or
added to except in writing signed by the parties hereto.

                                      -62-


     29.15  RIGHT TO LEASE. Landlord reserves the absolute right to effect such
other tenancies in the Pacific Corporate Center as Landlord in the exercise of
its sole business judgment shall determine to best promote the interests of the
Pacific Corporate Center. Tenant does not rely on the fact, nor does Landlord
represent, that any specific tenant or type or number of tenants shall, during
the Lease Term, occupy any space in the Pacific Corporate Center.

     29.16  FORCE MAJEURE. Any prevention, delay or stoppage due to (i) strikes,
lockouts, labor disputes, acts of God (including inclement weather), inability
to obtain services, labor, or materials (which objectively preclude Tenant from
obtaining from any reasonable source of union labor or substitute materials at a
reasonable cost necessary for completing the Tenant Improvements), (ii)
governmental actions (which do not specifically relate to the construction of
the Tenant Improvements and which objectively preclude construction of tenant
improvements in the Pacific Corporate Center by any person), or (iii) acts of
war or terrorism, civil commotions, fire or other casualty, and other causes
beyond the reasonable control of the party obligated to perform, except with
respect to the obligations imposed with regard to Rent and other charges to be
paid by Tenant pursuant to this Lease (collectively, a "FORCE MAJEURE"),
notwithstanding anything to the contrary contained in this Lease, shall excuse
the performance of such party for a period equal to any such prevention, delay
or stoppage and, therefore, if this Lease specifies a time period for
performance of an obligation of either party, that time period shall be extended
by the period of any delay in such party's performance caused by a Force
Majeure; provided, however, such extension shall not exceed one hundred twenty
(120) consecutive days.

     29.17  INTENTIONALLY OMITTED.

     29.18  NOTICES. All notices, demands, statements, designations, approvals
or other communications (collectively, "NOTICES") given or required to be given
by either party to the other hereunder or by law shall be in writing, shall be
(A) sent by United States certified or registered mail, postage prepaid, return
receipt requested ("MAIL"), (B) transmitted by telecopy, if such telecopy is
promptly followed by a Notice sent by Mail, (C) delivered by a nationally
recognized overnight courier, or (D) delivered personally. Any Notice shall be
sent, transmitted, or delivered, as the case may be, to Tenant at the
appropriate address set forth in SECTION 10 of the Summary, or to such other
place as Tenant may from time to time designate in a Notice to Landlord, or to
Landlord at the addresses set forth below, or to such other places as Landlord
may from time to time designate in a Notice to Tenant. Any Notice will be deemed
given (i) three (3) days after the date it is posted if sent by Mail, (ii) the
date the telecopy is transmitted, (iii) the date the overnight courier delivery
is made, or (iv) the date personal delivery is received or attempted to be made.
If Tenant is notified of the identity and address of Landlord's mortgagee or
ground or underlying lessor, Tenant shall give to such mortgagee or ground or
underlying lessor written notice of any default by Landlord under the TCCs of
this Lease by registered or certified mail, and such mortgagee or ground or
underlying lessor shall be given a reasonable opportunity to cure such default
prior to Tenant's exercising any remedy available to Tenant. As of the date of
this Lease, any Notices to Landlord must be sent, transmitted, or delivered, as
the case may be, to the following addresses:

                    LANDLORD:

                                      -63-


                                    Kilroy Realty Corporation
                                    2250 East Imperial Highway
                                    Suite 1200
                                    El Segundo, California  90245
                                    Attention:  Legal Department

                                    with copies to:

                                    Kilroy Realty Corporation
                                    3811 Valley Centre Drive, Suite 300
                                    San Diego, California  92130
                                    Attention:  Mr. Roger Simsiman

                                    and

                                    Allen, Matkins, Leck, Gamble & Mallory
                                    1901 Avenue of the Stars, Suite 1800
                                    Los Angeles, California 90067
                                    Attention:  Anton N. Natsis, Esq.

                                    TENANT:

                                    Prior to the Lease Commencement Date:

                                    Vical Incorporated
                                    9373 Towne Centre Drive
                                    San Diego, California  92121
                                    Attention:  Chief Financial Officer
                                    (if via U.S. Mail)

                                    or

                                    Vical Incorporated
                                    4510 Executive Drive, Suite 215
                                    San Diego, California 92121
                                    Attention:  Chief Financial Officer
                                    (if via Federal Express or messenger)

                                    with a copy to:

                                    Vical Incorporated
                                    9373 Towne Centre Drive
                                    San Diego, California  92121
                                    Attention:  General Counsel
                                    (if via U.S. Mail)

                                    or

                                      -64-


                                    Vical Incorporated
                                    4510 Executive Drive, Suite 215
                                    San Diego, California 92121
                                    Attention:  General Counsel
                                    (if via Federal Express or messenger)

                                    and at such time after the Lease
                                    Commencement Date that Tenant notifies
                                    Landlord of such change:

                                    Vical Incorporated
                                    at the Premises to the attention
                                    of Chief Financial Officer

                                    with a copy to:

                                    Vical Incorporated
                                    at the Premises to the attention
                                    of General Counsel

     29.19  JOINT AND SEVERAL. If there is more than one Tenant, the obligations
imposed upon Tenant under this Lease shall be joint and several.

     29.20  AUTHORITY. Each individual executing this Lease on behalf of Tenant
hereby represents and warrants that Tenant is a duly formed and existing entity
qualified to do business in California and that Tenant has full right and
authority to execute and deliver this Lease and that each person signing on
behalf of Tenant is authorized to do so. In such event, Tenant shall, within ten
(10) days after execution of this Lease, deliver to Landlord satisfactory
evidence of such authority and, if a corporation, upon demand by Landlord, also
deliver to Landlord satisfactory evidence of (i) good standing in Tenant's state
of incorporation and (ii) qualification to do business in California.

     29.21  ATTORNEYS' FEES. In the event that either Landlord or Tenant should
bring suit for the possession of the Premises, for the recovery of any sum due
under this Lease, or because of the breach of any provision of this Lease or for
any other relief against the other, then all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other party shall
be deemed to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to judgment.

     29.22  GOVERNING LAW. This Lease shall be construed and enforced in
accordance with the laws of the State of California. Except as otherwise
provided herein, all disputes arising hereunder, and all legal actions and
proceedings related thereto, shall be solely and exclusively initiated and
maintained in the court with the appropriate jurisdiction located in the City of
San Diego, County of San Diego, State of California. IN ANY ACTION OR PROCEEDING
ARISING HEREFROM, LANDLORD AND TENANT HEREBY CONSENT TO (I) THE JURISDICTION OF
ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA,

                                      -65-


AND (II) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW. IN THE
EVENT LANDLORD COMMENCES ANY SUMMARY PROCEEDINGS OR ACTION FOR NONPAYMENT OF
BASE RENT OR ADDITIONAL RENT, TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OF ANY
NATURE OR DESCRIPTION (UNLESS SUCH COUNTERCLAIM SHALL BE MANDATORY) IN ANY SUCH
PROCEEDING OR ACTION, BUT SHALL BE RELEGATED TO AN INDEPENDENT ACTION AT LAW.

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

     29.24  BROKERS. Landlord and Tenant hereby warrant to each other that they
have had no dealings with any real estate broker or agent in connection with the
negotiation of this Lease, excepting only CB Richard Ellis (as specified in
SECTION 12 of the Summary, the "BROKER"), and that they know of no other real
estate broker or agent who is entitled to a commission in connection with this
Lease. Each party agrees to indemnify and defend the other party against and
hold the other party harmless from any and all claims, demands, losses,
liabilities, lawsuits, judgments, costs and expenses (including without
limitation reasonable attorneys' fees) with respect to any leasing commission or
equivalent compensation alleged to be owing on account of any dealings with any
real estate broker or agent, other than the Broker, occurring by, through, or
under the indemnifying party. Landlord and Tenant each acknowledge that the
Broker is representing both Landlord and Tenant with regard to this Lease.

     29.25  INDEPENDENT COVENANTS. This Lease shall be construed as though the
covenants herein between Landlord and Tenant are independent and not dependent
and Tenant hereby expressly waives the benefit of any statute to the contrary
and agrees that if Landlord fails to perform its obligations set forth herein,
Tenant shall not be entitled to make any repairs or perform any acts hereunder
at Landlord's expense or to any setoff of the Rent or other amounts owing
hereunder against Landlord.

     29.26  PROJECT OR BUILDING NAME AND SIGNAGE. Landlord shall have the right
at any time to change the name of the Pacific Corporate Center and to install,
affix and maintain any and all signs on the exterior and on the interior of any
other building in Pacific Corporate Center other than the Building as Landlord
may, in Landlord's sole discretion, desire. Landlord shall not have the right to
change the name of the Project or to install or affix any signs on the exterior
or on the interior of the Building except as otherwise expressly set forth in
ARTICLE 23 of this Lease. Tenant shall not use the name of the Project or
Building or use pictures or illustrations of the Project or Building in
advertising or other publicity or for any purpose other than as the address of
the business to be conducted by Tenant in the Premises, without the prior
written consent of Landlord. Notwithstanding the foregoing, Tenant may use a
picture of the Building showing its name thereon in its advertising and
promotional materials.

     29.27  COUNTERPARTS. This Lease may be executed in counterparts with the
same effect as if both parties hereto had executed the same document. Both
counterparts shall be construed together and shall constitute a single lease.

                                      -66-


     29.28  CONFIDENTIALITY. Landlord and Tenant each hereby acknowledge that
the contents of this Lease and any related documents are confidential
information. Each of the parties shall keep such confidential information
strictly confidential and shall not disclose such confidential information to
any person or entity other than Landlord's or Tenant's partners, administrators,
consultants, financial, legal, and space planning consultants, a prospective or
current purchaser, mortgagee, or ground or underlying lessor of the Building or
the Project, a prospective Transferee, and except as required by Applicable Law
or in connection with a dispute or litigation hereunder or as required by
subpoena. Tenant shall have the right to review and approve (with no less than
seventy-two (72) hour advance notice) any press releases of Landlord which
reference Tenant by name (or makes reference in such a manner to preclude any
entity other than Tenant).

     29.29  TRANSPORTATION MANAGEMENT. Tenant shall fully comply with all
present or future mandatory programs required by applicable law (provided
Landlord provides Tenant with sufficient prior notice of such program's
requirements) which are intended to manage parking, transportation or traffic in
and around the Building, and in connection therewith, Tenant shall take
responsible action for the transportation planning and management of all
employees located at the Premises by working directly with Landlord, any
governmental transportation management organization or any other
transportation-related committees or entities.

     29.30  EMERGENCY GENERATOR. Subject to Landlord's approval, which shall not
be unreasonably withheld or delayed, and subject to the TCCs of this
SECTION 29.30 and ARTICLE 8 of this Lease, Tenant may install, for Tenant's own
use and at Tenant's sole cost and expense, but without the payment of any Rent
or a license or similar fee or charge, an emergency generator, cooling towers,
storage enclosures and related enclosures and equipment (all such equipment
defined collectively as the "EMERGENCY GENERATOR") in, on or adjacent to the
Building (such location to be reasonably determined in conjunction with Landlord
and Landlord's reasonable requirements). The location, physical appearance and
the size of the Emergency Generator shall be subject to Landlord's reasonable
approval, and Landlord may require Tenant to install screening around such
Emergency Generator, at Tenant's sole cost and expense, as reasonably designated
by Landlord; provided, however, Landlord hereby pre-approves the embankment area
for the installation of such Emergency Generator as identified on EXHIBIT A-3;
provided further, however, that to the extent such Emergency Generator is
located on Project parking areas, the number of spaces so used shall
commensurately reduce Landlord's obligation to provide a particular number of
spaces as otherwise set forth in ARTICLE 28 of this Lease. Tenant shall maintain
such Emergency Generator, at Tenant's sole cost and expense. In the event Tenant
elects to exercise its right to install the Emergency Generator, then Tenant
shall give Landlord no less than forty-five (45) days prior written notice
thereof. Tenant shall reimburse to Landlord the actual costs reasonably incurred
by Landlord in approving such Emergency Generator. Tenant shall remove such
Emergency Generator upon the expiration or earlier termination of this Lease and
shall repair any damage to the Building caused by such removal and return the
affected portion of the Premises to a building standard tenant improved
condition as determined by Landlord. Such Emergency Generator shall be installed
pursuant to plans and specifications approved by Landlord, which approval will
not be unreasonably withheld. Such Emergency Generator shall, in all instances,
comply with applicable governmental laws, codes, rules and regulations.

                                      -67-


     29.31  NO VIOLATION. Landlord and Tenant hereby warrant and represent that
neither its execution of nor performance under this Lease shall cause either
party to be in violation of any agreement, instrument, contract, law, rule or
regulation by which it is bound, and each party shall protect, defend, indemnify
and hold the other harmless against any claims, demands, losses, damages,
liabilities, costs and expenses, including, without limitation, reasonable
attorneys' fees and costs, arising from Tenant's breach of this warranty and
representation.

     29.32  COMMUNICATIONS AND COMPUTER LINES. Tenant may install, maintain,
replace, remove or use any communications or computer wires and cables
(collectively, the "LINES") at the Project in or serving the Premises, provided
that (i) Tenant shall use an experienced and qualified contractor and comply
with all of the other provisions of ARTICLES 7 AND 8 of this Lease, (ii) any new
or existing Lines servicing the Premises shall comply with all applicable
governmental laws and regulations, and (iii) Tenant shall pay all costs in
connection therewith. Landlord reserves the right to require that Tenant remove
any Lines located in or serving the Premises which are installed in violation of
these provisions, or which are at any time in violation of any laws or represent
a dangerous or potentially dangerous condition. Landlord acknowledges that
Tenant may, without any charge therefore, exclusively use any existing conduit
running from the street directly to the Building.

     29.33  HAZARDOUS SUBSTANCES.

            29.33.1   DEFINITIONS. For purposes of this Lease, the following
definitions shall apply: "HAZARDOUS MATERIAL(S)" shall mean any substance or
material that is described as a toxic or hazardous substance, waste, material,
pollutant, contaminant or infectious waste, or any matter that in certain
specified quantities would be injurious to the public health or welfare, or
words of similar import, in any of the "Environmental Laws," as that term is
defined below in this SECTION 29.33.1, or any other words which are intended to
define, list or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, toxicity or reproductive
toxicity and includes, without limitation, asbestos, petroleum (including crude
oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural
gas, or synthetic gas usable for fuel, or any mixture thereof), petroleum
products, polychlorinated biphenyls, urea formaldehyde, radon gas, radioactive
matter, medical waste, and chemicals which may cause cancer or reproductive
toxicity. "ENVIRONMENTAL LAWS" shall mean all federal, state, local and
quasi-governmental laws (whether under common law, statute or otherwise),
ordinances, decrees, codes, rulings, awards, rules, regulations and guidance
documents now or hereafter be enacted or promulgated as amended from time to
time, in any way relating to or regulating Hazardous Materials.

            29.33.2   COMPLIANCE WITH ENVIRONMENTAL LAWS. Landlord covenants
that during the Lease Term, Landlord shall comply with all Environmental Laws in
accordance with, and as required by, the TCCs of ARTICLE 24 of this Lease.

            29.33.3   INDEMNIFICATIONS. Landlord agrees to indemnify, defend,
protect and hold harmless the Tenant Parties from any and all Claims arising
from any Hazardous Materials to the extent placed in, on, under or about the
Project by Landlord or a Landlord Party. Tenant agrees to indemnify, defend,
protect and hold harmless the Landlord Parties from any and all

                                      -68-


Claims arising from any Hazardous Materials to the extent placed in, on, under
or about the Premises or the Project by Tenant or Tenant Parties.

     29.34  DEVELOPMENT OF THE PACIFIC CORPORATE CENTER.

           29.34.1    SUBDIVISION. Following the lot-line adjustment identified
in SECTION 1.1.2 of this Lease, Landlord reserves the right to further subdivide
all or a portion of the Pacific Corporate Center (other than the Project).

           29.34.2    THE OTHER IMPROVEMENTS. If portions of the Pacific
Corporate Center or property adjacent to the Pacific Corporate Center
(collectively, the "OTHER IMPROVEMENTS") are owned by an entity other than
Landlord, Landlord, at its option, may enter into an agreement with the owner or
owners of any or all of the Other Improvements to provide (i) for reciprocal
rights of access and/or use of the Project and the Other Improvements, (ii) for
the common management, operation, maintenance, improvement and/or repair of all
or any portion of the Project and the Other Improvements, and (iii) for the use
or improvement of the Other Improvements and/or the Project in connection with
the improvement, construction, and/or excavation of the Other Improvements
and/or the Project. Subject to ARTICLE 30 of this Lease, nothing contained
herein shall be deemed or construed to limit or otherwise affect Landlord's
right to convey all or any portion of the Project or any other of Landlord's
rights described in this Lease, provided such conveyance by Landlord does not
adversely impact Tenant's use or occupancy of the Premises or the Project.

     29.35  INDEMNIFICATION BY LANDLORD. Landlord shall defend, indemnify and
hold Tenant and its partners, subpartners and their respective officers, agents,
servants, employees, and independent contractors (collectively, the "TENANT
PARTIES") harmless from and against any and all costs (including reasonable
attorneys' fees and costs) and claims of liability for of loss from personal
injury to the extent such claims result from the use of the Project by Landlord
and Landlord's Parties, provided that the provisions of this SECTION 29.35 shall
not apply to any claim to the extent arising from or in connection with any
negligent or intentional conduct of Tenant or a Tenant Party.

     29.36  NO DISCRIMINATION. Tenant covenants by and for itself, its heirs,
executors, administrators and assigns, and all persons claiming under or through
Tenant, and this Lease is made and accepted upon and subject to the following
conditions: that there shall be no discrimination against or segregation of any
person or group of persons, on account of race, color, creed, sex, religion,
marital status, ancestry or national origin in the leasing, subleasing,
transferring, use, or enjoyment of the Premises, nor shall Tenant itself, or any
person claiming under or through Tenant, establish or permit such practice or
practices of discrimination or segregation with reference to the selection,
location, number, use or occupancy, of tenants, lessees, sublessees, subtenants
or vendees in the Premises.

                                      -69-


                                   ARTICLE 30

                           OPTION TO PURCHASE PREMISES

     30.1   PURCHASE OPTION. Subject to the TCCs of SECTION 30.5 below, the
Original Tenant, its Affiliates and any Permitted Assignee shall have a one-time
right to purchase the Premises (the "PURCHASE OPTION"), upon the terms and
conditions set forth in this ARTICLE 30.

     30.2   PROCEDURE FOR EXERCISE. If Tenant wishes to exercise Tenant's
Purchase Option, Tenant shall deliver notice (the "EXERCISE NOTICE") to Landlord
of Tenant's irrevocable election to exercise the Purchase Option no sooner than
the first day of the ninth (9th) Lease Year and not later than the last day of
the ninth (9th) Lease Year (the "OPTION EXERCISE PERIOD"). In order for the
Exercise Notice to be effective hereunder, concurrently with the delivery of the
"Purchase Contract" to "Escrow Holder" (as those terms are set forth below) as
more particularly set forth below, Tenant shall deliver to "Escrow Holder" a
cashier's check or wire transfer of immediately available funds in an amount
equal to $250,000.00 (the "INITIAL NON-REFUNDABLE DEPOSIT"), which amount shall
be held by Escrow Holder, released to Landlord, and otherwise applied against
the "Purchase Price," all in accordance with the TCCs of the Purchase Contract.
Within fifteen (15) business days following the date of Landlord's receipt of
the Exercise Notice in accordance with the terms of this SECTION 30.2, (i)
Landlord and Tenant shall mutually and reasonably agree upon an escrow holder to
be utilized in connection with the sale of the Premises to Tenant (the "ESCROW
HOLDER"), and (ii) Landlord and Tenant shall execute and deliver to Escrow
Holder a purchase and sale contract in the form attached hereto as EXHIBIT I
(the "PURCHASE CONTRACT"). The date upon which the Escrow Holder has received
both parties executed counterparts of the Purchase Contract and the Initial
Non-Refundable Deposit from Tenant shall be known as the "OPENING OF ESCROW". On
or before the date which is ninety (90) days following the date of Landlord's
receipt of the Exercise Notice, Tenant shall deliver to Landlord, as more
particularly set forth in the Purchase Contract, a cashier's check or wire
transfer of immediately available funds in an amount equal to $100,000.00 (the
"ADDITIONAL NON-REFUNDABLE DEPOSIT"), which amount shall be applied against the
Purchase Price. The Initial Non-Refundable Deposit (including any interest
earned during the time the same was held by Escrow Holder prior to its release
to Landlord) and the Additional Non-Refundable Deposit shall be, collectively,
the "NON-REFUNDABLE DEPOSIT." The Purchase Contract shall not be subject to
negotiation or modification, except as specifically set forth herein and except
to fill in blanks and/or to comply with applicable laws; provided, however, that
to the extent suitable cross-easement and access agreements (with pro-rata cost
splitting provisions) have not been recorded against the Property and the
remainder of the Pacific Corporate Center in conjunction with the lot-line
adjustment pursuant to the TCCs of SECTION 1.1.2 of this Lease, such Purchase
Contract shall be modified such that the same shall become conditions precedent
to the Close of Escrow. Notwithstanding anything to the contrary contained
herein, Tenant must elect to exercise its Purchase Option, if at all, with
respect to all of the Premises, and Tenant may not elect to purchase only a
portion thereof.

