10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

OR

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER 000-26124

IXYS CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	77-0140882
(State or other jurisdiction	(I.R.S. Employer Identification No.)
of incorporation or organization)

3540 BASSETT STREET
SANTA CLARA, CALIFORNIA 95054-2704
(Address of principal executive offices and Zip Code)

(408) 982-0700
(Registrant’s telephone number, including area code)

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 þ           No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o           Accelerated filer þ           Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o           No þ

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of November 1, 2007 was 32,199,755.

IXYS CORPORATION

FORM 10-Q
September 30, 2007

INDEX

		Page
PART I — FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS		3
	UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS		3
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		4
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME		5
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		6
	NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		16
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		27
ITEM 4.	CONTROLS AND PROCEDURES		27
PART II — OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		28
ITEM 1A	RISK FACTORS		28
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		39
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		39
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		39
ITEM 5.	OTHER INFORMATION		39
ITEM 6.	EXHIBITS		39
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30,			March 31,
	2007			2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	56,009		$	54,027
Restricted cash		691			169
Accounts receivable, net of allowances of $2,422 at September 30, 2007 and $2,847 at March 31, 2007		46,622			42,519
Inventories		85,672			85,965
Prepaid expenses and other current assets		3,012			3,268
Deferred income taxes, net		11,943			14,345
Total current assets		203,949			200,293
Property, plant and equipment, net		55,778			48,741
Other assets		7,422			5,319
Deferred income taxes, net		11,220			12,827
Goodwill		6,461			6,461
Total assets	$	284,830		$	273,641
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capitalized lease obligations	$	4,163		$	3,686
Current portion of loans payable		1,168			1,012
Accounts payable		19,577			19,926
Accrued expenses and other current liabilities		16,355			19,081
Litigation reserve		6,978			14,180
Total current liabilities		48,241			57,885
Long term income tax payable		4,050			—
Capitalized lease obligations, net of current portion		6,580			6,660
Long term loans payable, net of current portion		18,615			11,112
Pension liabilities		17,233			16,875
Total liabilities		94,719			92,532
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized: 5,000,000 shares; none issued and outstanding		—			—
Common stock, $0.01 par value:
Authorized: 80,000,000 shares; 35,233,163 issued and 32,196,755 outstanding at September 30, 2007 and 35,031,947 issued and 32,512,039 outstanding at March 31, 2007		352			350
Additional paid-in capital		167,927			165,889
Less cost of treasury stock: 3,036,408 shares at September 30, 2007 and 2,519,908 shares at March 31, 2007		(27,879	)		(22,851	)
Retained earnings		38,158			29,605
Accumulated other comprehensive income		11,553			8,116
Total stockholders’ equity		190,111			181,109
Total liabilities and stockholders’ equity	$	284,830		$	273,641

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

3

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(unaudited)						(unaudited)
Net revenues	$	76,165		$	71,875		$	152,066		$	139,616
Cost of goods sold		56,160			49,755			109,673			95,612
Gross profit		20,005			22,120			42,393			44,004
Operating expenses:
Research, development and engineering		5,131			4,921			10,204			10,029
Selling, general and administrative		9,897			10,828			20,737			22,884
Litigation (release) provision		(1,195	)		183			(5,979	)		(36,644	)
Total operating expenses		13,833			15,932			24,962			(3,731	)
Operating income		6,172			6,188			17,431			47,735
Other income (expense):
Interest income		595			734			1,174			1,508
Interest expense		(559	)		(346	)		(867	)		(471	)
Other income (expense), net		(1,253	)		(188	)		(911	)		(1,681	)
Income before income tax		4,955			6,388			16,827			47,091
Provision for income tax		(1,006	)		(2,600	)		(5,874	)		(19,007	)
Net income	$	3,949		$	3,788		$	10,953		$	28,084
Net income per share—basic	$	0.12		$	0.11		$	0.34		$	0.82
Weighted average shares used in per share calculation — basic		32,280			33,929			32,385			34,051
Net income per share—diluted	$	0.12		$	0.11		$	0.33		$	0.79
Weighted average shares used in per share calculation — diluted		33,603			35,124			33,696			35,326

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

4

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2007			2006		2007			2006
	(unaudited)					(unaudited)
Net income	$	3,949		$	3,788	$	10,953		$	28,084
Other comprehensive income:
Unrealized gain (loss) on available for sale investment securities, net of taxes of ($393) and ($220) for the three and six months ended September 30, 2007 and net of taxes of $69 and $261 for the three and six months ended September 30, 2006		(544	)		52		(257	)		81
Foreign currency translation adjustments		2,956			807		3,694			2,707
Comprehensive income	$	6,361		$	4,647	$	14,390		$	30,872

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

5

IXYS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	Six Months Ended
	September 30,
	2007			2006
	(unaudited)
Cash flows from operating activities:
Net income	$	10,953		$	28,084
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,147			5,080
Provision for receivables allowances		1,419			4,881
Net change in inventory reserves		2,734			1,757
Change in litigation reserve		(5,979	)		(36,644	)
Foreign currency adjustments on intercompany amounts		179			139
Deferred income taxes		4,437			15,482
Stock based compensation		944			1,092
Gain on investments		(306	)		(282	)
Changes in operating assets and liabilities:
Accounts receivable		(4,264	)		(6,709	)
Inventories		(81	)		(16,324	)
Prepaid expenses and other current assets		368			(430	)
Other assets		114			106
Accounts payable		(1,040	)		3,576
Accrued expenses and other liabilities		(2,853	)		905
Pension liabilities		(588	)		(137	)
Net cash provided by operating activities		12,184			576
Cash flows from investing activities:
Change in restricted cash		(522	)		31
Purchase of investments		(2,408	)		(100	)
Proceeds from sale of investments		366			328
Purchase of plant and equipment		(2,855	)		(6,619	)
Net cash used in investing activities		(5,419	)		(6,360	)
Cash flows from financing activities:
Principal payments on capital lease obligations		(1,977	)		(1,810	)
Repayments of loans and notes payable		(536	)		(426	)
Purchases of treasury stock		(5,028	)		(5,676	)
Proceeds from employee equity plans		1,096			433
Proceeds from collection of notes from stockholders		—			59
Net cash used in financing activities		(6,445	)		(7,420	)
Effect of exchange rate fluctuations on cash and cash equivalents		1,662			1,667
Net increase (decrease) in cash and cash equivalents		1,982			(11,537	)
Cash and cash equivalents at beginning of period		54,027			78,192
Cash and cash equivalents at end of period	$	56,009		$	66,655
Supplemental disclosure of noncash investing and financing activities
Note payable assumed in connection with building acquisition		7,474			—
Fixed assets acquired under capital lease		1,676			2,099

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

6

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Unaudited Condensed Consolidated Financial Statements

     The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of IXYS Corporation (“IXYS” or the “Company”) and its wholly owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most difficult judgments include: allowance for sales returns, allowance for doubtful accounts, allowance for ship and debits, valuation of inventories, valuation of property, plant, equipment, goodwill, and intangible assets, revenue recognition, legal contingencies, income tax and defined benefit plans. All significant intercompany transactions have been eliminated in consolidation. All adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair statement of the results for the interim periods have been made. The condensed balance sheet as of March 31, 2007 has been derived from the Company’s audited balance sheet as of that date. It is recommended that the interim financial statements be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2007 contained in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of the operating results expected for later quarters or the full fiscal year.

2. Recent Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board (“FASB”), issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for the Company beginning in the first quarter of fiscal 2009. The Company is currently evaluating the impact of SFAS 157 to the Company’s financial position and results of operations.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for the Company beginning in the first quarter of fiscal 2009. The Company is currently evaluating the impact of SFAS 159 to its financial position and results of operations.

     The Company adopted FIN 48 as of April 1, 2007 as required. See Note 14 for further discussion.

3. Employee Equity Incentive Plans

Stock Option, Restricted Stock Units and Stock Bonuses:

     Stock options, restricted stock units (“RSUs”) and stock bonuses may be granted under the 1999 Equity Incentive Plan and the 1999 Non-Employee Directors’ Equity Incentive Plan (the “Plans”). Stock options are granted for not less than 85% of fair market value at the time of grant. The options granted to employees typically vest over four years and expire ten years from the date of grant. The Board of Directors has the full power to determine the provisions of each option issued under the Plans. No options have been granted below fair market value. The Company also grants net exercise options. These options generally vest over a period of four years. In a net exercise option, the number of shares issued upon exercising the stock option is net of the number of shares subject to the option cancelled to cover the aggregate exercise price. Under the Plans, IXYS may also award shares of common stock as stock bonuses. The Company did not award any stock bonuses during the three and six months ended September 30, 2007.

     RSUs may be granted under the Company’s 1999 Equity Incentive Plan. Pursuant to an award, the Company will, in the future, deliver shares of the Company’s common stock if certain requirements, including continued performance of services, are met. RSUs granted to employees typically vest over four years. When vested, each RSU will entitle the holder of the RSU award to one share of the Company’s common stock. The Company did not award any RSUs during the three and six months ended September 30, 2007.

7

     Since inception, the cumulative amount authorized for the 1999 Equity Incentive Plan was approximately 11.6 million shares. The 1999 Equity Incentive Plan has an evergreen feature that adds up to 1,000,000 shares to the total shares authorized each year at the discretion of the Board. The 1999 Non-Employee Directors’ Equity Incentive Plan had a total of 500,000 shares authorized at its inception date.

Employee Stock Purchase Plan

     In May 1999, IXYS approved the 1999 Employee Stock Purchase Plan (“Purchase Plan”) and reserved 500,000 shares of common stock for issuance under the Purchase Plan. Under the Purchase Plan, substantially all U.S. employees may purchase the Company’s common stock at a price equal to 85% of the lower of the fair market value at the beginning or the end of each specified six-month offering period. Stock purchases are limited to 15% of an employee’s eligible compensation. On July 31, 2007, the Board of Directors of the Company amended the Purchase Plan and reserved an additional 350,000 shares of common stock for issuance under the Purchase Plan. No shares were purchased during the quarter ended September 30, 2007. During the six months ended September 30, 2007, there were approximately 44,000 shares purchased under the Purchase Plan, leaving about 378,000 shares available for purchase under the plan in the future.

Stock-Based Compensation:

     The following table summarizes the effects of share-based compensation charges (in thousands):

     Income Statement Classifications

	Three Months Ended September 30,				Six Months Ended September 30,
	2007		2006		2007		2006
	(unaudited)
Selling, general and administrative expenses	$	510	$	555	$	944	$	1,092
Share-based compensation effect in income before taxes		510		555		944		1,092
Provision for income taxes 1		199		217		368		426
Net share-based compensation effects in net income	$	311	$	338	$	576	$	666

^1. Estimated at a statutory income tax rate of 39%.

     During the three and six months ended September 30, 2007, the unaudited condensed consolidated statements of operations and cash flows do not reflect any tax benefit for the tax deduction from option exercises and other awards. As of September 30, 2007, approximately $4.1 million in stock based compensation is to be recognized for unvested stock options granted under the Plans. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.0 years.

     The Black-Scholes option pricing model is used to estimate the fair value of options granted under the Company’s equity incentive plans and rights to acquire stock granted under the Company’s stock purchase plan. The weighted average estimated values of employee stock option grants and rights granted under the stock purchase plan, as well as the weighted average assumptions used in calculating these values during the three and six months ended September 30, 2007 and 2006, were based on estimates at the grant date as follows:

	Stock Options												Purchase Plan1
	Three months ended September 30,						Six months ended September 30,						Six months ended September 30,
	2007			2006			2007			2006			2007			2006
Weighted average estimated per share fair value of grant	$	4.54		$	3.92		$	4.29		$	4.21		$	2.65		$	2.40
Risk-free interest rate		4.0	%		4.8	%		4.5	%		4.9	%		4.9	%		4.2	%
Expected term (in years)		4.3			3.7			4.3			3.7			0.5			0.5
Volatility		48.0	%		52.0	%		49.0	%		54.0	%		44.0	%		56.0	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%

^1. Under the stock purchase plan, rights to purchase shares are only granted during the first and third quarters of each fiscal year.

8

     Information with respect to outstanding stock options as of September 30, 2007 was as follows:

	Number of			Weighted Average		Intrinsic
	Shares			Exercise Price Per Share		Value1
						(000)
Balances, March 31, 2007		4,456,025		$	8.27
Options granted		720,200		$	9.52
Options exercised		(116,630	)	$	6.38	$	422
Options cancelled and expired		(58,248	)	$	14.60
Balances, September 30, 2007		5,001,347		$	8.42
Exercisable, September 30, 2007		4,090,072		$	8.18
Exercisable, March 31, 2007		4,071,650		$	8.20

^1. Represents the difference between the exercise price and the value of IXYS stock at the time of exercise.

     RSUs award activity under the Company’s equity incentive plans for the quarter ended September 30, 2007 is summarized below:

	Number of			Weighted Average		Intrinsic
	Shares			Grant-Date Fair Value		Value1
						(000)
Balances, March 31, 2007		139,352		$	9.54
RSUs vested		(40,268	)	$	9.46	$	401
RSUs forfeited		(1,734	)	$	9.35
Balances, September 30, 2007		97,350		$	9.58

^1. Represents the value of IXYS stock on the vesting date.

4. Computation of Net Income per Share

Basic and diluted earnings per share are calculated as follows (in thousands, except per share amounts):

	Three Months Ended September 30,				Six Months Ended September 30,
	2007		2006		2007		2006
	(unaudited)				(unaudited)
Basic:
Weighted average shares outstanding for the period		32,280		33,929		32,385		34,051
Net income available for common stockholders	$	3,949	$	3,788	$	10,953	$	28,084
Net income per share available for common stockholders	$	0.12	$	0.11	$	0.34	$	0.82
Diluted:
Weighted average shares outstanding for the period		32,280		33,929		32,385		34,051
Net effective dilutive stock options and RSUs based on treasury stock method using average market price		1,323		1,195		1,311		1,275
Shares used in computing per share amounts		33,603		35,124		33,696		35,326
Net income available for common stockholders	$	3,949	$	3,788	$	10,953	$	28,084
Net income per share available for common stockholders	$	0.12	$	0.11	$	0.33	$	0.79
Total common stock equivalents excluded for the computation of earnings per share as their effect was anti-dilutive		1,995		1,621		1,995		1,407

9

     Basic income available per common share is computed using net income and the weighted average number of common shares outstanding during the period. Diluted income per common share is computed using net income and the weighted average number of common shares outstanding, assuming dilution. Weighted average common shares outstanding, assuming dilution, includes potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of restricted stock units using the treasury stock method. If the exercise price of an outstanding stock option was equal to or greater than the average market value of the shares of common stock, it was excluded from the computation. These options could be included in the calculation in the future, if the average market value of the common shares increases and is greater than the exercise price of these options.

5. Common Stock Repurchase Program

     During the three and six months ended September 30, 2007, the Company repurchased 277,000 shares of common stock at a cost of $2.7 million and 517,000 shares of common stock at a cost of $5.0 million, respectively. During the three and six months ended September 30, 2006, the Company purchased 645,000 shares of common stock at a cost of $5.7 million. As of September 30, 2007, 1.4 million shares remained available for repurchase under the existing repurchase authorization.

6. Property, Plant and Equipment

     On August 2, 2007, IXYS Buckeye, LLC, a subsidiary of IXYS, acquired for $7.5 million a property in Milpitas, California to be used as the Company’s corporate offices and a facility for operations. Additional costs of $101,000 incurred in connection with preparing the building for occupancy were capitalized. The building is being depreciated over its estimated useful life of 40 years. The property was acquired by assumption of a loan in the principal amount of $7.5 million. For further details regarding the loan, see Note 9.

7. Inventories

     Inventories consist of the following (in thousands):

	September 30,		March 31,
	2007		2007
	(unaudited)
Raw materials	$	23,743	$	23,144
Work in process		41,055		43,477
Finished goods		20,874		19,344
Total	$	85,672	$	85,965

8. Other Assets

     At September 30, 2007, other long term assets include equity securities held as available for sale of $2.5 million, long term equity investments of $4.0 million and intangible assets of $606,000. Available for sale investment securities have been stated at their fair value as at September 30, 2007. Long term equity investments are accounted for under the equity method of accounting. In respect of these long term equity investments, the Company recognized income under the equity method of accounting of $108,000 and $239,000 during the three and six month period ended September 30, 2007, respectively ($198,000 for the three and six months ended September 30, 2006). At March 31, 2007, other assets included $2.9 million of investments available for sale, $1.7 million of long term equity investments and intangible assets of $390,000.

9. Borrowing Arrangements

     IKB Deutsche Industriebank

     On June 10, 2005, IXYS Semiconductor GmbH, a German subsidiary of IXYS, borrowed €10.0 million, or about $12 million, from IKB Deutsche Industriebank for a term of 15 years.

     The interest rate on the loan is determined by adding the then effective three-month Euribor rate and a margin. The margin can range from 70 basis points to 125 basis points, depending on the calculation of a ratio of indebtedness to cash flow for the German subsidiary. During the first five years of the loan, if the Euribor rate exceeds 3.75%, then the Euribor rate for the purposes of the loan shall be 4.1%, and, if the Euribor rate falls below 2%, then the Euribor rate for the purposes of the loan shall be 3%. Thereafter, the interest rate is recomputed annually. The interest rate at September 30, 2007 was 4.8%.

10

     Each fiscal quarter beginning September 2005, during the first five years of the loan, a principal payment of €167,000, or about $238,000, and a payment of accrued interest will be required. Thereafter, the amount of the payment will be recomputed.

     Financial covenants for a ratio of indebtedness to cash flow, a ratio of equity to total assets and a minimum stockholders’ equity for the German subsidiary must be satisfied for the loan to remain in good standing. The loan may be prepaid in whole or in part at the end of a fiscal quarter without penalty. At September 30, 2007, the Company had complied with the financial covenants. The loan is partially collateralized by a security interest in the facility owned by IXYS in Lampertheim, Germany.

     LaSalle Bank National Association

     On August 2, 2007, IXYS Buckeye, LLC, a subsidiary of IXYS, entered into an Assumption Agreement with LaSalle Bank National Association, trustee for Morgan Stanley Dean Witter Capital I Inc., for the assumption of a loan of $7.5 million in connection with the purchase of property in Milpitas, California. For further details regarding the acquisition of property, see Note 6. The loan carries a fixed annual interest rate of 7.455%. Monthly payments of principal and interest of $56,000 are due under the loan. In addition, monthly impound payments aggregating $13,000 are to be made for items such as real property taxes, insurance and capital expenditures. The loan is due and payable on February 1, 2011. At maturity, the remaining balance on the loan will be approximately $7.1 million. The loan is secured by a guarantee from IXYS and collateralized by a security interest in the property acquired. Aggregate loan costs of $93,000 incurred in connection with the loan are amortized over the loan period and the unamortized balance is shown net of the loan liability.

10. Accrued Expenses and Other Current Liabilities

     At September 30, 2007, accrued expenses and other current liabilities include uninvoiced goods and services of $4.9 million, income taxes payable of $689,000, accrued compensation of $4.1 million and other liabilities of $6.6 million. At March 31, 2007, accrued expenses and other current liabilities include uninvoiced goods and services of $7.0 million, income taxes payable of $3.9 million and other liabilities of $8.2 million.

11. Pension Plans

     IXYS maintains two defined benefit pension plans: one for the United Kingdom employees and one for German employees. These plans cover most of the employees in the United Kingdom and Germany. Benefits are based on years of service and the employees’ compensation. The Company deposits funds for these plans, consistent with the requirements of local law, with investment management companies, insurance companies, trustees, and/or accrues for the unfunded portion of the obligations. These plans have been curtailed. As such, the plans are closed to new entrants and no credit is provided for additional periods of service.

     The net periodic pension expense includes the following components (in thousands):

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(unaudited)						(unaudited)
Service cost	$	3		$	225		$	5		$	424
Interest cost on projected benefit obligation		118			469			233			927
Expected return on plan assets		(5	)		(397	)		(9	)		(785	)
Recognized actuarial loss		8			7			16			16
Net periodic pension expense	$	124		$	304		$	245		$	582

     IXYS expects to contribute approximately $801,000 to the plans in the fiscal year ending March 31, 2008. This contribution is primarily contractual.

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12. Accumulated Other Comprehensive Income:

     The components of accumulated other comprehensive income, net of tax (in thousands):

	September 30,			March 31,
	2007			2007
	(unaudited)
Accumulated net unrealized gain on available for sale investments securities, net of tax $227 as on September 30, 2007 and $447 as on March 31, 2007	$	386		$	644
Accumulated minimum pension liability, net of tax of $1,521		(2,747	)		(2,747	)
Accumulated foreign currency translation adjustments		13,914			10,219
Total accumulated other comprehensive income	$	11,553		$	8,116

13. Segment Information

     IXYS has a single operating segment. This operating segment is comprised of semiconductor products used primarily in power related applications. While the Company has separate businesses with discrete financial information, the Company has one chief operating decision maker and the businesses are highly integrated and have similar economic characteristics. IXYS’s sales by major geographic area (based on destination) were as follows (in thousands):

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
	(unaudited)				(unaudited)
United States	$	21,142	$	19,867	$	40,450	$	41,285
Europe and the Middle East
Germany		10,768		9,016		21,672		17,628
Italy		1,939		1,262		3,780		2,978
United Kingdom		5,011		6,345		12,002		11,242
Other		11,389		9,530		23,210		17,863
Asia Pacific
Korea		4,916		6,622		8,496		10,971
China		10,454		7,752		20,503		16,301
Japan		2,389		2,529		4,610		4,580
Other		3,506		5,911		7,748		10,714
Rest of the World
India		2,742		1,741		5,415		3,712
Other		1,909		1,300		4,180		2,342
Total	$	76,165	$	71,875	$	152,066	$	139,616

     The following table sets forth net revenues for each of IXYS’s product groups for the three and six months ended September 30, 2007 and 2006 (in thousands):

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
	(unaudited)				(unaudited)
Power Semiconductors	$	58,451	$	50,349	$	115,645	$	100,490
Integrated Circuits		11,200		15,678		23,525		28,757
Systems and RF Power Semiconductors		6,514		5,848		12,896		10,369
Total	$	76,165	$	71,875	$	152,066	$	139,616

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     For the quarter ended September 30, 2007, one customer accounted for 10.8% of our net revenues. For the six months ended September 30, 2007 and for the three and six months ended September 30, 2006, no customer accounted for more than 10% of our net revenues.