     30.3   PURCHASE PRICE. The purchase price of the Property shall be
determined pursuant to the provisions of SECTIONS 2.2 AND 2.3 of the Purchase
Contract.

                                      -70-


     30.4   CLOSING DATE. The "CLOSING DATE" shall occur on the date which is
one hundred eighty (180) days following the date of Landlord's receipt of the
Exercise Notice in accordance with the terms of SECTION 30.2, above, provided
that upon notice to Tenant and Escrow Holder at least ninety (90) days prior to
the originally scheduled Closing Date, Landlord shall have the one-time right to
extend the Closing Date to a date occurring on or before the last day of the
tenth (10th) Lease Year (the "OUTSIDE CLOSING DATE"). If the Closing Date, as
determined pursuant to this ARTICLE 30, is not a business day, the Closing Date
shall be the first business day following the date the Closing Date would have
occurred had the same occurred in accordance with the terms hereof. Upon the
"Close of Escrow," as that term is defined in the Purchase Contract, this Lease
shall automatically terminate and be of no further force or effect, except with
respect to the provisions hereof which survive the expiration or earlier
termination of this Lease, including, without limitation, the payment by Tenant
of all amounts due Landlord under this Lease through and including the Close of
Escrow.

     30.5   TERMINATION OF PURCHASE OPTION. The rights contained in this
ARTICLE 30 shall be personal to the Original Tenant, and may only be exercised
by the Original Tenant, its Affiliates and any Permitted Assignee (and not any
other assignee, sublessee or other transferee of the Original Tenant's interest
in this Lease). The Purchase Option granted herein shall terminate upon the
failure by Tenant to satisfy EITHER of the following: (i) timely deliver the
Exercise Notice and the Initial Non-Refundable Deposit, or (ii) timely deliver
the Additional Non-Refundable Deposit. Tenant shall not have the right to
purchase the Property, as provided in this ARTICLE 30, if, as of either of (A)
the date of the attempted exercise of the Purchase Option by Tenant, or (B) the
Closing Date, Tenant is in default under this Lease (beyond any applicable
notice and cure periods).

     30.6   LIQUIDATED DAMAGES - NON-REFUNDABLE DEPOSIT. IF, FOLLOWING TENANT'S
DELIVERY OF TENANT'S EXERCISE NOTICE TO LANDLORD, THE SALE OF THE PREMISES TO
TENANT IS NOT CONSUMMATED DUE TO A "LANDLORD DEFAULT" AS THAT TERM IS SET FORTH
IN THE PURCHASE CONTRACT, OR DUE TO TENANT'S EXERCISE OF AN EXPRESS TERMINATION
RIGHT CONTAINED IN SUCH PURCHASE CONTRACT, THE NON-REFUNDABLE DEPOSIT SHALL BE
REFUNDED AND DELIVERED TO TENANT WITHIN THREE (3) BUSINESS FOLLOWING RECEIPT BY
LANDLORD AND ESCROW HOLDER OF TENANT'S WRITTEN DEMAND THEREFORE. NOTWITHSTANDING
ANYTHING TO THE CONTRARY CONTAINED IN THIS ARTICLE 30, THIS LEASE OR THE
PURCHASE CONTRACT, IF, FOLLOWING TENANT'S DELIVERY OF TENANT'S EXERCISE NOTICE
TO LANDLORD AND THE EXPIRATION OF THE "CONTINGENCY PERIOD," AS THAT TERM IS SET
FORTH IN SECTION 4.1 OF THE PURCHASE CONTRACT, THE SALE OF THE PREMISES TO
TENANT IS NOT CONSUMMATED FOR ANY REASON OTHER THAN LANDLORD'S DEFAULT UNDER THE
PURCHASE CONTRACT OR TENANT'S EXERCISE OF AN EXPRESS TERMINATION RIGHT CONTAINED
IN SUCH PURCHASE CONTRACT, LANDLORD SHALL BE ENTITLED TO RETAIN THE
NON-REFUNDABLE DEPOSIT AS LANDLORD'S LIQUIDATED DAMAGES. THE PARTIES AGREE THAT
IT WOULD BE IMPRACTICABLE AND EXTREMELY DIFFICULT TO ASCERTAIN THE ACTUAL
DAMAGES SUFFERED BY LANDLORD AS A RESULT OF TENANT'S FAILURE TO COMPLETE THE
PURCHASE OF THE PREMISES PURSUANT TO THIS ARTICLE 30 AND THE PURCHASE

                                      -71-


CONTRACT, AND THAT UNDER THE CIRCUMSTANCES EXISTING AS OF THE DATE
OF THIS LEASE, THE LIQUIDATED DAMAGES PROVIDED FOR IN THIS SECTION REPRESENT A
REASONABLE ESTIMATE OF THE DAMAGES WHICH LANDLORD WILL INCUR AS A RESULT OF SUCH
FAILURE; PROVIDED, HOWEVER, THAT THIS PROVISION SHALL NOT LIMIT LANDLORD'S
RIGHTS TO RECEIVE REIMBURSEMENT FOR ATTORNEYS' FEES. THE PARTIES ACKNOWLEDGE
THAT THE PAYMENT OF SUCH LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR
PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTION 3275 OR 3369, BUT IS
INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO CALIFORNIA CIVIL
CODE SECTIONS 1671, 1676, AND 1677. THE PARTIES HAVE SET FORTH THEIR INITIALS
BELOW TO INDICATE THEIR AGREEMENT WITH THE LIQUIDATED DAMAGES PROVISION
CONTAINED IN THIS SECTION 30.6.

     /s/   SS     JCH                 /s/   MJD     VBS
     -----------------                -----------------
     LANDLORD'S INITIALS              TENANT'S INITIALS

     30.7   NO BROKERS OR COMMISSIONS. Each party represents to the other that
there are no brokers which are owed any real estate brokerage commission or
finder's fee in connection with the Purchase Option. Landlord and Tenant each
agree to indemnify and hold the other harmless from and against all liability,
claims, demands, damages, or costs of any kind arising from or connected with
any broker's or finder's fee or commission or charge claimed to be due from any
person arising from the indemnifying party's conduct with respect to the
contemplated purchase and sale.

                          [continued on following page]

                                      -72-


     IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
executed the day and date first above written.

                                     "LANDLORD":

                                     KILROY REALTY, L.P.,
                                     a Delaware limited partnership

                                     By:  Kilroy Realty Corporation,
                                          a Maryland corporation,
                                          General Partner

                                          By:  /s/ STEVE SCOTT
                                               ---------------

                                          Its: SENIOR VICE PRESIDENT

                                          By:  /s/ JEFFREY C. HAWKINS
                                               ----------------------

                                          Its: EXECUTIVE VICE PRESIDENT

                                               CHIEF OPERATING OFFICER

                                     "TENANT":

                                     VICAL INCORPORATED,
                                     a Delaware corporation

                                     By:  /s/ MARTHA J. DEMSKI
                                          --------------------

                                     Its: VICE PRESIDENT/CFO

                                     By:  /S/ VIJAY B. SAMANT
                                          -------------------

                                     Its: PRESIDENT AND CEO

                                      -73-


                                    EXHIBIT A

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                    [GRAPHIC DEPICTING OUTLINE OF BUILDING &

                            PACIFIC CORPORATE CENTER]

                                    EXHIBIT A

                                      -1-


                                   EXHIBIT A-1

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                      INITIAL LEGAL DESCRIPTION OF PROJECT
              (INCLUSIVE OF REMAINDER OF PACIFIC CORPORATE CENTER)

PARCELS 2 AND 3 OF PARCEL MAP NO. 15121, IN THE CITY OF SAN DIEGO, COUNTY OF SAN
DIEGO, STATE OF CALIFORNIA, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN
DIEGO COUNTY, JANUARY 29, 1988 AS FILE NO. 88-243556 OF OFFICIAL RECORDS.

                                   EXHIBIT A-1

                                       -1-


                                   EXHIBIT A-2

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                     [GRAPHIC DEPICTING LOT-LINE ADJUSTMENT]

                                   EXHIBIT A-2

                                       -1-



                                   EXHIBIT A-3

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                     [GRAPHIC DEPICTING CURRENT COMMON AREAS
                 (INCLUDING DESIGNATION OF EMBANKMENT AVAILABLE
               TO TENANT FOR CONSTRUCTION OF EMERGENCY GENERATOR)]

                                   EXHIBIT A-3

                                       -1-



                                   EXHIBIT A-4

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                            SUPERIOR RIGHTS HOLDERS'
                           EXISTING POSSESSORY RIGHTS

Nanogen (as to the FO Building located at 10398 Pacific Center Court):

     -    Existing lease term for entire building expires on March 31, 2010.

     -    Nanogen may exercise, on or before June 30, 2009, an option to extend
          the existing lease term until March 31, 2015.

CN Biosciences (as to the FO Building located at 10394 Pacific Center Court):

     -    Existing lease term for entire building expires on August 15, 2008.

     -    CN Biosciences may exercise, on or before February 15, 2008 and
          February 15, 2013, respectively, two (2) options to extend the
          existing lease term until August 15, 2013 and August 15, 2018,
          respectively.

                                   EXHIBIT A-4

                                       -1-


                                    EXHIBIT B

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                               TENANT WORK LETTER

     This Tenant Work Letter shall set forth the terms and conditions relating
to the construction of the tenant improvements in the Premises. This Tenant Work
Letter is essentially organized chronologically and addresses the issues of the
construction of the Premises, in sequence, as such issues will arise during the
actual construction of the Premises. All references in this Tenant Work Letter
to Articles or Sections of "this Lease" shall mean the relevant portion of
ARTICLES 1 THROUGH 30 of the Lease to which this Tenant Work Letter is attached
as EXHIBIT B and of which this Tenant Work Letter forms a part, and all
references in this Tenant Work Letter to Sections of "this Tenant Work Letter"
shall mean the relevant portion of SECTIONS 1 THROUGH 6 of this Tenant Work
Letter.

                                    SECTION 1

                 LANDLORD'S INITIAL CONSTRUCTION IN THE PREMISES

     1.1  BASE AND SHELL. In accordance with the TCCs of this Lease, Landlord
shall, upon the execution and delivery of the Lease, deliver to Tenant the base
and shell of the Premises (collectively, the "BASE AND SHELL"), which has been
constructed by Landlord at Landlord's sole cost and expense and without
deduction (excepting only certain elevator charges identified in SECTION 2.2.1,
below) from the Tenant Improvement Allowance, and which materially consists of
all the items and matters set forth in the "AS-BUILT BASE AND SHELL
IMPROVEMENTS" referenced on SCHEDULE 1 attached to this EXHIBIT B, a copy of
which has been provided to Tenant. Landlord may not materially modify the
As-Built Base and Shell Improvements without Tenant's approval; provided that
Landlord may in all events make changes to the As-Built Base and Shell
Improvements required by applicable laws and codes and to the extent required to
correct defects. Any delays encountered by Tenant in the "Substantial Completion
of the Tenant Improvements," as that term is defined in SECTION 5.3 below, as a
result of material changes in the As-Built Base and Shell Improvements shall be
considered a "Landlord Caused Delay" as described in SECTION 5.1 below; and any
increased costs incurred by Tenant as a result of any such changes shall be paid
by Landlord and shall not be paid or deducted from the Tenant Improvement
Allowance. The Base and Shell shall be in good condition and working order and
shall comply with the Existing CC&Rs, the PID, applicable building codes and
other governmental laws, ordinances and regulations which were enacted prior to
the Lease Commencement Date and applicable to new construction for unoccupied
space to the extent required to obtain a certificate of occupancy (collectively,
the "CODE") and Tenant shall, except as otherwise set forth in this Lease or in
this Tenant Work Letter, accept the Premises and Base and Shell from Landlord in
their then existing, "as-is" condition as of the Commencement Date of this
Lease, subject to the terms of this Tenant Work Letter. Tenant shall have the
right, within thirty (30) days following the Lease Commencement Date, to notify
Landlord of any material defects in the Base and Shell, in which event Landlord
shall promptly repair such items to Tenant's reasonable satisfaction.

                                    EXHIBIT B

                                       -1-


                                   SECTION 2

                               TENANT IMPROVEMENTS

     2.1  TENANT IMPROVEMENT ALLOWANCE. Tenant shall be entitled to a one-time
tenant improvement allowance (the "TENANT IMPROVEMENT ALLOWANCE") in the amount
of $100.00 per rentable square foot of the Premises for the costs relating to
the initial design and construction of Tenant's improvements which are
permanently affixed to the Premises (the "TENANT IMPROVEMENTS"); provided,
however, the Tenant Improvement Allowance shall also include an additional
$5,000.00 relating to Tenant's construction of the trash enclosure which
Landlord has elected not to construct as part of the Base and Shell. Except as
otherwise expressly provided herein, in no event shall Landlord be obligated to
make disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Tenant Improvement Allowance, as the same may be increased by the
"TIA Increase" pursuant to SECTION 2.2.2.1 of this Tenant Work Letter. All
Tenant Improvements for which the Tenant Improvement Allowance has been made
available (except for Tenant's trade fixtures and equipment, which shall remain
Tenant's property) shall be deemed Landlord's property under the TCCs of the
Lease. Landlord acknowledges that the Tenant Improvement Allowance, together
with the TIA Increase, shall be available to Tenant, pursuant to the TCCs of the
Lease and this Tenant Work Letter, during all phases of its initial Tenant
Improvement work in the Premises which may take up to three (3) years to
complete, and to the extent any portion of such Tenant Improvement Allowance
(including any TIA Increase elected pursuant to SECTION 2.2.2 hereinbelow)
remains following completion of all such Tenant Improvements, the same shall be
available to Tenant during the first eight (8) years of the initial Lease Term
for the construction of Alterations pursuant to the TCCs of ARTICLE 8 of the
Lease.

     2.2  DISBURSEMENT OF THE TENANT IMPROVEMENT ALLOWANCE.

          2.2.1     TENANT IMPROVEMENT ALLOWANCE ITEMS. Except as otherwise set
forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be
disbursed by Landlord (each of which disbursements shall be made pursuant to
Landlord's disbursement process) for costs related to the design, permitting,
construction and testing of the Tenant Improvements and for the following items
and costs (collectively, the "TENANT IMPROVEMENT ALLOWANCE ITEMS"), and except
as otherwise specifically and expressly provided for in this Tenant Work Letter,
Landlord shall not deduct any other expenses from the Tenant Improvement
Allowance: (i) payment of the fees of the "Architect" and the "Engineers," as
those terms are defined in SECTION 3.1 of this Tenant Work Letter, and payment
of the actual cost of documents and materials supplied by Landlord and/or
Landlord's consultants in connection with the preparation and review of the
"Construction Drawings," as that term is defined in SECTION 3.1 of this Tenant
Work Letter; (ii) the cost of any changes in the Base and Shell when such
changes are required by the Construction Drawings (except to the extent that any
such changes are necessary to correct a material defect or a code violation with
respect to the Base and Shell, in which case Landlord shall pay such costs);
(iii) the cost of any changes to the Construction Drawings or Tenant
Improvements required by all applicable Code; (iv) the "Landlord Supervision
Fee", as that term is defined in SECTION 4.2.4 of this Tenant Work Letter; (v)
the cost of Tenant's work stations, signage, security and cabling systems, in an
amount not to exceed $10.00 per rentable square feet of the Premises, (vi) the
cost of any meters and switch gear for Tenant's utility

                                   EXHIBIT B

                                      -2-


service, (vii) the cost of the installation of an elevator in the Premises
(which the parties acknowledge has already been installed in the Premises by
Landlord and which the parties agree entitles Landlord to a reimbursement of
such cost in an amount equal to $58,641.00), (viii) the costs associated with
any commercially reasonable testing and/or inspection of the Base and Shell in
connection with the construction of the Tenant Improvements, and (viii) sales
and use taxes.

          2.2.2     INCREASE TENANT IMPROVEMENT ALLOWANCE.

                    2.2.2.1 TIA INCREASE. Tenant may, upon written notice to
Landlord given on or before the completion of the Tenant Improvements, below,
elect to cause the Tenant Improvement Allowance to be increased by an amount
(the "TIA INCREASE") set forth in such notice; provided, however, that the
amount of such TIA Increase shall (i) be an amount equal to the product of (A)
an even number of United States Dollars (as opposed to fractions of United
States Dollars) and (B) the rentable square feet in the Premises, and (ii) in no
event exceed $20.00 per rentable square foot of the Premises. In the event
Tenant elects to increase the amount of the Tenant Improvement Allowance
pursuant to the foregoing sentence, the TIA Increase shall be amortized over the
then-remaining initial Lease Term commencing on the date on which the applicable
portion of the TIA Increase is disbursed to Tenant by Landlord using an
amortization rate of twelve and one-half percent (12 1/2%) per annum, the
monthly payment of which shall be payable by Tenant to Landlord in the same
place and in the same manner as Base Rent for each month of the initial Lease
Term occurring after the applicable disbursement date as Additional Rent.
Accordingly, by way of example only, for each dollar of TIA Increase utilized by
Tenant prior to the Rent Commencement Date, each year's Base Rent payable by
Tenant during the initial Lease Term, as set forth in SECTION 4 of the Summary,
shall be increased by an amount equal to $0.01233 per rentable square foot of
the Premises per month commencing on the Rent Commencement Date.

                    2.2.2.2 STANDARD TENANT IMPROVEMENT PACKAGE. Landlord has
established specifications (the "BUILDING STANDARD TENANT IMPROVEMENTS") for the
Building standard components to be used in the construction of the Tenant
Improvements in the Premises, which Building Standard Tenant Improvements are
set forth on SCHEDULE 2 attached hereto. The quality of Tenant Improvements
shall be equal to or of greater quality than the quality of the Building
Standard Tenant Improvements. Landlord acknowledges that Tenant is not required
to use any of the specific Building Standard Tenant Improvements set forth on
Schedule 2 and that Schedule 2 has been provided only as a means of indicating
the minimum quality and quantity of the items listed thereon that will be
required in the construction of the Tenant Improvements.

                    2.2.2.3 REMOVAL BY TENANT OF EXTRAORDINARY TENANT
IMPROVEMENTS. Landlord may require that Tenant remove any initial Tenant
Improvements in the lab portion of the Premises identified by Landlord
concurrently with Landlord's review and approval of the Approved Construction
Drawings as "Extraordinary Alterations," as that term is defined in SECTION 8.5
of the Lease, and to repair any damage to the Premises and Building caused by
such removal (reasonable wear and tear excepted); provided, however, if
Landlord, in its approval of any Extraordinary Alterations, fails to address the
removal requirement with regard to such Extraordinary Alterations, Landlord
shall be deemed to have agreed to waive the removal requirement with regard to
such Extraordinary Alterations.

                                   EXHIBIT B

                                      -3-


          2.2.3     DISBURSEMENT OF TENANT IMPROVEMENT ALLOWANCE. During the
construction of the Tenant Improvements, Landlord shall make monthly
disbursements of the Tenant Improvement Allowance (and any TIA Increase elected
by Tenant) for Tenant Improvement Allowance Items for the benefit of Tenant and
shall authorize the release of monies for the benefit of Tenant as follows.