14. Taxes

     Effective at the beginning of the first quarter of fiscal 2008, the Company adopted the provision of FIN 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109.” FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

     As a result of the implementation of FIN 48, the Company increased the liability for net unrecognized tax benefits by $2.4 million, and accounted for the reduction as a cumulative effect of a change in accounting principle that resulted in a decrease to retained earnings of $2.4 million. The total amount of gross unrecognized tax benefits as of the date of adoption was $6.2 million. These gross unrecognized tax benefits would affect the effective tax rate if realized. The Company historically classified unrecognized tax benefits in current taxes payable. As a result of adoption of FIN 48, $4.1 million unrecognized tax benefits were reclassified to long term income taxes payable.

     During the quarter ended September 30, 2007, tax authorities in foreign tax jurisdictions completed their audit relating to the 2001 to 2003 tax years. As a result, the Company reversed a portion of current tax payable, which resulted in recording a $350,000 tax benefit.

     During the six months ended September 30, 2007, the Company initiated a transfer of certain intellectual properties that triggered a taxable event in the United States. The gain allows the Company to utilize certain net operating loss carryforwards, which triggered the realization of unrecognized tax benefits of approximately $1.5 million. The total amount of gross unrecognized tax benefit was $4.1 million as of September 30, 2007.

     The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated condensed statements of income. As of the date of adoption of FIN 48, the Company had accrued $19,000 for the payment of interest and penalties relating to unrecognized tax benefits.

     The Company files U.S. federal, U.S. state, and foreign tax returns. The Company is generally no longer subject to tax examinations for years prior to fiscal 2004 for federal and state tax returns, except in certain limited circumstances. The Company has no non-U.S. income tax audit pending.

15. Commitments and Contingencies

Legal Proceedings:

     IXYS is currently involved in a variety of legal matters that arise in the normal course of business. Were an unfavorable ruling to occur, there could be a material adverse impact on our financial condition, results of operations or cash flows.

International Rectifier

     On June 22, 2000, International Rectifier Corporation filed an action for patent infringement against IXYS in the United States District Court for the Central District of California, alleging that certain of IXYS’s products sold in the United States infringe U.S. patents owned by International Rectifier. International Rectifier’s complaint against IXYS contended that IXYS’s alleged infringement of International Rectifier’s patents had been and continued to be willful and deliberate. Subsequently, the U.S. District Court decided that certain of IXYS’s power MOSFETs and IGBTs infringed certain claims of each of three International Rectifier U.S. patents.

     In 2002, the U.S. District Court entered a permanent injunction barring IXYS from making, using, offering to sell or selling in, or importing into, the United States, MOSFETs (including IGBTs) covered by the subject patents and ruled that International Rectifier should be awarded damages of $9.1 million for IXYS’s alleged infringement of International Rectifier’s patents. In addition, the U.S. District Court ruled that IXYS had been guilty of willful infringement. Subsequently, the U.S. District Court increased the damages to a total of $27.2 million, plus attorney fees.

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     IXYS appealed and on March 19, 2004 the United States Court of Appeals for the Federal Circuit reversed or vacated all findings of patent infringement previously issued against IXYS by the U.S. District Court, and vacated the permanent injunction. On August 9, 2004, the Federal Circuit Court vacated the damages award. The case was remanded to the U.S. District Court for further proceedings. Trial commenced in the U.S. District Court on September 6, 2005. On September 15, 2005, the jury specifically found that IXYS was not guilty of willful infringement.

     International Rectifier had accused IXYS of infringing its 4,959,699 (“699”), 5,008,725 (“725”) and 5,130,767 (“767”) patents. The claims of these patents fall into two groups. The jury ruled that one of the groups of claims was infringed by the doctrine of equivalents; however, the claims in this group are minor claims and are not expected to have a material financial impact on IXYS.

     As to the other group of claims, the jury found that IXYS did not infringe the 725 and 767 patents, but did infringe the 699 patent by the doctrine of equivalents. If upheld on appeal, this finding would have a material financial impact on IXYS. However, the jury also made a specific finding that IXYS’s devices do not infringe the 725 and 767 patents because they include an “annular source region,” which IXYS believes is inconsistent with the conclusion that the 699 patent is infringed. The jury’s verdict awarded International Rectifier $6.2 million as damages for the infringement plus 6.5% of revenues from infringing products, by implication, after September 30, 2005. The U.S. District Court entered a judgment reflecting the jury’s verdict and also issued a permanent injunction barring IXYS from selling or distributing the infringing products. Thereafter, IXYS appealed the judgment and the injunction to the Federal Circuit Court. Without addressing the substance of IXYS’s appeal, on July 14, 2006, the Federal Circuit Court vacated the judgment and the injunction and remanded the matter to U.S. District Court for “further proceedings as appropriate” in view of the United States Supreme Court’s recent decision in eBay, Inc v. MercExchange, LLC. In September 2006, the U.S. District Court again entered another judgment reflecting the jury’s determination of damages and issued a permanent injunction barring IXYS from selling or distributing the infringing products. IXYS is appealing the judgment against it and the injunction barring IXYS from selling or distributing products. Counsel to IXYS inadvertently did not file the requisite notice of appeal following the entry of judgment within the required time period. However, because IXYS’s counsel has taken timely corrective measures, IXYS believes that it is unlikely that IXYS will be precluded from pursuing its appeal. In January 2007, the Federal Circuit Court declined to issue a stay of the judgment and injunction. The judgment therefore became payable and the injunction enforceable. In September 2007, the 699 patent expired and the practical effect of the injunction ended. At September 30, 2007, IXYS’s reserve for this matter was $7.0 million. There is no assurance that this amount is sufficient for any actual losses that may be incurred as a result of this litigation.

     There can be no assurance of a favorable final outcome in the International Rectifier suit. In the event of an adverse outcome, damages or the injunction awarded by the U.S. District Court would be materially adverse to IXYS’s financial condition, results of operations and cash flows.

LoJack

     On April 10, 2003, LoJack Corporation (“LoJack”) filed a suit against Clare, Inc., a subsidiary of IXYS, in the Superior Court of Norfolk County, Massachusetts claiming breach of contract, unjust enrichment, breach of the implied covenant of good faith and fair dealing, failure to perform services and violation of a Massachusetts statute prohibiting unfair and deceptive acts and practices, all purportedly resulting from Clare’s alleged breach of a contract to develop custom integrated circuits and a module assembly. The trial commenced on January 30, 2006. On February 8, 2006, the jury awarded LoJack $36.7 million in damages. On July 20, 2006, the Superior Court reduced LoJack’s damages to $4 million.

     Under Massachusetts law, a damage award is increased for pre-judgment interest. Pre-judgment interest was determined to be $2.1 million at the time of the entry of the judgment on July 25, 2006. In addition, the Superior Court determined the attorneys’ fees and costs payable by Clare to be $708,000. Post-judgment interest accrues on the total judgment, inclusive of the pre-judgment interest, attorneys’ fees and costs, at the rate of 12% per annum simple interest.

     In August 2006, LoJack filed a notice with the Superior Court of a motion to reconsider the judgment for the purpose of reinstating the full amount of the jury’s damage award. In September 2006, the Superior Court ruled against LoJack’s motion. LoJack and IXYS each appealed the judgment of the Superior Court. On April 13, 2007, the parties’ appeals were argued before the Appeals Court of Massachusetts.

     On July 23, 2007, the Appeals Court ruled that IXYS owed LoJack $805,000 plus simple interest at the rate of 12% per annum from April 10, 2003, which aggregated to $1.2 million at September 30, 2007. On September 26, 2007, the Supreme Judicial Court of Massachusetts denied the application for further appellate review filed by LoJack. The denial by the Supreme Judicial Court effectively concluded the material litigation between IXYS and LoJack. IXYS paid LoJack $1.2 million in accordance with the opinion of the Appeals Court. In light of the outcome of the LoJack litigation, IXYS released $1.3 million and $6.2 million in reserves in the three and six month periods ended September 30, 2007, respectively.

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Other Commitments and Contingencies:

     The Company does not provide product guarantees or warranties. On occasion, the Company provides limited indemnification to customers against intellectual property infringement claims related to the Company’s products. To date, the Company has not experienced significant activity or claims related to such indemnifications. The Company does provide in the normal course of business indemnification to its officers, directors and selected parties. The Company is unable to estimate any potential future liability, if any; therefore, no liability for these indemnification agreements has been recorded as of September 30, 2007 and 2006.

     IXYS Corporation guarantees, for certain events of default, a $5.0 million line of credit issued by a German bank to IXYS Semiconductor GmbH to support a letter of credit facility. At September 30, 2007, there were approximately $2.0 million of open letters of credit to support inventory purchases. Westcode Semiconductor Limited, a subsidiary, had a Letter of Credit facility from a British bank for £383,000, or approximately $784,000, as of September 30, 2007. The bank also issued a guarantee on behalf of the subsidiary for £248,000, or approximately $508,000, in connection with a product supply contract. As of September 30, 2007, the remaining balance of the guarantee is £146,000, or approximately $299,000.

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

     This discussion contains forward-looking statements, which are subject to certain risks and uncertainties, including, without limitation, those described elsewhere in Item 1A of Part II of this Form 10-Q. Actual results may differ materially from the results discussed in the forward-looking statements. For a discussion of risks that could affect future results, see “Risk Factors” in Item 1A of Part II of this Form 10-Q. All forward-looking statements included in this document are made as of the date hereof, based on the information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

Overview

     We are a multi-market integrated semiconductor company. Our three principal product groups are power semiconductors; integrated circuits; and systems and RF power semiconductors.

     Our power semiconductors improve system efficiency and reliability by converting electricity at relatively high voltage and current levels into the finely regulated power required by electronic products. We focus on the market for power semiconductors that are capable of processing greater than 200 watts of power.

     We also design, manufacture and sell integrated circuits, or ICs, for a variety of applications. Our analog and mixed signal ICs are principally used in telecommunications applications. Our mixed signal application specific ICs, or ASICs, address the requirements of the medical imaging equipment and display markets. Our power management and control ICs are used in conjunction with our power semiconductors.

     Our RF power semiconductors enable circuitry that amplifies or receives radio frequencies in wireless and other microwave communication applications, medical imaging applications and defense and space applications.

     Over the past four quarters, our revenues from the sale of power semiconductors and systems and RF power semiconductors have increased while our revenues from the sale of ICs have decreased. The growth in power semiconductor revenues primarily reflects increasing sales to the industrial and commercial market. Currently, our sales of bipolar power semiconductors are constrained by capacity limits in one of our wafer fabrication facilities. We are working to expand our capacity. Sales of subassemblies to industrial and commercial customers have driven the growth in systems and RF power semiconductor revenues. IC revenues decreased in light of a decline in the sale of ASICs for the consumer products market and lower demand in the telecom market. Distribution revenues, compared to total net revenues, increased in part because of the growth of sales to the industrial and commercial market. Amounts spent for research, development and engineering expenses continued to be relatively flat and are expected to remain in this range over the next few quarters. Selling, general and administrative expenses, exclusive of the bad debt expense for the All American Semiconductor bankruptcy and the expenses of the canceled convertible debt financing, have been relatively flat over the past four quarters as well.

Critical Accounting Policies and Significant Management Estimates

     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the reasonableness of its estimates. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies require that we make significant judgments and estimates in preparing our consolidated financial statements.

     Revenue recognition. We sell to distributors and original equipment manufacturers. Approximately 50% of our revenues in the first six months of fiscal 2008 and 45% of our revenues in the first six months of fiscal 2007 were from distributors. We provide some of our distributors with the following programs: stock rotation and ship and debit. Ship and debit is a sales incentive program for products previously shipped to distributors. We recognize revenue from product sales upon shipment provided that we have received an executed purchase order, the price is fixed and determinable, the risk of loss has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Our shipping terms are generally FOB shipping point. Reserves for allowances are also recorded at the time of shipment. Our management must make estimates of potential future product returns and so called “ship and debit” transactions related to current period product

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revenue. Our management analyzes historical returns and ship and debit transactions, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the allowances in any accounting period. Different judgments or estimates would result in material differences in the amount and timing of our revenue for any period.

     For our nonrecurring engineering, or NRE, related to engineering work performed by our Clare Micronix division to design chip prototypes that will later be used to produce required units, customers enter into arrangements with Clare Micronix to perform engineering work for a fixed fee. Clare Micronix records fixed-fee payments during the development phase from customers in accordance with Statement of Financial Accounting Standards No. 68, “Research and Development Arrangements.” Amounts offset against research and development costs totaled approximately $190,000 in the first six months of fiscal 2008 and $235,500 in the first six months of fiscal 2007.

     We state our revenues net of any taxes collected from customers that are required to be remitted to the various government agencies. The amount of taxes collected from customers and payable to government is included under accrued expenses and other current liabilities. Shipping and handling costs are included in cost of sales.

     Allowance for sales returns. We maintain an allowance for sales returns for estimated product returns by our customers. We estimate our allowance for sales returns based on our historical return experience, current economic trends, changes in customer demand, known returns we have not received and other assumptions. If we were to make different judgments or utilize different estimates, the amount and timing of our revenue could be materially different. Given that our revenues consist of a high volume of relatively similar products, to date our actual returns and allowances have not fluctuated significantly from period to period, and our returns provisions have historically been reasonably accurate. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations.

     Allowance for stock rotation. We also provide “stock rotation” to select distributors. The rotation allows distributors to return a percentage of the previous six months’ sales in exchange for orders of an equal or greater amount. In the first six months of fiscal 2008 and 2007 approximately $282,000 and $741,000, respectively, of products were returned to us under the program. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations. We establish the allowance based upon the historical experience and management’s estimation of future returns.

     Allowance for ship and debit. Ship and debit is a program designed to assist distributors in meeting competitive prices in the marketplace on sales to their end customers. Ship and debit requires a request from the distributor for a pricing adjustment for a specific part for a customer sale to be shipped from the distributor’s stock. We have no obligation to accept this request. However, it is our historical practice to allow some companies to obtain pricing adjustments for inventory held. We receive periodic statements regarding our products held by our distributors. Our distributors had approximately $4.4 million in inventory of our products on hand at September 30, 2007. Ship and debit authorizations may cover current and future distributor activity for a specific part for sale to the distributor’s customer. In accordance with Staff Accounting Bulletin No. 104 Topic 13, “Revenue Recognition,” at the time we record sales to the distributors, we provide an allowance for the estimated future distributor activity related to such sales since it is probable that such sales to distributors will result in ship and debit activity. The sales allowance requirement is based on sales during the period, credits issued to distributors, distributor inventory levels, historical trends, market conditions, pricing trends we see in our direct sales activity with original equipment manufacturers and other customers, and input from sales, marketing and other key management. We believe that the analysis of these inputs enable us to make reliable estimates of future credits under the ship and debit program. This analysis requires the exercise of significant judgments. Our actual results to date have approximated our estimates. At the time the distributor ships the part from stock, the distributor debits us for the authorized pricing adjustment. This allowance is included as part of the accounts receivable allowance on the balance sheet and as a reduction of revenues in the statement of operations. If competitive pricing were to decrease sharply and unexpectedly, our estimates might be insufficient, which could significantly adversely affect results.

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     Additions to the ship and debit allowance are estimates of the amount of expected future ship and debit activity related to sales during the period and reduce revenues and gross profit in the period. The following table sets forth the beginning and ending balances of, additions to, and deductions from, our allowance for ship and debit during the six months ended September 30, 2007 (in thousands):

Balance at March 31, 2007	$	237
Additions		621
Deductions		(554	)
Balance at June 30, 2007	$	304
Additions		689
Deductions		(619	)
Balance at September 30, 2007	$	374

     Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments. We evaluate our allowance for doubtful accounts based on the aging of our accounts receivable, the financial condition of our customers and their payment history, our historical write-off experience and other assumptions. If we were to make different judgments of the financial condition of our customers or the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. This allowance is reported on the balance sheet as part of the accounts receivable allowance and is included on the statement of operations as part of selling, general and administrative expense. This allowance is based on historical losses and management’s estimates of future losses.

     Inventories. Inventories are recorded at the lower of standard cost, which approximates actual cost on a first-in-first-out basis, or market value. Our accounting for inventory costing is based on the applicable expenditure incurred, directly or indirectly, in bringing the inventory to its existing condition. Such expenditures include acquisition costs, production costs and other costs incurred to bring the inventory to its use. As it is impractical to track inventory from the time of purchase to the time of sale for the purpose of specifically identifying inventory cost, our inventory is therefore valued based on a standard cost, given that the materials purchased are identical and interchangeable at various production processes. Under standard costing, abnormal expenditures are recognized as expenses in the current period versus being capitalized in inventory. The fixed production overhead is allocated to inventory based on the normal capacity of the production facilities. We review our standard costs on an as-needed basis but in any event at least once a year, and update them as appropriate to approximate actual costs.

     We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. The value of our inventories is dependent on our estimate of future demand as it relates to historical sales. If our projected demand is over-estimated, we may be required to reduce the valuation of our inventories below cost. We regularly review inventory quantities on hand and record an estimated provision for excess inventory based primarily on our historical sales and expectations for future use. For example, we perform an analysis of inventories and compare the sales for the preceding two years. To the extent we have inventory in excess of the greater of two years’ historical sales, twice the most recent year’s historical sales or backlog, we recognize a reserve for excess inventories. We also recognize a reserve based on known technological obsolescence, when appropriate. However, for new products, we do not consider whether there is excess inventory until we develop sufficient sales history or experience a significant change in expected product demand based on backlog. Actual demand and market conditions may be different from those projected by our management. This could have a material effect on our operating results and financial position. If we were to make different judgments or utilize different estimates, the amount and timing of our write-down of inventories could be materially different.

     Excess inventory frequently remains saleable. When excess inventory is sold, it yields a gross profit margin of up to 100%. Sales of excess inventory have the effect of increasing the gross profit margin beyond that which would otherwise occur, because of previous write-downs. Once we have written down inventory below cost, we do not subsequently write it up. We do not physically segregate excess inventory and assign unique tracking numbers to it in our accounting systems. Consequently, we cannot isolate the sales prices of excess inventory from the sales prices of non-excess inventory. Therefore, we are unable to report the amount of gross profit resulting from the sale of excess inventory or quantify the favorable impact of such gross profit on our gross profit margin.

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     The following table provides information on our excess inventory at cost (which has been fully reserved in our financial statements), including the sale of excess inventory valued at cost (in thousands):

Balance at March 31, 2007	$	18,829
Sale of excess inventory		(167	)
Scrap of excess inventory		(383	)
Additional accrual of excess inventory		1,190
Balance at June 30, 2007	$	19,469
Sale of excess inventory		(163	)
Scrap of excess inventory		(660	)
Additional accrual of excess inventory		1,570
Balance at September 30, 2007	$	20,216

     The practical efficiencies of wafer fabrication require the manufacture of semiconductor wafers in minimum lot sizes. Often, when manufactured, we do not know whether or when all the semiconductors resulting from a lot of wafers will sell. With more than 9,000 different part numbers for semiconductors, excess inventory resulting from the manufacture of some of those semiconductors will be continual and ordinary. Because the cost of storage is minimal when compared to potential value and because our products generally do not quickly become obsolete, we expect to hold excess inventory for potential future sale for years. Consequently, we have no set time line for the sale or scrapping of excess inventory.

     In addition, our inventory is also being written down to the lower of cost or market or net realizable value. We review our inventory listing on a quarterly basis for an indication of losses being sustained for costs that exceed selling prices less direct costs to sell. When it is evident that our selling price is lower than current cost, the inventory is marked down accordingly. At September 30, 2007, our lower of cost or market reserve was $811,000.

     Furthermore, we perform an annual inventory count and periodic cycle counts for specific parts that have a high turnover. We also periodically identify any inventory that is no longer usable and write it off.

     Valuation of Goodwill and Intangible Assets. We value goodwill and intangible assets in accordance with Statement of Financial Accounting Standards No. (“SFAS”) 142, “Goodwill and Other Intangible Assets.”

     Goodwill. We regularly evaluate whether events and circumstances have occurred that indicate a possible impairment of goodwill and, in any event, we conduct such evaluation at least annually as of December 31. In determining whether there is an impairment of goodwill, we calculate the estimated implied fair value of our company by comparing the fair value of the reporting unit with its carrying amount, including goodwill. Then, if the carrying amount of the reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. We have one reporting unit for which we have a balance in goodwill. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. We determine the implied fair value of goodwill by allocating the fair value of the reporting unit to the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, we report the excess as an impairment loss. We believe the methodology we use in testing impairment of goodwill provides us with a reasonable basis in determining whether an impairment charge should be taken. To date, our goodwill has not been considered to be impaired based on the results of our analysis.

     Valuation of property, plant and equipment. We regularly evaluate the recoverability of our property, plant, equipment and intangible assets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Actual useful lives and cash flows could be different from those estimated by our management. This could have a material effect on our operating results and financial position. Reviews are regularly performed to determine whether facts and circumstances exist indicating that the carrying amount of assets may not be recoverable or that the useful life is shorter than originally estimated. We assess the recoverability of our assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the net book value of the assets is depreciated over the newly determined remaining useful lives.

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     Legal contingencies. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS 5, “Accounting for Contingencies,” requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position, results of operations or cash flows. We had reserves for litigation at September 30, 2007 of approximately $7.0 million towards our litigation against International Rectifier Corporation.

     Income tax. We adopted FIN 48 in the quarter ended June 30, 2007. See Note 14 in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q.

     As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. A valuation allowance reduces our deferred tax assets to the amount that is more likely than not to be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each taxing jurisdiction in which we operate. If we determine that we will not realize all or a portion of our remaining deferred tax assets, we will increase our valuation allowance with a charge to income tax expense. Conversely, if we determine that we will ultimately be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will reduce goodwill, intangible assets or income tax expense. Significant management judgment is required in determining our provision for income taxes and potential tax exposures, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial position and results of operations. Our ability to utilize our deferred tax assets and the need for a related valuation allowance are monitored on an ongoing basis.

     Furthermore, computation of our tax liabilities involves examining uncertainties in the application of complex tax regulations. As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on the two-step process as prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if there is sufficient available evidence to indicate if it is more likely than not that the position will be sustained on an audit, including resolution of any related appeals or litigation processes. The second step requires us to measure and determine the approximate amount of the tax benefit at the largest amount that is more than 50% likely of being realized upon ultimate settlement with the tax authorities. It is inherently difficult and requires significant judgment to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We re-examine these uncertain tax positions on a quarterly basis. This reassessment is based on various factors during the period including but not limited to, changes in worldwide tax laws and treaties, changes in facts or circumstances, effectively settled issues under audit and any new audit activity. A change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

     Defined benefit plans. We maintain pension plans covering certain of our employees in foreign locations. For financial reporting purposes we recognize the funded status of our defined benefit pension and post-retirement benefit plans with a corresponding adjustment to accumulated other comprehensive income, net of tax. Funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation for pension plans. These amounts are adjusted to recognize the amortized gain or losses as a part of net periodic pension cost. Net periodic pension costs are calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations, assumed rate of return on pension plan assets and assumed rate of compensation increase for plan employees. Our assumptions are derived from actuarial projections and actual market data. These assumptions are based upon management’s judgment, considering known trends and uncertainties. Actual results that differ from these assumptions would impact the future expense recognition and cash funding requirements of our pension plans.