                    2.2.3.1 MONTHLY DISBURSEMENTS. Once each month on a day
designated by Landlord (a "SUBMITTAL DATE") during the period from the date
hereof through the construction of the Tenant Improvements, Tenant shall deliver
to Landlord: (i) a request for payment of the "Contractor," as that term is
defined in SECTION 4.1 of this Tenant Work Letter (or reimbursement to Tenant if
Tenant has already paid the Contractor or other person or entity entitled to
payment and provides the evidence of such payment as more particularly
identified below), approved by Tenant, in a form to be provided by Landlord,
showing the schedule, by trade, of percentage of completion of the Tenant
Improvements in the Premises, detailing the portion of the work completed; (ii)
original invoices (unless the Federal Drug Administration or other governmental
agency requires any such original invoice, in which case a true copy of such
invoice shall be allowed) from all of "Tenant's Agents," as that term is defined
in SECTION 4.1.2 of this Tenant Work Letter, for labor rendered and materials
delivered to the Premises for the applicable payment period; (iii) executed
conditional mechanic's lien releases from all of Tenant's Agents which shall
substantially comply with the appropriate provisions of California Civil Code
Section 3262(d), or unconditional releases if appropriate; provided, however,
that with respect to fees and expenses of the Architect, Engineers, or
construction or project managers or other similar consultants, and/or any other
pre-construction items for which the payment scheme set forth in items (i)
through (iii), above of this Tenant Work Letter, is not applicable
(collectively, the "NON-CONSTRUCTION ALLOWANCE ITEMS"), Tenant shall only be
required to deliver to Landlord on or before the applicable Submittal Date,
reasonable evidence of incurring the cost for the applicable Non-Construction
Allowance Items (unless Landlord has received a preliminary notice in connection
with such costs in which event conditional lien releases must be submitted in
connection with such costs); and (iv) all other information reasonably requested
in good faith by Landlord. Tenant's request for payment shall be deemed Tenant's
acceptance and approval of the work furnished and/or the materials supplied as
set forth in Tenant's payment request vis-a-vis Landlord. On or before the date
occurring forty-five (45) days after the Submittal Date, and assuming Landlord
receives all of the information described in items (i) through (iv), above,
Landlord shall deliver a check to Tenant made jointly payable to Contractor and
Tenant or if Tenant elects, to the Contractor, subcontractor, Architect,
Engineer or consultant designated by Tenant and/or a separate check to Tenant to
the extent Tenant has provided evidence reasonably satisfactory to Landlord that
Tenant has paid such Contractor (or other supplier of services or goods)
accompanied, when appropriate, by unconditional lien releases, or any other
provider of good and services designated by Tenant to Landlord, and Tenant, in
payment of the lesser of: (A) the amounts so requested by Tenant, as set forth
in this SECTION 2.2.3.1, above, less a ten percent (10%) retention (the
aggregate amount of such retentions to be known as the "FINAL RETENTION"),
provided, however, that no such retention shall be duplicative of the retention
Tenant would otherwise withhold (but will not withhold) pursuant to its
agreement with such Contractor and no such deduction shall be applicable to
Non-Construction Allowance Items or other Tenant Improvement Allowance Items in
connection with the payment of suppliers for materials delivered to the
Premises, and (B) the balance of any remaining available portion of the Tenant
Improvement Allowance (not including the Final

                                   EXHIBIT B

                                      -4-


Retention). In the event that Landlord or Tenant identifies any material
non-compliance with the Approved Construction Drawings, or substandard work,
Landlord or Tenant as appropriate shall be provided a detailed statement
identifying such material non-compliance or substandard work by the party
claiming the same, and if the work is clearly substandard or if the material
non-compliance creates a "Design Problem," as that term is defined in
SECTION 3.2 of this Tenant Work Letter, Tenant shall cause such work to be
corrected so that such work is no longer substandard and/or that no Design
Problem exists. Landlord's payment of such amounts shall not be deemed
Landlord's approval or acceptance of the work furnished or materials supplied as
set forth in Tenant's payment request. If Tenant receives a check payable to
anyone other than solely to Tenant for a monthly disbursement pursuant to this
SECTION 2.2.3.1 or the Final Retention, Tenant may return such check to Landlord
and receive a check made payable only to Tenant, if Tenant provides the releases
and evidence required above to receive a check payable solely to Tenant.

                    2.2.3.2 FINAL RETENTION. Subject to the provisions of this
Tenant Work Letter, a check for the Final Retention payable jointly to Tenant
and Contractor shall be delivered by Landlord to Tenant following the completion
of each phase of construction of the Premises, provided that (i) Tenant delivers
to Landlord properly executed mechanics lien releases in compliance with both
California Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or
Section 3262(d)(4), (ii) Landlord has reasonably determined that no substandard
work exists which adversely affects the mechanical, electrical, plumbing,
heating, ventilating and air conditioning, life-safety or other systems of the
Building, the curtain wall of the Building, the structure or exterior appearance
of the Building, and (iii) Architect delivers to Landlord a certificate, in a
form reasonably acceptable to Landlord, certifying that the construction of the
applicable phase of the Tenant Improvements in the Premises has been
substantially completed.

          2.2.4 FAILURE TO DISBURSE TENANT IMPROVEMENT ALLOWANCE. If Landlord
fails to timely fulfill its obligation to fund any portion of the Tenant
Improvement Allowance, then Tenant shall provide written notice ("PAYMENT
NOTICE") thereof to Landlord and to any mortgage or trust deed holder of the
Building whose identity and address have been previously provided to Tenant. If
Landlord still fails to fulfill any such obligation within twenty (20) business
days after Landlord's receipt of the Payment Notice from Tenant, and if Landlord
fails to deliver notice to Tenant within such twenty (20) business day period
explaining Landlord's reasons that Landlord believes that the amounts described
in Tenant's Payment Notice are not due and payable by Landlord ("REFUSAL
NOTICE"), Tenant shall be entitled to offset the amount so funded, together with
interest at the rate of ten percent (10%) per annum, from the last day of such
20-business day period until the date of offset, against Tenant's next
obligations to pay Rent. However, if Tenant is in default under SECTION 19.1 of
this Lease at the time that such offset would otherwise be applicable, Tenant
shall not be entitled to such offset until such default is cured. If Landlord
delivers a Refusal Notice, and if Landlord and Tenant are not able to agree on
the amounts to be so paid by Landlord, if any, within ten (10) days after
Tenant's receipt of a Refusal Notice, then Tenant may submit such dispute to the
American Arbitration Association for resolution. If Tenant prevails in any such
arbitration, the arbitration award by the arbitrator shall include interest at
the rate of ten percent (10%) per annum calculated from the date of funding by
Tenant, if any, until the date of Landlord's payment of such arbitration award.
Similarly, if Tenant prevails in any such arbitration, Tenant shall be entitled
to apply such

                                    EXHIBIT B

                                       -5-


arbitration award as a credit against Tenant's obligations to pay Rent, and the
arbitration award shall include interest at the rate of ten percent (10%) per
annum calculated from the date of funding by Tenant, if any, until the date of
Tenant's application of such amounts as a credit against Rent.

                                    SECTION 3

                              CONSTRUCTION DRAWINGS

     3.1  SELECTION OF ARCHITECT/CONSTRUCTION DRAWINGS. Tenant shall retain
Pacific Cornerstone Architects (the "ARCHITECT") to prepare the "Construction
Drawings," as that term is defined in this SECTION 3.1. Tenant shall retain the
engineering consultants designated by Landlord and reasonably approved by Tenant
(the "ENGINEERS") to prepare all plans and engineering working drawings relating
to the structural, mechanical, electrical, plumbing, HVAC, lifesafety, and
sprinkler work of the Tenant Improvements. The plans and drawings to be prepared
by Architect and the Engineers hereunder shall be known collectively as the
"CONSTRUCTION Drawings." All Construction Drawings shall comply with industry
standards, and shall be subject to Landlord's approval. Tenant and Architect
shall verify in the field the dimensions and conditions as shown on the relevant
portions of the As-Built Base and Shell Improvements to the extent such
conditions can be confirmed by visual inspection and measurement without
penetrating walls ("VISUAL INSPECTION") and Tenant and Architect shall be solely
responsible for the same, and Landlord shall have no responsibility in
connection therewith, except for conditions which cannot be determined by Visual
Inspection. Any delays encountered by Tenant in the Substantial Completion of
the Tenant Improvements as a result of discrepancies in the dimensions and
conditions shown on the relevant portions of the As-Built Base and Shell
Improvements which are not subject to Visual Inspection shall be considered a
Landlord Caused Delay as described in SECTION 5.1, below, of this Tenant Work
Letter. Landlord's review of the Construction Drawings as set forth in this
SECTION 3, shall be for its sole purpose and shall not imply Landlord's review
of the same, or obligate Landlord to review the same, for quality, design, Code
compliance or other like matters. Accordingly, notwithstanding that any
Construction Drawings are reviewed by Landlord or its space planner, architect,
engineers and consultants, and notwithstanding any advice or assistance which
may be rendered to Tenant by Landlord or Landlord's space planner, architect,
engineers, and consultants, Landlord shall have no liability whatsoever in
connection therewith, except to the extent that Landlord has specifically
requested a modification to the Construction Drawings as a condition to
Landlord's approval of the Construction Drawings and shall not be responsible
for any omissions or errors contained in the Construction Drawings, and Tenant's
waiver and indemnity set forth in this Lease shall specifically apply to the
Construction Drawings. Landlord acknowledges that Tenant intends to build the
Tenant Improvements in various phases over an extended time period that may be
as long as three (3) years and further acknowledges that certain phases of the
construction shall be done on a "design-build" basis. Accordingly, despite the
use of the terms "Final Space Plan" and "Approved Working Drawings" and "Final
Costs", the parties agree that such terminology is being used for convenience
only and that there will be separate space plans and separate working drawings
(and potentially separate budgets) prepared for each phase of the construction.
Accordingly, the review and approval process set forth below shall apply to each
phase of the construction of the Tenant Improvements. Furthermore, each time
Landlord is granted the right to review, consent or approve any space plan or
construction

                                    EXHIBIT B

                                       -6-


drawings (collectively, "CONSENT"), such Consent shall be granted unless a
Design Problem, as such term is defined below, exists.

     3.2  FINAL SPACE PLAN. The Architect shall prepare, and Tenant shall
approve, the final space plan for each applicable phase of the construction of
the Tenant Improvements in the Premises (collectively, the "FINAL SPACE PLAN"),
which Final Space Plan shall include a layout and designation of all offices,
rooms and other partitioning, their intended use, and equipment to be contained
therein, and Architect shall promptly deliver the Final Space Plan to Landlord
for Landlord's approval. Landlord shall advise Tenant within five (5) business
days after Landlord's receipt of the Final Space Plan for the Premises if the
same is unsatisfactory or incomplete in any respect (based upon a commercially
reasonable standard). Landlord shall set forth with reasonable specificity in
what respect the Final Space Plan is unsatisfactory or incomplete. It shall be
deemed commercially reasonable for Landlord to disapprove a submitted Final
Space Plan for only the following reasons: (i) such Final Space Plan would have
an adverse effect on the structural integrity of the Building; (ii) such Final
Space Plan fails to comply with applicable Code and or other applicable
governmental regulations; (iii) such Final Space Plans would have an adverse
effect on the systems and equipment of the Building; or (iv) such Final Space
Plan would have an adverse effect on the exterior appearance of the Building
(individually or collectively, a "DESIGN PROBLEM"). If Tenant is so advised,
Tenant shall promptly direct the Architect to cause the Final Space Plan to be
revised to correct any deficiencies or other matters Landlord may reasonably
require, and immediately thereafter Architect shall promptly re-submit the Final
Space Plan to Landlord for its approval. Such procedure shall continue until the
Final Space Plan is approved by Landlord. Landlord's failure to object to the
Final Space Plan within such five (5) business days shall constitute Landlord's
approval of the Final Space Plan.

     3.3  COMPLETION OF CONSTRUCTION DRAWINGS. Following Landlord's approval of
the applicable Final Space Plan, Tenant, the Architect and the Engineers shall
complete (except to the extent certain construction is being completed on a
"design-build" basis) the Construction Drawings for the applicable phase of the
Tenant Improvements in a form which is sufficient to allow contractors to bid on
the work and to obtain all applicable permits and shall submit the same to
Landlord for Landlord's approval. The Construction Drawings may be submitted in
one or more stages at one or more times, provided that Tenant shall ultimately
supply Landlord with four (4) completed copies signed by Tenant of such
Construction Drawings. Landlord shall, within five (5) business days after
Landlord's receipt of all of the Construction Drawings, either (i) approve the
Construction Drawings, (ii) approve the Construction Drawings subject to
specified conditions which must be stated in a reasonably clear and complete
manner to be satisfied by Tenant prior to submitting the Approved Construction
Drawings for permits as set forth in SECTION 3.4, below of this Tenant Work
Letter, to the extent the Construction Drawings contain a Design Problem, or
(iii) disapprove and return the Construction Drawings to Tenant with requested
revisions to the extent the Construction Drawings contain a Design Problem. If
Landlord disapproves the Construction Drawings, Tenant may resubmit the
Construction Drawings to Landlord at any time, and Landlord shall approve or
disapprove the resubmitted Construction Drawings, based upon the criteria set
forth in this SECTION 3.3, within three (3) business days after Landlord
receives such resubmitted Construction Drawings. Such procedure shall be
repeated until the Construction Drawings are approved. Landlord's failure to
timely respond to Tenant within any applicable response period referenced herein
shall be deemed Landlord's approval of the Construction Drawings.

                                    EXHIBIT B

                                       -7-


     3.4  APPROVED CONSTRUCTION DRAWINGS. The Construction Drawings shall be
approved by Landlord (the "APPROVED CONSTRUCTION Drawings") prior to the
commencement of construction of the applicable phase of the Tenant Improvements
by Tenant in one or more stages. In the event that Tenant shall submit the
Construction Drawings to Landlord in more than one stage, Landlord shall be
entitled to approve a stage and to subsequently disapprove of such stage,
provided that a Design Problem is found to exist which is evident only following
Landlord's review of subsequent drawings. After approval by Landlord of the
Construction Drawings, Tenant may submit the same to the appropriate municipal
authorities for all applicable building permits. Tenant hereby agrees that
neither Landlord nor Landlord's consultants shall be responsible for obtaining
any building permit or certificate of occupancy for the Premises and that
obtaining the same shall be Tenant's responsibility; provided, however, that
Landlord shall cooperate with Tenant in executing permit applications and
performing other ministerial acts reasonably necessary to enable Tenant to
obtain any such permit or certificate of occupancy; provided that if the reason
for the non-issuance of any building permit or certificate of occupancy (the
"NON-ISSUANCE EVENT") relates to the condition of the Base and Shell not being
in compliance with the As-Built Base and Shell Improvements, then Landlord shall
correct, at Landlord's sole cost and expense, such portion of the Base and Shell
to the extent necessary to be in compliance with the As-Built Base and Shell
Improvements to enable Tenant to obtain any such building permits or certificate
of occupancy, and any delays encountered by Tenant in the Substantial Completion
of the Tenant Improvements as a result thereof shall be considered a Landlord
Caused Delay as described in SECTION 5.1 below of this Tenant Work Letter. No
material changes, modifications or alterations in the Approved Construction
Drawings may be made without the prior written consent of Landlord, which
consent may not be unreasonably withheld, conditioned or delayed except to the
extent necessary to eliminate a Design Problem.

     3.5  CHANGE ORDERS. In the event Tenant desires to materially change the
Approved Construction Drawings, Tenant shall deliver Notice (the "DRAWING CHANGE
NOTICE") of the same to Landlord, setting forth in detail the changes (the
"TENANT CHANGE") Tenant desires to make to the Approved Construction Drawings.
Landlord shall, no later than three (3) business days after receipt of a Drawing
Change Notice related to a Tenant Change affecting the Building Structure, and
no later than two (2) business days after receipt of the Drawing Change Notice
related to a Tenant Change which does not affect the Building Structure, either
(i) approve the Tenant Change, or (ii) disapprove the Tenant Change and deliver
a Notice to Tenant specifying in reasonably sufficient detail the reasons for
Landlord's disapproval; provided, however, that Landlord may only disapprove of
the Tenant Change if the Tenant Change contains a Design Problem. Any additional
costs which arise in connection with such Tenant Change shall be paid by Tenant;
provided, however, that to the extent the Tenant Improvement Allowance has not
been depleted, such payment shall be made out of the Tenant Improvement
Allowance, but in such event there shall be a corresponding adjustment made to
the "Final Costs" and the "Over-Allowance Amount," as those terms are defined in
SECTION 4.2.1 below, in connection with the application of the last sentence of
said SECTION 4.2.1.

                                    SECTION 4

                     CONSTRUCTION OF THE TENANT IMPROVEMENTS

     4.1  CONTRACTOR; TENANT'S AGENTS.

                                    EXHIBIT B

                                       -8-


          4.1.1     CONTRACTOR. David Begent and Company ("CONTRACTOR") shall
construct the Tenant Improvements. Contractor shall competitively bid all major
trades to a minimum of two (2) qualified subcontractors, review the bids with
Landlord's and Tenant's representatives (as identified in SECTIONS 6.2 AND 6.3
of this Tenant Work Letter), and award the appropriate subcontract to the lowest
acceptable bidder.

          4.1.2     TENANT'S AGENTS. All subcontractors, laborers, materialmen,
and suppliers used by Tenant, and the Contractor, shall be known collectively as
"TENANT'S AGENTS."

     4.2  CONSTRUCTION OF TENANT IMPROVEMENTS BY TENANT'S AGENTS.

          4.2.1     CONSTRUCTION CONTRACT; COST BUDGET. Prior to Tenant's
execution of the construction contract and general conditions with Contractor
(the "CONTRACT"), Tenant shall submit the Contract to Landlord for its approval,
which approval shall not be unreasonably withheld or delayed; provided, however,
Landlord hereby acknowledges that a delay of more than three (3) business days
shall be deemed unreasonable. Prior to the commencement of the construction of
the applicable phase of the Tenant Improvements, and after Tenant has accepted
all bids for such phase of the Tenant Improvements, Tenant shall provide
Landlord with a detailed breakdown, by trade, of the final costs to be incurred
or which have been incurred, as set forth more particularly in SECTION 2.2.1,
above, in connection with the design and construction of the Tenant Improvements
to be performed by or at the direction of Tenant or the Contractor, which costs
form a basis for the amount of the Contract (the "FINAL COSTS"). If the amount
of the Final Costs is greater than the amount of the Tenant Improvement
Allowance (after deducting from the Tenant Improvement Allowance any amounts
expended in connection with the preparation of the Construction Drawings, and
the cost of all other Tenant Improvement Allowance Items incurred prior to the
commencement of construction of the Tenant Improvements) (the "OVER-ALLOWANCE
AMOUNT"), then Tenant shall be solely responsible for such Over-Allowance
Amount.

          4.2.2     TENANT'S AGENTS.

                    4.2.2.1 LANDLORD'S GENERAL CONDITIONS FOR TENANT'S AGENTS
AND TENANT IMPROVEMENT WORK. Tenant's and Tenant's Agent's construction of the
Tenant Improvements shall cause the Tenant Improvements to be constructed in
material accordance with the Approved Construction Drawings.

                    4.2.2.2 INDEMNITY. Tenant's indemnity of Landlord as set
forth in this Lease shall also apply with respect to any and all costs, losses,
damages, injuries and liabilities related in any way to any act or omission of
Tenant or Tenant's Agents, or anyone directly or indirectly employed by any of
them, or in connection with Tenant's non-payment of any amount arising out of
the Tenant Improvements and/or Tenant's disapproval of all or any portion of any
request for payment (individually or collectively, "INDEMNIFICATION CLAIM").
Notwithstanding the foregoing, Tenant shall not be required to indemnify
Landlord pursuant to this SECTION 4.2.2.2 to the extent such Indemnification
Claim directly results from the gross negligence or willful misconduct of
Landlord or the Landlord Parties. The waivers of subrogation set forth in this
Lease pertaining to property damage shall be fully applicable to damage to
property arising as a result of any work performed pursuant to the TCCs of this

                                    EXHIBIT B

                                       -9-


Tenant Work Letter and Tenant shall be excused from its indemnification
obligation to the extent Landlord's damage is covered by insurance required to
be carried by Landlord as part of Operating Expenses and as to which the waiver
of subrogation is applicable. Such indemnity by Tenant, as set forth in this
Lease, shall also apply with respect to any and all costs, losses, damages,
injuries and liabilities related in any way to Landlord's performance of any
ministerial acts reasonably necessary (i) to permit Tenant to complete the
Tenant Improvements, and (ii) to enable Tenant to obtain any building permit or
certificate of occupancy for the Premises.

                    4.2.2.3 REQUIREMENTS OF TENANT'S AGENTS. The Contractor and
each of Tenant's Agents shall guarantee to Tenant and for the benefit of
Landlord that the portion of the Tenant Improvements for which it is responsible
shall be free from any defects in workmanship and materials for a period of not
less than one (1) year from the date of completion thereof. The Contractor and
each of Tenant's Agents shall be responsible for the replacement or repair,
without additional charge, of all work done or furnished in accordance with its
contract that shall become defective within one (1) year after the later to
occur of (i) completion of the work performed by such contractor or
subcontractors and (ii) the Lease Commencement Date. The correction of such work
shall include, without additional charge, all additional expenses and damages
incurred in connection with such removal or replacement of all or any part of
the Tenant Improvements, and/or the Building and/or common areas that may be
damaged or disturbed thereby. All such warranties or guarantees as to materials
or workmanship of or with respect to the Tenant Improvements shall be contained
in the Contract or subcontract and shall be written such that such guarantees or
warranties shall inure to the benefit of both Landlord and Tenant, as their
respective interests may appear, and can be directly enforced by either;
provided that Landlord shall only enforce such guaranty or warranty if Tenant
fails to do so in a reasonable time following Notice thereof from Landlord.
Tenant covenants to give to Landlord any assignment or other assurances which
may be necessary to effect such right of direct enforcement.

                    4.2.2.4 INSURANCE REQUIREMENTS.

                              (i) GENERAL COVERAGES. All of Tenant's Agents
shall carry worker's compensation insurance covering all of their respective
employees, and shall also carry public liability insurance, including property
damage, in form and with companies as are required to be carried by Tenant as
set forth in this Lease and with the following minimum limits of liability: (a)
Bodily Injury and Property Damage Liability - $1,000,000 each occurrence and
$2,000,000 annual aggregate, (b) Personal Injury Liability - $1,000,000 each
occurrence and $2,000,000 annual aggregate, and (c) Umbrella coverage of
$3,000,000. Notwithstanding anything to the contrary set forth in this SECTION
4.2.2.4, above, to the extent such levels of insurance are not commercially
reasonable vis-a-vis a particular type of individual/entity constituting one of
Tenant's Agents, such individual/entity may carry such lesser amount of
insurance as is commercially reasonable (in light of their trade and scope of
the particular Tenant Improvements they are constructing).