     Share-based compensation. Total share-based compensation during the first six months of fiscal 2008 was $944,000. Determining the appropriate fair value model and calculating the fair value of employee stock options and rights to purchase shares under stock purchase plans at the date of grant requires judgment. We use the Black-Scholes option pricing model to estimate the fair value of these share-based awards consistent with the provisions of SFAS 123(R). Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The assumptions for expected volatility and expected life are the two assumptions that significantly affect the grant date fair value.

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     We use historical volatility based on our stock price. We use the simplified calculation of expected life described in the Staff Accounting Bulletin 107 of the SEC, due to changes in the vesting terms and contractual life of current option grants compared to our historical grants. If we determined that another method used to estimate expected volatility or expected life was more reasonable than our current methods, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher volatility and longer expected lives result in an increase to share-based compensation determined at the date of grant.

     In addition, SFAS 123(R) requires us to develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the cumulative effect of adjusting the rate for expense amortization after April 1, 2006 is recognized in the period the forfeiture estimate is changed. We estimate and adjust forfeiture rates based on a quarterly review of recent forfeiture activity and expected future employee turnover. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the expense recognized in the financial statements. These adjustments affect our selling, general and administrative expenses. The effect of forfeiture adjustments in the first six months of fiscal 2008 was insignificant. Cumulative adjustments are recorded to the extent that the related expense is recognized in the financial statements, beginning with implementation in the first quarter of fiscal 2007. Therefore, we expect the potential impact from cumulative forfeiture adjustments to increase in future periods. The expense that we recognize in future periods could also differ significantly from the current period and/or our forecasts due to adjustments in the assumed forfeiture rates.

Recent Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, or GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for our company beginning in the first quarter of fiscal 2009. We are currently evaluating the impact of SFAS 157 to our financial position and results of operations.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for our company beginning in the first quarter of fiscal 2009, although earlier adoption is permitted. We are currently evaluating the impact of SFAS 159 to our financial position and results of operations.

     We adopted FIN 48 as of April 1, 2007 as required. See Note 14 of Notes to Unaudited Condensed Consolidation Financial Statements for further discussion.

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Results of Operations — Three and Six Months Ended September 30, 2007 and 2006

     The following table sets forth selected consolidated statements of operations data for the fiscal periods indicated and the percentage change in such data from period to period. These historical operating results may not be indicative of the results for any future period.

	Three Months Ended								Six Months Ended
	September 30,								September 30,
	2007			% change			2006		2007			% change			2006
	(000)						(000)		(000)						(000)
Net revenues	$	76,165			6.0	%	$	71,875	$	152,066			8.9	%	$	139,616
Cost of goods sold		56,160			12.9	%		49,755		109,673			14.7	%		95,612
Gross profit	$	20,005			-9.6	%	$	22,120	$	42,393			-3.7	%	$	44,004
Operating expenses:
Research, development and engineering	$	5,131			4.3	%	$	4,921	$	10,204			1.7	%	$	10,029
Selling, general and administrative		9,897			-8.6	%		10,828		20,737			-9.4	%		22,884
Litigation provision (release)		(1,195	)	nm				183		(5,979	)		-83.7	%		(36,644	)
Total operating expenses	$	13,833			-13.2	%	$	15,932	$	24,962		nm			$	(3,731	)

nm  —  not meaningful

     The following table sets forth certain financial data as a percentage of net revenues for the fiscal periods indicated. These historical operating results may not be indicative of the results for any future period.

	% of Net Revenues
	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Net revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		73.7	%		69.2	%		72.1	%		68.5	%
Gross profit		26.3	%		30.8	%		27.9	%		31.5	%
Operating expenses:
Research, development and engineering		6.7	%		6.8	%		6.7	%		7.2	%
Selling, general and administrative		13.0	%		15.1	%		13.6	%		16.4	%
Litigation provision (release)		-1.6	%		0.3	%		-3.9	%		-26.2	%
Total operating expenses		18.1	%		22.2	%		16.4	%		-2.6	%
Operating income		8.2	%		8.6	%		11.5	%		34.1	%
Other income (expense), net		-1.6	%		0.3	%		-0.4	%		-0.4	%
Income before income tax		6.6	%		8.9	%		11.1	%		33.7	%
Provision for income tax		1.3	%		3.6	%		3.9	%		13.6	%
Net income		5.3	%		5.3	%		7.2	%		20.1	%

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Net Revenues

     The following tables set forth the revenue for each of our product groups for the fiscal periods indicated:

Revenues
	Three Months Ended September 30,							Six Months Ended September 30,
	2007		% change			2006		2007		% change			2006
	(000)					(000)		(000)					(000)
Power Semiconductors	$	58,451		16.1	%	$	50,349	$	115,645		15.1	%	$	100,490
Integrated Circuits		11,200		-28.6	%		15,678		23,525		-18.2	%		28,757
Systems and RF Power Semiconductors		6,514		11.4	%		5,848		12,896		24.4	%		10,369
Total	$	76,165		6.0	%	$	71,875	$	152,066		8.9	%	$	139,616
The following tables set forth the average selling prices, or ASPs, and units for the fiscal periods indicated:
ASPs
	Three Months Ended September 30,							Six Months Ended September 30,
	2007		% change			2006		2007		% change			2006
Power Semiconductors	$	1.80		-3.7	%	$	1.87	$	1.95		-3.5	%	$	2.02
Integrated Circuits	$	0.89		78.0	%	$	0.50	$	0.77		54.0	%	$	0.50
Systems and RF Power Semiconductors	$	17.01		25.1	%	$	13.60	$	17.52		43.3	%	$	12.23
Units
	Three Months Ended September 30,							Six Months Ended September 30,
	2007		% change			2006		2007		% change			2006
	(000)					(000)		(000)					(000)
Power Semiconductors		32,555		21.0	%		26,907		59,288		19.0	%		49,823
Integrated Circuits		12,569		-59.9	%		31,361		30,554		-46.9	%		57,593
Systems and RF Power Semiconductors		383		-11.0	%		430		736		-13.2	%		848
Total Units		45,507					58,698		90,578					108,264

     The 6.0% increase in net revenues in the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 reflects an increase of $8.1 million, or 16.1%, in the sale of power semiconductors, offset by a $4.5 million, or 28.6%, decrease in the sale of ICs. The increase in revenues in the power semiconductor group included a $4.6 million increase from the sale of bipolar products and a $3.5 million increase from the sale of MOS products. The increase in revenues from the sale of bipolar products was primarily in Europe and to the industrial and commercial markets. The increase in the revenues from the sale of MOS products was primarily in the Europe and Asia Pacific regions and to the industrial and commercial markets. The decrease in IC revenues was principally due to a $2.4 million decrease in revenues from the sale of ASICs to the consumer products market and a $1.6 million decrease in the sale of ICs to the telecom market.

     The 8.9% increase in the six months ended September 30, 2007 as compared to the six months ended September 30, 2006 reflects a $15.2 million, or 15.1%, increase from the sale of power semiconductors and a $2.5 million, or 24.4%, increase from the sale of subassemblies, offset by a $5.2 million, or 18.2%, decrease in the sale of ICs. The increase in power semiconductors was primarily due to an increase of $8.2 million in the sale of bipolar products and an increase of $6.7 million in the sale of MOS products. The increase in revenues from the sale of bipolar products was primarily in Europe and to the industrial and commercial markets. The increase in the revenues from the sale of MOS products was primarily in the Europe and Asia Pacific regions and to industrial and commercial markets. The decrease in ICs was principally due to a $4.5 million decrease from the sale of ASICs to the consumer products market and a $2.1 million decrease in the sale of ICs to the telecom market.

     The decrease in the ASP of power semiconductors during the three and six month periods was due to a change in the product mix rather than a reduction in unit prices. The increase in the ASP of ICs in the three and six month periods was principally due to the reduction of sales of ASICs to the consumer products market. The increase in ASPs of systems and RF power semiconductors was due to an increase in the sale of systems, which typically have higher ASPs.

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     In the three and six month periods, power semiconductor unit growth was primarily from increases in MOS products sales. IC units declined with the reduction in the sale of ICs to the consumer products market.

     For the quarter ended September 30, 2007, sales to customers in the United States represented approximately 27.8% and sales to international customers represented approximately 72.2% of our net revenues. Of our international sales, approximately 52.9% were derived from sales in Europe and the Middle East, approximately 38.6% were derived from sales in the Asia Pacific region and approximately 8.5% were derived from sales in the rest of the world. By comparison, for the quarter ended September 30, 2006, sales to customers in the United States represented approximately 27.6% and sales to international customers represented approximately 72.4% of our net revenues. Of our international sales, approximately 50.3% were derived from sales in Europe and the Middle East, approximately 43.9% were derived from sales in the Asia Pacific region and approximately 5.8% were derived from sales in the rest of the world.

     For the six months period ended September 30, 2007, sales to customers in the United States represented approximately 26.6%, and sales to international customers represented approximately 73.4%, of our net revenues. Of our international sales, approximately 54.4% were derived from sales in Europe and the Middle East, approximately 37.0% were derived from sales in Asia and approximately 8.6% were derived from sales in the rest of the world. By comparison, for the six months ended September 30, 2006, sales to customers in the United States represented approximately 29.6%, and sales to international customers represented approximately 70.4%, of our net revenues. Of our international sales, approximately 50.5% were derived from sales in Europe and the Middle East, approximately 43.3% were derived from sales in Asia and approximately 6.2% were derived from sales in the rest of the world.

     For the three and six month periods ended September 30, 2007, growth was substantial in China and Germany, while notable declines were experienced in Singapore and Korea.

     For the quarter ended September 30, 2007, one customer, accounted for 10.8% of our net revenues. For the six months ended September 30, 2007 and the three and six months ended September 30, 2006, no one customer accounted for more than 10% of net revenues.

     For the three and six months ended September 30, 2007, our revenues were reduced by allowances for sales returns, stock rotations and ship and debit. See “Critical Accounting Policies and Significant Management Estimates” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Gross Profit.

     Gross profit margin decreased to 26.3% in the three months ended September 30, 2007 from 30.8% in the three months ended September 30, 2006. Gross profit margin decreased to 27.9% in the six months ended September 30, 2007 from 31.5% in the six months ended September 30, 2006. The decrease in gross profit margin and gross profits expressed in dollars in the three and six months ended September 30, 2007, as compared to the same periods of the prior year, was primarily the result of changes in product mix. During the current fiscal year, our product mix shifted to lower margin power semiconductors and away from higher margin ICs. This resulted in substantially lower IC units sold, causing underutilized capacity and production inefficiencies. The shift in the product mix and the resulting underutilized capacity and production inefficiencies caused a decline of approximately 4.2% and 3.4% in the gross profit margin in the three and six month periods ending September 30, 2007, respectively.

     In the three and six months ended September 30, 2007, our gross profit and gross profit margin were increased by the sale of excess inventory, which had previously been written down. See “Critical Accounting Policies and Significant Management Estimates — Inventories” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Research, Development and Engineering.

     Research, development and engineering, or R&D, expenses typically consist of internal engineering efforts for product design and development. For the three and six months ended September 30, 2007 as compared to the three and six months ended September 30, 2006, research, development and engineering expenses was largely unchanged. Expressed as a percentage of revenues, our R&D expenses were 6.7% for the three and six months ended September 30, 2007 and 6.8% and 7.2% for the three and six months ended September 30, 2006, respectively. Although R&D expenses may increase as we fund more development projects, we do not expect a material increase in such expenses when expressed as a percentage of revenues.

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Selling, General and Administrative.

     For the three months ended September 30, 2007 as compared to the three months ended September 30, 2006, selling, general and administrative expenses decreased by $931,000, and from 15.1% to 13.0% of net revenues, primarily due to a reduction of consulting fees related to regulatory compliance.

     For the six months ended September 30, 2007 as compared to six months ended September 30, 2006, selling, general and administrative expenses decreased by $2.1 million, and from 16.4% to 13.6% of net revenues. The reduction was primarily due to a reduction of consulting fees related to regulatory compliance of $2.0 million and a decrease of $736,000 in litigation related expenses, offset by an increase of $974,000 in selling expenses.

Release of Litigation Provision.

     For the quarter ended September 30, 2007, we released $1.3 million, net of interest accruals, including our remaining provision for our litigation against LoJack Corporation. For the six months ended September 30, 2007, we released $6.0 million, net of interest accruals, from our litigation provision. See Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements for a description of the current status of these litigation matters.

Other Income (Expense).

     In the quarter ended September 30, 2007, other expense, net was $1.2 million as compared to other income, net of $200,000 in the quarter ended September 30, 2006. In the three months ended September 30, 2007, other expense, net consisted principally of losses associated with changes in foreign currency rates of $1.3 million. Other expense, net in the six months ended September 30, 2007 was $604,000, as compared to other expense, net of $644,000 in the six months ended September 30, 2006. In the six months ended September 30, 2007, other expense, net primarily consisted of losses associated with changes in foreign currency of $2.2 million, offset by the recognition of $1.1 million received on an insurance claim.

     For the three months ended September 30, 2006, other income, net consisted principally of interest income. For six months ended September 30, 2006, other expense, net consisted principally of losses associated with changes in foreign currency rates partially offset by interest income.

Provision for Income Tax.

     In the quarter ended September 30, 2007, the provision for income tax reflected an effective tax rate of 20.3% as compared to an effective tax rate of 40.7% in the quarter ended September 30, 2006. For the six months ended September 30, 2007, the provision for income tax reflected an effective tax rate of 34.9%, as compared to an effective rate of 40.4% for the six months ended September 30, 2006. In both the three and six month periods of the current fiscal year, the effective tax rate decreased because of an adjustment due to the settlement of a tax audit in a foreign tax jurisdiction, as well as a change in expectations for the current year’s income.

Liquidity and Capital Resources

     At September 30, 2007, cash and cash equivalents of $56.0 million increased by 3.7% from the $54.0 million at March 31, 2007.

     Net cash provided by operating activities in the six months ended September 30, 2007 was $12.2 million, as compared to net cash provided by operating activities of $576,000 in the six months ended September 30, 2006. Net accounts receivable increased by $4.1 million, or 9.6%, from March 31, 2007 to September 30, 2007, primarily due to the timing of revenues. At September 30, 2007, one customer accounted for 16.8% of our net account receivables. Our net inventories at September 30, 2007 decreased slightly by $293,000, or 0.3%, from March 31, 2007 as a result of higher revenues. Our accounts payable at September 30, 2007 decreased by $349,000, or 1.8%, from accounts payable at March 31, 2007, primarily because of a reduction in the purchase of inventories.

     We used $5.4 million in net cash for investing activities during the six months ended September 30, 2007, as compared to $6.4 million during the six months ended September 30, 2006. During the six months ended September 30, 2007, our uses of cash for investing activities principally reflected an increase in investments of $2.4 million and purchase of plant and equipment of $2.9 million. During the six months ended September 30, 2006, we spent $6.6 million on capital expenditures, to increase our capacity and replace older equipment.

     For the six months ended September 30, 2007, net cash used in financing activities was $6.4 million as compared to net cash used in financing activities of $7.4 million in the six months ended September 30, 2006. During the six months ended September 30, 2007 and 2006, the cash was used principally to purchase treasury stock and for principal repayments on capital lease obligations.

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     Another potential source of liquidity is available borrowings under existing lines of credit. At September 30, 2007, we had credit aggregating $3.1 million available.

     At September 30, 2007, our debt, consisting of capital lease obligations and loans payable, was $31.0 million, representing 54.5% of our cash and cash equivalents and 16.1% of our stockholders equity.

     We are obligated on a €8.5 million, or a $12.1 million, loan. The loan has a term of 15 years and bears a variable interest rate, dependent upon the current Euribor rate and the calculation of a ratio of indebtedness to cash flow for the German subsidiary. Each fiscal quarter during the first five years of the loan, a principal payment of €167,000, or about $238,000, and a payment of accrued interest will be required. Thereafter, the amount of the payment will be recomputed. Financial covenants for a ratio of indebtedness to cash flow, a ratio of equity to total assets and a minimum stockholders’ equity for the German subsidiary must be satisfied for the loan to remain in good standing. The loan may be prepaid in whole or in part at the end of a fiscal quarter without penalty. At September 30, 2007, the Company had complied with the financial covenants. The loan is partially collateralized by a security interest in the facility owned by IXYS in Lampertheim, Germany.

     On August 2, 2007, IXYS completed the purchase of a building in Milpitas, California, to be used as its corporate offices and facility for operations, for $7.5 million. In connection with the purchase, the Company assumed a loan, secured by the building, of $7.5 million. The loan bears interest at rate of 7.455% per annum and is due and payable in February 2011. Monthly payments of principal and interest of $56,000 are due under the loan. In addition, monthly impound payments aggregating $13,000 are to be made for items such as real property taxes, insurance and capital expenditures. At maturity, the remaining balance on the loan will be approximately $7.1 million.

     We believe that our cash and cash equivalents, together with cash generated from operations, will be sufficient to meet our anticipated cash requirement for the next 12 months. Our liquidity could be negatively affected by a decline in demand for our products, the need to invest in new product development, one or more acquisitions or the payment of damages and related interest and attorneys’ fees, including the damages of at least $7.0 million awarded to International Rectifier. There can be no assurance that additional debt or equity financing will be available when required or, if available, can be secured on terms satisfactory to us.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our market risk has not changed materially from the market risk disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

     An evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act) as of September 30, 2007. This evaluation included various processes that were carried out in an effort to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC. In this evaluation, the Chief Executive Officer and the Chief Financial Officer considered whether our disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. This evaluation also included consideration of certain aspects of our internal controls and procedures for the preparation of our financial statements. Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2007, our disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

     There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

     Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our procedures or our internal controls will prevent or detect all errors and all fraud. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of our controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, have been detected.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     We currently are involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described by reference below, will have a material adverse effect on our financial condition, results of operations and cash flows. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs.

     The information set forth in Note 15 of Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 hereof is hereby incorporated by reference into this Item 1 of Part II.

ITEM 1A. RISK FACTORS

     In addition to the other information in this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully in evaluating our business and us. Additional risks not presently known to us or that we currently believe are not serious may also impair our business and its financial condition.

Our operating results fluctuate significantly because of a number of factors, many of which are beyond our control.

     Given the nature of the markets in which we participate, we cannot reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations. Large portions of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, small declines in revenues could seriously negatively affect our operating results in any given quarter. Our operating results may fluctuate significantly from quarter to quarter and year to year. For example, comparing fiscal 2002 to fiscal 2001, net revenues fell by 25.6% and net income fell by 85.7%. Further, from fiscal 2002 to fiscal 2003 and from fiscal 2005 to fiscal 2006, net income in one year shifted to net loss in the next year. Some of the factors that may affect our quarterly and annual results are:

• the reduction, rescheduling or cancellation of orders by customers;

• fluctuations in timing and amount of customer requests for product shipments;

• changes in the mix of products that our customers purchase;

• loss of key customers;

• the cyclical nature of the semiconductor industry;

• competitive pressures on selling prices;

• damage awards or injunctions as the result of litigation;

• market acceptance of our products and the products of our customers;

• fluctuations in our manufacturing yields and significant yield losses;

• difficulties in forecasting demand for our products and the planning and managing of inventory levels;

• the availability of production capacity;

• the amount and timing of investments in research and development;

• changes in our product distribution channels and the timeliness of receipt of distributor resale information;

• the impact of vacation schedules and holidays, largely during the second and third fiscal quarters of our fiscal year; and

• the amount and timing of costs associated with product returns.

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     As a result of these factors, many of which are difficult to control or predict, as well as the other risk factors discussed in this Quarterly Report on Form 10-Q, we may experience materially adverse fluctuations in our future operating results on a quarterly or annual basis.

Our gross margin is dependent on a number of factors, including our level of capacity utilization.

     Semiconductor manufacturing requires significant capital investment, leading to high fixed costs, including depreciation expense. We are limited in our ability to reduce fixed costs quickly in response to any shortfall in revenues. If we are unable to utilize our manufacturing, assembly and testing facilities at a high level, the fixed costs associated with these facilities will not be fully absorbed, resulting in higher costs and lower gross margins. Increased competition and other factors may lead to price erosion, lower revenues and lower gross margins for us in the future.

IXYS could be harmed by litigation.

     As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. We have been sued on occasion for purported patent infringement and are currently defending such claims. For example, we were sued by International Rectifier for purportedly infringing some of its patents covering power MOSFETs. The U.S. District Court awarded damages to International Rectifier of $6.2 million plus 6.5% of revenues from infringing products, by implication, after September 30, 2005 and interest. In addition, a permanent injunction against IXYS, effectively barring us from selling or distributing the allegedly infringing products, was issued by the U.S. District Court. We are appealing the damage award and the injunction. Our counsel inadvertently did not file the requisite notice of appeal following the entry of judgment within the required period. Although we believe that it is unlikely that we will be precluded from pursuing our appeal, we could be denied the opportunity to pursue our appeal. In January 2007, the Federal Circuit Court declined to issue a stay of the damage award. The judgment therefore became payable. We cannot predict the final outcome of this litigation matter. An adverse outcome would materially and adversely affect our financial condition, results of operations and cash flows. There can be no assurance that our accrual of $7.0 million is sufficient for any actual losses that may be incurred as a result of this litigation.

     Additionally, in the future, we could be accused of infringing the intellectual property rights of third parties. We also have certain indemnification obligations to customers and suppliers with respect to the infringement of third party intellectual property rights by our products. We could incur substantial costs defending ourselves and our customers and suppliers from any such claim. Infringement claims or claims for indemnification, whether or not proven to be true, may divert the efforts and attention of our management and technical personnel from our core business operations and could otherwise harm our business.

     In the event of an adverse outcome in any intellectual property litigation, we could be required to pay substantial damages, cease the development, manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license from the third party claiming infringement with royalty payment obligations by us. An adverse outcome in an infringement action could materially and adversely affect our financial condition, results of operations and cash flows.

Semiconductors for inclusion in consumer products have short product life cycles.

     We believe that consumer products are subject to shorter product life cycles, because of technological change, consumer preferences, trendiness and other factors, than other types of products sold by our customers. Shorter product life cycles result in more frequent design competitions for the inclusion of semiconductors in next generation consumer products, which may not result in design wins for us.