                              (ii) SPECIAL COVERAGES. Tenant shall require
Contractor to carry "Builder's All Risk" insurance in an amount not more than
the amount of the Contract covering the construction of the Tenant Improvements,
and such other insurance as Landlord may reasonably require, it being understood
and agreed that the Tenant Improvements shall be

                                    EXHIBIT B

                                      -10-


insured by Tenant pursuant to this Lease immediately upon completion thereof.
Such insurance shall be in amounts and shall include such extended coverage
endorsements as may be reasonably required by Landlord, and as generally
required by landlords of buildings comparable to and in the vicinity of the
Building.

                              (iii) GENERAL TERMS. Certificates for all
insurance carried pursuant to this SECTION 4.2.2.4 shall be delivered to
Landlord before the commencement of construction of the Tenant Improvements and
before the Contractor's equipment is moved onto the site. All such policies of
insurance must contain a provision that the company writing said policy will
give Landlord thirty (30) days prior written notice of any cancellation or lapse
of the effective date or any reduction in the amounts of such insurance. In the
event that the Tenant Improvements are damaged by any cause during the course of
the construction thereof, Tenant shall immediately repair the same at Tenant's
sole cost and expense. Tenant's Agents shall maintain all of the foregoing
insurance coverage in force until the Tenant Improvements are fully completed
and accepted by Landlord, except for any Products and Completed Operation
Coverage insurance required by Landlord, which is to be maintained for the term
of the policy following completion of the work and acceptance by Landlord and
Tenant. All policies carried under this SECTION 4.2.2.4 shall insure Landlord
and Tenant, as their interests may appear, as well as Contractor and Tenant's
Agents. All insurance, except Workers' Compensation, maintained by Tenant's
Agents shall preclude subrogation claims by the insurer against anyone insured
thereunder. Such insurance shall provide that it is primary insurance as
respects the owner and that any other insurance maintained by owner is excess
and noncontributing with the insurance required hereunder. The requirements for
the foregoing insurance shall not derogate from the provisions for
indemnification of Landlord by Tenant under SECTION 4.2.2.2 of this Tenant Work
Letter and Tenant's rights with respect to the waiver of subrogation.

          4.2.3     GOVERNMENTAL COMPLIANCE. The Tenant Improvements shall
comply in all respects with the following: (i) the Code and other state,
federal, city or quasi-governmental laws, codes, ordinances and regulations, as
each may apply according to the rulings of the controlling public official,
agent or other person; (ii) applicable standards of the American Insurance
Association (formerly, the National Board of Fire Underwriters) and the National
Electrical Code; and (iii) building material manufacturer's specifications.

          4.2.4     INSPECTION BY LANDLORD. Landlord shall have the right to
inspect the Tenant Improvements at all reasonable times, provided however, that
Landlord's failure to inspect the Tenant Improvements shall in no event
constitute a waiver of any of Landlord's rights hereunder nor shall Landlord's
inspection of the Tenant Improvements constitute Landlord's approval of the
same. In the event that Landlord should discover a Design Problem during an
inspection, Landlord shall notify Tenant in writing within a reasonable time
after such inspection of such disapproval and shall specify in reasonably
sufficient detail the items disapproved. Any defects or deviations in, and/or
disapprovals in accordance herewith (because of the existence of a Design
Problem) by Landlord of, the Tenant Improvements shall be rectified by Tenant at
Tenant's expense and at no additional expense to Landlord, provided however,
that in the event Landlord determines that a defect or deviation exists or in
the event Landlord reasonably disapproves of any matter in connection with any
portion of the Tenant Improvements because of a Design Problem, Landlord may,
following notice to Tenant and a reasonable period of time for Tenant to cure,
take such action as Landlord deems necessary to correct the Design Problem, at

                                    EXHIBIT B

                                      -11-


Tenant's expense, and at no additional expense to Landlord and without incurring
any liability on Landlord's part, to correct any such Design Problem, including,
without limitation, causing the cessation of performance of the construction of
the Tenant Improvements until such time as the Design Problem is corrected to
Landlord's reasonable satisfaction. In connection with the foregoing, Tenant
shall pay a construction supervision fee (the "LANDLORD SUPERVISION FEE") to
Landlord in an amount equal to one percent (1.0%) of the Tenant Improvement
Allowance (including any TIA Increase) attributable to all costs in connection
with the construction of the Tenant Improvements (i.e., the "hard" costs),
excluding the following: (i) architecture, engineering and consulting fees, (ii)
the costs of FF&E purchased with such Tenant Improvement Allowance, (iii) costs
attributable to the requisite permits and related governmental fees, and (iv)
utility hook-up charges.

          4.2.5     MEETINGS. Commencing upon the execution of this Lease,
Tenant shall hold regular meetings at a reasonable time (but in no event to be
required more often than weekly), with the Architect and the Contractor
regarding the progress of the preparation of Construction Drawings and the
construction of the Tenant Improvements, which meetings shall be held at a
location designated by Tenant on the Project site, or as otherwise mutually
agreed by Landlord and Tenant, and Landlord and/or its agents shall receive
prior notice of, and shall have the right to attend, all such meetings, and,
upon Landlord's request, certain of Tenant's Agents (to the extent reasonably
necessary) shall attend such meetings. In addition, minutes shall be taken at
all such meetings, a copy of which minutes shall be promptly delivered to
Landlord. One such meeting each month shall include the review of Contractor's
current request for payment.

     4.3  NOTICE OF COMPLETION; COPY OF RECORD SET OF PLANS. Within ten (10)
business days after completion of construction of the Tenant Improvements,
Tenant shall cause a Notice of Completion to be recorded in the office of the
Recorder of the county in which the Building is located in accordance with
Section 3093 of the Civil Code of the State of California or any successor
statute, and shall furnish a copy thereof to Landlord upon such recordation. If
Tenant fails to do so, Landlord may execute and file the same on behalf of
Tenant as Tenant's agent for such purpose, at Tenant's sole cost and expense. At
the conclusion of construction, (i) Tenant shall cause the Architect and
Contractor (A) to update the Approved Construction Drawings as necessary to
reflect all changes made to the Approved Construction Drawings during the course
of construction, (B) to certify to the best of their knowledge that the
"record-set" of as-built drawings are true and correct, which certification
shall survive the expiration or termination of this Lease, and (C) to deliver to
Landlord two (2) sets of copies of such record set of drawings within ninety
(90) days following issuance of a certificate of occupancy for the Premises, and
(ii) Tenant shall deliver to Landlord a copy of all warranties, guaranties, and
operating manuals and information relating to the improvements, equipment, and
systems in the Premises.

                                   SECTION 5

                                  MISCELLANEOUS

     5.1  LEASE COMMENCEMENT DATE DELAYS. The Lease Commencement Date shall
occur as provided in SECTION 2.1 of this Lease and SECTION 3.2 of the Summary,
provided that the Lease Commencement Date and the Rent Commencement Date shall
be extended by the number of days of delay of the Substantial Completion of the
Tenant Improvements in the Premises to

                                   EXHIBIT B

                                      -12-


the extent caused by a "Lease Commencement Date Delay," as that term is defined
below. As used herein, the term "LEASE COMMENCEMENT DATE DELAY" shall mean only
a "Force Majeure" delay as described in SECTION 29.16 of the Lease or a
"Landlord Caused Delay," as that term is defined below in this SECTION 5.1. As
used in this Tenant Work Letter, "LANDLORD CAUSED DELAY" shall mean actual
delays to the extent resulting from the acts or omissions of Landlord including,
but not limited to (i) failure of Landlord to timely approve or disapprove any
Construction Drawings or Change Orders; (ii) material and unreasonable
interference by Landlord, its agents, employees or contractors with the
Substantial Completion of the Tenant Improvements and which objectively preclude
or delay the construction of tenant improvements in the Building by any person,
which interference relates to access by Tenant, or Tenant's Agents to the
Building or any Building facilities (including loading docks and freight
elevators) or service (including temporary power and parking areas as provided
herein) during normal construction hours, or the use thereof during normal
construction hours; (iii) delays due to the acts or failures to act of Landlord,
its agents, employees or contractors including without limitation any such acts
or failures to act with respect to payment of the Tenant Improvement Allowance;
(iv) delays due to events covered by SECTIONS 1.1, 3.1, 6.6 and 6.7 of this
Tenant Work Letter, and (v) delays due to Landlord's non-delivery of the Base
and Shell in a condition as of March 1, 2002, which allows Tenant to construct
the Tenant Improvements without material delays and/or any lack of reasonably
sufficient access thereto to allow Tenant to construct the Tenant Improvements
on a timely basis.


     5.2  DETERMINATION OF LEASE COMMENCEMENT DATE DELAY. If Tenant contends
that a Lease Commencement Date Delay has occurred, Tenant shall notify Landlord
in writing of (i) the event which constitutes such Lease Commencement Date Delay
and (ii) the date upon which such Lease Commencement Date Delay is anticipated
to end. If such actions, inaction or circumstance described in the notice set
forth in (i) above of this SECTION 5.2 of this Tenant Work Letter (the "DELAY
NOTICE") are not cured by Landlord within one (1) business day of Landlord's
receipt of the Delay Notice and if such action, inaction or circumstance
otherwise qualifies as a Lease Commencement Date Delay, then a Lease
Commencement Date Delay shall be deemed to have occurred commencing as of the
date of Landlord's receipt of the Delay Notice and ending as of the date such
delay ends.

     5.3  DEFINITION OF SUBSTANTIAL COMPLETION OF THE TENANT IMPROVEMENTS.
"SUBSTANTIAL COMPLETION OF THE TENANT IMPROVEMENTS" shall mean completion of
construction of the Tenant Improvements in the Premises pursuant to the Approved
Construction Drawings, with the exception of any punch list items.

                                   SECTION 6

                                  MISCELLANEOUS

     6.1  TENANT'S ENTRY INTO THE PREMISES. TENANT SHALL HAVE access to the
Premises upon the execution of delivery of this Lease for the purpose of
designing and constructing the Tenant Improvements and installing overstandard
equipment or fixtures (including Tenant's data and telephone equipment) in the
Premises. Such entry shall be on all the TCCs of the Lease except for the
payment of Rent.

                                    EXHIBIT B

                                      -13-


     6.2  TENANT'S REPRESENTATIVE. Tenant has designated Mr. Kevin R. Bracken,
as its sole representative with respect to the matters set forth in this Tenant
Work Letter, who, until further notice to Landlord, shall have full authority
and responsibility to act on behalf of the Tenant as required in this Tenant
Work Letter.

     6.3  LANDLORD'S REPRESENTATIVE. Landlord has designated Mr. Jim Edwards as
its sole representative with respect to the matters set forth in this Tenant
Work Letter who, until further notice to Tenant, shall have full authority and
responsibility to act on behalf of Landlord as required in this Tenant Work
Letter.

     6.4  TIME OF THE ESSENCE IN THIS TENANT WORK LETTER. Unless otherwise
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. In all instances where Tenant or Landlord is required to approve
or deliver an item, if no written notice of approval is given or the item is not
delivered within the stated time period, at Landlord's or Tenant's sole option,
as the case may be, at the end of such period the item shall automatically be
deemed approved or delivered by the party whose approval or delivery is required
and the next succeeding time period shall commence. If any item requiring
approval is timely disapproved by the party whose approval is required, the
procedure for preparation of the document and approval thereof shall be repeated
until the document is approved by the party whose approval is required.

     6.5  TENANT'S LEASE DEFAULT. Notwithstanding any TCCs to the contrary
contained in this Lease, if an event of default as described in SECTION 19.1 of
the Lease, or a material default by Tenant under this Tenant Work Letter beyond
the applicable notice and cure period set forth in ARTICLE 19 of the Lease, has
occurred at any time on or before the Substantial Completion of the Tenant
Improvements, then (i) in addition to all other rights and remedies granted to
Landlord pursuant to the Lease, Landlord shall have the right to withhold
payment of all or any portion of the Tenant Improvement Allowance and/or
Landlord may cause Contractor to cease the construction of the Premises (in
which case, Tenant shall be responsible for any delay in the Substantial
Completion of the Tenant Improvements caused by such work stoppage), and (ii)
all other obligations of Landlord under the TCCs of this Tenant Work Letter
shall be forgiven until such time as such default is cured pursuant to the TCCs
of the Lease (in which case, Tenant shall be responsible for any delay in the
Substantial Completion of the Tenant Improvements caused by the inaction of
Landlord); provided, however, that, notwithstanding any other provision of the
Lease, if a default by Tenant is cured, forgiven or waived, Landlord's suspended
obligations shall be fully reinstated and resumed, effective immediately.

     6.6  HAZARDOUS MATERIAL COSTS. Landlord agrees to bear any increased costs
in the design or construction of the Tenant Improvements directly resulting from
any Hazardous Materials in the Project (provided such Hazardous Materials are
not introduced by Tenant) and shall reimburse to Tenant, in addition to and
separate and apart from the Tenant Improvement Allowance, any additional costs
incurred by Tenant as a result of the presence of Hazardous Materials in the
Project (provided such Hazardous Materials are not introduced by Tenant) prior
to the date Tenant constructs the Tenant Improvements and any delays encountered
by Tenant in the Substantial Completion of the Tenant Improvements as a result
of the presence of such Hazardous Materials shall be considered a Landlord
Caused Delay, as such term is described in SECTION 5.1 above in this Tenant Work
Letter.

                                    EXHIBIT B

                                      -14-


     6.7  CODE. In the event that the Base and Shell does not comply with Code
as required by the terms of SECTION 1.1 of this Tenant Work Letter, and
therefore Tenant incurs increased design or construction costs that it would not
have incurred but for such noncompliance with Code, then such costs shall be
reimbursed by Landlord to Tenant without deduction from the Tenant Improvement
Allowance within thirty (30) days after receipt by Landlord from Tenant of an
original invoice (unless such original invoice is required by the Federal Drug
Administration or other governmental agency, in which case a true copy of the
invoice shall be allowed) documenting and evidencing such increased costs and
any delays actually encountered by Tenant in the completion of the Tenant
Improvements as a direct result of such noncompliance shall be considered a
Landlord Caused Delay, as such term is defined in SECTION 5.1 above of this
Tenant Work Letter.

     6.8  NO MISCELLANEOUS CHARGES. Landlord shall provide, subject to
availability, and neither Tenant nor Tenant's agents shall be charged for,
elevators and/or loading docks or for the use of electricity to the extent
utilized in connection with the construction of the Tenant Improvements. Subject
to the TCCs of this Tenant Work Letter and the first sentence of this
SECTION 6.8, the foregoing items shall be made reasonably available to the
Contractor and the subcontractors during the period of Tenant's construction of
the Tenant Improvements.

                                    EXHIBIT B

                                      -15-


                             SCHEDULE 1 TO EXHIBIT B

               [LISTING OF "AS-BUILT" BASE AND SHELL IMPROVEMENTS]

                                  SCHEDULE 1 TO
                                    EXHIBIT B

                                       -1-


                             SCHEDULE 2 TO EXHIBIT B

               [LISTING OF BUILDING STANDARD TENANT IMPROVEMENTS]

                                  SCHEDULE 2 TO
                                    EXHIBIT B

                                       -1-


                                    EXHIBIT C

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                           NOTICE OF LEASE TERM DATES

To:
     ------------------------

     ------------------------

     ------------------------

     ------------------------

     Re:  Lease dated ____________, 2002 between ____________________, a
          ___________________ ("Landlord"), and _______________________, a
          ___________________ ("Tenant") concerning the office/lab/manufacturing
          building located at __________________________, San Diego, California.

Gentlemen:

     In accordance with the Lease (the "Lease"), we wish to advise you and/or
confirm as follows:

     1.   The Lease Term shall commence on or has commenced on ______________
          for a term of __________________ ending on __________________.

     2.   Rent commenced to accrue on __________________, in the amount of
          ________________.

     3.   If the Rent Commencement Date is other than the first day of the
          month, the first billing will contain a pro rata adjustment. Each
          billing thereafter, with the exception of the final billing, shall be
          for the full amount of the monthly installment as provided for in the
          Lease.

     4.   Your rent checks should be made payable to __________________ at
          ___________________.

     5.   The exact number of rentable square feet within the Building/Premises
          is 68,400 square feet.

                                    EXHIBIT C

                                      -1-


     6.   Tenant's Share based upon the exact number of rentable square feet
          within the Premises is one hundred percent (100%).
                               "Landlord":

                               -----------------------------------------,
                               a
                                  --------------------------------------

                               By:
                                   -------------------------------------
                                     Its:
                                         -------------------------------

Agreed to and Accepted
as of ____________, 200__.

"Tenant":

- ----------------------------------
a
 ---------------------------------

By:
   -------------------------------
     Its:
         -------------------------

                                    EXHIBIT C

                                       -2-


                                    EXHIBIT D

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                             RULES AND REGULATIONS

     Tenant shall faithfully observe and comply with the following Rules and
Regulations. Landlord shall not be responsible to Tenant for the nonperformance
of any of said Rules and Regulations by or otherwise with respect to the acts or
omissions of any other tenants or occupants of the Project; provided, however,
in no event shall Landlord enforce such Rules and Regulations in a
discriminatory manner to the detriment of Tenant. In the event of any conflict
between the Rules and Regulations and the other provisions of this Lease, the
latter shall control.

     1.   Safes and other heavy objects shall, if reasonably considered
necessary by Landlord, stand on supports of such thickness as is necessary to
properly distribute the weight. Landlord will not be responsible for loss of or
damage to any such safe or property in any case. Any damage to any part of the
Building, its contents, occupants or visitors by moving or maintaining any such
safe or other property shall be the sole responsibility and expense of Tenant.

     2.   The requirements of Tenant will be attended to only upon application
at Landlord's management office or at such office location designated by
Landlord. Employees of Landlord shall not perform any work or do anything
outside their regular duties unless under special instructions from Landlord.

     3.   No advertisement, notice or handbill shall be exhibited, distributed,
painted or affixed by Tenant on any part of the Pacific Corporate Center without
the prior written consent of the Landlord. Tenant shall not disturb, solicit,
peddle, or canvass any occupant of the Pacific Corporate Center and shall
cooperate with Landlord and its agents of Landlord to prevent same.

     4.   Tenant shall not overload the floor of the Premises.

     5.   Tenant shall not use or keep in or on the Premises, the Building, or
the Project any kerosene, gasoline, explosive material, corrosive material,
material capable of emitting toxic fumes, or other inflammable or combustible
fluid chemical, substitute or material, except in compliance with applicable
law. Tenant shall maintain material safety data sheets for any Hazardous
Material used or kept on the Premises.

     6.   Tenant shall not use, keep or permit to be used or kept, any foul or
noxious gas or substance in or on the Premises to the extent the same is
noticeable in the Common Areas of the Pacific Corporate Center or which affects
other tenants of the Pacific Corporate Center. Tenant shall not throw anything
out of doors, windows or skylights.

     7.   No cooking shall be done or permitted on the Premises (unless Tenant
receives Landlord's prior written approval to install a cafeteria for its
employees in the Premises), nor shall the Premises be used for lodging.
Notwithstanding the foregoing, Underwriters' laboratory-approved equipment and
microwave ovens may be used in the Premises for heating food and

                                   EXHIBIT D

                                       -1-


brewing coffee, tea, hot chocolate and similar beverages for employees and
visitors, provided that such use is in accordance with all applicable federal,
state, county and city laws, codes, ordinances, rules and regulations.

     8.   Intentionally Omitted.

     9.   Tenant shall store all its trash and garbage within the interior of
the Premises or in the appropriate external trash area(s) for the Building. No
material shall be placed in the trash boxes or receptacles if such material is
of such nature that it may not be disposed of in the ordinary and customary
manner of removing and disposing of trash and garbage in San Diego, California
without violation of any law or ordinance governing such disposal; provided,
however, Tenant may maintain separate trash enclosures for the storage of
non-conforming disposal items to the extent Tenant satisfies and complies with
any applicable laws or other governmental regulations relating to the storage
and disposal thereof. If the Premises is or becomes infested with vermin as a
result of the use or any misuse or neglect of the Premises by Tenant, its
agents, servants, employees, contractors, visitors or licensees, Tenant shall
forthwith, at Tenant's expense, cause the Premises to be exterminated from time
to time to the satisfaction of Landlord and shall employ such licensed
exterminators as shall be approved in writing in advance by Landlord.

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

     11.  Neither the interior nor exterior of any windows shall be coated or
otherwise sunscreened without the prior written consent of Landlord. Tenant
shall be responsible for any damage to the window film on the exterior windows
of the Premises and shall promptly repair any such damage at Tenant's sole cost
and expense.

     12.  Tenant must comply with requests by the Landlord concerning the
informing of their employees of items of reasonable importance to the Landlord
vis-a-vis the operation of the Project and the Pacific Corporate Center.

     13.  Tenant must comply with any applicable "NO-SMOKING" Ordinances. If
Tenant is required under the ordinance to adopt a written smoking policy, a copy
of said policy shall be on file in the office of the Building. Additionally,
Tenant must provide at least one area within the Premises in which its
employees, invitees and visitors may smoke, to the extent such area is required
by law.

     14.  Tenant hereby acknowledges that Landlord shall have no obligation to
provide guard service or other security measures for the benefit of the
Premises, the Building or the Project. Tenant hereby assumes all responsibility
for the protection of Tenant and its agents, employees, contractors, invitees
and guests, and the property thereof, from acts of third parties, including
keeping doors locked and other means of entry to the Premises closed, whether or
not Landlord, at its option, elects to provide security protection for the
Project or any portion thereof. Tenant further assumes the risk that any safety
and security devices, services and programs which Landlord elects, in its sole
discretion, to provide may not be effective, or may malfunction or be
circumvented by an unauthorized third party, and Tenant shall, in addition to
its other

                                    EXHIBIT D

                                       -2-


insurance obligations under this Lease, obtain its own insurance coverage to the
extent Tenant desires protection against losses related to such occurrences.
Tenant shall cooperate in any reasonable safety or security program developed by
Landlord or required by law.

     15.  No auction, liquidation, fire sale, going-out-of-business or
bankruptcy sale shall be conducted in the Premises without the prior written
consent of Landlord.

     16.  No tenant shall use or permit the use of any portion of the Premises
for living quarters, sleeping apartments or lodging rooms.

     Landlord reserves the right at any time to change or rescind any one or
more of these Rules and Regulations, or to make such other and further
reasonable, non-discriminatory Rules and Regulations as in Landlord's judgment
may from time to time be necessary (relative to a building occupied solely by
one tenant) for the management, safety, care and cleanliness of the Premises,
Building, the Common Areas and the Project, and for the preservation of good
order therein, as well as for the convenience of other occupants and tenants
therein. Landlord may waive any one or more of these Rules and Regulations for
the benefit of any particular tenants, but no such waiver by Landlord shall be
construed as a waiver of such Rules and Regulations in favor of any other
tenant, nor prevent Landlord from thereafter enforcing any such Rules or
Regulations against any or all tenants of the Project; provided, however, in no
event shall Landlord enforce such Rules and Regulations in a discriminatory
manner to the detriment of Tenant. Tenant shall be deemed to have read these
Rules and Regulations and to have agreed to abide by them as a condition of its
occupancy of the Premises.

                                    EXHIBIT D

                                       -3-


                                    EXHIBIT E

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                      FORM OF TENANT'S ESTOPPEL CERTIFICATE

     The undersigned as Tenant under that certain Lease (the "Lease") made and
entered into as of ___________, 200__ by and between _______________ as
Landlord, and the undersigned as Tenant, for Premises consisting of the
office/lab/manufacturing building located at ______________, San Diego,
California ____________, certifies as follows:

     1.   Attached hereto as EXHIBIT A is a true and correct copy of the Lease
and all amendments and modifications thereto. The documents contained in EXHIBIT
A represent the entire agreement between the parties as to the Premises.

     2.   The undersigned currently occupies the Premises described in the
Lease, the Lease Term commenced on __________, and the Lease Term expires on
___________, and the undersigned has no option to terminate or cancel the Lease
or to purchase all or any part of the Premises, the Building and/or the Project,
except as expressly set forth in the Lease.

     3.   Base Rent became payable on ____________.

     4.   The Lease is in full force and effect and has not been modified,
supplemented or amended in any way except as provided in EXHIBIT A.

     5.   Tenant has not transferred, assigned, or sublet any portion of the
Premises nor entered into any license or concession agreements with respect
thereto except as follows:

     6.   Intentionally Omitted.

     7.   All monthly installments of Base Rent, all Additional Rent and all
monthly installments of estimated Additional Rent have been paid when due
through ___________. The current monthly installment of Base Rent is
$_____________________.

     8.   To the undersigned's best knowledge, all conditions of the Lease to be
performed by Landlord necessary to the enforceability of the Lease have been
satisfied and Landlord is not in default thereunder. In addition, the
undersigned has not delivered any notice to Landlord regarding a default by
Landlord thereunder.

     9.   No rental (other than Estimated Direct Expenses) has been paid more
than thirty (30) days in advance and no security has been deposited with
Landlord except as provided in the Lease.

                                    EXHIBIT E

                                       -1-


     10.  As of the date hereof, there are, to the undersigned's best knowledge,
no existing defenses or offsets, or claims or any basis for a claim, that the
undersigned has against Landlord.

     11.  If Tenant is a corporation or partnership, each individual executing
this Estoppel Certificate on behalf of Tenant hereby represents and warrants
that Tenant is a duly formed and existing entity qualified to do business in
California and that Tenant has full right and authority to execute and deliver
this Estoppel Certificate and that each person signing on behalf of Tenant is
authorized to do so.

     12.  There are no actions pending against the undersigned under the
bankruptcy or similar laws of the United States or any state.

     13.  Other than in compliance with all applicable laws and incidental to
the ordinary course of the use of the Premises, the undersigned has not used or
stored any hazardous substances in the Premises.

     14.  To the undersigned's knowledge, all tenant improvement work to be
performed by Landlord under the Lease has been completed in accordance with the
Lease and has been accepted by the undersigned and all reimbursements and
allowances due to the undersigned under the Lease in connection with any tenant
improvement work have been paid in full.

     The undersigned acknowledges that this Estoppel Certificate may be
delivered to Landlord or to a prospective mortgagee or prospective purchaser,
and acknowledges that said prospective mortgagee or prospective purchaser will
be relying upon the statements contained herein in making the loan or acquiring
the property of which the Premises are a part and that receipt by it of this
certificate is a condition of making such loan or acquiring such property.

     Executed at ______________ on the ____ day of ___________, 200__.

                               "Tenant":

                               -----------------------------------------,
                               a
                                 ----------------------------------------

                               By:
                                   --------------------------------------
                                     Its:
                                         --------------------------------

                               By:
                                   --------------------------------------
                                     Its:
                                         --------------------------------

                                   EXHIBIT E

                                       -2-


                                    EXHIBIT F

                                  KILROY REALTY

RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:

ALLEN, MATKINS, LECK, GAMBLE
    & MALLORY LLP
1999 Avenue of the Stars
18th Floor
Los Angeles, California 90067
Attention:  Anton N. Natsis, Esq.

================================================================================

                            RECOGNITION OF COVENANTS,
                          CONDITIONS, AND RESTRICTIONS

     This Recognition of Covenants, Conditions, and Restrictions (this
"AGREEMENT") is entered into as of the __ day of ________, 200__, by and between
__________________ ("Landlord"), and ________________ ("Tenant"), with reference
to the following facts:

     A.   Landlord and Tenant entered into that certain Lease Agreement dated
_____, 200__ (the "Lease"). Pursuant to the Lease, Landlord leased to Tenant and
Tenant leased from Landlord all of the space located in an
office/lab/manufacturing building and 273 parking spaces (collectively, the
"PREMISES") on certain real property depicted on EXHIBIT "A" attached hereto and
incorporated herein by this reference (the "PROPERTY").

     B.   The Premises are located on real property which is part of an area
owned by Landlord containing approximately ___(__) acres of real property
located in the City of ____________, California (the "PROJECT"), as more
particularly described in EXHIBIT "B" attached hereto and incorporated herein by
this reference.

     C.   Landlord, as declarant, has previously recorded, or proposes to record
concurrently with the recordation of this Agreement, a Declaration of Covenants,
Conditions, and Restrictions (the "DECLARATION"), dated ________________, 200__,
in connection with the Project.

     D.   Tenant is agreeing to recognize and be bound by the terms of the
Declaration, and the parties hereto desire to set forth their agreements
concerning the same.

     NOW, THEREFORE, in consideration of (a) the foregoing recitals and the
mutual agreements hereinafter set forth, and (b) for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows,

                                   EXHIBIT F

                                       -1-


     1.   TENANT'S RECOGNITION OF DECLARATION. Notwithstanding that the Lease
has been executed prior to the recordation of the Declaration, Tenant agrees to
recognize and by bound by all of the terms and conditions of the Declaration.

     2.   MISCELLANEOUS.

          2.1 This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, estates, personal
representatives, successors, and assigns.

          2.2 This Agreement is made in, and shall be governed, enforced and
construed under the laws of, the State of California.

          2.3 This Agreement constitutes the entire understanding and agreements
of the parties with respect to the subject matter hereof, and shall supersede
and replace all prior understandings and agreements, whether verbal or in
writing. The parties confirm and acknowledge that there are no other promises,
covenants, understandings, agreements, representations, or warranties with
respect to the subject matter of this Agreement except as expressly set forth
herein.

          2.4 This Agreement is not to be modified, terminated, or amended in
any respect, except pursuant to any instrument in writing duly executed by both
of the parties hereto.

          2.5 In the event that either party hereto shall bring any legal action
or other proceeding with respect to the breach, interpretation, or enforcement
of this Agreement, or with respect to any dispute relating to any transaction
covered by this Agreement, the losing party in such action or proceeding shall
reimburse the prevailing party therein for all reasonable costs of litigation,
including reasonable attorneys' fees, in such amount as may be determined by the
court or other tribunal having jurisdiction, including matters on appeal.

          2.6 All captions and heading herein are for convenience and ease of
reference only, and shall not be used or referred to in any way in connection
with the interpretation or enforcement of this Agreement.

          2.7 If any provision of this Agreement, as applied to any party or to
any circumstance, shall be adjudged by a court of competent jurisdictions to be
void or unenforceable for any reason, the same shall not affect any other
provision of this Agreement, the application of such provision under
circumstances different form those adjudged by the court, or the validity or
enforceability of this Agreement as a whole.

          2.8 Time is of the essence of this Agreement.

          2.9 The Parties agree to execute any further documents, and take any
further actions, as may be reasonable and appropriate in order to carry out the
purpose and intent of this Agreement.

                                    EXHIBIT F

                                       -2-


          2.10 As used herein, the masculine, feminine or neuter gender, and the
singular and plural numbers, shall each be deemed to include the others whenever
and whatever the context so indicates.

                                    EXHIBIT F

                                       -3-


                        SIGNATURE PAGE OF RECOGNITION OF

                     COVENANTS, CONDITIONS AND RESTRICTIONS

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

                               "Landlord":

                               ---------------------------------------,
                               a
                                 --------------------------------------

                               By:
                                           ----------------------------
                                     Its:
                                           ----------------------------

                               "Tenant":

                               ----------------------------------------
                               a
                                 --------------------------------------

                               By:
                                     ----------------------------------
                                     Its:
                                         ------------------------------

                               By:
                                 --------------------------------------
                                 Its:
                                     ----------------------------------

                                    EXHIBIT F

                                       -4-


                                    EXHIBIT G

                              INTENTIONALLY OMITTED

                                    EXHIBIT G

                                      -1-


                                    EXHIBIT H

                            FORM OF LETTER OF CREDIT
                       (LETTERHEAD OF A MONEY CENTER BANK
                           ACCEPTABLE TO THE LANDLORD)

______________, 200_

- -------------------------------

- -------------------------------

- -------------------------------

- -------------------------------

     Gentlemen:

     We hereby establish our Irrevocable Letter of Credit and authorize you to
draw on us at sight for the account of _____________________, a
___________________________, the aggregate amount of _____________________
_________________________________ ($_____________).

     Funds under this Letter of Credit are available to the beneficiary hereof
as follows:

     Any or all of the sums hereunder may be drawn down at any time and from
time to time from and after the date hereof by a representative of
________________________________ ("Beneficiary") when accompanied by this Letter
of Credit and a written statement signed by a representative of Beneficiary,
certifying that such moneys are due and owing to Beneficiary.

     This Letter of Credit is transferable in its entirety. Any costs/fee
incurred in connection with any such transfer shall be paid by Beneficiary;
provided, however, in no event shall such costs/fee exceed $750.00 with regard
to any single transfer. Should a transfer be desired, such transfer will be
subject to the return to us of this advice, together with written instructions.

     The amount of each draft must be endorsed on the reverse hereof by the
negotiating bank. We hereby agree that this Letter of Credit shall be duly
honored upon presentation and delivery of the certification specified above.

     This Letter of Credit shall expire on ______________.

     Notwithstanding the above expiration date of this Letter of Credit, the
term of this Letter of Credit shall be automatically renewed for successive,
additional one (1) year periods unless, at least thirty (30) days prior to any
such date of expiration, the undersigned shall give written notice to
Beneficiary, by certified mail, return receipt requested and at the address set
forth above or at such other address as may be given to the undersigned by
Beneficiary, that this Letter of Credit will not be renewed.

     This Letter of Credit is governed by the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication 500.

                                   EXHIBIT H

                                       -1-


                               Very truly yours,
                               (Name of Issuing Bank)

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

                                    EXHIBIT H

                                       -2-


                                    EXHIBIT I

                                PURCHASE CONTRACT

                         AGREEMENT OF PURCHASE AND SALE

     This Agreement of Purchase and Sale ("AGREEMENT") is made and entered into
by and between VICAL INCORPORATED, a Delaware corporation ("BUYER") and KILROY
REALTY, L.P., a Delaware limited partnership ("SELLER").

                                    ARTICLE 1

                                     GENERAL

     1.1  THE PURCHASE PROPERTY. Seller is the owner of certain real property
located in the County of San Diego, State of California, more particularly
described on EXHIBIT A attached hereto and made a part hereof (the "PROPERTY"),
which Property is commonly referred to as Lots 25/27 of the Pacific Corporate
Center, and which Property includes all improvements thereon, specifically
including the 273 parking spaces set forth in ARTICLE 28 of the Lease, and the
entire "Premises" as that term is defined in the Lease, and all of Seller's
right, title and interest in all privileges, entitlements, subsurface rights,
easements, personal property, warranties, guaranties, air rights, water rights
and appurtenances pertaining to such real property and improvements.

     1.2  GRANT OF OPTION. Pursuant to ARTICLE 30 of that certain Lease dated as
of January 30, 2002 (together with any amendments thereto, the "LEASE"), Seller
granted to Buyer an option to purchase the Property. The terms of the Lease are
incorporated herein by reference.

     1.3  PURPOSE. The purpose of this Agreement is to provide for the purchase
and sale of the Property, on the terms and conditions herein provided, pursuant
to Buyer's exercise of its option to purchase granted by Seller under the Lease.

     1.4  CAPITALIZED TERMS. All capitalized terms used herein, if not otherwise
defined herein, shall have the meaning given them under the Lease.

                                    ARTICLE 2

                                PURCHASE AND SALE

     2.1  PURCHASE AND SALE. Seller agrees to sell the Property to Buyer, and
Buyer agrees to purchase the Property from Seller, on the terms and conditions
specified in this Agreement.

     2.2  PURCHASE PRICE. The "Purchase Price" for the Property shall be an
amount equal to one hundred ten percent (110%) of the "Fair Market Value" of the
Property; provided, however, that if neither Kilroy Realty, L.P., a Delaware
limited partnership nor an Affiliate thereof holds fee title to the Property on
the date Buyer delivers the Exercise Notice, then the "PURCHASE PRICE" for the
Property shall be equal to the "Fair Market Value" of the Property. For purposes
of this Agreement, the term "FAIR MARKET VALUE" shall mean the value at which a

                                   EXHIBIT I

                                       -1-


third-party purchaser would purchase the Property as of the date on which
Buyer's Exercise Notice was delivered to Seller, taking into consideration the
value of the Lease (using the following assumptions: (i) stabilized 100%
occupancy of the Property, (ii) no defaults, (iii) continuation of Lease Term
through the expiration of the final Option Term; and (iv) then-standard "Rent
Concessions" being provided to tenants in the "Comparable Buildings," as both
terms are defined in SECTION 2.2.2 of the Lease), as well as the size, location,
and quality of the Property and the size, location, appearance, age and quality
all of the improvements constructed thereon and therein. During the twenty (20)
business day period immediately following the date of Seller's receipt of the
Exercise Notice, Seller and Buyer shall attempt to agree upon the Fair Market
Value using reasonable good-faith efforts.

     2.3  DETERMINATION OF MARKET RENT. In the event Seller and Buyer fail to
reach agreement within twenty (20) business days following Seller's receipt of
the Exercise Notice (the "OUTSIDE AGREEMENT DATE"), then the issue of Fair
Market Value shall be submitted to third party appraisers pursuant to the terms
and conditions of this SECTION 2.3, but subject to the conditions, when
appropriate, of SECTION 2.2.

          2.3.1     Seller and Buyer shall each appoint one MAI appraiser who
shall have been active over the ten (10) year period ending on the date of such
appointment in the appraisal of first-class office/lab/manufacturing properties
located in the Sorrento Mesa and University Town Center areas of San Diego
County, California. The determination of the appraisers shall be limited solely
to the correct determination of Fair Market Value, taking into account the
requirements of SECTION 2.2 of this Agreement. Each such appraiser shall be
appointed within ten (10) business days after the applicable Outside Agreement
Date. Seller and Buyer may consult with their selected appraisers prior to
appointment and may select an appraiser who is favorable to their respective
positions. The appraisers so selected by Seller and Buyer shall be deemed
"ADVOCATE ARBITRATORS".

          2.3.2     During the thirty (30) day period following the date upon
which the last of the Advocate Arbitrators was selected, each Advocate
Arbitrator shall complete its appraisal with regard to the Fair Market Value and
shall meet with the other Advocate Arbitrator to discuss the same. During the
ten (10) business day period immediately following such meeting, the Advocate
Arbitrators shall attempt to agree upon the Fair Market Value using reasonable
good-faith efforts, based upon their respective appraisals. To the extent the
Advocate Arbitrators reach agreement as to the Fair Market Value during such ten
(10) business day period, they shall (within such time period) publish a ruling
("AWARD") indicating the Fair Market Value as jointly determined by such
Advocate Arbitrators. Following notification of the Award, the Fair Market Value
as jointly determined by such Advocate Arbitrator shall become the then
applicable Fair Market Value (for purposes of calculating the applicable
Purchase Price). To the extent the Advocate Arbitrators fail to reach agreement
within the applicable period as to the Fair Market Value, the process for
determining the Fair Market Value shall continue as follows.

          2.3.3     In the event the Advocate Arbitrators fail to reach
agreement within ten (10) business days following their post-appraisal meeting
(the "ADVOCATE'S OUTSIDE DATE"), then the issue of Fair Market Value shall be
submitted to the "Neutral Arbitrator" for a final determination. The two
Advocate Arbitrators shall (pursuant to a specific requirement of their
engagement letters) within five (5) business days of the Advocate's Outside Date
agree upon and

                                   EXHIBIT I

                                       -2-


appoint a third appraiser ("NEUTRAL ARBITRATOR") who shall be qualified under
the same criteria set forth hereinabove for qualification of the two Advocate
Arbitrators except that neither the Seller or Buyer or either party's Advocate
Arbitrator may, directly or indirectly, consult with the Neutral Arbitrator
prior to, or subsequent to, his or her appointment and such Neutral Arbitrator
shall not have had any business dealings with either Seller or Buyer, or an
Affiliate thereof, during the immediately preceding two (2)-year period, and
shall not be in then-active consideration for any such business dealings.
Notwithstanding anything to the contrary set forth above, upon the completion of
such appraisal process, in no event shall such determination of Fair Market
Value be challenged or disputed based upon (i) information regarding the Neutral
Arbitrator subsequently discovered, unless such information consisted of a
party's actual knowledge of a then-existing relationship with such Neutral
Arbitrator (as of the commencement of the Fair Market Value determination
process) and such party intentionally withheld such information from the other
party, or (ii) the Neutral Arbitrator's subsequent activities and relationships
(even if the Neutral Arbitrator does, at some later time, enter into a business
dealing with either Seller or Buyer, or an Affiliate thereof). The Neutral
Arbitrator shall be retained via an engagement letter jointly prepared by
Seller's counsel and Buyer's counsel.

          2.3.4     The Neutral Arbitrator shall within thirty (30) days of the
appointment conduct its appraisal of the Property to determine the applicable
Fair Market Value and simultaneously publish a ruling (also, an "AWARD")
indicating the Fair Market Value as determined by such Neutral Arbitrator.
Following notification of the Award, the Fair Market Value as determined by such
Neutral Arbitrator shall become the then applicable Fair Market Value (for
purposes of calculating the applicable Purchase Price).

          2.3.5     The Award issued jointly by the Advocate Arbitrators (or, if
applicable, the Award issued by the Neutral Arbitrator) shall be binding upon
Seller and Buyer.

          2.3.6     If either Seller or Buyer fail to appoint an Advocate
Arbitrator within ten (10) business days after the applicable Outside Agreement
Date, either party may petition the presiding judge of the Superior Court of San
Diego County to appoint such Advocate Arbitrator subject to the criteria in
SECTION 2.3.1 of this Agreement, or if he or she refuses to act, either party
may petition any judge having jurisdiction over the parties to appoint such
Advocate Arbitrator.

          2.3.7     If the two Advocate Arbitrators fail (i) to agree upon the
Fair Market Value on or before the Advocate Outside Date, and (ii) thereafter to
agree upon and appoint the Neutral Arbitrator, then either party may petition
the presiding judge of the Superior Court of San Diego County to appoint the
Neutral Arbitrator, subject to criteria in SECTION 2.3.1 of this Agreement, or
if he or she refuses to act, either party may petition any judge having
jurisdiction over the parties to appoint such arbitrator.