     In particular, in recent years we have sold semiconductors for inclusion in the plasma display panels of a small number of manufacturers. Plasma display panels are one of several technologies used for visual display in television. Should competition among the various visual display technologies for television adversely affect the sales of plasma display panels that incorporate our products, our operating results could be adversely affected. Moreover, our operating results could be adversely affected if those plasma display panel manufacturers that have selected our semiconductors for inclusion in their products are not successful in their competition against other manufacturers of plasma display panels. As plasma display panels cycle into next generation products, we must achieve new design wins for our semiconductors to be included in the next generation plasma display panels. New design wins may not occur.

Our international operations expose us to material risks.

     During fiscal 2007, our product sales by region were approximately 27.5% in the United States, approximately 37.8% in Europe and the Middle East, approximately 30.0% in Asia Pacific and approximately 4.7% in Canada and the rest of the world. We expect revenues from foreign markets to continue to represent a significant portion of total revenues. IXYS maintains significant operations in Germany and the United Kingdom and contracts with suppliers and manufacturers in South Korea, Japan and elsewhere in Europe and Asia Pacific. Some of the risks inherent in doing business internationally are:

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• foreign currency fluctuations;

• changes in the laws, regulations or policies of the countries in which we manufacture or sell our products;

• trade restrictions;

• longer payment cycles;

• challenges in collecting accounts receivable;

• cultural and language differences;

• employment regulations;

• limited infrastructure in emerging markets;

• transportation delays;

• seasonal reduction in business activities;

• work stoppages;

• terrorist attack or war; and

• economic or political instability.

     Our sales of products manufactured in our Lampertheim, Germany facility and our costs at that facility are primarily denominated in Euros, and sales of products manufactured in our Chippenham, U.K. facility and our costs at that facility are primarily denominated in British pounds and Euros. Fluctuations in the value of the Euro and the British pound against the U.S. dollar could have a significant adverse impact on our balance sheet and results of operations. We generally do not enter into foreign currency hedging transactions to control or minimize these risks. Fluctuations in currency exchange rates could cause our products to become more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. If we expand our international operations or change our pricing practices to denominate prices in other foreign currencies, we could be exposed to even greater risks of currency fluctuations.

     In addition, the laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as do U.S. laws regarding the manufacture and sale of our products in the U.S. Therefore, the risk of piracy of our technology and products may be greater when we manufacture or sell our products in these foreign countries.

The semiconductor industry is cyclical, and an industry downturn could adversely affect our operating results.

     Business conditions in the semiconductor industry may rapidly change from periods of strong demand and insufficient production to periods of weakened demand and overcapacity. The industry in general is characterized by:

• alternating periods of overcapacity and production shortages;

• cyclical demand for semiconductors;

• changes in product mix in response to changes in demand;

• significant price erosion;

• variations in manufacturing costs and yields;

• rapid technological change and the introduction of new products; and

• significant expenditures for capital equipment and product development.

     These factors could harm our business and cause our operating results to suffer.

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Our operating expenses are relatively fixed, and we order materials and commence production in advance of anticipated customer demand. Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls.

     Our operating expenses are relatively fixed, and, therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our operating results will be harmed if we do not meet our revenue goals.

     We also typically plan our production and inventory levels based on our own expectations for customer demand. Actual customer demand, however, can be highly unpredictable and can fluctuate significantly. In response to anticipated long lead times to obtain inventory and materials, we order materials and production in advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize. This risk has increased in recent periods. As our customers have increasingly demanded “just-in-time” deliveries that cannot be accommodated in the time required for a normal production cycle, we have increased our inventory produced in expectation of future orders. If anticipated demand fails to materialize, we may have to write down excess inventory, which would hurt our financial results.

We may not be able to acquire additional production capacity to meet the present and future demand for our products.

     The semiconductor industry has been characterized by periodic limitations on production capacity. Although we may be able to obtain the capacity necessary to meet present demand, if we are unable to increase our production capacity to meet possible future demand, some of our customers may seek other sources of supply or our future growth may be limited.

We may not be successful in our acquisitions.

     We have in the past made, and may in the future make, acquisitions of other companies and technologies. These acquisitions involve numerous risks, including:

• diversion of management’s attention during the acquisition process;

• disruption of our ongoing business;

• the potential strain on our financial and managerial controls and reporting systems and procedures;

• unanticipated expenses and potential delays related to integration of an acquired business;

• the risk that we will be unable to develop or exploit acquired technologies;

• failure to successfully integrate the operations of an acquired company with our own;

• the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;

• the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets;

• the risks of entering new markets in which we have limited experience;

• difficulties in expanding our information technology systems or integrating disparate information technology systems to accommodate the acquired businesses;

• failure to retain key personnel of the acquired business;

• the challenges inherent in managing an increased number of employees and facilities and the need to implement appropriate policies, benefits and compliance programs;

• customer dissatisfaction or performance problems with an acquired company’s products or personnel;

• adverse effects on our relationships with suppliers;

• the reduction in financial stability associated with the incurrence of debt or the use of a substantial portion of our available cash;

• the costs associated with acquisitions, including in-process R&D charges and amortization expense related to intangible assets, and the integration of acquired operations; and

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• assumption of known or unknown liabilities or other unanticipated events or circumstances.

     We cannot assure that we will be able to successfully acquire other businesses or product lines or integrate them into our operations without substantial expense, delay in implementation or other operational or financial problems.

     As a result of an acquisition, our financial results may differ from the investment community’s expectations in a given quarter. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows, or stock price could be negatively impacted.

We depend on external foundries to manufacture many of our products.

     Of our revenues for fiscal 2007, 37.8% came from wafers manufactured for us by external foundries. Our dependence on external foundries may grow. We currently have arrangements with a number of wafer foundries, three of which produce the wafers for power semiconductors that we purchase from external foundries. Samsung Electronics’ facility in Kiheung, South Korea is our principal external foundry.

     Our relationships with our external foundries do not guarantee prices, delivery or lead times, or wafer or product quantities sufficient to satisfy current or expected demand. These foundries manufacture our products on a purchase order basis. We provide these foundries with rolling forecasts of our production requirements; however, the ability of each foundry to provide wafers to us is limited by the foundry’s available capacity. At any given time, these foundries could choose to prioritize capacity for their own use or other customers or reduce or eliminate deliveries to us on short notice. If growth in demand for our products occurs, these foundries may be unable or unwilling to allocate additional capacity to our needs, thereby limiting our revenue growth. Accordingly, we cannot be certain that these foundries will allocate sufficient capacity to satisfy our requirements. In addition, we cannot be certain that we will continue to do business with these or other foundries on terms as favorable as our current terms. If we are not able to obtain additional foundry capacity as required, our relationships with our customers could be harmed and our revenues could be reduced or their growth limited. Moreover, even if we are able to secure additional foundry capacity, we may be required, either contractually or as a practical business matter, to utilize all of that capacity or incur penalties or an adverse effect on the business relationship. The costs related to maintaining foundry capacity could be expensive and could harm our operating results. Other risks associated with our reliance on external foundries include:

• the lack of control over delivery schedules;

• the unavailability of, or delays in obtaining access to, key process technologies;

• limited control over quality assurance, manufacturing yields and production costs; and

• potential misappropriation of our intellectual property.

     Our requirements typically represent a small portion of the total production of the external foundries that manufacture our wafers and products. We cannot be certain these external foundries will continue to devote resources to the production of our wafers and products or continue to advance the process design technologies on which the manufacturing of our products is based. These circumstances could harm our ability to deliver our products or increase our costs.

Our success depends on our ability to manufacture our products efficiently.

     We manufacture our products in facilities that are owned and operated by us, as well as in external wafer foundries and subcontract assembly facilities. The fabrication of semiconductors is a highly complex and precise process, and a substantial percentage of wafers could be rejected or numerous die on each wafer could be nonfunctional as a result of, among other factors:

• contaminants in the manufacturing environment;

• defects in the masks used to print circuits on a wafer;

• manufacturing equipment failure; or

• wafer breakage.

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     For these and other reasons, we could experience a decrease in manufacturing yields. Additionally, if we increase our manufacturing output, we may also experience a decrease in manufacturing yields. As a result, we may not be able to cost-effectively expand our production capacity in a timely manner.

Our markets are subject to technological change and our success depends on our ability to develop and introduce new products.

     The markets for our products are characterized by:

• changing technologies;

• changing customer needs;

• frequent new product introductions and enhancements;

• increased integration with other functions; and

• product obsolescence.

     To develop new products for our target markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to expand our technical and design expertise. Failure to do so could cause us to lose our competitive position and seriously impact our future revenues.

     Products or technologies developed by others may render our products or technologies obsolete or noncompetitive. A fundamental shift in technologies in our product markets would have a material adverse effect on our competitive position within the industry.

We may not be able to protect our intellectual property rights adequately.

     Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technology that is substantially similar or superior to our technology. More specifically, we cannot assure that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties. Nor can we assure that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. We may also become subject to or initiate interference proceedings in the U.S. Patent and Trademark Office, which can demand significant financial and management resources and could harm our financial results. Also, others may independently develop similar products or processes, duplicate our products or processes or design their products around any patents that may be issued to us.

Our revenues are dependent upon our products being designed into our customers’ products.

     Many of our products are incorporated into customers’ products or systems at the design stage. The value of any design win largely depends upon the customer’s decision to manufacture the designed product in production quantities, the commercial success of the customer’s product and the extent to which the design of the customer’s electronic system also accommodates incorporation of components manufactured by our competitors. In addition, our customers could subsequently redesign their products or systems so that they no longer require our products. The development of the next generation of products by our customers generally results in new design competitions for semiconductors, which may not result in design wins for us, potentially leading to reduced revenues and profitability. We may not achieve design wins or our design wins may not result in future revenues.

Because our products typically have lengthy sales cycles, we may experience substantial delays between incurring expenses related to research and development and the generation of revenues.

     The time from initiation of design to volume production of new semiconductors often takes 18 months or longer. We first work with customers to achieve a design win, which may take nine months or longer. Our customers then complete the design, testing and evaluation process and begin to ramp up production, a period that may last an additional nine months or longer. As a result, a significant period of time may elapse between our research and development efforts and our realization of revenues, if any, from volume purchasing of our products by our customers.

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Our backlog may not result in future revenues.

     Customer orders typically can be cancelled or rescheduled without penalty to the customer. As a result, our backlog at any particular date is not necessarily indicative of actual revenues for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenues, could harm our results of operations.

The markets in which we participate are intensely competitive.

     Certain of our target markets are intensely competitive. Our ability to compete successfully in our target markets depends on the following factors:

• proper new product definition;

• product quality, reliability and performance;

• product features;

• price;

• timely delivery of products;

• breadth of product line;

• design and introduction of new products;

• market acceptance of our products and those of our customers; and

• technical support and service.

     In addition, our competitors or customers may offer new products based on new technologies, industry standards or end-user or customer requirements, including products that have the potential to replace our products or provide lower cost or higher performance alternatives to our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable.

     Our primary power semiconductor competitors include Fairchild Semiconductor, Fuji, Hitachi, Infineon, International Rectifier, Microsemi, Mitsubishi, On Semiconductor, Powerex, Renesas Technology, Semikron International, STMicroelectronics, and Toshiba. Our IC products compete principally with those of Agere Systems, Legerity, NEC and Silicon Labs. Our RF power semiconductor competitors include RF Micro Devices. Many of our competitors have greater financial, technical, marketing and management resources than we have. Some of these competitors may be able to sell their products at prices below which it would be profitable for us to sell our products or benefit from established customer relationships that provide them with a competitive advantage. We cannot assure you that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased price competition.

We rely on our distributors and sales representatives to sell many of our products.

     A substantial majority of our products are sold to distributors or through sales representatives. Our distributors and sales representatives could reduce or discontinue sales of our products. They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we depend upon the continued viability and financial resources of these distributors and sales representatives, some of which are small organizations with limited working capital. These distributors and sales representatives, in turn, depend substantially on general economic conditions and conditions within the semiconductor industry. We believe that our success will continue to depend upon these distributors and sales representatives. If any significant distributor or sales representative experiences financial difficulties, or otherwise becomes unable or unwilling to promote and sell our products, our business could be harmed. For example, All American Semiconductor, Inc., one of our distributors, filed for bankruptcy in April 2007.

Fluctuations in the mix of products sold may adversely affect our financial results.

     Because of the wide price differences among our products, geographies and markets, the mix and types of products sold may have a substantial impact on our revenues and gross profit margins. In addition, more recently introduced products tend to have higher associated costs because of initial overall development costs and higher start-up costs. Fluctuations in the mix and types of our products may also affect the extent to which we are able to recover our fixed costs and investments that are associated with a particular product, and as a result can negatively impact our financial results.

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Our future success depends on the continued service of management and key engineering personnel and our ability to identify, hire and retain additional personnel.

     Our success depends upon our ability to attract and retain highly-skilled technical, managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and abilities of Nathan Zommer, Ph.D., our President and Chief Executive Officer, and other members of senior management. The loss of the services of one or more of our senior management or other key employees could adversely affect our business. We do not maintain key person life insurance on any of our officers, employees or consultants. There is intense competition for qualified employees in the semiconductor industry, particularly for highly skilled design, applications and test engineers. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified individuals who could leave us at any time in the future. If we grow, we expect increased demands on our resources, and growth would likely require the addition of new management and engineering staff as well as the development of additional expertise by existing management employees. If we lose the services of or fail to recruit key engineers or other technical and management personnel, our business could be harmed.

Growth and expansion place a significant strain on our resources, including our information systems and our employee base.

     Presently, because of past acquisitions, we are operating a number of different information systems that are not integrated. In part because of this, we use spreadsheets, which are prepared by individuals rather than automated systems, in our accounting. Consequently, in our accounting, we perform many manual reconciliations and other manual steps, which result in a high risk of errors. Manual steps also increase the probability of control deficiencies and material weaknesses.

     If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage and grow our business may be harmed. Our ability to successfully implement our goals and comply with regulations, including those adopted under the Sarbanes-Oxley Act of 2002, requires an effective planning and management system and process. We will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future.

     In improving our operational and financial systems, procedures and controls, we would expect to periodically implement new software and other systems that will affect our internal operations regionally or globally. The conversion process from one system to another is complex and could require, among other things, that data from the existing system be made compatible with the upgraded system. During any transition, we could experience errors, delays and other inefficiencies, which could adversely affect our business. Any delay in the implementation of, or disruption in the transition to, any new or enhanced systems, procedures or controls, could harm our ability to forecast sales demand, manage our supply chain, achieve accuracy in the conversion of electronic data and record and report financial and management information on a timely and accurate basis. In addition, as we add additional functionality, new problems could arise that we have not foreseen. Such problems could adversely impact our ability to do the following in a timely manner: provide quotes; take customer orders; ship products; provide services and support to our customers; bill and track our customers; fulfill contractual obligations; and otherwise run our business. Failure to properly or adequately address these issues could result in the diversion of management’s attention and resources, impact our ability to manage our business and our results of operations, cash flows, and stock price could be negatively impacted.

     Any future growth would also require us to successfully hire, train, motivate and manage new employees. In addition, continued growth and the evolution of our business plan may require significant additional management, technical and administrative resources. We may not be able to effectively manage the growth and evolution of our current business.

Our dependence on subcontractors to assemble and test our products subjects us to a number of risks, including an inadequate supply of products and higher materials costs.

     We depend on subcontractors for the assembly and testing of our products. The substantial majority of our products are assembled by subcontractors located outside of the United States. Our reliance on these subcontractors involves the following significant risks:

• reduced control over delivery schedules and quality;

• the potential lack of adequate capacity during periods of excess demand;

• difficulties selecting and integrating new subcontractors;

• limited or no warranties by subcontractors or other vendors on products supplied to us;

• potential increases in prices due to capacity shortages and other factors;

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• potential misappropriation of our intellectual property; and

• economic or political instability in foreign countries.

     These risks may lead to delayed product delivery or increased costs, which would harm our profitability and customer relationships.

     In addition, we use a limited number of subcontractors to assemble a significant portion of our products. If one or more of these subcontractors experience financial, operational, production or quality assurance difficulties, we could experience a reduction or interruption in supply. Although we believe alternative subcontractors are available, our operating results could temporarily suffer until we engage one or more of those alternative subcontractors. Moreover, in engaging alternative subcontractors in exigent circumstances, our production costs could increase markedly.

We depend on a limited number of suppliers for our substrates, most of whom we do not have long-term agreements with.

     We purchase the bulk of our silicon substrates from a limited number of vendors, most of whom we do not have long-term supply agreements with. Any of these suppliers could reduce or terminate our supply of silicon substrates at any time. Our reliance on a limited number of suppliers involves several risks, including potential inability to obtain an adequate supply of silicon substrates and reduced control over the price, timely delivery, reliability and quality of the silicon substrates. We cannot assure that problems will not occur in the future with suppliers.

We face the risk of financial exposure to product liability claims alleging that the use of products that incorporate our semiconductors resulted in adverse effects.

     Approximately 12% of our net revenues in fiscal 2007 were derived from sales of products used in medical devices such as defibrillators. Product liability risks may exist even for those medical devices that have received regulatory approval for commercial sale. We cannot be sure that the insurance that we maintain against product liability will be adequate to cover our losses. Any defects in our semiconductors used in these devices, or in any other product, could result in significant replacement, recall or product liability costs to us.

Regulations may adversely affect our ability to sell our products.

     Power semiconductors with operating voltages above 40 volts are subject to regulations intended to address the safety, reliability and quality of the products. These regulations relate to processes, design, materials and assembly. For example, in the United States, some high voltage products are required to pass Underwriters Laboratory recognition for voltage isolation and fire hazard tests. Sales of power semiconductors outside of the United States are subject to international regulatory requirements that vary from country to country. The process of obtaining and maintaining required regulatory clearances can be lengthy, expensive and uncertain. The time required to obtain approval for sale internationally may be longer than that required for U.S. approval, and the requirements may differ.

     In addition, approximately 12% of our revenues in fiscal 2007 were derived from the sale of products included in medical devices that are subject to extensive regulation by numerous governmental authorities in the United States and internationally, including the U.S. Food and Drug Administration, or FDA. The FDA and certain foreign regulatory authorities impose numerous requirements for medical device manufacturers to meet, including adherence to Good Manufacturing Practices, or GMP, regulations and similar regulations in other countries, which include testing, control and documentation requirements. Ongoing compliance with GMP and other applicable regulatory requirements is monitored through periodic inspections by federal and state agencies, including the FDA, and by comparable agencies in other countries. Our failure to comply with applicable regulatory requirements could prevent our products from being included in approved medical devices.

     Our business could also be harmed by delays in receiving or the failure to receive required approvals or clearances, the loss of previously obtained approvals or clearances or the failure to comply with existing or future regulatory requirements.

If our goodwill or long-lived assets become impaired, we may be required to record a significant charge to earnings.

     Under generally accepted accounting principles, we review our long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or long-lived assets may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or long-lived assets is determined resulting in an impact on our results of operations.

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We estimate tax liabilities, the final determination of which is subject to review by domestic and international taxation authorities.

     We are subject to income taxes and other taxes in both the United States and the foreign jurisdictions in which we currently operate or have historically operated. We are also subject to review and audit by both domestic and foreign taxation authorities. The determination of our worldwide provision for income taxes and current and deferred tax assets and liabilities requires judgment and estimation. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our consolidated financial statements and may materially affect our income tax provision, net income or cash flows in the period or periods for which such determination is made.

We are exposed to various risks related to the regulatory environment.

     We are subject to various risks related to: (1) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by legislative bodies and/or regulatory agencies in the countries in which we operate; (2) disagreements or disputes between national or regional regulatory agencies; and (3) the interpretation and application of laws, rules and regulations. If we are found by a court or regulatory agency not to be in compliance with applicable laws, rules or regulations, our business, financial condition and results of operations could be materially and adversely affected.

We are subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act.

     Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include in our Annual Report on Form 10-K a report of management on the effectiveness of our internal controls over financial reporting and an attestation by our independent registered public accounting firm to the adequacy of management’s assessment of our internal control. Ongoing compliance with these requirements is complex, costly and time-consuming. If (1) we fail to maintain effective internal control over financial reporting; (2) our management does not timely assess the adequacy of such internal control; or (3) our independent registered public accounting firm does not timely attest to the evaluation, we could be subject to regulatory sanctions and the public’s perception of our company may decline.

We invest in companies for strategic reasons and may not realize a return on our investments.

     We make investments in companies to further our strategic objectives and support our key business initiatives. Such investments include investments in equity securities of public companies and investments in non-marketable equity securities of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies whose products or technologies may directly support a product or initiative. The success of these companies is dependent on product development, market acceptance, operational efficiency, and other key business success factors. The private companies in which we invest may fail because they may not be able to secure additional funding, obtain favorable investment terms for future financings, or take advantage of liquidity events such as initial public offerings, mergers, and private sales. If any of these private companies fail, we could lose all or part of our investment in that company. If we determine that an other-than-temporary decline in the fair value exists for the equity securities of the public and private companies in which we invest, we write down the investment to its fair value and recognize the related write-down as an investment loss. Furthermore, when the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may decide to dispose of the investment even at a loss. Our investments in non-marketable equity securities of private companies are not liquid, and we may not be able to dispose of these investments on favorable terms or at all. The occurrence of any of these events could negatively affect our results of operations.

Our ability to access capital markets could be limited.

     From time to time, we may need to access the capital markets to obtain long-term financing. Although we believe that we can continue to access the capital markets on acceptable terms and conditions, our flexibility with regard to long-term financing activity could be limited by our existing capital structure, our credit ratings, and the health of the semiconductor industry. In addition, many of the factors that affect our ability to access the capital markets, such as the liquidity of the overall capital markets and the current state of the economy, are outside of our control. There can be no assurance that we will continue to have access to the capital markets on favorable terms.

Geopolitical instability, war, terrorist attacks, terrorist threats, and government responses thereto, may negatively affect all aspects of our operations, revenues, costs and stock prices.

     Any such event may disrupt our operations or those of our customers or suppliers. Our markets currently include South Korea, Taiwan and Israel, which are currently experiencing political instability. Additionally, our principal external foundry is located in South Korea.

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Business interruptions may damage our facilities or those of our suppliers.

     Our operations and those of our suppliers are vulnerable to interruption by fire, earthquake and other natural disasters, as well as power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan and do not have backup generators. Our facilities in California are located near major earthquake faults and have experienced earthquakes in the past. If any of these events occur, our ability to conduct our operations could be seriously impaired, which could harm our business, financial condition and results of operations and cash flows. We cannot be sure that the insurance we maintain against general business interruptions will be adequate to cover all our losses.

We may be affected by environmental laws and regulations.

     We are subject to a variety of laws, rules and regulations in the United States, England and Germany related to the use, storage, handling, discharge and disposal of certain chemicals and gases used in our manufacturing process. Any of those regulations could require us to acquire expensive equipment or to incur substantial other expenses to comply with them. If we incur substantial additional expenses, product costs could significantly increase. Our failure to comply with present or future environmental laws, rules and regulations could result in fines, suspension of production or cessation of operations.