          2.3.8     The cost of arbitration shall be paid by Seller and Buyer
equally.

     2.4  DEPOSITS.  In  accordance  with the terms of SECTION 30.2 of the
Lease, $250,000.00 of the Purchase Price (the "INITIAL NON-REFUNDABLE DEPOSIT")
shall be delivered by Buyer to Escrow Holder concurrently with the Buyer's
delivery of its execution counterpart of this Agreement to Escrow Holder, which
Initial Non-Refundable Deposit shall be held in Escrow (in

                                    EXHIBIT I

                                       -3-


an interest-bearing account) during the "Contingency Period," as that term is
defined in SECTION 4.1 of this Agreement. Upon the expiration of the Contingency
Period, provided that the Initial Non-Refundable Deposit has not been returned
to Buyer pursuant to the Terms of SECTION 4.1 of this Agreement, Escrow Holder
shall deliver to Seller the Initial Non-Refundable Deposit. An additional
deposit of $100,000.00 toward the Purchase Price (the "ADDITIONAL NON-REFUNDABLE
DEPOSIT") shall be delivered by Buyer to Seller by cashier's check or wire
transfer of immediately available funds on or before the date which is ninety
(90) days following the date of Seller's receipt of the Exercise Notice. The
Initial Non-Refundable Deposit (inclusive of all interest accrued thereon during
the Contingency Period) and the Additional Non-Refundable Deposit are
collectively referred to herein as the "DEPOSIT." If Escrow closes, the Deposit
shall be applied to the Purchase Price. If Escrow does not close, the Deposit
shall be applied as provided in this Agreement. The remaining amount of the
Purchase Price (the Purchase Price less the Deposit) shall be delivered by Buyer
to Escrow Holder on or prior to the Closing Date (as hereinafter defined).

                                    ARTICLE 3

                                     ESCROW

     3.1  OPENING. The purchase and sale of the Property shall be consummated by
means of the escrow which shall be opened with Escrow Holder (the "ESCROW")
pursuant to the terms of the Lease.

     3.2  INSTRUCTIONS. Prior to the Closing Date, each party shall execute and
deliver to Escrow Holder any additional written instructions and shall provide
Escrow Holder with such other information, documents and funds as Escrow Holder
may reasonably require to enable it to close the transaction contemplated herein
on the Closing Date. The additional escrow instructions shall be consistent with
the terms of this Agreement and in the event of any inconsistency between the
additional instructions and this Agreement, the terms of this Agreement shall
prevail.

     3.3  CLOSE OF ESCROW. Subject to the terms of the Lease and this
SECTION 3.3, Escrow shall close on the date which is one hundred eighty (180)
days following the date the Exercise Notice was received by Seller (the "CLOSING
DATE"); provided, however, Seller may extend such Closing Date by delivering, on
or before the date which is ninety (90) days prior to the originally scheduled
Closing Date, written notice to Buyer and Escrow Holder (the "ESCROW EXTENSION
NOTICE") that Seller is so extending the Closing Date, which Escrow Extension
Notice shall set forth such extended Closing Date; provided further, however, in
no event shall the Closing Date as so extended be later than the last day of the
tenth (10th) Lease Year (the "OUTSIDE CLOSING DATE"). Escrow shall be considered
closed (the "CLOSE OF ESCROW") when the grant deed to the Property is recorded.

     3.4  COSTS. Seller shall pay all documentary transfer taxes and the premium
for the C.L.T.A. Owner's Title Insurance Policy; provided, however, that Buyer
shall pay any premium applicable to A.L.T.A. extended coverage to the extent the
same is requested by Buyer. Buyer and Seller shall each pay one-half (1/2) of
the escrow fee. Buyer shall pay the costs of recording the Grant Deed. Each
party shall bear its own attorneys' fees. All other costs and expenses shall

                                   EXHIBIT I

                                       -4-


be allocated between the parties in accordance with the customary practice of
San Diego County, California.

     3.5  PRORATIONS.

          3.5.1     As of the Close of Escrow, all real and personal property
taxes based on the most recent property tax bills available, rents, issues and
profits from the Property, utilities, and such other matters as the parties
shall instruct Escrow Holder shall be equitably prorated, and the Escrow Holder
shall provide Seller and Buyer with a summary of such prorations.

          3.5.2     All bonds or special assessments against the Property due
before the Close of Escrow shall be paid by Seller and all bonds or special
assessments due after the Close of Escrow, which relate to events occurring
prior to the Close of Escrow, shall be prorated as of the Close of Escrow.

          3.5.3     Rentals and operating expense pass-throughs shall be
prorated as of the Close of Escrow.  All security deposits in whatever form,
held by Seller under the lease shall be transferred to Buyer upon Close of
Escrow

                                    ARTICLE 4

                          CONDITIONS TO CLOSE OF ESCROW

     4.1  CONTINGENCIES. In the event that any contingency set forth in this
SECTION 4.1 has not been either satisfied or waived prior to the expiration of
the Contingency Period, this Agreement shall be terminated, the Deposit shall be
returned to Buyer, the Escrow shall thereupon be canceled, and neither party
shall have any further obligation to the other under this Agreement. The
"CONTINGENCY PERIOD" as used herein means the period commencing on the "Opening
of Escrow" (as such term is defined in the Lease) and continuing until thirty
(30) days thereafter.

          4.1.1     TITLE.

                    (a) Immediately following the Opening of Escrow, Escrow
Holder shall cause to be issued a CLTA preliminary title report with a full
legal description of the Property, legible copies of all documents referred to
therein and a map plotting the location of all recorded easements (collectively
the "PTR"). In connection with the PTR, immediately following the Opening of
Escrow, Buyer shall have the right (but not the obligation) to obtain, at
Buyer's cost, an ALTA survey of the Property (the "SURVEY") sufficient for the
issuance of an ALTA policy of title insurance.

                    (b) Buyer shall have the right to notify Seller and Escrow
Holder, in writing, of Buyer's disapproval of any title exception, the PTR, or
the legal description of the Property shown therein, which Buyer may do in its
sole and absolute discretion. If Seller and Escrow Holder shall not have timely
received any such notice of disapproval on or before the expiration of the
Contingency Period, the PTR, the condition of title and the legal description of
the Property shall be deemed approved.

                                    EXHIBIT I

                                       -5-


                    (c) Buyer shall have the right during the Contingency Period
to disapprove any matters on the Survey, which Buyer may do in Buyer's sole and
absolute discretion. In addition, Buyer shall have until the later of (a) the
date of the end of the Contingency Period, or (b) five (5) business days after
receipt thereof, to disapprove any new matters described in any ALTA supplement
to the PTR issued based on the Survey (but only to the extent Buyer's receipt
thereof occurred during the Contingency Period), or any other supplement to the
PTR issued for any reason whatsoever, which Buyer may do in Buyer's sole and
absolute discretion.

                    (d) All encumbrances, liens, covenants and other title
exceptions appearing on the PTR or any ALTA supplement to the PTR and not
disapproved are hereinafter referred to as the "PERMITTED EXCEPTIONS." Any deeds
of trust and all prepayment fees or expenses owed to the beneficiaries thereof,
or other monetary encumbrances other than real property taxes and assessments
not yet delinquent, shall be paid in full by Seller prior to or concurrently
with the Close of Escrow.

          4.1.2     DOCUMENTS AND RECORDS. True and complete copies of the
following shall be delivered to Buyer upon the Opening of Escrow. Buyer shall
have the right to disapprove (which Buyer may do in its sole and absolute
discretion) any of the following within the Contingency Period:

                    (a)  to the extent in Seller's possession or readily
available to Seller without unreasonable cost, copies of all of the following:

                         (1) surveys;

                         (2) as-built plans, grading plans, and the plans,
specifications and design documents related to the Improvements;

                         (3) drawings, specifications, engineering and
architectural studies and similar documents, maps, topographical maps, soils
reports, water reports and construction testing documents;

                         (4) warranties and guarantees;

                         (5) draft and final studies, reports, surveys and
assessments relating to the environmental condition of the Property or any
property within the vicinity of the Property, including, without limitation, any
soils, toxics and hazardous waste (including, without limitation, asbestos)
reports;

                         (6) correspondence, applications, permits and other
communications to or from any governmental or quasi-governmental agency in
connection with any Hazardous Substances (as defined below) or the environmental
condition of the Property or any property within the vicinity of the Property;

                         (7) notifications required by applicable law to be
provided to any party as a result of the condition of the Property, if
applicable (including, without limitation, (i) the asbestos notification
required pursuant to California Health & Safety Code Section 25915,

                                    EXHIBIT I

                                       -6-


et seq., and (ii) the notification required pursuant to California Health &
Safety Code Section 25249.6, et seq. ("PROPOSITION 65"); and

                    (8) building, occupancy and use permits and approvals and
any other governmental licenses, permits or approvals for the Property or the
equipment used in connection with the Property;

                    (b) a list and complete copies of all contracts, agreements
or other documents affecting the Property, including, without limitation,
service contracts, maintenance contracts, management contracts, employment
contracts;

                    (c) a schedule setting forth an inventory of personal
property, if any, to be delivered to Buyer at the Close of Escrow;

                    (d) expense reports for the Property for the previous three
(3) year period covering all items of operation of the Property which relate to
the Common Areas, including, without limitation, taxes, common area maintenance
fees and utilities, and the source and nature of all income from the Property
for such periods, together with all appropriate back-up information reasonably
requested by Buyer and in Seller's possession or readily available to Seller
without unreasonable cost, and a schedule of all Improvements made and capital
costs incurred;

                    (e) such other documents or information regarding the
Property in Seller's possession or readily available to Seller without
unreasonable cost, as Buyer reasonably requests.

     Buyer's failure to provide Seller and Escrow Holder with written notice of
disapproval of any of the foregoing within the Contingency Period, which Buyer
may do in its sole and absolute discretion, shall constitute Buyer's approval
thereof.

     Seller shall promptly provide to Buyer any supplement, addition or new
information received or discovered by Seller relating to any of the items
delivered in this SECTION 4.1.2. Buyer shall have until the later of (i) the
expiration of the Contingency Period, or (ii) ten (10) calendar days from
receipt of such supplement, addition or new information (but only to the extent
the same would have been subject to Buyer's review during the Contingency Period
pursuant to this SECTION 4.1), to approve or disapprove any said supplement,
addition or new information, which Buyer may do in its sole and absolute
discretion. Failure to disapprove shall constitute approval.

     If Escrow fails to close, Buyer agrees to promptly return to Seller the
documents and other materials delivered by Seller to Buyer without
representation or warranty. Notwithstanding any other provision in this
Agreement, Buyer shall have no obligation to return documents provided to Buyer
by Seller so long as any dispute regarding termination of this Agreement is
pending between Buyer and Seller to which such documents are, or may be,
germane. Within one (1) business day after the Close of Escrow, Seller shall
provide Buyer with all original documents in Seller's possession described
above.

                                    EXHIBIT I

                                       -7-


          4.1.3     BOOKS AND RECORDS. During the Contingency Period, Buyer
shall be entitled, at any reasonable time and with reasonable prior notice, to
inspect all books and records relating to the Property in the possession of
Seller. Seller shall reasonably cooperate with Buyer in enabling Buyer to
accomplish such inspections and permit Buyer to make such copies at the Property
as Buyer may request and at Buyer's sole cost.

          4.1.4     CURE AND WAIVER RIGHTS. Provided Seller, at its option,
within three (3) business days of receipt of Buyer's disapproval of any of the
matters Buyer has the right to disapprove pursuant to the terms of this
Agreement as specifically set forth in SECTIONS 4.1.1, 4.1.2 and 4.1.3
hereinabove, advises Buyer that Seller intends to cure said disapproved
matter(s), Seller shall have until the Close of Escrow to cure such matter(s) in
a manner satisfactory to Buyer, in Buyer's sole and absolute discretion, and, if
timely cured, Escrow shall close as set forth herein. Seller's failure to
deliver such notice of intent to cure to Buyer within said three (3) business
days shall constitute Seller's refusal to cure any such disapproved matter(s).
Upon expiration of said three (3) business day period, Buyer shall have three
(3) business days in which to advise Seller and Escrow Holder in writing that
Buyer is willing to waive the previously disapproved matter(s). Delivery of such
notice of waiver shall continue the Escrow. Failure to deliver such notice of
waiver shall terminate the Escrow. Upon such termination, the Initial
Non-Refundable Deposit (including any interest earned thereon during the
Contingency Period) shall be returned to Buyer. All costs of Escrow and all
title and Escrow cancellation charges shall be shared equally by Buyer and
Seller.

     4.2  BUYER'S CONDITIONS. The following provisions of this SECTION 4.2 are
conditions precedent to Buyer's obligations hereunder.

          4.2.1     TITLE. Fee simple title to the Property shall be conveyed to
Buyer by Seller by a Grant Deed, subject to any Permitted Exceptions. On the
Close of Escrow, Seller shall cause Escrow Holder to issue to Buyer, at Buyer's
option, either a CLTA or an ALTA Owner's Policy of Title Insurance showing fee
title vested in Buyer subject only to the Permitted Exceptions ("TITLE POLICY").
The Title Policy shall be issued with liability in the amount of the Purchase
Price.

          4.2.2     DELIVERY OF DOCUMENTS. At least one (1) business day prior
to the Closing Date, Seller shall deliver to Escrow a fully executed and
acknowledged original of the Grant Deed, the General Assignment, the Non-Foreign
Affidavit, and all other documents referenced in SECTION 7.12 below.

          4.2.3     REPRESENTATIONS, WARRANTIES AND COVENANTS. Seller shall have
duly performed each and every agreement to be performed by Seller hereunder and
Seller's representations, warranties and covenants set forth in this Agreement
shall be true and correct as of the Closing Date. Seller agrees to deliver to
Buyer a certificate, executed by Seller and effective as of the Closing Date,
re-certifying to Buyer that the representations, warranties and covenants set
forth in this Agreement are true and correct as of the Closing Date. Seller
hereby represents and warrants to Buyer, except to the extent otherwise
expressly set forth in the documents delivered to Buyer by Seller pursuant to
SECTION 4.1.2 of this Agreement, the following matters.

                                    EXHIBIT I

                                       -8-


                    (a)  Seller has the legal power, right and authority to
enter into this Agreement and the instruments referenced herein and therein and
to consummate the transaction contemplated hereby and thereby.

                    (b)  All requisite action has been taken by Seller in
connection with entering into this Agreement and the instruments referenced
herein and therein and the consummation of the transactions contemplated hereby.

                    (c)  Neither the execution and delivery of this Agreement
and the documents referenced herein and therein, nor the consummation of the
transaction contemplated herein, nor the compliance with the terms of this
Agreement and the documents referenced herein conflict with or result in a
material breach of any terms, conditions or provisions of, or constitute a
default under, any note or other evidence of an indebtedness or any contract,
deed of trust, loan, partnership agreement or other agreement to which Seller is
a party.

                    (d)  There is no pending or contemplated action, suit,
arbitration, claim or proceeding, at law or in equity, affecting all or any
portion of the Property or Seller's interest in the Property or in which Seller
is or will be a party by reason of Seller's ownership of the Property.

                    (e)  CONTRACTS. The copies of the contracts, if any,
delivered to Buyer pursuant to SECTION 4.1.2(b) hereof are true, complete and
correct copies of all such contracts and there are no other contracts relating
to the Property. All such contracts shall be terminated prior to the Close of
Escrow to the extent Landlord is so instructed by Buyer. Except to the extent
otherwise instructed by Buyer, as of the Close of Escrow, there will be no
contracts or agreements affecting, binding or relating to the Property.
Notwithstanding anything to the contrary, Seller agrees to use commercially
reasonable efforts to cooperate with regard to extending such contracts to (or
causing the service provider to enter into similar contracts with) Buyer to the
extent Buyer so informs Seller.

                    (f)  USE PERMITS AND OTHER APPROVALS. To the extent held by
Landlord as owner (as opposed to being held by Tenant, as exclusive occupant),
all licenses, approvals, permits and certificates from governmental and
quasi-governmental agencies or private parties necessary for the use and
operation of the Property as are currently possessed by Seller. To the extent
the Property has been used by Seller (as opposed to Tenant's exclusive use of
the Building), the same has been used in accordance with (1) all such approvals,
licenses, permits and certificates, (2) all governmental regulations, and (3)
all covenants, conditions, restrictions, easements and agreements of any kind or
nature affecting the Property.

                    (g)  EXPENSE REPORTS. To Seller's actual knowledge, the
copies of the expense reports for the Property delivered by Seller to Buyer are
true, complete and correct copies of the originals thereof, and accurately show
all income and expenses of the Property in all respects, for the periods
indicated, in accordance with sound accounting principles.

                    (h)  HAZARDOUS SUBSTANCES. Seller has no actual knowledge
that any Hazardous Substances are present in, on or under the Property or any
nearby real property which could reasonably be expected to migrate to the
Property. Seller has no actual knowledge of any

                                   EXHIBIT I

                                       -9-


present Release (as hereinafter defined) or threatened Release of any Hazardous
Substances in, on or under the Property. Seller has no actual knowledge that
Hazardous Substances were ever present in, on or under the Property. Seller has
no actual knowledge that underground storage tanks of any kind are located in,
on or under the Property, nor were any underground storage tanks previously
located in, on or under the Property. To Seller's actual knowledge, the Property
has not been designated as "hazardous waste property" or "border zone property"
pursuant to California Health and Safety Code ss. 25220 et seq., no proceedings
for a determination as to whether the Property should be so designated are
pending or threatened, and no portion of the Property is located within two
thousand (2,000) feet of a significant disposal of "hazardous waste" within the
meaning of California Health and Safety Code Section 25221, which could cause
the Property to be classified as "border zone property." To Seller's actual
knowledge, no claim, demand, action or proceeding of any kind relating to any
past or present Release or threatened Release or any past or present violation
of any Environmental Laws at the Property has been made or commenced, or is
pending, or is being threatened or contemplated by any person. To Seller's
actual knowledge, no notice of any order, directive, complaint or other
communication, written or oral, has been made or issued by any governmental or
quasi-governmental agency nor has Seller received a written notice from any
other third party alleging the occurrence of any activity on the Property in
violation of any applicable Environmental Laws or demanding payment or
contribution for environmental damage or injury to the Property.

     As used in this Agreement, the following definitions shall apply:
"ENVIRONMENTAL LAWS" shall mean all federal, state and local laws, ordinances,
rules and regulations now or hereafter in force, as amended from time to time,
in any way relating to or regulating human health or safety, or industrial
hygiene or environmental conditions, or protection of the environment, or
pollution or contamination of the air, soil, surface water or groundwater, and
includes, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. Section. 9601, et seq.
("CERCLA"), the Resource Conservation and Recovery Act, 42 U.S.C. Section. 6901,
et seq., the Clean Water Act, 33 U.S.C. Section. 1251, et seq., the Hazardous
Substance Account Act, California Health and Safety Code Section. 25300, et
seq., the Hazardous Waste Control Law, California Health and Safety Code
Section. 25100, et seq., the Medical Waste Management Act, California Health and
Safety Code Section. 25015, et seq., and the Porter-Cologne Water Quality
Control Act, California Water Code Section. 13000, et seq. "HAZARDOUS
SUBSTANCE(S)" shall mean any substance or material that is described as a toxic
or hazardous substance, waste or material or a pollutant or contaminant or
infectious waste, or words of similar import, in any of the Environmental Laws,
and includes asbestos, petroleum or petroleum products (including crude oil or
any fraction thereof, natural gas, natural gas liquids, liquefied natural gas,
or synthetic gas usable for fuel, or any mixture thereof), polychlorinated
biphenyls, urea formaldehyde, radon gas, radioactive matter, medical waste, and
chemicals which may cause cancer or reproductive toxicity. "RELEASE" shall mean
any spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, dumping or disposing into the environment,
including continuing migration, of Hazardous Substances into or through soil,
air, surface water or groundwater.

                    (i)  COMPLIANCE WITH LAWS. To Seller's actual knowledge, no
notices of violation of or exemptions from governmental regulations relating to
the Property or Seller have been issued to, served upon, received by or entered
against Seller and no such violations or exemptions exist.

                                    EXHIBIT I

                                      -10-


                    (j)  LAND USE REGULATIONS. To Seller's actual knowledge,
Seller has not received any written notice of any condemnation, environmental,
planning, zoning or other land use regulation adversely affecting the Property
or any part thereof and no such regulations are contemplated. The Property
possesses all governmental and quasi-governmental entitlements necessary for the
continued operation and use of the Property. To Seller's actual knowledge, the
Property is in compliance with all federal, state and local zoning and general
plan designations. To Seller's actual knowledge, the Property is not located in
a redevelopment or other area proposed for special land use designations
including, without limitation, historical or other overlay zones and moratoria
or interim control ordinances and Seller has no basis to believe that the
Property may be included in a redevelopment or other special land use area. To
Seller's actual knowledge, Seller has not received any written notice of any
special assessment action or proceeding affecting the Property and no such
action or proceeding is contemplated.