Nathan Zommer, Ph.D. owns a significant interest in our common stock.

     Nathan Zommer, Ph.D., our President and Chief Executive Officer, beneficially owned, as of November 1, 2007, approximately 21% of the outstanding shares of our common stock. As a result, Dr. Zommer can exercise significant control over all matters requiring stockholder approval, including the election of the board of directors. His holdings could result in a delay of, or serve as a deterrent to, any change in control of IXYS, which may reduce the market price of our common stock.

Our stock price is volatile.

     The market price of our common stock has fluctuated significantly to date. The future market price of our common stock may also fluctuate significantly in the event of:

• variations in our actual or expected quarterly operating results;

• announcements or introductions of new products;

• technological innovations by our competitors or development setbacks by us;

• conditions in the communications and semiconductor markets;

• the commencement or adverse outcome of litigation;

• changes in analysts’ estimates of our performance or changes in analysts’ forecasts regarding our industry, competitors or customers;

• announcements of merger or acquisition transactions or a failure to achieve the expected benefits of an acquisition as rapidly or to the extent anticipated by financial analysts;

• terrorist attack or war;

• sales of our common stock by one or more members of management, including Nathan Zommer, Ph.D., our President and Chief Executive Officer; or

• general economic and market conditions.

     In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, including semiconductor companies. These fluctuations have often been unrelated or disproportionate to the operating performance of companies in our industry, and could harm the market price of our common stock.

The anti-takeover provisions of our certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control.

     Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control because the terms of any issued preferred stock could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction, without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders.

     Our stockholders must give substantial advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action. The Delaware anti-takeover law restricts business combinations with some stockholders once the stockholder acquires 15% or more of our common stock. The Delaware statute makes it more difficult for us to be acquired without the consent of our board of directors and management.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

						(c) Total Number of
						Shares (or Units)
	(a) Total Number of		(b) Average			Purchased as Part of		(d) Maximum Number (or Approximate Dollar
	shares (or Units)		Price Paid per			Publicly Announced		Value) of Shares (or Units) that May Yet Be
Period	Purchased		Share (or Unit)			Plans or Programs		Purchased Under the Plans or Programs
July 1, 2007 — July 31, 2007		—		(1	)		—		1,697,176	(2)
August 1, 2007 — August 31, 2007		277,300		9.86			277,300		1,419,876
September 1, 2007 — September 30, 2007		—		(1	)		—		1,419,876
Total		277,300		9.86			277,300

(1)	Not applicable
(2)	The current stock purchase program was approved on February 27, 2007 and will expire on June 15, 2008. The purchase of up to 2,000,000 shares of common stock was approved.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

     The 2007 Annual Meeting of the Stockholders of the Company was held on September 7, 2007.

     At the Annual Meeting, the stockholders elected each of the persons identified below to serve as a director of the Company until the next Annual Meeting of the Stockholders or until such person’s successor is elected (the “Director Proposal”), approved an increase of 350,000 shares of Common Stock under the 1999 Employee Stock Purchase Plan (the “Plan Increase Proposal”) and ratified the appointment of BDO Seidman, LLP as the independent registered public accounting firm of the Company for the fiscal year ending March 31, 2008 (the “Auditor Proposal”). The votes on the three proposals were as follows:

Proposal 1: The Director Proposal

Director	Votes For		Votes Withheld
Donald Feucht		29,471,276		642,369
Samuel Kory		29,141,597		972,048
S. Joon Lee		29,634,470		479,175
Timothy A. Richardson		29,939,225		174,420
James M. Thorburn		29,940,283		173,362
Nathan Zommer		29,767,989		345,656

Proposal 2: The Plan Increase Proposal

For	Against		Abstain		Broker Non-Vote
23,267,177		1,520,524		37,196		5,288,748

Proposal 3: The Auditor Proposal

For	Against		Abstain		Broker Non-Vote
30,058,798		42,416		12,431		0

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

See the Index to Exhibits, which is incorporated by reference herein.

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SIGNATURES

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

IXYS CORPORATION

By: /s/ Uzi Sasson Uzi Sasson, Chief Operating Officer,
Chief Financial Officer and Vice President
(Principal Financial Officer)

Date: November 7, 2007

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EXHIBIT INDEX

Exhibit
No.	Description
10.1	Amended and Restated 1999 Employee Stock Purchase Plan.
10.2	Assumption Agreement dated August 2, 2007 by and among La Salle Bank National Association, Barber Lane Associates L.P., Menlo Equities LLC, IXYS Buckeye, LLC and IXYS Corporation.
10.3	Limited Guaranty dated as of August 2, 2007 by IXYS Corporation in favor of La Salle Bank National Association.
10.4	Promissory Note Secured by Deed of Trust dated December 21, 2000 made by Barber Lane Associates L.P.
10.5	Deed of Trust dated December 21, 2000 on 1590 Buckeye Drive, Milpitas, California.
31.1	Certificate of Chief Executive Officer required under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certificate of Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification required under Section 906 of the Sarbanes-Oxley Act of 2002. (1)

(1) This exhibit is furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1933, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities and Exchange Act of 1993, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

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EX-10.1

Exhibit 10.1

IXYS CORPORATION

AMENDED AND RESTATED 1999 EMPLOYEE STOCK PURCHASE PLAN

Adopted May 7, 1999
Approved by the Stockholders on November 19, 1999
Effective Date: December 1, 1999

1. Purpose.

     (a) The purpose of this 1999 Employee Stock Purchase Plan (the “Plan”) is to provide a means by which employees of IXYS Corporation, a Delaware corporation (the “Company”), and its Affiliates, as defined in subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be given an opportunity to purchase stock of the Company.

     (b) The word “Affiliate” as used in the Plan means any parent corporation or subsidiary corporation of the Company, as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended (the “Code”).

     (c) The Company, by means of the Plan, seeks to retain the services of its employees, to secure and retain the services of new employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company.

     (d) The Company intends that the rights to purchase stock of the Company granted under the Plan be considered options issued under an “employee stock purchase plan” as that term is defined in Section 423(b) of the Code.

2. Administration.

     (a) The Plan shall be administered by the Board of Directors (the “Board”) of the Company unless and until the Board delegates administration to a committee as provided in subparagraph 2(c). Whether or not the Board has delegated administration the Board shall have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan.

     (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

               (i) To determine when and how rights to purchase stock of the Company shall be granted and the provisions of each offering of such rights (which need not be identical).

               (ii) To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan.

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               (iii) To construe and interpret the Plan and rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

               (iv) To amend the Plan as provided in paragraph 13.

               (v) Generally, to exercise such powers and to perform such acts as the Board or the Committee deems necessary or expedient to promote the best interests of the Company and its Affiliates and to carry out the intent that the Plan be treated as an “employee stock purchase plan” within the meaning of Section 423 of the Code.

     (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members of the Board (the “Committee”). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the board, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.

3. Shares Subject to the Plan.

     (a) Subject to the provisions of paragraph 12 relating to adjustments upon changes in stock, the stock that may be sold pursuant to rights granted under the Plan shall not exceed in the aggregate eight hundred fifty thousand (850,000) shares of the Company’s common stock (the “Common Stock”). If any right granted under the Plan shall for any reason terminate without having been exercised, the Common Stock not purchased under such right shall again become available for the Plan.

     (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.

4. Grant of Rights; Offering.

     (a) The Board or the Committee may from time to time grant or provide for the grant of rights to purchase Common Stock of the Company under the Plan to eligible employees (an “Offering”) on a date or dates (the “Offering Date(s)”) selected by the Board or the Committee. Each Offering shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate, which shall comply with the requirements of Section 423(b)(5) of the Code that all employees granted rights to purchase stock under the Plan shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in paragraphs 5 through 8, inclusive.

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     (b) If an employee has more than one right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (1) each agreement or notice delivered by that employee will be deemed to apply to all of his or her rights under the Plan, and (2) a right with a lower exercise price (or an earlier-granted right, if two rights have identical exercise prices), will be exercised to the fullest possible extent before a right with a higher exercise price (or a later-granted right, if two rights have identical exercise prices) will be exercised.

5. Eligibility.

     (a) Rights may be granted only to employees of the Company or, as the Board or the Committee may designate as provided in subparagraph 2(b), to employees of any Affiliate of the Company. Except as provided in subparagraph 5(b), an employee of the Company or any Affiliate shall not be eligible to be granted rights under the Plan unless, on the Offering Date, such employee has been in the employ of the Company or any Affiliate for such continuous period preceding such grant as the Board or the Committee may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. In addition, unless otherwise determined by the Board or the Committee and set forth in the terms of the applicable Offering, no employee of the Company or any Affiliate shall be eligible to be granted rights under the Plan unless, on the Offering Date, such employee’s customary employment with the Company or such Affiliate is for at least twenty (20) hours per week and at least five (5) months per calendar year.

     (b) The Board or the Committee may provide that each person who, during the course of an Offering, first becomes an eligible employee of the Company or designated Affiliate will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an eligible employee or occurs thereafter, receive a right under that Offering, which right shall thereafter be deemed to be a part of that Offering. Such right shall have the same characteristics as any rights originally granted under that Offering, as described herein, except that:

               (i) the date on which such right is granted shall be the “Offering Date” of such right for all purposes, including determination of the exercise price of such right;

               (ii) the period of the Offering with respect to such right shall begin on its Offering Date and end coincident with the end of such Offering; and

               (iii) the Board or the Committee may provide that if such person first becomes an eligible employee within a specified period of time before the end of the Offering, he or she will not receive any right under that Offering.

     (c) No employee shall be eligible for the grant of any rights under the Plan if, immediately after any such rights are granted, such employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any employee, and stock which such

3

employee may purchase under all outstanding rights and options shall be treated as stock owned by such employee.

     (d) An eligible employee may be granted rights under the Plan only if such rights, together with any other rights granted under “employee stock purchase plans” of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such employee’s rights to purchase stock of the Company or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of fair market value of such stock (determined at the time such rights are granted) for each calendar year in which such rights are outstanding at any time.

     (e) Officers of the Company and any designated Affiliate shall be eligible to participate in Offerings under the Plan, provided, however, that the Board or the Committee may provide in an Offering that certain employees who are highly compensated employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate.

6. Rights; Purchase Price.

     (a) On each Offering Date, each eligible employee, pursuant to an Offering made under the Plan, shall be granted the right to purchase up to the number of shares of Common Stock of the Company purchasable with a percentage designated by the Board or the Committee not exceeding fifteen percent (15%) of such employee’s Earnings (as defined by the Board for each Offering) during the period which begins on the Offering Date (or such later date as the Board or the Committee determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering. The Board or the Committee shall establish one or more dates during an Offering (the “Purchase Date(s)”) on which rights granted under the Plan shall be exercised and purchases of Common Stock carried out in accordance with such Offering.

     (b) In connection with each Offering made under the Plan, the Board or the Committee may specify a maximum number of shares that may be purchased by any employee as well as a maximum aggregate number of shares that may be purchased by all eligible employees pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board or the Committee may specify a maximum aggregate number of shares which may be purchased by all eligible employees on any given Purchase Date under the Offering. If the aggregate purchase of shares upon exercise of rights granted under the Offering would exceed any such maximum aggregate number, the Board or the Committee shall make a pro rata allocation of the shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable.

     (c) The purchase price of stock acquired pursuant to rights granted under the Plan shall be not less than the lesser of:

               (i) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Offering Date; or

               (ii) an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Purchase Date.

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7. Participation; Withdrawal; Termination.

     (a) An eligible employee may become a participant in the Plan pursuant to an Offering by delivering a participation agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board or the Committee of such employee’s Earnings (as defined by the Board for each Offering) during the Offering. The payroll deductions made for each participant shall be credited to an account for such participant under the Plan and shall be deposited with the general funds of the Company. A participant may reduce (including to zero) or increase such payroll deductions, and an eligible employee may begin such payroll deductions, after the beginning of any Offering only as provided for in the Offering. A participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the participant has not had the maximum amount withheld during the Offering.

     (b) At any time during an Offering, a participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering except as provided by the Board or the Committee in the Offering. Upon such withdrawal from the Offering by a participant, the Company shall distribute to such participant all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the participant) under the Offering, without interest, and such participant’s right to acquire Common Stock under that Offering shall be automatically terminated. A participant’s withdrawal from an Offering will have no effect upon such participant’s eligibility to participate in any other Offerings under the Plan but such participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan.

     (c) Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of a participant’s employment with the Company and any designated Affiliate, for any reason, and the Company shall distribute to such terminated employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the terminated employee), under the Offering, without interest.

     (d) Rights granted under the Plan shall not be transferable by a participant other than by will or the laws of descent and distribution, or by a beneficiary designation as provided in paragraph 14, and during a participant’s lifetime, shall be exercisable only by such participant.

8. Exercise.

     (a) On each date specified therefor in the relevant Offering (“Purchase Date”), each participant’s accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of whole shares of stock of the Company, up to the maximum number of shares permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. Unless otherwise provided for in the applicable Offering, no fractional shares shall be issued upon the exercise of rights granted under the Plan. The amount, if any, of accumulated payroll

5

deductions remaining in each participant’s account after the purchase of shares which is less than the amount required to purchase one share of stock on the final Purchase Date of an Offering shall be held in each such participant’s account for the purchase of shares under the next Offering under the Plan, unless such participant withdraws from such next Offering, as provided in subparagraph 7(b), or is no longer eligible to be granted rights under the Plan, as provided in paragraph 5, in which case such amount shall be distributed to the participant after such final Purchase Date, without interest. The amount, if any, of accumulated payroll deductions remaining in any participant’s account after the purchase of shares which is equal to the amount required to purchase whole shares of stock on the final Purchase Date of an Offering shall be distributed in full to the participant after such Purchase Date, without interest.

     (b) No rights granted under the Plan may be exercised to any extent unless the shares to be issued upon such exercise under the Plan (including rights granted thereunder) are covered by an effective registration statement pursuant to the Securities Act of 1933, as amended (the “Securities Act”) and the Plan is in material compliance with all applicable state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date in any Offering hereunder the Plan is not so registered or in such compliance, no rights granted under the Plan or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the Plan is subject to such an effective registration statement and such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If on the Purchase Date of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered and in such compliance, no rights granted under the Plan or any Offering shall be exercised then all payroll deductions accumulated during the Offering (reduced to the extent, if any, such deductions have been used to acquire stock) shall be distributed to the participants, without interest.

9. Covenants of the Company.

     (a) During the terms of the rights granted under the Plan, the Company shall at all times keep available the number of shares of stock required to satisfy such rights.

     (b) The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the rights granted under the Plan. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such rights unless and until such authority is obtained.

10. Use of Proceeds from Stock.

     Proceeds from the sale of stock to participants pursuant to rights granted under the Plan shall constitute general funds of the Company.

11. Rights as a Stockholder.

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     A participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to rights granted under the Plan unless and until the participant’s shares acquired upon exercise of rights hereunder are recorded in the books of the Company (or its transfer agent).

12. Adjustments upon Changes in Stock.

     (a) If any change is made in the stock subject to the Plan, or subject to any rights granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan and outstanding rights will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding rights. Such adjustments shall be made by the Board or the Committee, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a “transaction not involving the receipt of consideration by the Company.”)

     (b) In the event of: (1) a dissolution or liquidation of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; (3) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (4) the acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or any Affiliate of the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors, then, as determined by the Board in its sole discretion (i) any surviving or acquiring corporation may assume outstanding rights or substitute similar rights for those under the Plan, (ii) such rights may continue in full force and effect, or (iii) participants’ accumulated payroll deductions may be used to purchase Common Stock immediately prior to the transaction described above and the participants’ rights under the ongoing Offering terminated.

13. Amendment of the Plan.

     (a) The Board or the Committee at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment if such amendment requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Exchange Act.

     (b) The Board or the Committee may amend the Plan in any respect the Board or the Committee deems necessary or advisable to provide eligible employees with the maximum

7

benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to employee stock purchase plans and/or to bring the Plan and/or rights granted under it into compliance therewith.

     (c) Rights and obligations under any rights granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan, except with the consent of the person to whom such rights were granted, or except as necessary to comply with any laws or governmental regulations, or except as necessary to ensure that the Plan and/or rights granted under the Plan comply with the requirements of Section 423 of the Code.

14. Designation of Beneficiary.

     (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant’s account under the Plan in the event of such participant’s death subsequent to the end of an Offering but prior to delivery to the participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant’s account under the Plan in the event of such participant’s death during an Offering.

     (b) Such designation of beneficiary may be changed by the participant at any time by written notice in the form prescribed by the Company. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant’s death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.

15. Termination or Suspension of the Plan.

     (a) The Board or the Committee, in its discretion, may suspend or terminate the Plan at any time. No rights may be granted under the Plan while the Plan is suspended or after it is terminated.

     (b) Rights and obligations under any rights granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except as expressly provided in the Plan or with the consent of the person to whom such rights were granted, or except as necessary to comply with any laws or governmental regulation, or except as necessary to ensure that the Plan and/or rights granted under the Plan comply with the requirements of Section 423 of the Code.

16. Effective Date of Plan.

     The Plan shall become effective on December 1, 1999 (the “Effective Date”), provided that the Plan has been approved by the stockholders of the Company prior to the Effective Date.

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EX-10.2

Exhibit 10.2

Loan No. 31-0900266

ASSUMPTION AGREEMENT

     This Assumption Agreement (“Agreement”) is made this 2nd day of August, 2007, by LASALLE BANK NATIONAL ASSOCIATION, as Trustee for Morgan Stanley Dean Witter Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 2001-TOP1 (“Lender”), BARBER LANE ASSOCIATES L.P., a California limited partnership (“Borrower”), MENLO EQUITIES LLC, a California limited liability company (“Guarantor”), IXYS BUCKEYE, LLC, a Delaware limited liability company (“Buyer”), and IXYS CORPORATION, a Delaware corporation (“New Guarantor”).

RECITALS

A. Lender’s predecessor in interest made a loan to Borrower in the original principal amount of Eight Million and no/100ths Dollars ($8,000,000.00) (“Loan”), under the terms and provisions set forth in the following loan documents, all of which are dated as of December 21, 2000, unless otherwise noted:

1.	Promissory Note Secured By Deed of Trust (“Note”) in the original principal amount of the Loan, made by Borrower and payable to Lender’s predecessor in interest;
2.	Deed of Trust and Absolute Assignment of Rents and Leases and Security Agreement (and Fixture Filing) (as assigned, as set forth below, “Security Instrument”), executed by Borrower, as trustor, for the benefit of Lender’s predecessor in interest, as beneficiary, which secures the Note and other obligations of Borrower and which was recorded on January 12, 2001, as Instrument No. 0015525418, in the Official Records of Santa Clara County, California (“Official Records”), the beneficiary’s interest under which was assigned by instrument recorded on April 9, 2001, as Instrument No. 15629028 in the Official Records. The land, improvements and other real property which are subject to the Security Instrument are hereinafter referred to as the “Property” and the equipment, machinery and other personal property which are subject to the Security Instrument are hereinafter referred to as the “Collateral”;
3.	Limited Guaranty (“Guaranty”) executed by Guarantor;
4.	Assignment of Management Contracts executed by Borrower (“Existing Assignment of Management Contracts”); and
5.	UCC-1 Financing Statement filed with the California Secretary of State.
	The above documents and any other Loan Documents (as defined in the Note), including, in each case, any prior amendments thereto, together with this Agreement are hereinafter collectively defined as the “Loan Documents”.

B. As of July 3, 2007:

1.	The principal balance outstanding under the Note was Seven Million Four Hundred Seventy-Four Thousand Fifty-Six and 03/100ths Dollars ($7,474,056.03).
2.	Accrued interest on the Note has been paid through June 30, 2007.

3.	Accrued but unpaid interest on the Note through July 2, 2007, was Three Thousand Ninety-Five and 50/100ths Dollars ($3,095.50).
4.	The balance in the tax escrow reserve was Twenty-Four Thousand Six Hundred Sixty-Five and 85/100ths Dollars ($24,665.85);
5.	The balance in the insurance escrow reserve was Twenty-Five Thousand Three Hundred Sixty-Five and 64/100ths Dollars ($25,365.64);
6.	The balance in the tenant improvement and leasing commission escrow reserve was Three Hundred Seven Thousand Three Hundred Twenty-Five and 53/100ths Dollars ($307,325.53); and
7.	The balance in the capital reserve was Fifty Thousand Seven Hundred Forty-Three and no/100ths Dollars ($50,743.00).

C.	Borrower has sold and conveyed the Property and the Collateral to Buyer, or is about to sell and convey the Property and the Collateral to Buyer, and both parties desire to obtain from Lender a waiver of any right Lender may have under the Loan Documents to accelerate the Maturity Date of the Note by virtue of such conveyance.
D.	Subject to the terms and conditions hereof, Lender is willing to waive any right of acceleration of the Maturity Date of the Note upon assumption by Buyer of all obligations of Borrower under the Loan Documents.

NOW THEREFORE, FOR VALUABLE CONSIDERATION, including, without limitation, the mutual covenants and promises contained herein, the parties agree as follows:

1.	Incorporation. The foregoing recitals are incorporated herein by this reference.
2.	Assumption Fee. As consideration for Lender’s execution of this Agreement and in addition to any other sums due hereunder, Buyer agrees to pay Lender or Lender’s servicer(s) (all as set forth in the escrow instructions to be executed in connection with the closing of this assumption) an assumption fee of Seventy-Four Thousand Seven Hundred Forty and 56/100ths Dollars ($74,740.56), due on execution of this Agreement by Lender.
3.	Conditions Precedent. The following are conditions precedent to Lender’s obligations under this Agreement:

a.	The irrevocable commitment of Commonwealth Land Title Insurance Company (“Title Company”) to issue CLTA 104.8 and CLTA 111.4 (or equivalent) endorsements to Title Company’s Title Policy No. SFO1786 dated January 12, 2001, in each case in form and substance acceptable to Lender and without deletions or exceptions other than as expressly approved by Lender in writing, insuring Lender that the priority and validity of the Security Instrument has not been and will not be impaired by this Agreement, the conveyance of the Property, or the transaction contemplated hereby;
b.	Receipt and approval by Lender of: (i) the executed original of this Agreement; (ii) an executed original of a Memorandum of Assumption Agreement in the form attached hereto as Exhibit A and otherwise in form and substance acceptable to Lender (“Memorandum of Assumption Agreement”); and (iii) any other documents and agreements which are required pursuant to this Agreement, in form and content acceptable to Lender;
c.	Recordation in the Official Records of the Memorandum of Assumption Agreement, together with such other documents and agreements, if any, required pursuant to this Agreement or which Lender has requested to be recorded or filed;
d.	Buyer’s delivery to Lender of UCC-1 Financing Statements in proper form for filing in the appropriate jurisdictions as determined by Lender;

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e.	Execution and delivery to Lender by New Guarantor of a limited guaranty in favor of Lender, in the form previously delivered to New Guarantor by Lender, pursuant to which New Guarantor irrevocably guarantees payment for certain matters under the Loan;
f.	Execution and delivery to Lender by Buyer of an assignment of management contracts in favor of Lender, comparable to the Existing Assignment of Management Contracts and in form and substance acceptable to Lender;
g.	Delivery to Lender of the organizational documents and evidence of good standing of Buyer, together with such resolutions or certificates as Lender may require, in form and content acceptable to Lender, authorizing the assumption of the Loan and executed by the appropriate persons and/or entities on behalf of Buyer and New Guarantor;
h.	The representations and warranties contained herein are true and correct;
i.	Receipt by Lender of a copy of Buyer’s casualty insurance policy and comprehensive liability insurance policy with respect to the Property, each in form and amount satisfactory to Lender;
j.	Receipt by Lender of a copy of the grant deed by which title to the Property will be conveyed to Buyer, and the purchase and sale agreement documenting the sale of the Property to Buyer;
k.	Receipt by Lender of an executed assignment of the purchaser’s interest in the purchase and sale agreement for the Property from the purchaser named therein to Buyer;
l.	Receipt by Lender of an executed Form W-9 for Buyer;
m.	Lender shall have received an opinion of counsel to Lender with respect to the compliance of this Agreement, the transfer to Buyer, and the transactions referenced herein with the provisions of the Internal Revenue Code as the same pertain to real estate mortgage investment conduits;
n.	New Guarantor, as tenant, shall have entered into a lease with Buyer for all of the leasable space at Property on terms approved by Lender, and for a term of no less than five years and at an annual minimum rental rate of $13.75 per square foot ($724,668 annual rent) on a “triple-net” basis, and Lender shall have received an executed copy thereof;
o.	Payment of the assumption fee provided for in Section 2 above;
p.	Buyer’s reimbursement to Lender of Lender’s costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby, including, without limitation, title insurance costs, escrow and recording fees, attorneys’ fees, appraisal, engineers’ and inspection fees and documentation costs and charges, whether such services are furnished by Lender’s employees, agents or independent contractors.

4.

Effective Date. The effective date of this Agreement shall be the date the Memorandum of Assumption Agreement is recorded in the Official Records (“Effective Date”).

5.

Assumption. Buyer hereby assumes as of the Effective Date and agrees to pay when due all sums due or to become due or owing under the Note, the Security Instrument and the other Loan Documents and shall hereafter faithfully perform all of Borrower’s obligations under and be bound by all of the provisions of the Loan Documents and assumes all liabilities of Borrower under the Loan Documents as if Buyer were an original signatory thereto. The execution of this Agreement by Buyer shall be deemed its execution of the Note, the Security Instrument and the other Loan Documents. Lender acknowledges that, upon the Effective Date, Lender (in reliance upon the representation contained in Section 8(a)(vi) below) shall recognize Buyer as having acquired and succeeded to all of Borrower’s rights to the funds deposited in

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impound and/or reserve accounts held by or for the benefit of Lender pursuant to the terms of the Loan Documents.

6. Partial Release of Borrower; Release of Lender. Lender hereby releases (on the Effective Date) Borrower from liability under the Loan Documents other than this Agreement (including, without limitation, any obligations pertaining to “; provided however, that the parties hereby acknowledge and agree that Borrower is expressly not released from and nothing contained herein is intended to limit, impair, terminate or revoke, any of Borrower’s obligations with respect to the matters set forth in Section 8.2 of the Note to the extent the same arise out of or in connection with any act or omission occurring on or before the Effective Date (the “Retained Obligations”), and that such obligations shall continue in full force and effect in accordance with the terms and provisions thereof and hereof. Borrower’s obligations under the Loan Documents with respect to the Retained Obligations shall not be discharged or reduced by any extension, amendment, renewal or modification to, the Note, the Security Instrument or any other Loan Documents, including, without limitation, changes to the terms of repayment thereof, modifications, extensions or renewals of repayment dates, releases or subordinations of security in whole or in part, changes in the interest rate or advances of additional funds by Lender in its discretion for purposes related to those set forth in the Loan Documents. Each of Borrower, Guarantor, Buyer and New Guarantor hereby fully releases (on the Effective Date) Lender and any servicer(s) of the Loan from any liability of any kind to Borrower arising out of or in connection with the Loan or the Loan Documents other than this Agreement. Each of Borrower, Guarantor, Buyer and New Guarantor after consultation with its respective attorney, hereby expressly waives the benefits of the provisions of Section 1542 of the California Civil Code which provides to the effect that:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release which, if known by him or her, must have materially affected his or her settlement with the debtor.”

	From time to time without first requiring performance on the part of Buyer, Lender may look to and require performance by Borrower of all Retained Obligations. Borrower waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest and notices of dishonor of all or any part of the indebtedness now existing or hereafter arising under the Loan Documents.
7.	Confirmation of Guaranty; Partial Release of Guarantor. Nothing contained herein is intended to limit, impair, terminate or revoke Guarantor’s obligations under the Guaranty to the extent the same arise out of or in connection with any act or omission occurring on or before the Effective Date and such obligations shall continue in full force and effect in accordance with the terms and provisions of the Guaranty; provided, however, Lender hereby releases Guarantor from its obligations under the Guaranty (including, without limitation, any obligations pertaining to “to the extent the same arise out of or in connection with any act or omission occurring after the Effective Date.
8.	Representations and Warranties.

a. Assignment. Borrower and Buyer each hereby represents and warrants to Lender that, as of the Effective Date, Borrower has irrevocably and unconditionally transferred and assigned to Buyer all of Borrower’s right, title and interest in and to:

i.	The Property and the Collateral;
ii.	The Loan Documents;
iii.	All leases related to the Property or the Collateral;
iv.	All reciprocal easement agreements, operating agreements, and declarations of conditions, covenants and restrictions related to the Property;

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v.	All prepaid rents and security deposits, if any, held by Borrower in connection with leases of any part of the Property or the Collateral; and
vi.	All funds, if any, deposited in impound and/or reserve accounts held by or for the benefit of Lender pursuant to the terms of the Loan Documents.

	Borrower and Buyer each hereby further represents and warrants to Lender that no consent to the transfer of the Property and the Collateral to Buyer is required under any agreement to which it is a party, including, without limitation, under any lease, operating agreement, mortgage or security instrument (other than the Loan Documents), or if such consent is required, that the parties have obtained all such consents.
b.	No Defaults. Buyer and Borrower each hereby represents and warrants, to the best of its respective knowledge, that no default, event of default, breach or failure of condition has occurred, or would exist with notice or the lapse of time or both, under any of the Loan Documents, as modified by this Agreement, and all representations and warranties herein and in the other Loan Documents are true and correct.
c.	Loan Documents. Buyer represents and warrants to Lender that Buyer has actual knowledge of all terms and conditions of the Loan Documents, and agrees that Lender has no obligation or duty to provide any information to Buyer regarding the terms and conditions of the Loan Documents. Buyer further agrees that all representations, agreements and warranties in the Loan Documents regarding Borrower, its status, authority, financial condition and business shall apply to Buyer as well as to Borrower, as though Buyer were the borrower originally named in the Loan Documents. Buyer further understands and acknowledges that, except as expressly provided herein or in another writing executed by Lender, Lender has not waived any right of Lender or obligation of Borrower or Buyer under the Loan Documents and Lender has not agreed to any modification of any provision of any Loan Document or to any extension of the Loan.
d.	Financial Statements. Buyer represents and warrants to Lender that the financial statements of Buyer, of each general partner (if Buyer is a partnership) of each member of Buyer (if Buyer is a limited liability company) and of each New Guarantor, if any, previously delivered by Buyer or any of such parties to Lender: (i) are materially complete and correct; (ii) present fairly the financial condition of each of such parties; and (iii) have been prepared in accordance with generally accepted accounting principles consistently applied or other accounting standards approved by Lender. Buyer further represents and warrants to Lender that, since the date of such financial statements, there has been no material adverse change in the financial condition of any of such parties, nor have any assets or properties reflected on such financial statements been sold, transferred, assigned, mortgaged, pledged or encumbered except as previously disclosed in writing by Buyer to Lender and approved in writing by Lender.
e.	Reports. Buyer represents and warrants to Lender that all reports, documents, instruments and information delivered to Lender by Buyer in connection with Buyer’s assumption of the Loan: (i) are correct and sufficiently complete to give Lender accurate knowledge of their subject matter; and (ii) do not contain any misrepresentation of a material fact or omission of a material fact which omission makes the provided information misleading.
f.	Buyer Location. Buyer’s chief executive office (or principal residence, if applicable) is located at the following address: 3540 Bassett Street, Santa Clara, California 95954. Buyer is an organization organized solely under the laws of the State of Delaware. All organizational documents of Buyer delivered to Lender are complete and accurate in every respect. Buyer’s legal name is exactly as shown on page one of this Agreement. Buyer shall not change Buyer’s name or, as applicable, Buyer’s chief executive office, Buyer’s principal residence or the jurisdiction in which Buyer is organized, without giving Lender at least 30 days’ prior written notice.

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g.

No Adverse Change. Buyer represents and warrants to Lender that since the date of the financial statements for Buyer and New Guarantor submitted by Buyer in connection with its application to assume the Loan, there has occurred no adverse change in the financial condition of Buyer or New Guarantor.

h.

No Pledge of Equity Interests. Buyer represents and warrants to Lender that no equity interest in Buyer or in any entity that, directly or indirectly, owns an equity interest in Buyer has been pledged, hypothecated or otherwise encumbered as security for any obligation, and that no portion of the capital contributed to Buyer, directly or indirectly, in connection with Buyer’s acquisition of the Property consists of borrowed funds.

9.	Waiver of Restricted Account Agreement Requirement. Buyer, Borrower and Lender hereby agree that, upon the Effective Date, Section 5 of Exhibit A of the Note shall no longer be effective and shall be deleted in its entirety. Buyer and Lender acknowledge that neither a Restricted Account Agreement nor a Restricted Account (as such terms are defined in Section 5 of the Note) have been implemented.
10.	Letter of Credit Provisions. Buyer, Borrower and Lender hereby agree that, upon the Effective Date, Section 6 of Exhibit A of the Note shall no longer be effective and shall be deleted in its entirety.
11.	Deletion of Permitted Transfers Provisions. Buyer, Borrower and Lender hereby agree that, upon the Effective Date, Section 7 of Exhibit A of the Note shall no longer be effective and shall be deleted in its entirety.
12.	Waiver of Key Person or Entity Requirement. Buyer, Borrower and Lender hereby agree that, upon the Effective Date, Section 7. 1(a)(vii) of the Security Instrument shall no longer be effective and shall be deleted in its entirety.
13.	Notice Address. Section 11 of the Note, Section 8.20 of the Security Instrument, and any comparable notice provisions among the Loan Documents, pertaining to notice to the borrower, shall be amended by reference to the notice address of Buyer in Section 18 below.
14.	Waiver of Acceleration. Lender hereby agrees that it shall not exercise its right to cause all sums secured by the Security Instrument to become immediately due and payable because of the conveyance of the Property and the Collateral from Borrower to Buyer; provided, however, Lender reserves its right under the terms of the Security Instrument or any other Loan Document to accelerate all principal and interest in the event of any subsequent sale, transfer, encumbrance or other conveyance of the Property, the Collateral or any interest in Buyer, except as permitted by the Loan Documents.
15.	Hazardous Materials; CCP Section 726.5; Section 736. Without in any way limiting any other provision of this Agreement, Buyer reaffirms as of the Effective Date and continuing hereafter: (a) each and every representation and warranty in the Loan Documents respecting “Hazardous Materials”; and (b) each and every covenant and indemnity in the Loan Documents respecting “Hazardous Materials”. In addition, Buyer and Lender agree that: (i) this Section is intended as Lender’s written request for information (and Buyer’s response) concerning the environmental condition of the real property security under the terms of California Code of Civil Procedure Section 726.5; and (ii) each representation and/or covenant in this Agreement or any other Loan Document (together with any indemnity applicable to a breach of any such representation and/or covenant) with respect to the environmental condition of the real property security is intended by Lender and Borrower to be an “environmental provision” for purposes of California Code of Civil Procedure Section 736.
16.	Multiple Parties. If more than one buyer has signed this Agreement as Buyer, then all references in this Agreement to Buyer shall mean each and all of the buyers signing this Agreement as Buyer. The liability of all of the buyers signing this Agreement as Buyer shall be joint and several with all others similarly liable. If more than one borrower has signed this Agreement as Borrower, then all references in this Agreement to Borrower shall mean each and all of the borrowers signing this Agreement as Borrower. The

9

	liability of all of the borrowers signing this Agreement as Borrower shall be joint and several with all others similarly liable.
17.	Confirmation of Security Interest. Nothing contained herein shall affect or be construed to affect any lien, charge or encumbrance created by any Loan Document or the priority of that lien, charge or encumbrance. All assignments and transfers by Borrower to Buyer are subject to any security interest(s) held by Lender.
18.	Notices. All notices to be given to Buyer pursuant to the Loan Documents shall be addressed as follows:

3540 Bassett Street
Santa Clara, California
95954 Attention: Uzi Sasson
Facsimile: (408) 496-6104

All notices to be given to Borrower or Guarantor pursuant to the Loan documents shall be addressed as follows:

c/o Menlo Equities LLC
490 California Avenue
4th Floor
Palo Alto, California 94306
Facsimile: (650) 326-9333

19.	Integration; Interpretation. The Loan Documents, including this Agreement, contain or expressly incorporate by reference the entire agreement of the parties with respect to the matters contemplated herein and supersede all prior negotiations. The Loan Documents shall not be modified except by written instrument executed by Lender and Buyer. Any reference in any of the Loan Documents to the Property or the Collateral shall include all or any parts of the Property or the Collateral.
20.	Successors and Assigns. This Agreement is binding upon and shall inure to the benefit of the heirs, successors and assigns of the parties but subject to all prohibitions of transfers contained in any Loan Document.
21.	Attorneys’ Fees; Enforcement. If any attorney is engaged by Lender to enforce, construe or defend any provision of this Agreement, or as a consequence of any default under or breach of this Agreement by Buyer, with or without the filing of any legal action or proceeding, Buyer shall pay to Lender, upon demand, the amount of all attorneys’ fees and costs reasonably incurred by Lender in connection therewith, together with interest thereon from the date of such demand at the rate of interest applicable to the principal balance of the Note as specified therein.
22.	One-Time Right of Transfer of Property. The parties acknowledge that Section 4 of Exhibit A to Promissory Note attached to and forming a part of the Note provides that Lender shall, one (1) time only, consent to the voluntary sale or exchange of all of the Property, all subject, however, to the terms and conditions set forth therein. The parties agree that this Agreement and the actions to be taken as contemplated herein shall constitute such one consent and that hereafter, Lender shall not be required to consent to any further such sale or exchange.
23.	Miscellaneous. This Agreement shall be governed and interpreted in accordance with the laws of the jurisdiction(s) specified in the other Loan Documents as governing the other Loan Documents. In any action brought or arising out of this Agreement, Borrower and Buyer, and general partners, members and joint venturers of them, hereby consent to the jurisdiction of any state or federal court having proper venue as specified in the other Loan Documents and also consent to the service of process by any means authorized by the law of such jurisdiction(s). Except as expressly provided otherwise herein, all terms used herein shall have the meaning given to them in the other Loan Documents. Time is of the essence of each

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term of the Loan Documents, including this Agreement. If any provision of this Agreement or any of the other Loan Documents shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that portion shall be deemed severed therefrom and the remaining parts shall remain in full force as though the invalid, illegal, or unenforceable portion had not been a part thereof.

24.

Counterparts. This Agreement may be executed in any number of counterparts, each of which when executed and delivered will be deemed an original and all of which taken together will be deemed to be one and the same instrument.

[No further text this page]

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     IN WITNESS WHEREOF, Borrower, Guarantor, Buyer, New Guarantor and Lender have caused this Agreement to be duly executed as of the date first above written.

LENDER
LASALLE BANK NATIONAL ASSOCIATION, as Trustee for Morgan Stanley Dean Witter Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 2001-TOP1
By:	Wells Fargo Bank, National Association, as Servicer under the Pooling and Servicing Agreement dated as of February 1, 2001, by and between Morgan Stanley Dean Witter Capital I Inc., Wells Fargo Bank, National Association, GMAC Commercial Mortgage Corporation, LaSalle Bank National Association, Wells Fargo Bank Minnesota, National Association, and ABN AMRO Bank N.V.
	By:	/s/ Traci Mills-Smith
	Name:
	Title:

[Signatures continued on next page]

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BORROWER
BARBER LANE ASSOCIATES L.P., a California limited partnership
By:	Menlo Equities Associates V LLC, a California limited liability company, General Partner
	By:	Menlo Equities LLC, a California limited liability company, Managing Member
		By:	Menlo Equities, Inc., a California corporation, Managing Member
			By:	/s/ Henry D. Bullock
				Henry D. Bullock,
				President
		By:	Diamant Investments LLC, a Delaware limited liability company Member
			By:	/s/ Richard J. Holmstrom
				Richard J. Holmstrom,
				Managing Member

GUARANTOR
MENLO EQUITIES LLC, a California limited liability company,
By:	Menlo Equities, Inc., a California corporation, Managing Member
	By:	/s/ Henry D. Bullock
		Henry D. Bullock,
		President
By:	Diamant Investments LLC, a Delaware limited liability company Member
	By:	/s/ Richard J. Holmstrom
		Richard J. Holmstrom,
		Managing Member

[Signatures continued on next page]

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BUYER
IXYS BUCKEYE, LLC, a Delaware limited liability company
By:	IXYS CORPORATION, a Delaware corporation
Its:	Sole Member and Manager
	By:	/s/ Uzi Sasson
		Uzi Sasson
		Vice President of Finance
NEW GUARANTOR
IXYS CORPORATION, a Delaware corporation
By:	/s/ Uzi Sasson
	Uzi Sasson
	Vice President of Finance

14

Exhibit A

Recording Requested by
and when recorded return to:

PEPLER MASTROMONACO LLP

100 First Street, 25^th Floor

San Francisco, California 94105

Attention: Peter A. Mastromonaco, Esq.

Loan No.: 31-0900266

MEMORANDUM OF ASSUMPTION AGREEMENT

BARBER LANE ASSOCIATES L.P., a California limited partnership (“Borrower”), with a mailing address at c/o Menlo Equities LLC, 490 California Avenue, 4th Floor, Palo Alto, California 94306, MENLO EQUITIES LLC, a California limited liability company (“Guarantor”), with a mailing address at c/o Menlo Equities LLC, 490 California Avenue, 4th Floor, Palo Alto, California 94306, IXYS BUCKEYE, LLC, a Delaware limited liability company (“Buyer”), with a mailing address at 3540 Bassett Street, Santa Clara, California 95954, IXYS CORPORATION, a Delaware corporation (“New Guarantor”), with a mailing address at 3540 Bassett Street, Santa Clara, California 95954, and LASALLE BANK NATIONAL ASSOCIATION, as Trustee for Morgan Stanley Dean Witter Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 2001-TOP1 (“Lender”), with a mailing address at c/o Wells Fargo Bank, N.A., Commercial Mortgage Servicing, 1320 Willow Pass Road, Suite 300, Concord, California 94520, are parties to that certain ASSUMPTION AGREEMENT dated of even date herewith (“Assumption Agreement”). The undersigned parties agree that all obligations under that certain promissory note (“Note”) dated December 21, 2000, in the original principal amount of Eight Million and no/100ths Dollars ($8,000,000.00), secured by that certain Deed of Trust and Absolute Assignment of Rents and Leases and Security Agreement (and Fixture Filing) (“Security Instrument”) recorded on January 12, 2001, as Instrument No. 0015525418, in the Official Records of Santa Clara County, California (“Official Records”), the beneficiary’s interest under which was assigned by instrument recorded on April 9, 2001, as Instrument No. 15629028, in the Official Records, and all other Loan Documents (as defined in the Assumption Agreement), have been assumed by Buyer upon the terms and conditions set forth in the Assumption Agreement. The Assumption Agreement is by this reference incorporated herein and made a part hereof. This Memorandum of Assumption Agreement may be executed in any number of counterparts, each of which when executed and delivered will be deemed an original and all of which taken together will be deemed to be one and the same instrument.

Dated:                     , 2007

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     IN WITNESS WHEREOF, Borrower, Guarantor, Buyer, New Guarantor and Lender have caused this Agreement to be duly executed as of the date first above written.

LENDER
LASALLE BANK NATIONAL ASSOCIATION, as Trustee for Morgan Stanley Dean Witter Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 2001-TOP1
By:	Wells Fargo Bank, National Association, as Servicer under the Pooling and Servicing Agreement dated as of February 1, 2001, by and between Morgan Stanley Dean Witter Capital I Inc., Wells Fargo Bank, National Association, GMAC Commercial Mortgage Corporation, LaSalle Bank National Association, Wells Fargo Bank Minnesota, National Association, and ABN AMRO Bank N.V.
	By:
	Name:
	Title:

[Signatures continued on next page]

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BORROWER
BARBER LANE ASSOCIATES L.P., a California limited partnership
By:	Menlo Equities Associates V LLC, a California limited liability company, General Partner
	By:	Menlo Equities LLC, a California limited liability company, Managing Member
		By:	Menlo Equities, Inc., a California corporation, Managing Member
			By:
				Henry D. Bullock,
				President
		By:	Diamant Investments LLC, a Delaware limited liability company Member
			By:
				Richard J. Holmstrom,
				Managing Member

GUARANTOR
MENLO EQUITIES LLC, a California limited liability company,
By:	Menlo Equities, Inc., a California corporation, Managing Member
	By:
		Henry D. Bullock,
		President
By:	Diamant Investments LLC, a Delaware limited liability company Member
	By:
		Richard J. Holmstrom,
		Managing Member

[Signatures continued on next page]

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BUYER
IXYS BUCKEYE, LLC, a Delaware limited liability company
By:	IXYS CORPORATION, a Delaware corporation
Its:	Sole Member and Manager
	By:
		Uzi Sasson
		Vice President of Finance
NEW GUARANTOR
IXYS CORPORATION, a Delaware corporation
By:
	Uzi Sasson
	Vice President of Finance

18

EX-10.3

Exhibit 10.3

LIMITED GUARANTY

Loan No. 31-0900266A

THIS LIMITED GUARANTY (“Guaranty”) is made as of August 2, 2007, by IXYS CORPORATION, a Delaware corporation (“Guarantor”) in favor of LASALLE BANK NATIONAL ASSOCIATION, as Trustee for Morgan Stanley Dean Witter Capital I Inc., Commercial Mortgage Pass-Through Certificates, Series 2001-TOP1 (“Lender”).