                    (k)  TAXES. Other than the amounts disclosed by the tax
bills delivered to Buyer by Seller, no other real property taxes, assessments,
or other governmental charges or exactions ("TAXES") have been or will be
assessed against the Property for the current tax year except for real property
taxes to be assessed due to the change of ownership of the Property. Seller has
no actual knowledge, and Seller has received no notice of any Taxes or other
charges which will result from work, activities or improvements done to the
Property by Seller. Seller has no knowledge and Seller has received no notice of
any intended public improvements which will result in any Taxes being levied
against, or in the creation of any lien upon, the Property or any portion
thereof.

                    (l)  DEFECT NOTICES. To Seller's actual knowledge, Seller
has not received any notice from any insurance company of any defects or
inadequacies in the Property which remain pending or unresolved, except as may
be indicated in the written materials supplied Buyer by Seller pursuant to this
Agreement.

                    (m)  OTHER CONTRACTS. To Seller's actual knowledge, Seller
has not entered into any other contract for the sale of the Property.

                    (n)  AIR RIGHTS. To Seller's actual knowledge, neither
Seller, nor any previous owner of the Property, has sold, transferred, conveyed,
or entered into any agreement regarding "air rights," "excess floor area ratio,"
"transferable density rights," or other development or density rights or
restrictions relating to the Property.

                    (o)  TRUE COPIES. To Seller's actual knowledge, all
documents to be submitted to Buyer for Buyer's approval pursuant to this
Agreement will be true, correct and complete copies thereof as of the date of
submission thereof and as of the Close of Escrow, and all supplements or
additions will be true, correct and complete copies thereof as of the date
submitted and as of the Close of Escrow. Seller has no actual knowledge of any
error, misrepresentation or inconsistency with any of the documents or
supplemental documents delivered by Seller pursuant to this Agreement.

                    (p)  INSOLVENCY. This Agreement is the product of an
arms-length transaction and the Purchase Price represents the fair value of the
Property. To Seller's actual knowledge, Seller has not taken any action relating
to the Property which would invalidate this

                                    EXHIBIT I

                                      -11-


transaction or the transfer of the Property to Buyer. Seller is currently
solvent, and shall not be rendered insolvent by virtue of the sale of the
Property to Buyer, and, in Seller's actual knowledge, Seller has not otherwise
taken any action which may subject Seller to applicable bankruptcy or similar
laws affecting the rights of creditors generally.

                    (q)  PERSONAL PROPERTY; INTANGIBLE RIGHTS AND WARRANTIES. To
Seller's actual knowledge, Seller has not made any previous assignments, sales
or conveyances of any personal property covered by this Agreement and there are
no encumbrances covering any such personal property which will survive the Close
of Escrow. Seller has good title to all of such personal property free from any
liens and encumbrances that will survive the Close of Escrow, and no affiliate
of Seller has any interest in any of such personal property. Seller has not made
any previous assignment, transfer or disposition of all or any part of its
interest in the intangible property or any warranties relating to the Property,
Seller has not encumbered the intangible property and the warranties, and Seller
is not aware of any encumbrances covering the intangible property and the
warranties that will survive the Close of Escrow.

                    (r)  ADVERSE MATTERS. To Seller's actual knowledge, Seller
is not aware of any material adverse facts or information concerning the
Property which would be relevant to Buyer with respect to Buyer's determination
to acquire the Property.

For purposes of this Agreement, all references to "Seller's actual knowledge,"
shall mean to the actual knowledge of the then-current property manager employed
by Seller who is responsible for the management and oversight of the Project and
Pacific Corporate Center, the identity of whom shall be disclosed by Seller to
Buyer in conjunction with Seller's deliver of documents pursuant to Section
4.1.2 of this Agreement; provided, however, that to the extent such
then-existing property manager does not have reasonable actual knowledge with
regard to the Project (based upon having held such position for less than two
(2) years), Seller shall provide a suitable replacement or replacements for the
purpose of "Seller's actual knowledge", the identity of whom shall be subject to
Buyer's reasonable approval.

          4.2.4     COVENANTS OF SELLER PRIOR TO CLOSING. During the period from
the Opening of Escrow until the earlier of (a) Close of Escrow or (b) the
termination of this Agreement, Seller shall, in addition to the covenants set
forth elsewhere in this Agreement:

                    (a)  Not permit or suffer to exist any encumbrance, charge
or lien to be placed or claimed upon the Property (i) unless such encumbrance,
charge or lien has been approved in writing by Buyer, (ii) unless such
encumbrance, charge or lien results generally from a mandatory action or
assessment by an applicable governmental entity (as opposed to resulting from a
direct action of Seller), or (iii) unless such monetary encumbrance, charge or
lien will be removed by Seller prior to the Close of Escrow;

                    (b)  Not enter into any service, management or other
contract relating to the Property which will survive the Close of Escrow, unless
otherwise approved by Buyer;

                    (c)  Promptly notify Buyer in writing if, to Seller's actual
knowledge, any of the representations and warranties set forth in this Agreement
are no longer true and correct;

                                   EXHIBIT 1

                                      -12-


                    (d)  Not sell, convey, assign, transfer, encumber or
otherwise dispose of the Property; and

                    (e)  Not take any other action which may reasonably be
expected to have an adverse effect upon the Property or upon Buyer if Buyer
acquires the Property.

     4.3  SELLER'S CONDITIONS. The following provisions of this SECTION 4.3
shall be conditions precedent to Seller's obligations hereunder.

          4.3.1     DELIVERY OF FUNDS AND DOCUMENTS. Buyer shall have delivered
to Escrow Holder the balance of the Purchase Price as provided in SECTIONS 2.2
and 2.4 above and delivered to Escrow Holder any other document required to be
delivered by Buyer hereunder.

          4.3.2     REPRESENTATION, WARRANTIES AND COVENANTS. Buyer shall have
duly performed each and every agreement to be performed by Buyer hereunder.

                                    ARTICLE 5

                            ACTIONS BY ESCROW HOLDER

     5.1  DISBURSEMENTS AND OTHER ACTIONS BY ESCROW HOLDER. On the Closing Date,
Escrow Holder shall promptly undertake all of the following in the manner herein
below indicated.

          5.1.1     RECORDING. Cause the Grant Deed (with documentary transfer
tax information to be affixed after recording) to be recorded in the Official
Records of San Diego County, California and obtain conformed copies thereof for
distribution to Buyer.

          5.1.2     FUNDS. Disburse all funds deposited with Escrow Holder by
Buyer in the payment of the Purchase Price as follows.

                    (a)  to the extent that Seller is a foreign person pursuant
to Section 1445 of the Internal Revenue Code of 1986, as amended, and is not
otherwise exempt from such section's withholding requirements, withhold the cash
equivalent of ten percent (10%) of the Purchase Price (unless some lesser amount
is authorized by the Internal Revenue Service);

                    (b)  to the extent that Seller is a non-California resident
pursuant to Revenue and Taxation Code Sections 18805 and 26131, and is not
otherwise exempted from such sections' withholding requirements, withhold the
cash equivalent of three and one-third percent (3-1/3%) of the Purchase Price
(unless some lesser amount is authorized by the Franchise Tax Board);

                    (c)  Deduct all items chargeable to the account of Seller
pursuant to SECTION 3.4.

                    (d)  Disburse the remaining balance of the Purchase Price to
Seller on the Close of Escrow.

                                   EXHIBIT I

                                      -13-


                    (e)  Disburse the remaining balance, if any, of funds
remaining in the Escrow to Buyer promptly upon the Close of Escrow.

          5.1.3     TITLE POLICY. Cause the Title Policy to be issued and
delivered to Buyer.

          5.1.4     DISBURSEMENT OF DOCUMENTS TO BUYER. Disburse the FIRPTA
Certificate and a conformed copy of the recorded Grant Deed and all other
documents set forth in SECTION 7.12 below to Buyer.

                                    ARTICLE 6

                              DEFAULT AND REMEDIES

     6.1  DEFAULT BY SELLER. If Seller breaches this Agreement or defaults in
the performance of its obligations hereunder, Buyer may, at its option, (a)
terminate this Agreement and all of its obligations hereunder, in which event
any sums paid to Seller and/or deposited into Escrow (including, without
limitation, the Deposit and any interest accrued on the Initial Non-Refundable
Deposit during the Contingency Period)) shall be returned to Buyer, or (b) elect
to proceed with the purchase notwithstanding such breach or default, in which
event all of Buyer's remedies for such breach shall be preserved, including,
without limitation, the right of specific performance.

     6.2  DEFAULT OF BUYER.

          6.2.1     IN GENERAL. Seller's right to terminate the Escrow, to
receive liquidated damages as set forth below, and to continue the Lease in full
force and effect shall be Seller's sole recourse and remedy for the unexcused
failure or refusal of Buyer to purchase the Property, and Seller waives any
right to bring an action for specific performance against Buyer with respect to
the Property.

          6.2.2     LIQUIDATED DAMAGES - DEPOSIT. FOLLOWING THE EXPIRATION OF
THE CONTINGENCY PERIOD, IF THE SALE OF THE PREMISES TO BUYER IS NOT CONSUMMATED
DUE TO A SELLER DEFAULT OR TENANT'S EXERCISE OF AN EXPRESS TERMINATION RIGHT SET
FORTH HEREIN, THE DEPOSIT SHALL BE REFUNDED AND DELIVERED TO BUYER WITHIN THREE
(3) BUSINESS FOLLOWING RECEIPT BY SELLER AND ESCROW HOLDER OF BUYER'S WRITTEN
DEMAND THEREFORE. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS
AGREEMENT, IF, FOLLOWING THE EXPIRATION OF THE CONTINGENCY PERIOD, THE SALE OF
THE PROPERTY TO BUYER IS NOT CONSUMMATED FOR ANY REASON OTHER THAN SELLER'S
DEFAULT UNDER THE AGREEMENT OR TENANT'S EXERCISE OF AN EXPRESS TERMINATION RIGHT
SET FORTH HEREIN, SELLER SHALL BE ENTITLED TO RETAIN THE DEPOSIT AS SELLER'S
LIQUIDATED DAMAGES. THE PARTIES AGREE THAT IT WOULD BE IMPRACTICABLE AND
EXTREMELY DIFFICULT TO ASCERTAIN THE ACTUAL DAMAGES SUFFERED BY SELLER AS A
RESULT OF BUYER'S FAILURE TO COMPLETE THE PURCHASE OF THE PROPERTY PURSUANT TO
THIS AGREEMENT, AND THAT UNDER THE CIRCUMSTANCES

                                    EXHIBIT I

                                      -14-


EXISTING AS OF THE DATE OF THIS AGREEMENT, THE LIQUIDATED DAMAGES PROVIDED FOR
IN THIS SECTION REPRESENT A REASONABLE ESTIMATE OF THE DAMAGES WHICH SELLER WILL
INCUR AS A RESULT OF SUCH FAILURE; PROVIDED, HOWEVER, THAT THIS PROVISION SHALL
NOT LIMIT SELLER'S RIGHTS TO RECEIVE REIMBURSEMENT FOR ATTORNEYS' FEES. THE
PARTIES ACKNOWLEDGE THAT THE PAYMENT OF SUCH LIQUIDATED DAMAGES IS NOT INTENDED
AS A FORFEITURE OR PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTION
3275 OR 3369, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER
PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671, 1676, AND 1677. THE PARTIES
HAVE SET FORTH THEIR INITIALS BELOW TO INDICATE THEIR AGREEMENT WITH THE
LIQUIDATED DAMAGES PROVISION CONTAINED IN THIS SECTION.

                     -----------------   ---------------
                     SELLER'S INITIALS   BUYER'S INITIALS

                                    ARTICLE 7

                                  MISCELLANEOUS

     7.1  NOTICE. Any notices, requests, demands or other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given upon receipt thereof. Notice may be
given by private messenger, by telecopy transmission, by nationally recognized
overnight courier, by first class mail, registered or certified, postage
prepaid, and return receipt requested. Notice shall be addressed as follows:

     Seller:                                Buyer:

     Kilroy Realty Corporation              Vical Incorporated
     2250 East Imperial Highway             10390 Pacific Centre
     Suite 1200                             San Diego, California  92121
     El Segundo, California  90245          Attention: Chief Financial Officer
     Attention: Legal Department

     And                                    And

     Kilroy Realty Corporation              Vical Incorporated
     3811 Valley Centre Drive, Suite 300    10390 Pacific Centre Court
     San Diego, California  92130           San Diego, California  92121
     Attention: Mr. Steve Scott             Attention: General Counsel

     And

     Allen Matkins Leck Gamble & Mallory
     1901 Avenue of the Stars, Suite 1800
     Los Angeles, California 90067
     Attention: Anton N. Natsis, Esq.

                                   EXHIBIT I
                                      -15-


     Either party may change such address for notification purposes by sending
written notice thereof to the other party pursuant to this Section.

     7.2  BROKERS. Each party represents to the other that there are no brokers
which are owed any real estate brokerage commission or finder's fee in
connection with this transaction. Seller and Buyer each agree to indemnify and
hold the other harmless from and against all liability, claims, demands,
damages, or costs of any kind arising from or connected with any broker's or
finder's fee or commission or charge claimed to be due from any person arising
from the indemnifying party's conduct with respect to this transaction.

     7.3 PROPERTY "AS IS".

          7.3.1     NO SIDE AGREEMENTS OR REPRESENTATIONS. No person acting on
behalf of Seller is authorized to make, and by execution hereof, Buyer
acknowledges that no person has made, any representation, agreement, statement,
warranty, guarantee or promise regarding the Property or the transaction
contemplated herein or the zoning, construction, physical condition or other
status of the Property except as may be expressly set forth in this Agreement.
No representation, warranty, agreement, statement, guarantee or promise, if any,
made by any person acting on behalf of Seller which is not contained in this
Agreement will be valid or binding on Seller.

          7.3.2     AS IS CONDITION. BUYER ACKNOWLEDGES AND AGREES THAT, EXCEPT
AS EXPRESSLY SET FORTH IN SECTION 4.2.3 ABOVE, SELLER HAS NOT MADE, DOES NOT
MAKE AND SPECIFICALLY NEGATES AND DISCLAIMS ANY REPRESENTATIONS, WARRANTIES,
PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER
WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR
FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO (I) VALUE; (II) THE INCOME TO
BE DERIVED FROM THE PROPERTY; (III) THE SUITABILITY OF THE PROPERTY FOR ANY AND
ALL ACTIVITIES AND USES WHICH BUYER MAY CONDUCT THEREON, INCLUDING, WITHOUT
LIMITATION, THE POSSIBILITIES FOR FUTURE DEVELOPMENT OF THE PROPERTY; (IV) THE
HABITABILITY, MERCHANTABILITY, MARKETABILITY, PROFITABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OF THE PROPERTY; (V) THE MANNER, QUALITY, STATE OF REPAIR OR
LACK OF REPAIR OF THE PROPERTY; (VI) THE NATURE, QUALITY OR CONDITION OF THE
PROPERTY, INCLUDING, WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY; (VII) THE
COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION WITH ANY LAWS, RULES,
ORDINANCES OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL AUTHORITY OR BODY;
(VIII) THE MANNER OR QUALITY OF THE CONSTRUCTION OR MATERIALS, IF ANY,
INCORPORATED INTO THE PROPERTY; (IX) COMPLIANCE WITH ANY ENVIRONMENTAL
PROTECTION, POLLUTION OR LAND USE LAWS, RULES, REGULATION, ORDERS OR
REQUIREMENTS, INCLUDING, WITHOUT LIMITATION, TITLE III OF THE AMERICANS WITH
DISABILITIES ACT OF 1990, CALIFORNIA HEALTH &

                                   EXHIBIT I

                                      -16-


SAFETY CODE, THE VISUAL ARTISTS RIGHTS ACT, THE FEDERAL WATER POLLUTION CONTROL
ACT, THE FEDERAL RESOURCE CONSERVATION AND RECOVERY ACT, THE U.S. ENVIRONMENTAL
PROTECTION AGENCY REGULATIONS AT 40 C.F.R., PART 261, THE COMPREHENSIVE
ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED, THE
RESOURCE CONSERVATION AND RECOVERY ACT OF 1976, THE CLEAN WATER ACT, THE SAFE
DRINKING WATER ACT, THE HAZARDOUS MATERIALS TRANSPORTATION ACT, THE TOXIC
SUBSTANCE CONTROL ACT, AND REGULATIONS PROMULGATED UNDER ANY OF THE FOREGOING;
(X) THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS AT, ON, UNDER, OR ADJACENT TO
THE PROPERTY; (XI) THE CONTENT, COMPLETENESS OR ACCURACY OF ANY DUE DILIGENCE
MATERIALS OR PRELIMINARY REPORT REGARDING TITLE; (XII) THE CONFORMITY OF THE
IMPROVEMENTS TO ANY PLANS OR SPECIFICATIONS FOR THE PROPERTY, INCLUDING ANY
PLANS AND SPECIFICATIONS THAT MAY HAVE BEEN OR MAY BE PROVIDED TO BUYER; (XIII)
THE CONFORMITY OF THE PROPERTY TO PAST, CURRENT OR FUTURE APPLICABLE ZONING OR
BUILDING REQUIREMENTS; (XIV) DEFICIENCY OF ANY UNDERSHORING; (XV) DEFICIENCY OF
ANY DRAINAGE; (XVI) THE FACT THAT ALL OR A PORTION OF THE PROPERTY MAY BE
LOCATED ON OR NEAR AN EARTHQUAKE FAULT LINE OR ON OR NEAR A FLOOD PLAIN; (XVII)
THE EXISTENCE OF VESTED LAND USE, ZONING OR BUILDING ENTITLEMENTS AFFECTING THE
PROPERTY; OR (XVIII) WITH RESPECT TO ANY OTHER MATTER. BUYER FURTHER
ACKNOWLEDGES AND AGREES THAT HAVING BEEN IN POSSESSION OF THE PROPERTY FOR OVER
NINE (9) YEARS AND HAVING BEEN GIVEN THE OPPORTUNITY TO INSPECT THE PROPERTY AND
REVIEW INFORMATION AND DOCUMENTATION AFFECTING THE PROPERTY, BUYER IS RELYING
SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND REVIEW OF SUCH INFORMATION
AND DOCUMENTATION, AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY
SELLER. BUYER FURTHER ACKNOWLEDGES AND AGREES THAT ANY INFORMATION MADE
AVAILABLE TO BUYER OR PROVIDED OR TO BE PROVIDED BY OR ON BEHALF OF SELLER WITH
RESPECT TO THE PROPERTY WAS OBTAINED FROM A VARIETY OF SOURCES AND THAT SELLER
HAS NOT MADE ANY INDEPENDENT INVESTIGATION OR VERIFICATION OF SUCH INFORMATION
AND MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR COMPLETENESS OF SUCH
INFORMATION EXCEPT AS PROVIDED IN SECTION 4.2.3 ABOVE. EXCEPT AS PROVIDED IN
SECTION 4.2.3 ABOVE, BUYER AGREES TO FULLY AND IRREVOCABLY RELEASE SELLER FROM
ANY AND ALL CLAIMS THAT BUYER MAY NOW HAVE OR HEREAFTER ACQUIRE AGAINST SELLER
FOR ANY COSTS, LOSS, LIABILITY, DAMAGE, EXPENSE, DEMAND, ACTION OR CAUSE OF
ACTION ARISING FROM SUCH INFORMATION OR DOCUMENTATION. SELLER IS NOT LIABLE OR
BOUND IN ANY MANNER BY ANY ORAL OR WRITTEN STATEMENTS, REPRESENTATIONS OR
INFORMATION PERTAINING TO THE PROPERTY, OR THE OPERATION THEREOF, FURNISHED BY
ANY REAL ESTATE BROKER, AGENT, EMPLOYEE, SERVANT OR OTHER PERSON. BUYER FURTHER
ACKNOWLEDGES AND AGREES THAT TO THE MAXIMUM EXTENT

                                   EXHIBIT I

                                      -17-


PERMITTED BY LAW, THE SALE OF THE PROPERTY AS PROVIDED FOR HEREIN IS MADE ON AN
"AS IS" CONDITION AND BASIS WITH ALL FAULTS, AND THAT SELLER HAS NO OBLIGATIONS
TO MAKE REPAIRS, REPLACEMENTS OR IMPROVEMENTS EXCEPT AS MAY OTHERWISE BE
EXPRESSLY STATED HEREIN AND/OR IN THE LEASE. BUYER REPRESENTS, WARRANTS, AND
COVENANTS TO SELLER, WHICH REPRESENTATION, WARRANTY, AND COVENANT SHALL SURVIVE
THE CLOSE OF ESCROW AND NOT BE MERGED WITH THE GRANT DEED, THAT, EXCEPT FOR
SELLER'S EXPRESS REPRESENTATIONS AND WARRANTIES SPECIFIED IN THIS AGREEMENT,
BUYER IS RELYING SOLELY UPON BUYER'S OWN INVESTIGATION OF THE PROPERTY.