RECITALS

A. Lender’s predecessor in interest extended a loan (the “Loan”) to Barber Lane Associates L.P., a California limited partnership (“Barber Lane”), in the principal sum of EIGHT MILLION AND NO/100THS DOLLARS ($8,000,000). The Loan is evidenced by that certain Promissory Note Secured By Deed of Trust in the original principal amount of the Loan, made by Borrower and payable to Lender’s predecessor in interest and dated as of December 21, 2000 (the “Note”) and secured by, among other things, a deed of trust and absolute assignment of rents and leases and security agreement (and fixture filing) (“Deed of Trust”) on the real property and improvements described in the Deed of Trust (which real property and improvements are collectively referred to herein as the “Property”) and other security instruments, if any specified in the Note.

B. The Loan Documents (as defined and described in the Note) include the Note, the Deed of Trust, and such other documents described in the Note as “Loan Documents”. The Loan Documents have been assigned and transferred to Lender from Lender’s predecessor in interest by mesne conveyances.

C. Barber Lane desires to transfer the Property to IXYS BUCKEYE, LLC, a Delaware limited liability company (“Borrower”) and in connection with such transfer, Borrower, with Lender’s consent, is to assume Barber Lane’s payment and performance obligations under the Loan Documents (the “Assumption”) pursuant to a certain Assumption Agreement of even date herewith (“Assumption Agreement”).

D. As a condition precedent to Lender consenting to the transfer of the Property and to the Assumption, Lender has required, among other things, that Guarantor execute and deliver this Guaranty to Lender. Guarantor has an economic interest in Borrower and will benefit from the transfer of the Property to Borrower and Borrower’s assumption of the Loan.

E. This Guaranty is not one of the Loan Documents.

F. Capitalized terms used herein and not specifically defined herein shall have the respective meanings ascribed to those terms in the Loan Documents (as may have been amended by the Assumption Agreement). All references herein or in any of the Loan Documents to Borrower shall, from and after the date hereof, refer to Borrower as defined herein.

THEREFORE, to induce Lender to enter into the Loan Documents and to make the Loan, and in consideration thereof, Guarantor unconditionally guarantees and agrees as follows:

1. LIMITED GUARANTY. Guarantor hereby unconditionally, absolutely, and irrevocably guarantees and promises to pay to Lender or order, on demand, in lawful money of the United States of America, in immediately available funds, all sums for which Borrower is now or hereafter liable to Lender with respect to any of the following matters: (a) fraud or willful misrepresentation; (b) material physical waste of the Property or the Collateral; (c) failure to pay property or other taxes, assessments or charges from available property cash flow (other than amounts paid to Lender for taxes, assessments or charges pursuant to an impound account and where Lender elects not to apply such funds toward payment of the taxes, assessments or charges owed) which may create liens senior to the lien of the Deed of Trust on all or any portion of the Property; (d) failure to deliver any insurance or condemnation proceeds or awards or any security deposits received by Borrower to Lender or to otherwise apply such sums as required under the terms of the Loan Documents or any other instrument now or hereafter securing the Note; (e) failure to apply any rents, royalties, accounts, revenues, income, issues, profits and other benefits from the Property which are collected or received by Borrower during the period of any Default or after acceleration of the indebtedness and other sums owing under the Loan

1

Documents to the payment of either (i) such indebtedness or other sums or (ii) the normal and

2

	necessary operating expenses of the Property; or (f) any breach by Borrower of any covenant in the Note or in the Deed of Trust regarding Hazardous Materials or any representation or warranty of Borrower regarding Hazardous Materials proving to have been untrue when made.
2.	REMEDIES. If Guarantor fails to promptly perform its obligations under this Guaranty, Lender may from time to time, and without first requiring performance by Borrower or exhausting any or all security for the Loan, bring any action at law or in equity or both to compel Guarantor to perform its obligations hereunder, and to collect in any such action compensation for all loss, cost, damage, injury and expense sustained or incurred by Lender as a direct or indirect consequence of the failure of Guarantor to perform its obligations together with interest thereon at the rate of interest applicable to the principal balance of the Note.
3.	RIGHTS OF LENDER. Guarantor authorizes Lender, without giving notice to Guarantor or obtaining Guarantor’s consent and without affecting the liability of Guarantor, from time to time to: (a) renew or extend all or any portion of Borrower’s obligations under the Note or any of the other Loan Documents; (b) declare all sums owing to Lender under the Note and the other Loan Documents due and payable upon the occurrence of a Default (as defined in the Note) under the Loan Documents; (c) make non-material changes in the dates specified for payments of any sums payable in periodic installments under the Note or any of the other Loan Documents; (d) otherwise modify, amend, supplement or replace from time to time the terms of any of the Loan Documents, except for (i) increases in the principal amount of the Note or changes in the terms and conditions by which interest rates, fees or charges are calculated under the Note and the other Loan Documents (Guarantor acknowledges that if the Note or other Loan Documents so provide, said interest rates, fees and charges may vary from time to time) or (ii) advancement of the Maturity Date of the Note where no Default has occurred under the Loan Documents; (e) take and hold security for the performance of Borrower’s obligations under the Note or the other Loan Documents and exchange, enforce, waive and release any such security; (f) apply such security and direct the order or manner of sale thereof as Lender in its discretion may determine; (g) release, substitute or add any one or more endorsers of the Note or guarantors of Borrower’s obligations under the Note or the other Loan Documents; (h) apply payments received by Lender from Borrower to any obligations of Borrower to Lender, in such order as Lender shall determine in its sole discretion, whether or not any such obligations are covered by this Guaranty; and (i) assign this Guaranty in whole or in part.
4.	GUARANTOR’S WAIVERS. Guarantor waives: (a) any defense based upon any legal disability or other defense of Borrower, any other guarantor or other person, or by reason of the cessation or limitation of the liability of Borrower from any cause other than full payment of all sums payable under the Note or any of the other Loan Documents; (b) any defense based upon any lack of authority of the officers, directors, partners or agents acting or purporting to act on behalf of Borrower or any principal of Borrower or any defect in the formation of Borrower or any principal of Borrower; (c) any defense based upon the application by Borrower of the proceeds of the Loan for purposes other than the purposes represented by Borrower to Lender or intended or understood by Lender or Guarantor; (d) all rights and defenses arising out of an election of remedies by Lender, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Guarantor’s rights of subrogation and reimbursement against Borrower by the operation of Section 580d of the California Code of Civil Procedure or otherwise; (e) any defense based upon Lender’s failure to disclose to Guarantor any information concerning Borrower’s financial condition or any other circumstances bearing on Borrower’s ability to pay all sums payable under the Note or any of the other Loan Documents; (f) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in any other respects more burdensome than that of a principal; (g) any defense based upon Lender’s election, in any proceeding instituted under the Federal Bankruptcy Code, of the application of Section 111 1(b)(2) of the Federal Bankruptcy Code or any successor statute; (h) any defense based upon any borrowing or any grant of a security interest under Section 364 of the Federal Bankruptcy Code; (i) presentment, demand, protest and notice of any kind; (j) the benefit of any statute of limitations affecting the liability of Guarantor hereunder or the enforcement hereof; and (k) any rights under California Code of Civil Procedure Sections 580a and 726(b), which provide, among other things, that (i) a creditor must file a complaint for deficiency within three (3) months of a nonjudicial foreclosure sale or judicial foreclosure sale, as applicable; (ii) a fair market value hearing must be held; and (iii) the amount of the deficiency judgment shall be limited to the amount by which the unpaid debt exceeds the fair market value of the security, but not more than the amount by which the unpaid debt exceeds the sale price of the security. In addition, Guarantor waives all rights and defenses that Guarantor may have because Borrower’s debt is secured by real property. This means, among other things: (l) Lender may collect from Guarantor without first foreclosing on any real or personal property collateral pledged by Borrower; and (m) if Lender forecloses on any real property collateral pledged by Borrower, then (i) the amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (ii) Lender may collect from Guarantor even if Lender, by foreclosing on the real property collateral, has destroyed any right Guarantor may have to collect from Borrower. The foregoing sentence is an

3

	unconditional and irrevocable waiver of any rights and defenses Guarantor may have because Borrower’s debt is secured by real property. These rights and defenses being waived by Guarantor include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure. Without limiting the generality of the foregoing or any other provision hereof, Guarantor also waives, to the extent permitted by law, any and all rights and defenses which might otherwise be available to Guarantor under California Civil Code Sections 2787 to 2855, inclusive, or any of such sections. Finally, Guarantor agrees that the payment of all sums payable under the Note or any of the other Loan Documents or any part thereof or other act which tolls any statute of limitations applicable to the Note or the other Loan Documents shall similarly operate to toll the statute of limitations applicable to Guarantor’s liability hereunder.
5.	GUARANTOR’S WARRANTIES. Guarantor warrants and acknowledges that: (a) Lender would not make the Loan but for this Guaranty; (b) there are no conditions precedent to the effectiveness of this Guaranty; (c) Guarantor has established adequate means of obtaining from sources other than Lender, on a continuing basis, financial and other information pertaining to Borrower’s financial condition, the Property and Borrower’s activities relating thereto and the status of Borrower’s performance of obligations under the Loan Documents, and Guarantor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Guarantor’s risks hereunder and Lender has made no representation to Guarantor as to any such matters; (d) the most recent financial statements of Guarantor previously delivered to Lender are true and correct in all respects, have been prepared in accordance with generally accepted accounting principles consistently applied (or other principles acceptable to Lender) and fairly present the financial condition of Guarantor as of the respective dates thereof, and no material adverse change has occurred in the financial condition of Guarantor since the respective dates thereof; (e) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer or otherwise dispose of all or substantially all of Guarantor’s assets, or any interest therein, other than in the ordinary course of Guarantor’s business; and (f) Guarantor shall not later than thirty (30) days from written request from Lender, provide Lender with year-end financial statements of such Guarantor, such statements to be prepared in a form and in accordance with accounting principles acceptable to Lender.
6.	SUBORDINATION. Guarantor subordinates all present and future indebtedness owing by Borrower to Guarantor to the obligations at any time owing by Borrower to Lender under the Note and the other Loan Documents. Guarantor agrees that as long as this Guaranty is in effect, Guarantor will not take any action or initiate any proceedings, judicial or otherwise, to enforce Guarantor’s rights or remedies with respect to any such indebtedness, including, without limitation, any action to enforce remedies with respect to any defaults under such indebtedness or to any collateral securing such indebtedness or to obtain any judgment or prejudgment remedy against Borrower or any such collateral. Guarantor also agrees that it shall not commence or join with any other creditor or creditors of Borrower in commencing any bankruptcy, reorganization or insolvency proceedings against Borrower. Guarantor further agrees not to assign all or any part of such indebtedness unless Lender is given prior notice and such assignment is expressly made subject to the terms of this Guaranty. If Lender so requests, (a) all instruments evidencing such indebtedness shall be duly endorsed and delivered to Lender, (b) all security for such indebtedness shall be duly assigned and delivered to Lender, (c) such indebtedness shall be enforced, collected and held by Guarantor as trustee for Lender and shall be paid over to Lender on account of the Loan but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty, and (d) Guarantor shall execute, file and record such documents and instruments and take such other action as Lender deems necessary or appropriate to perfect, preserve and enforce Lender’s rights in and to such indebtedness and any security therefor. If Guarantor fails to take any such action, Lender, as attorney-in-fact for Guarantor, is hereby authorized to do so in the name of Guarantor. The foregoing power of attorney is coupled with an interest and cannot be revoked.
7.	BANKRUPTCY OF BORROWER. In any bankruptcy or other proceeding in which the filing of claims is required by law, Guarantor shall file all claims which Guarantor may have against Borrower relating to any indebtedness of Borrower to Guarantor and shall assign to Lender all rights of Guarantor thereunder. If Guarantor does not file any such claim, Lender, as attorney-in-fact for Guarantor, is hereby authorized to do so in the name of Guarantor or, in Lender’s discretion, to assign the claim to a nominee and to cause proof of claim to be filed in the name of Lender’s nominee. The foregoing power of attorney is coupled with an interest and cannot be revoked. Lender or its nominee shall have the right, in its reasonable discretion, to accept or reject any plan proposed in such proceeding and to take any other action which a party filing a claim is entitled to do. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claim shall pay to Lender the amount payable on such claim and, to the full extent necessary for that purpose, Guarantor hereby assigns to Lender all of Guarantor’s rights to any such payments or distributions; provided, however, Guarantor’s obligations hereunder shall not be satisfied except to the extent that Lender receives cash by reason of any such payment or distribution. If Lender receives anything hereunder other than cash, the same shall be held as collateral for amounts due under this Guaranty. If all or any

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	portion of the obligations guarantied hereunder are paid or performed, the obligations of Guarantor hereunder shall continue and shall remain in full force and effect in the event that all or any part of such payment or performance is avoided or recovered directly or indirectly from Lender as a preference, fraudulent transfer or otherwise under the Bankruptcy Code or other similar laws, irrespective of (a) any notice of revocation given by Guarantor prior to such avoidance or recovery, and (b) full payment and performance of all of the indebtedness and obligations evidenced and secured by the Loan Documents.
8.	DISCLOSURE OF INFORMATION; PARTICIPATIONS. Guarantor agrees that Lender may elect, at any time, to sell, assign, participate or securitize all or any portion of Lender’s rights and obligations under the Loan Documents, and that any such sale, assignment, participation or securitization may be to one or more financial institutions or other entities, to private investors, and/or into the public securities marketplace, at Lender’s sole discretion. Guarantor further agrees that Lender may disseminate to any such actual or potential purchaser(s), assignee(s) or participant(s) all documents and information (including, without limitation, all financial information) which has been or is hereafter provided to or known to Lender with respect to: (a) the Property and its operation; and/or (b) any party connected with the Loan (including, without limitation, the Guarantor, the Borrower, any partner of Borrower, any constituent partner of Borrower, any guarantor and any nonborrower trustor). In the event of any such sale, assignment, participation, or securitization, Lender and parties to the same shall share in the rights and obligations of Lender set forth in the Loan Documents as and to the extent they shall agree among themselves. In connection with any such sale, assignment, participation, or securitization, Guarantor further agrees that this Guaranty shall be sufficient evidence of the obligations of Guarantor to each purchaser, assignee, or participant, and upon request by Lender, Guarantor shall, within fifteen (15) days after request by Lender, (d) deliver to Lender and any other party designated by Lender an estoppel certificate verifying for the benefit of Lender and any other party designated by Lender the status and the terms and provisions of this Guaranty in form and substance acceptable to Lender, and (e) enter into such amendments or modifications to this Guaranty as may be reasonably required in order to facilitate any such sale, assignment, participation or securitization without impairing Guarantor’s rights or increasing Guarantor’s obligations hereunder. The indemnity obligations of Guarantor under this Guaranty shall also apply with respect to any purchaser, assignee or participant.
9.	ADDITIONAL, INDEPENDENT AND UNSECURED OBLIGATIONS. This is a guaranty of payment and not of collection and the obligations of Guarantor hereunder shall be in addition to and shall not limit or in any way affect the obligations of Guarantor under any other existing or future guaranties unless said other guaranties are expressly modified or revoked in writing. This Guaranty is independent of the obligations of Borrower under the Note, the Deed of Trust and the other Loan Documents. Guarantor agrees that nothing contained in this Guaranty shall prevent Lender from suing to collect on the Note or from exercising concurrently or successively any rights available to it at law and/or in equity or under any of the Loan Documents, and that the exercise of any of the aforesaid rights shall not constitute a legal or equitable discharge of Guarantor. Guarantor hereby authorizes and empowers Lender to exercise, in its sole discretion, any rights and remedies, or any combination thereof, which may then be available, since it is the intent and purpose of Guarantor that the obligations hereunder shall be absolute, independent and unconditional under any and all circumstances. Lender may bring a separate action to enforce the provisions hereof against Guarantor without taking action against Borrower or any other party or joining Borrower or any other party as a party to such action. Except as otherwise provided in this Guaranty, this Guaranty is not secured and shall not be deemed to be secured by any security instrument unless such security instrument expressly recites that it secures this Guaranty.
10.	ATTORNEYS’ FEES; ENFORCEMENT. If any attorney is engaged by Lender to enforce or defend any provision of this Guaranty, or any of the other Loan Documents, or as a consequence of any Default under the Loan Documents, with or without the filing of any legal action or proceeding, Guarantor shall pay to Lender, immediately upon demand all reasonable attorneys’ fees and costs incurred by Lender in connection therewith, together with interest thereon from the date of such demand until paid at the rate of interest applicable to the principal balance of the Note as specified therein.
11.	RULES OF CONSTRUCTION. The word “Borrower” as used herein shall include both the named Borrower and any other person at any time assuming or otherwise becoming primarily liable for all or any part of the obligations of the named Borrower under the Note and the other Loan Documents. The term “person” as used herein shall include any individual, company, trust or other legal entity of any kind whatsoever. If this Guaranty is executed by more than one person, the term “Guarantor” shall include all such persons. When the context and construction so require, all words used in the singular herein shall be deemed to have been used in the plural and vice versa. All headings appearing in this Guaranty are for convenience only and shall be disregarded in construing this Guaranty. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Deed of Trust.

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12.	CREDIT REPORTS. Each legal entity and individual obligated on this Guaranty hereby authorizes Lender to order and obtain, from a credit reporting agency of Lender’s choice, a third party credit report on such legal entity and individual.
13.	GOVERNING LAW. This Guaranty shall be governed by, and construed in accordance with, the laws of the State of California, except to the extent preempted by Federal laws. Guarantor and all persons and entities in any manner obligated to Lender under this Guaranty consent to the jurisdiction of any Federal or State Court within the State of California having proper venue and also consent to service of process by any means authorized by California or Federal law.
14.	MISCELLANEOUS. The provisions of this Guaranty will bind and benefit the heirs, executors, administrators, legal representatives, nominees, successors and assigns of Guarantor and Lender. The liability of all persons and entities who are in any manner obligated hereunder shall be joint and several. If any provision of this Guaranty shall be determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that portion shall be deemed severed from this Guaranty and the remaining parts shall remain in full force as though the invalid, illegal or unenforceable portion had never been part of this Guaranty.
15.	SURVIVAL. This Guaranty shall be deemed to be continuing in nature and shall remain in full force and effect and shall survive the exercise of any remedy by Lender under the Deed of Trust or any of the other Loan Documents, including, without limitation, any foreclosure or deed in lieu thereof.
16.	ADDITIONAL PROVISIONS. Such additional terms, covenants and conditions as may be set forth on any exhibit executed by Guarantor and attached hereto which recites that it is an exhibit to this Guaranty are incorporated herein by this reference.
17.	ENFORCEABILITY. Guarantor hereby acknowledges that: (a) the obligations undertaken by Guarantor in this Guaranty are complex in nature, and (b) numerous possible defenses to the enforceability of these obligations may presently exist and/or may arise hereafter, and (c) as part of Lender’s consideration for entering into this transaction, Lender has specifically bargained for the waiver and relinquishment by Guarantor of all such defenses, and (d) Guarantor has had the opportunity to seek and receive legal advice from skilled legal counsel in the area of financial transactions of the type contemplated herein. Given all of the above, Guarantor does hereby represent and confirm to Lender that Guarantor is fully informed regarding, and that Guarantor does thoroughly understand: (i) the nature of such possible defenses, and (ii) the circumstances under which such defenses may arise, and (iii) the benefits which such defenses might confer upon Guarantor, and (iv) the legal consequences to Guarantor of waiving such defenses. Guarantor acknowledges that Guarantor makes this Guaranty with the intent that this Guaranty and all of the informed waivers herein shall each and all be fully enforceable by Lender, and that Lender is induced to enter into this transaction in material reliance upon the presumed full enforceability thereof.
18.	WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, LENDER AND GUARANTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS GUARANTY, OR ANY COURSE OR CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF LENDER OR GUARANTOR. THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THIS LOAN TO BORROWER.

IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date appearing on the first page of this Guaranty.

“GUARANTOR”

IXYS CORPORATION, a Delaware corporation
By:	/s/ Uzi Sasson
	Uzi Sasson
	Vice President of Finance

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EX-10.4

Exhibit 10.4

PROMISSORY NOTE SECURED BY DEED OF TRUST

Loan No. 31 - 0900266A

$8,000,000.00

San Francisco, California
December 21, 2000

1.	PROMISE TO PAY. For value received, the undersigned BARBER LANE ASSOCIATES L. P. , a California limited partnership (‘Borrower”), promise(s) to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Lender”), 1320 Willow Pass Road, Suite 205, Concord, California 94520, or at such other place as may be designated in writing by Lender, the principal sum of EIGHT MILLION AND NO/ 10 0 THS DOLLARS ($8 , 0 0 0 , 0 0 0 . 00) (“Loan”), with interest thereon as specified herein. All sums owing hereunder are payable in lawful money of the United States of America, in immediately available funds, without offset, deduction or counterclaim of any kind.
2.	SECURED BY DEED OF TRUST. This Note is secured by, among other things, that Deed of Trust and Absolute Assignment of Rents and Leases and Security Agreement (and Fixture Filing) (“Deed of Trust”) of even date herewith, encumbering certain real property described therein (“Property”).
3.	DEFINITIONS. For the purposes of this Note, the following terms shall have the following meanings:
	“Business Day” shall mean any day other than a Saturday, Sunday, legal holiday or other day on which commercial banks in California are authorized or required by law to close. All references in this Note to a “day” or a “date” shall be to a calendar day unless specifically referenced as a Business Day.
	“Default” shall have the meaning set forth in the Deed of Trust.
	“Disbursement Date” shall mean the date upon which the Loan proceeds are funded into escrow in connection with the closing of the Loan.
	“Effective Date” shall mean the date the Deed of Trust is recorded in the Office of the County Recorder of the county where the Property is located and Lender authorizes the Loan proceeds to be released to Borrower.
	“Loan Documents” shall mean the documents listed in Exhibit B attached hereto and incorporated herein by this reference.
	“Maturity Date” shall mean February 1, 2011.
4.	INTEREST; PAYMENTS.