          BY INITIALING BELOW, THE BUYER ACKNOWLEDGES THAT (I) THIS
SECTION 7.3.2 HAS BEEN READ AND FULLY UNDERSTOOD, (II) THE BUYER HAS HAD THE
CHANCE TO ASK QUESTIONS OF ITS COUNSEL ABOUT ITS MEANING AND SIGNIFICANCE, AND
(III) THE BUYER HAS ACCEPTED AND AGREED TO THE TERMS SET FORTH IN THIS SECTION
7.3.2.

          -----------------
          BUYER'S INITIALS

     7.4  CHANGE IN CONDITION OF PROPERTY.

     Seller covenants and agrees to immediately advise Buyer of any material
change in the physical condition of the Property, or of any material damage or
destruction to the Property, or upon receipt of any notice regarding the
condemnation of the Property or any portion thereof ("CHANGE IN CONDITION"),
except to the extent Seller's knowledge thereof resulted from information
provided to Seller by Buyer.

     If Seller is obligated as Landlord under the terms of the Lease to repair
such Change in Condition, and if the cost to make such repair is determined by a
contractor retained by Buyer, and approved by Seller, to be less than $100,000,
Seller, at Buyer's election, shall either perform such repairs to Buyer's
satisfaction prior to the Close of Escrow or reduce the Purchase Price by the
amount determined by such contractor as necessary to perform such repairs. If
Seller is obligated as Landlord under the terms of the Lease to repair such
Change in Condition, and if such Change in Condition is estimated by such
contractor to cost $100,000 or more to repair, then Buyer shall have the right,
exercisable by giving notice of such decision to Seller within fifteen (15)
calendar days after receiving notice from Seller of such Change in Condition or
discovering such Change in Condition, either to (i) terminate this Agreement and
the Escrow, or (ii) accept the Property in its then condition without a
reduction in the Purchase Price and with all proceeds of insurance payable to
Seller by reason of such damage or destruction to be paid or assigned to Buyer.

                                   EXHIBIT I

                                      -18-


     7.5  SUCCESSORS. The provisions of this Agreement shall be binding upon and
inure to the benefit of the successors and assigns of Seller and Buyer, subject
to the limitation on assignment expressed in SECTION 7.6 below.

     7.6  ASSIGNMENT. Buyer may assign this Agreement to any Affiliate of Buyer
or any other assignee or transferee of Buyer's interest in the Lease, in Buyer's
sole and absolute discretion.

     7.7  ATTORNEYS' FEES. If either party files any action or brings any
proceeding against the other arising out of this Agreement, or is made a party
to any action or proceeding brought by the Escrow Holder, then as between Buyer
and Seller, the prevailing party shall be entitled to recover as an element of
its costs of suit, and not as damages, its actual attorneys' fees incurred. The
"PREVAILING PARTY" shall be the party who was entitled to recover its costs of
suit, whether or not such suit proceeds to final judgment. No sum for attorneys'
fees shall be counted in calculating the amount of the judgment for purposes of
determining whether a party is entitled to its costs or attorneys' fees.

     7.8  INTEGRATION. This Agreement and the Lease contain the entire agreement
of the parties and supersede any prior written or oral agreements between them
concerning the subject matter contained herein. There are no representations,
agreements, arrangements or understandings, either oral or written, relating to
the subject matter hereof which are not fully expressed herein and in the Lease.

     7.9  DEPENDENCY AND SURVIVAL OF PROVISIONS. The respective warranties,
representations, covenants, agreements, obligations and undertakings of each
party hereunder shall be construed as dependent upon and given in consideration
of those of the other party, and they shall survive the Close of Escrow and
delivery of the Grant Deed and shall not merge into the Grant Deed.

     7.10 TAX DEFERRED EXCHANGE. Seller may wish to effect the transaction
described in this Agreement, as to all or a portion of the Property, as a tax
deferred exchange pursuant to Internal Revenue Code Section 1031, or any
successor or similar statute. Buyer agrees to cooperate in such an exchange so
long as Buyer is not required to incur any costs or obligations or take title to
any property in connection therewith other than the Property. Seller shall
defend, indemnify and hold Buyer harmless from and against any claims, costs or
liabilities, including reasonable attorneys' fees, arising from Buyer's
participation in such an exchange. The completion of any such exchange shall not
be a condition to or delay the Close of Escrow.

     7.11 NO JOINT VENTURE. Nothing in this Agreement, including the exhibits,
or in the performance of this Agreement, shall create or be deemed to create a
partnership or joint venture relationship between the parties to this Agreement.

     7.12 TRANSFER DOCUMENTS. Seller agrees to deliver through the Escrow (i) a
"General Assignment", in the form attached hereto as Exhibit "B"; (ii) a
Non-Foreign Affidavit pursuant to Section 1445(b)(2) of the Internal Revenue
Code in form and substance reasonably satisfactory to Buyer; (iii) a bill of
sale conveying to Buyer all of Seller's personal property used in connection
with the Property, in form and substance reasonably satisfactory to Buyer; (iv)a

                                   EXHIBIT I

                                      -19-


1099 Designation Agreement; and (v) a Withholding Exemption Certificate, Form
597W or in the event that the Seller is a non-California resident, a certificate
issued by the California Franchise Tax Board, pursuant to Revenue and Taxation
Code Sections 18805 and 26131, stating either the amount of withholding required
from Seller's proceeds or that Seller is exempt from such withholding
requirement.

     7.13 CROSS-EASEMENT AND ACCESS AGREEMENTS. To the extent the
cross-easement and access agreements described in Sections 1.1.2 and 4.3 of the
Lease (i) have not been recorded, (ii) do not provide for the owner of the
Premises to receive a credit against its share of the Pacific Corporate Center
Common Area Costs (as defined in the Lease), or their equivalent, for 9.05% of
the taxes paid for the land included in the Premises, or (iii) do not provide
for the owner of the Premises to participate in any third party property
management decisions relating to the Property, then Seller shall cause the same
to occur to Buyer's reasonable satisfaction, prior to the Close of Escrow.

     7.14 SEVERABILITY. Should any part of this Agreement for any reason be
declared invalid, such decision shall not affect the validity of any remaining
portion, which remaining portion shall remain in force and effect as if this
Agreement had been executed with the invalid portion thereof eliminated, and it
is hereby declared the intention of the parties that they would have executed
the remaining portion of this Agreement without including any such part, parts,
or portions which may, for any reason, be hereafter declared invalid.

     7.15 TIME OF ESSENCE. Time is of the essence of this Agreement and of the
Escrow provided for herein.

                          [continued on following page]

                                   EXHIBIT I

                                      -20-


     7.15 COUNTERPARTS. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

     IN WITNESS WHEREOF, this Agreement of Purchase and Sale is executed as of
the date first set forth above.

SELLER:                                            BUYER:

KILROY REALTY, L.P.,                               VICAL INCORPORATED,
a Delaware limited partnership                     a Delaware corporation

By:  Kilroy Realty Corporation,                    By:
     a Maryland corporation,                          --------------------------
     General Partner                                  Its:
                                                          ---------------------

     By:                                           By:
        -------------------------                     -------------------------
        Its:                                          Its:
            ---------------------                         ----------------------

     By:
        -------------------------
        Its:
            ---------------------

                                   EXHIBIT I

                                      -21-


                             EXHIBIT A TO EXHIBIT I

                        LEGAL DESCRIPTION OF THE PROPERTY

          [TO BE ATTACHED FOLLOWING THE ANTICIPATED LOT-LINE ADJUSTMENT
             CREATING A SEPARATE PARCEL UNDER THE PROJECT/PREMISES]


                                  EXHIBIT A TO
                                   EXHIBIT I

                                      -1-


                             EXHIBIT B TO EXHIBIT I

                               GENERAL ASSIGNMENT

                               GENERAL ASSIGNMENT

     THIS ASSIGNMENT AND ASSUMPTION (the "Assignment") dated as of _________,
20___, is between KILROY REALTY, L.P., a Delaware limited partnership
("Assignor"), and VICAL, INCORPORATED., a Delaware corporation ("Assignee").

     A.   Assignor owns certain real property and certain improvements thereon
commonly known as [INSERT DESCRIPTION OF PROPERTY], and more particularly
described in Exhibit "A" attached hereto (the "Property").

     B.   Assignor and Assignee entered into an Agreement of Sale and Purchase
dated as of January __, 2002 (the "Purchase Agreement"), pursuant to which
Assignee agreed to purchase the Property from Assignor and Assignor agreed to
sell the Property to Assignee, on the terms and conditions contained therein.

     C.   Assignor desire to assign to Assignee its interest, if any, in all
warranties, guaranties and intangible personal property with respect to the
Property, to the extent the same are assignable, and Assignee desires to accept
the assignment thereof, on the terms and conditions below.

     ACCORDINGLY, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:

     1.   Assignor hereby assigns to Assignee all of Assignor's right, title,
and interest, if any, in and to the following, from and after the date hereof,
to the extent the same are assignable:

          (a) any warranties and guaranties ("Warranties and Guaranties") made
     by or received from any third party with respect to the Property and/or to
     any improvements owned by Assignor on the Property; and

          (b) any and all intangible personal property owned by Seller which is
     appurtenant to the Property.

     2.   Assignee hereby accepts the foregoing assignment by Assignor and
assumes all of the Assignor's obligations under the matters assigned from and
after the date hereof.

     3.   Assignee agrees to indemnify Assignor and hold Assignor harmless from
and against any and all claims, liens, damages, demands, causes of action,
liabilities, lawsuits, judgments, losses, costs and expenses (including but not
limited to attorneys' fees and expenses) asserted against or incurred by
Assignor by reason of or arising out of any failure by Assignee on

                                  EXHIBIT B TO
                                   EXHIBIT I

                                       -1-


or after the date of this assignment to perform or observe the obligations,
covenants, terms and conditions assumed by Assignee hereunder. Assignor agrees
to indemnify Assignee and hold Assignee harmless from and against any and all
claims, liens, damages, demands, causes of action, liabilities, lawsuits,
judgments, losses, costs and expenses (including but not limited to attorneys'
fees and expenses) asserted against or incurred by Assignee by reason of or
arising out of any failure by Assignor, prior to the date of this Assignment, to
perform or observe the obligations, covenants, terms and conditions to assumed
by Assignee hereunder.

     4.   In the event of any dispute between Assignor and Assignee arising out
of the obligations of the parties under this Assignment or concerning the
meaning or interpretation of any provision contained herein, the losing party
shall pay the prevailing party's costs and expenses of such dispute, including,
without limitation, reasonable attorneys' fees and costs.

     5.   This Assignment shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.

     6.   This Assignment shall be governed and construed in accordance with the
laws of the State of California.

     7.   This Assignment may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.

     Assignor and Assignee have executed this Agreement the day and year first
above written.

ASSIGNOR:                      KILROY REALTY, L.P.,
                               a Delaware limited partnership

                               By:
                                     -----------------------------------
                               Name:
                                     -----------------------------------
                               Title:
                                     -----------------------------------

ASSIGNEE:                      VICAL, INCORPORATED,
                               a Delaware corporation

                               By:
                                     -----------------------------------
                               Name:
                                     -----------------------------------
                               Title:
                                     -----------------------------------

                               By:
                                     -----------------------------------
                               Name:
                                     -----------------------------------
                               Title:
                                     -----------------------------------

                                  EXHIBIT B TO
                                   EXHIBIT I

                                      -2-


                                    EXHIBIT J

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                   [GRAPHIC DEPICTING PROJECT PARKING SPACES]

                                   EXHIBIT J

                                      -1-


                                    EXHIBIT K

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

           [LISTING OF PACIFIC CORPORATE CENTER COMMON AREA COSTS AND
                          GRAPHIC DEPICTING SITE PLAN]

                                   EXHIBIT K

                                      -1-


                                    EXHIBIT L

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

            [GRAPHIC DEPICTING PRE-APPROVED FORM OF TENANT'S SIGNAGE
                         (APPROVED SIGN SPECIFICATIONS)]

                                   EXHIBIT L

                                      -1-


                                    EXHIBIT M

                   PACIFIC CORPORATE CENTER LOT 25/27 PROJECT

                        SHORT FORM OF MEMORANDUM OF LEASE

RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:

Vical Incorporated
9373 Towne Centre Drive
San Diego, California  92121
Attention:  General Counsel

===============================================================================

                      SHORT FORM OF MEMORANDUM OF SUBLEASE

     THIS SHORT FORM OF MEMORANDUM OF LEASE is entered into as of the 30th day
of January, 2002, by and between KILROY REALTY, L.P., a Delaware limited
partnership ("LANDLORD"), and VICAL INCORPORATED, a Delaware corporation
("TENANT"), who agree as follows.

     1.   TERMS AND PREMISES. Landlord leases to Tenant, and Tenant leases from
Landlord, certain premises (the "PREMISES") to be located on a portion of the
real property (the "PROJECT") legally described on SCHEDULE 1 attached hereto
and incorporated herein by this reference (including parking areas more
particularly identified in the Lease), for the term and in accordance with the
provisions of that certain Lease by and between Landlord and Tenant, dated as of
the date hereof (the "LEASE"). The provisions of the Lease are hereby
incorporated herein.

     2.   CERTAIN EXPRESS LEASE TERMS. As more particularly set forth in the
referenced sections of the Lease, Tenant enjoys the following rights pursuant to
the terms and conditions of the Lease: (i) an initial Lease Term of fifteen (15)
years (Section 2.1); (ii) options to extend the initial Lease Term for up to
three (3) five (5)-year Option Terms (Section 2.2); (iii) an ongoing Right Of
First Offer with regard to the adjacent buildings located at 10398 Pacific
Center Court and 10394 Pacific Center Court (Section 1.3); and (iv) a one-time
Option to Purchase Premises during the ninth (9th) Lease Year (Article 30).

     3.   PROVISIONS BINDING ON PARTIES. The provisions of the Lease to be
performed by Landlord or Tenant, whether affirmative or negative in nature, are
intended to and shall bind or benefit the respective parties hereto and their
assigns or successors, as applicable, at all times.

                                      (i)


     3.   PURPOSE OF SHORT FORM OF MEMORANDUM OF LEASE. This Short Form of
Memorandum of Lease is prepared solely for purposes of recordation, and in no
way modifies the provisions of the Lease.

LANDLORD                       KILROY REALTY, L.P.,
                               a Delaware limited partnership
                               By:   /s/ STEVE SCOTT
                                     ----------------------------------------
                               Name: Steve Scott
                                     ----------------------------------------
                               Title:Senior Vice President
                                     ----------------------------------------

TENANT                         VICAL INCORPORATED,
                               a Delaware corporation
                               By:   /s/ MARTHA J. DEMSKI
                                     ----------------------------------------
                               Name: Martha J. Demski
                                     ----------------------------------------
                               Title:Vice President/CFO
                                     ----------------------------------------

                                      (ii)


STATE OF CALIFORNIA            )
                               )ss.
COUNTY OF San Diego            )

     On 1 February 02, before me, Vanessa Whitlow, a Notary Public in and for
said state, personally appeared Martha Demski, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument, the person, or the entity upon behalf of which the person acted,
executed the instrument.

     WITNESS my hand and official seal.

                                     /s/ VANESSA WHITLOW
                                     -----------------------------------------
                                     Notary Public in and for said State

(SEAL)

STATE OF CALIFORNIA            )
                               )ss.
COUNTY OF San Diego            )

     On February 4, 2002, before me, Sharon Howerton, a Notary Public in and for
said state, personally appeared Steve Scott, personally known to me to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he executed the same in his authorized capacity, and that by his signature
on the instrument, the person, or the entity upon behalf of which the person
acted, executed the instrument.

     WITNESS my hand and official seal.

                                     /s/ SHARON HOWERTON
                                     -----------------------------------------
                                     Notary Public in and for said State

(SEAL)

                                     (iii)

EX-10.28

                               VICAL INCORPORATED
                             9373 TOWNE CENTRE DRIVE               EXHIBIT 10.28
                                    SUITE 100
                               SAN DIEGO, CA 92121

                                February 5, 2002

Mr. Vijay B. Samant

RE:    AMENDMENT TO NOVEMBER 28, 2000 LETTER REGARDING EMPLOYMENT TERMS

Dear Vijay:

This Amendment (the "AMENDMENT") to your Letter Agreement with Vical
Incorporated (the "COMPANY") dated November 28, 2000 (the "AGREEMENT") will
amend the terms and conditions of the Agreement to the extent provided herein.
Except as specifically amended by this Amendment, the terms and conditions of
the Agreement shall remain in full force and effect.

Paragraph 6 of the Agreement is hereby deleted in its entirety and replaced with
the following:

       "6.   RELOCATION. To assist you in moving to the San Diego area, we are
             prepared to pay the reasonable and customary expenses of relocating
             you and your family, not to exceed $60,000 (the aggregate amount of
             relocation expenses for which you are entitled to reimbursement
             hereunder shall be referred to herein as the "Relocation Expense
             Amount"), and such Relocation Expense Amount shall be subject to
             offset as provided in this Section 6 below. In addition, in the
             event your residence in Pennsylvania is prepared and maintained
             (including customary insurance coverage) for sale in reasonable
             condition and listed for sale by September 1, 2002, the Company
             will reimburse you up to $100,000 of any loss you incur on its
             sale; PROVIDED THAT, in the event such a loss is anticipated,
             the Company or its designees may, at the Company's sole discretion,
             purchase that residence for an amount equal to its cost to you
             (estimated to be approximately $550,000). The Company will also
             loan to you an amount not to exceed $500,000 for the purpose of
             purchasing a residence in the San Diego area, such loan to be
             evidenced by a promissory note bearing interest at the lowest
             applicable federal rate necessary to avoid imputed interest income
             under the Internal Revenue Code and secured by a second deed of
             trust on the residence. The loan will be due and payable upon the
             earlier of (A) the sale of that residence, (B) 90 days following
             the termination of your employment for any reason or (C) January 1,
             2007. Once you and your family have relocated to the San Diego
             area, the Company will provide to you for a period not to exceed 24
             months, a monthly housing cost-of-living differential payment of up
             to $2,500 per month. Further, the Company will either pay the
             costs, not to exceed $3,500 per month, of temporary housing for you
             in San Diego or, at the Company's option, provide temporary housing
             to you until the earlier of your purchase of a San Diego residence
             or

                                       1.


             December 31, 2002. You shall also receive the following: (i) a
             payment from the Company sufficient to pay the income, employment
             and any other taxes you incur arising from the actual monthly
             temporary housing payments received by you or, if the Company
             provides temporary housing to you, the amount of income imputed to
             you with respect thereto; and (ii) an additional payment from the
             Company sufficient to pay the income, employment and any other
             taxes arising from the payments made by the Company pursuant to
             Section 6(i) above and this Section 6(ii) so that you shall be
             fully reimbursed for any income, employment and any other taxes you
             incur associated with the payments to reimburse you for such
             income, employment and other taxes on such amounts (the aggregate
             amount paid to you under Sections 6(i) and 6(ii) herein shall be
             referred to herein as the "Gross-up Amount"). The Gross-up Amount
             shall be offset against and, thus, subtracted from the Relocation
             Expense Amount but, in no event, shall the Relocation Expense
             Amount be less than zero. The Company will also reimburse you for
             the reasonable costs of one trip per month in connection with your
             commuting to San Diego from your home in Pennsylvania, until the
             earlier of your purchase of a San Diego residence or December 31,
             2002. Except as specifically provided herein, you will be
             responsible for any personal taxes (income, employment or
             otherwise) arising from any of the payments described herein,
             except that the Company will reimburse you for personal taxes
             arising from the payment of any Relocation Expense Amount (to the
             extent not offset by the Gross-up Amount).

This Amendment shall be governed by and construed in accordance with the laws of
the State of California, without regard to conflicts of law principles.

Please sign and date this Amendment and return it to me at your earliest
convenience.

Sincerely,

VICAL INCORPORATED

By: /s/  MARTHA J. DEMSKI
   ----------------------
         Martha J. Demski
         Vice President & Chief Financial Officer

ACCEPTED AND AGREED:

/s/  VIJAY B. SAMANT
- --------------------
     Vijay B. Samant

MARCH 8, 2002

Date

                                       2.

EX-23.1

                                                                    EXHIBIT 23.1



                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS



As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into Vical Incorporated's previously
filed Registration Statements Files No. 33-60826, No. 33-60824, No. 33-81602,
No. 33-81600, No. 33-87972, No. 333-30181, No. 333-60293, No. 333-80681 and
No. 333-66254.



/s/ ARTHUR ANDERSEN LLP

San Diego, California
March 25, 2002

EX-99.1

                                                                   EXHIBIT 99.1



                               Vical Incorporated
                       9373 Towne Centre Drive, Suite 100
                            San Diego, CA 92121-3088


March 25, 2002



Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549

Ladies and Gentlemen:

Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, I am writing you
to inform you that Arthur Andersen LLP (Andersen) has represented to us in
writing that their audit as of and for the year ended December 31, 2001 was
subject to their quality control system for their U.S. accounting and auditing
practice to provide reasonable assurance that the engagement was conducted in
compliance with professional standards, that there was appropriate continuity of
Andersen personnel working on the audit, availability of national office
consultation, and availability of personnel at foreign affiliates of Andersen to
conduct the relevant portions of the audit.




/s/ MARTHA J. DEMSKI
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Martha J. Demski
Vice President and
Chief Financial Officer,
Treasurer and Secretary