4.1	Definitions. The following terms shall have the meanings indicated:
	“Actual/360 Basis” shall mean on the basis of a 360-day year and charged on the basis of actual days elapsed for any whole or partial month in which interest is being calculated.
	“30/360 Basis” shall mean on the basis of a 360-day year consisting of 12 months of 30 days each. “Interest Rate” shall mean a fixed annual rate of 7 . 4 5 5 %.
4.2	Interest Accrual. Interest on the outstanding principal balance of this Note shall accrue from the Disbursement Date at an annual rate equal to the Interest Rate calculated on an Actual/360 Basis.
4.3	Payments. Monthly payments hereunder shall commence on the first day of the calendar month following the Disbursement Date and continue on the first day of each calendar month thereafter through the Maturity Date. If the Disbursement Date is a date other than the fast day of a calendar month, the fast monthly payment shall be interest only. Subsequent monthly payments shall be calculated on the basis of an equal-payment 30 year amortization of principal and interest. Notwithstanding that interest on this Note accrues on an Actual./360 Basis,

the total amount of each such amortized monthly payment of principal and interest shall be determined using a 30/360 Basis. On the Maturity Date, all unpaid principal and accrued but unpaid interest shall be due and owing in full. All interest shall be paid in arrears.

4.4

Acknowledgments. Borrower acknowledges that interest calculated on an ActuaU360 Basis exceeds interest calculated on a 30/360 Basis and, therefore: (a) a greater portion of each monthly installment of principal and interest will be applied to interest using the Actual/360 Basis than would be the case if interest accrued on a 30/360 Basis; and (b) the unpaid principal balance of this Note on the Maturity Date will be greater using the Actuall360 Basis than would be the case if interest accrued on a 30/360 Basis.

4.5

Application of Payments. In the absence of a specific determination by Lender to the contrary, all payments paid by Borrower to Lender in connection with the obligations of Borrower under this Note and under the other Loan Documents shall 3e applied in the following order of priority: (a) to amounts, other than principal and interest, due to Lender pursuant to this Note or the other Loan Documents; (b) to accrued but unpaid interest on this Note; and (c) to the unpaid principal balance of this Note. Borrower irrevocably waives the right to direct the application of any and all payments at any time hereafter received by Lender from or on behalf of Borrower, and Borrower irrevocably agrees that Lender shall have the continuing exclusive right to apply any and all such payments against the then due and owing obligations of Borrower in such order of priority as Lender may deem advisable.

5. LATE CHARGE; DEFAULT RATE.

5.1

Late Charge. If all or any portion of any payment or deposit required hereunder (other than the payment due on the Maturity Date) is not paid or deposited on or before the fourth day following the day on which such payment or deposit is due, Borrower shall pay a late or collection charge, as liquidated damages, equal to 5% of the amount of such unpaid payment or deposit. If all or any portion of the payment due on the Maturity Date is paid more than 4 days after the Maturity Date and on a date other than the first day of a month, Borrower shall pay a late or collection charge, as liquidated damages, equal to the interest which would have accrued on such amount during the period commencing on the date payment of such amount is actually made and ending on the last day of the month in which payment of such amount is actually made. Borrower acknowledges that Lender will incur additional expenses as a result of any late payments or deposits hereunder, which expenses would be impracticable to quantify, and that Borrower’s payments under this Section 5.1 are a reasonable estimate of such expenses.

5.2

Default Rate. Commencing upon a Default and continuing until such Default shall have been cured by Borrower, all sums owing on this Note shall bear interest until paid in full at an annual rate equal to 5% plus the h terest Rate, but not higher than the maximum rate of interest permitted by applicable law (“Default Rate”).

6. MAXIMUM RATE PERMITTED BY LAW. Neither this Note nor any of the other Loan Documents shall require the payment or permit the collection of any interest or any late payment charge in excess of the maximum rate permitted by law. If any such excess interest or late payment charge is provided for under this Note or any of the other Loan Documents or if this Note or any of the other Loan Documents shall be adjudicated to provide for such excess, neither Borrower nor Borrower’s successors or assigns shall be obligated to pay such excess, and the right to demand the payment of any such excess shall be and hereby is waived, and this provision shall control any other provision of this Note or any of the other Loan Documents. If Lender shall collect amounts which are deemed to constitute interest and which would increase the effective interest rate to a rate in excess of the maximum rate permitted by law, all such amounts deemed to constitute interest in excess of the maximum. legal rate shall, upon such determination, at the option of Lender, be returned to Borrower or credited against the outstanding principal balance of this Note.

7. ACCELERATION. If (a) Borrower shall fail to pay when due any sums payable under this Note; (b) any other Default shall occur; or (c) any other event or condition shall occur which, under the terms of the Deed of Trust or any other Loan Document, gives rise to a right of acceleration of sums owing under this Note, then Lender, at its sole option, shall have the right to declare all sums owing under this Note immediately duc and payable; provided, however, that if the Deed of Trust or any other Loan Document provides for the automatic acceleration of payment of sums owing under this Note, all sums owing under this Note shall be automatically due and payable in accordance with the terms of the Deed of Trust or such other Loan Document.

8. BORROWER’S LIABILITY.

8.1	Limitation. Except as otherwise provided in this Section 8, Lender’s recovery against Borrower under this Note and the other Loan Documents shall be limited solely to the Property and the “Collateral” (as defined in the Deed of Trust).
8.2	Exceptions. Nothing contained in Section 8.1 or elsewhere in this Note or the other Loan Documents, however, shall limit in any way the personal liability of Borrower owed to Lender for any losses or damages incurred by Lender (including, without limitation, any impairment of Lender’s security for the Loan) with respect to any of the following matters: (a) fraud or willful misrepresentation;; (b) material physical waste of the Property or the Collateral; (c) failure to pay property or other taxes, assessments or charges from available property cash flow (other than amounts paid to Lender for taxes, assessments or charges pursuant to Impounds as defined in Exhibit A and where Lender elects not to apply such funds toward payment of the taxes, assessments or charges owed) which may create liens senior to the lien of the Deed of Trust on all or any portion of the Property; (d) failure to deliver any insurance or condemnation proceeds or awards or any security deposits received by Borrower to Lender or to otherwise apply such sums as required under the terms of the Loan Documents or any other instrument now or hereafter securing this Note; (e) failure to apply any rents, royalties, accounts, revenues, income, issues, profits and other benefits from the Property which are collected or received by Borrower during the period of any Default or after acceleration of the indebtedness and other sums owing under the Loan Documents to the payment of either (i) such indebtedness or other sums or (ii) the normal and necessary operating expenses of the Property; or (f) any breach by Borrower of any covenant in this Note or in the Deed of Trust regarding Hazardous Materials (as defined in the Deed of Tnrst) or any representation or warranty of Borrower regarding Hazardous Materials proving to have been untrue when made.
8.3	No Release or Impairment. Nothing contained in Section 8.1 shall be deemed to release, affect or impair the indebtedness evidenced by this Note or the obligations of Borrower under, or the liens and security interests created by the Loan Documents, or Lender’s rights to enforce its remedies under this Note and the other Loan Documents, including, without limitation, the right to pursue any remedy for injunctive or other equitable relief, or any suit or action in connection with the preservation, erforcement or foreclosure of the liens, mortgages, assignments and security interests which are now or at a.any time hereafter security for the payment and performance of all obligations under this Note or the other Loan Documents.
8.4	Prevail and Control. The provisions of this Section 8 shall prevail and control over any contrary provisions elsewhere in this Note or the other Loan Documents.

9. NON-TRUSTOR BORROWER. If any Borrower is not also a ^"Tmstor^” under the Deed of Trust, such Borrower hereby makes all representations and warranties in favor of Lender contained in Article 5 of the Deed of Trust, all covenants contained in Section 6.15 of the Deed of Trust, and all indemnities of Lender contained in Section 6.19 of the Deed of Trust, jointly and severally with the “Trustor.”

10. MISCELLANEOUS.

10.1	Joint and Several Liability. If this Note is executed by more than one person or entity as Borrower, the obligations of each such person or entity shall be joint and several. No person or entity shall be a mere accommodation maker, but each shall be primarily and directly liable hereunder.
10.2	Waiver of Presentment. Except as otherwise provided in any other Loan Document, Borrower hereby waives presentment, demand, notice of dishonor, notice of default or delinquency, notice of intent to accelerate, notice of acceleration, notice of nonpayment, notice of costs, expenses or losses and interest thereon, and notice of interest on interest and late charges.
10.3	Delay In Enforcement. No previous waiver or failure or delay by Lender in acting with respect to the terms of this Note or the Deed of Trust shall constitute a waiver of any breach, default or failure of condition under this Note, the Deed of Trust or the obligations secured thereby. A waiver of any term of this Note, the Deed of Trust or of any of the obligations secured thereby must be made in writing signed by Lender, shall be limited to the express terms of such waiver, and shall not constitute a waiver of any subsequent obligation of Borrower. The acceptance at any time by Lender of any past-due amount shall not be deemed to be a waiver of the right to require prompt payment when due of any other amounts then or thereafter due and payable.

10.4	Time of the Essence. Time is of the essence with respect to every provision hereof
10.5	Governing Law. This Note was accepted by Lender in the slate of California and the proceeds of this Note were disbursed from the state of California, which state the parties agree has a substantial relationship to the parties and to the underlying transaction embodied hereby. Accordingly, in all respects, including, without limiting the generality of the foregoing, matters of construction, validity, enforceability and performance, this Note, the Deed of Trust and the other Loan Documents and the obligations arising hereunder and thereunder shall be governed by, and construed in accordance with, the laws of the state of California applicable to contracts made and performed in such state and any applicable law of the United States of America, except that at all times the provisions for the enforcement of Lender’s STATUTORY POWER OF SALE granted under the Deed of Trust securing this Note and the creation, perfection and enforcement of the security interests created pursuant thereto and pursuant to the other Loan Documents shall be governed by and construed according to the law of the state where the Property is located. Except as provided in the immediately preceding sentence, Borrower hereby unconditionally and irrevocably waives, to the fullest extent permitted by law, any claim to assert that the law of any jurisdiction other than California governs the Deed o f Trutt, this Note and the other Loan Documents.
10.6	Consent to Jurisdiction,. Borrower irrevocably submits to the jurisdiction of: (a) any state or federal court sitting in the state of California over any suit, action, or proceeding, brought by Borrower against Lender, arising out of or relating to this Note or the Loan evidenced hereby; (b) any state or federal court sitting in the state where the Property is located or the state in which Borrower‘s principal place of business is located over any suit, action or proceeding, brought by Lender against Borrower, arising out: of or relating to this Note or the Loan evidenced hereby; and (c) any state court sitting in the county of the state where the Property is located over any suit, action, or proceeding, brought by Lender to exercise its STATUTORY POWER OF SALE under the Deed of Trust or any action brought by the Lender to enforce its rights with respect to the Collateral. Borrower irrevocably waives, to the fullest extent permitted by law, any objection that Borrower may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in a.ny such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum.
10.7	Counterparts. This Note may be executed in any number of counterparts, each of which when executed and delivered shall be deemed an original and all of which taken together shall be deemed to be one and the same Note.
10.8	Heirs, Successors and Assigns. All of the terns, covenants, conditions and indemnities contained in this Note and the other an Documents shall be binding upon the heirs, successors and assigns of Borrower and shall inure to the benefit of the successors and assigns of Lender. The foregoing sentence shall not be construed to permit Borrower to assign the Loan except as otherwise petted in this Note or the other Loan Documents.
10.9	Severability. If any tern of this Note, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this Note, or the application of such term to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term of this Note shall be valid and enforceable to the fullest extent permitted by law.
10.10	Consents and Approvals. Wherever Lender’s consent, approval, acceptance or satisfaction is required under any provision of this Note or any of the other Loan Documents, such consent, approval, acceptance or satisfaction shall not be unreasonably withheld, conditioned or delayed by Lender unless such provision expressly so provides.

11. NOTICES. All notices and other communications that are required or permitted to be given to a party under this Note shall be in writing and shall be sent to such party, either by personal delivery, by overnight delivery service, by certified first class mail, return receipt requested, or by facsimile transmission to the address or facsimile number below. All such notices and communications shall be effective upon receipt of such delivery or facsimile transmission. The addresses and facsimile numbers of the parties shall be:

Borrower:	Lender:
BARBER LANE ASSOCIATES L.P.	Wells Fargo Bank, N.A.
490 California Ave.	1320 Willow Pass Road, Suite 205
4th Floor	Concord, CA 94520
Palo Alto, CA 94301	Loan No. 31-0900266A
FAX No.: (650) 326-9333	FAX No.: (925) 691-5947
With copies to:
Cooley Godward LLP
One Maritime Plaza 20th Floor
San Francisco, CA 94111
Attn: Paul Churchill, Esq.
(415) 951-3699

12. ADDITIONAL TERMS ANI) CONDITIONS. The additional terms and conditions set forth in Exhibit A attached hereto are incorporated herein by this reference.

13. PREPAYMENT. Borrower acknowledges that any prepayment of this Note will cause Lender to lose its interest rate yield on this Note and will possibly require that Lender reinvest any such prepayment amount in loans of a lesser interest rate yield (including, without limitation, in debt obligations other than first mortgage loans on commercial properties). As a consequence, Borrower agrees as follows, as an integral part of the consideration for Lender’s making the Loan:

13.1	Voluntary Prepayment. Any voluntary prepayment of this Note: (a) is prohibited except during the last 3 months of the term, (b) is permitted in full only, and not in part.
13.2	Prepayment Charge.

a.

Basic Charge. Except as provided below, if this Note is prepaid prior to the last 3 months of the term, whether such prepayment is involuntary or upon acceleration of the principal amount of this Note by Lender following a Default, Borrower shall pay to Lender on the prepayment date (in addition to all other sums then due and owing to Lender under the Loan Documents) a prepayment charge equal to the greater of the following two amounts: (a) an amount equal to 1% of the then outstanding principal balance of the Loan; or (b) an amount equal to (i) the amount, if any, by which the sum of the present values as of the prepayment date of all unpaid principal and interest payments required under this Note, calculated by discounting such payments from their respective scheduled payment dates back to the prepayment date at a discount rate equal to the Periodic Treasury Yield (defined below) exceeds the outstanding principal balance of the Loan as of the prepayment date, multiplied by (ii) a fraction whose numerator is the amount of the prepayment and whose denominator is the outstanding principal balance of the Loan as of the prepayment date. For purposes of the foregoing, “Periodic Treasury Yield” means (c) the annual yield to maturity of the actively traded :ion-callable United States Treasury fixed interest rate security (other than any such security which can be surrendered at the option of the holder at face value in payment of federal estate tax or which was issued at a substantial discount) that has a maturity closest to (whether before, on or after) the Maturity Date (or if two or more such securities have maturity dates equally close to the Maturity Date, the average annual yield to maturity of all such securities), as reported in The Wall Street Journal or other authoritative publication or news retrieval service on the fifth Business Day preceding the prepayment date, divided by (d) 12, if scheduled payment dates are monthly, or 4, if scheduled payment dates are quarterly.

b.

Additional Charge. If this Note is prepaid on any day other than the first day of a month, whether such prepayment is involuntary or upon full acceleration of the principal amount of this Note by Lender following a Default, Borrower shall pay to Lender on the prepayment date (in addition to the basic prepayment charge described in Section 13.2a. above and all other sums then due and owing to Lender under this Note and the other Loan Documents) an additional prepayment charge equal to the interest which would otherwise have accrued on the amount prepaid (had such prepayment not occurred during

the period commencing on the prepayment date and ending on the last day of the month in which the prepayment occurred.

c. Exclusion. Notwithstanding the foregoing, no prepayment charge of any kind shall apply in respect to any prepayment resulting from the application of any insurance or condenmation proceeds received by Lender and applied by Lender to the outstanding principal balance of the Loan.

13.3

Effect of Prepayment. No partial prepayment of this Note shall change the dates or amounts of subsequent monthly installments of principal and interest, unless Lender otherwise agrees in writing.

13.4

Waiver. Borrower waives any right to prepay this Note except under the terms and conditions set forth in this Section and agrees that if this Note is prepaid, Borrower will pay the prepayment charge set forth above. Borrower hereby acknowledges that: (a) the inclusion of this waiver of prepayment rights and agreement to pay the prepayment charge for the right to prepay this Norse was separately negotiated with Lender; (b) the economic value of the various elements of this waiver and agreement was discussed; (c) the consideration given by Borrower for the Loan was adjusted to reflect the specific waiver and agreement negotiated between Borrower and Lender and contained herein; and (d) this waiver is intended to comply with California Civil Code Section 2954.10.

Borrower’s Initials:        HDB           RP           
 

14. DEFEASANCE.

14.1	Defeasance Definitions. The following terms shall have the meanings indicated:
	“Allocated Loan Amount” means that portion of the Loan which has been allocated to each Individual Property which is being dcfeased,
	“Code” means the Internal Revenue Code of 1986, as amended to date and as further amended from time to time, or any successor statutes thereto, together with applicable regulations issued pursuant thereto in temporary or final form.
	“Defeasance” means the Borrower’s substitution of collateral and Lender’s full or partial release of the lien of the Deed of Trust upon satisfaction of all of the terms and conditions of this Section 14.
	“Defeasance Collateral” means obligations or securities, not subject to prepayment, call or early redemption, that are direct obligations of, or obligations fully guaranteed as to timely payment by, the United States of America that are backed by the full faith and credit of the United States, together with all revenues and proceeds of such obligations or securities.
	“Defeasance Date” means the date upon which the Defeasance is completed.
	“Defeasance Security Agreements” shall have the meaning specified in Section 14.3 d.(ii). “Individual Property” means property as described in Exhibit A of the Deed of Trust.
	“Lockout Expiration Date” means the later of (a) two years after the Startup Day (defined below) of the REMIC (defined below), if any, that holds this Note on the Defeasance Date, and (b) the 3RD anniversary of the date of this Note.
	“Rating Agencies” means Fitch ICBA, Inc., Moody’s Investor Services, Inc., Standard & Poor’s Rating Services and any other nationally-recognized statistical rating organization that, in connection with the securitization of the Loan by a REMIC, maintains a rating on the Defeasance Date of the securities issued by the REMIC.
	“REMIC” means a “real estate mortgage investment conduit” within the meaning of Section 860D of the Code.
	“Startup Day” means the “startup day” within the meaning of Section 860G(a)(9) of the Code.

“Successor Borrower” means an entity designated by Lender whose sole purpose is to own the Defeasance Collateral delivered by Borrower under this Section 14 and assume Borrower’s obligations with respect to the Loan or portion of the Loan affected by the Defeasance, either alone, or together with the Defeasance Collateral for other, previously deceased loans or portions of loans assumed by Successor Borrower which are also held by the REMIC that holds this Note. The Successor Borrower shall, in either case, be restricted from taking actions that could result in its bankruptcy or dissolution

14.2	Borrower Right to Defease. At any time after the Lockout Expiration Date, Borrower may elect to effect a Defeasance of the entire Loan or one or more partial Defcas.nces of an Individual Property in accordance with the provisions of this Section 14, at Borrower’s sole cost and expense.
14.3	Conditions. Borrower shall only have the right to cause a Defeasance if all of the following conditions have been satisfied:

a.	Notice. Borrower shall give at least 45 days but rot more than 90 days written notice to Lender specifying the Borrower’s intended Defeasance Date and, for a partial Defeasance, the Individual Property affected. Simultaneously with the delivery cf such notice, Borrower shall deposit with Lender an amount estimated by Lender to be sufficient to reimburse Lender’s reasonable anticipated expenses in connection with the Defeasance, for which Borrower shall be solely responsible whether or not the Defeasance shall be completed. If any such notice shall have been given by Borrower, Borrower shall be obligated to complete the Defeasance of the Loan on the Defeasance Date, unless such notice is revoked in writing by Borrower prior to the Defeasance Date. Upon completion of the Defeasance or revocation by Borrower as specified above, Lender shall return any surplus deposit to Borrower;
b.	No Default. No Default shall have occurred and be continuing on the date of Borrower’s notice under Section 14.3 a. above or on the Defeasance Date.
c.	Payments. Borrower shall pay in full, on or before the Defeasance Date, all unpaid interest accruing under this Note to and including the Defeasance Date, and all other sums due under this Note and the other Loan Documents on or before the Defeasance Date, including without limitation, (i) all costs and expenses paid or incurred by Lender or its agents in connection with the Defeasance, the release of the lien of the Deed of Trust on the Property or the Individual Property, as the case may he, the review of the proposed Defeasance Collateral and the preparation of the Defeasance Security Agreements and related documentation, and (ii) any revenue, documentary stamp, intangible or other taxes, charges or fees due in connection with the transfer or assumption of this Note, the New Note (as hereinafter defined) or the Defeasance;
d.	Deliveries. Borrower shall, at Borrower’s sole cost and expense, deliver the following items to Lender on or before the Defeasance Date:

(i)

for any partial Defeasance, a new promissory note in an amount equal to one hundred twenty-five percent (125%) of the outstanding principal balance of the Allocated Loan Amount affected by the Defeasance (the “New Note”), and an amendment to this Note to evidence only the remaining principal balance of the Loan. The New Note and Defeasance Security Agreements will not be cross-defaulted to this Note and other Loan Documents;

(ii)

The Defeasance Collateral, as substitute collateral for the Loan or, for a partial Defeasance, for the New Note. The principal and interest payments under the Defeasance Collateral must be, in timing and amounts, sufficient to provide for payment prior, but as close as possible, to all successive scheduled payment dates occurring after the Defeasance Date, with each such payment being equal to or greater than the amount of the corresponding installment of principal and interest required to be paid under this Note or, for a partial Defeasance, under the New Note (including, without limitation, all amounts due on the Maturity Date) for the balance of the to m hereof Borrower shall take sucl actions, enter such agreements and issue such orders or directions (including those specified below), as are necessary or appropriate and in accordance with customary commercial standards to effectuate book-entry transfers and pledges through the book-entry facilities of the institution holding the Defeasance Collateral or otherwise to create and perfect a valid, enforceable, first priority security interest in the Defeasance Collateral in favor of Lender:

(iii)	a pledge and security agreement and an acccunt control agreement, each in form and substance customary in commercial mortgage defeasance transactions (such agreements, together with the New Note in the case of a partial Defeasance, the “Defeasance Security Agreements”), creating, attaching and perfecting a first priority security interest in favor of Lender in the Defeasance Collateral under the law of the ] urisdiction selected by Lender, which agreements shall provide, among other things, that all payments generated by the Defeasance Collateral shall be paid directly to Lender and applied by Lender to amounts then due and payable under this Note or, for a partial Defeasance, under the New Note;
(iv)	a certificate of Borrower certifying that all of the requirements of this Section 14 have been satisfied;
(v)	opinions of counsel for Borrower, addressed. to Lender and all Rating Agencies and delivered by counsel reasonably satisfactory to Lender, subject only to customary assumptions, qualifications and exceptions, stating, among other things, that (a) Lender has a perfected first priority security interest in the Defeasance Collateral, (b) the Defeasance Security Agreements are enforceable against Borrower in accordance with their terms and (c) any REMIC that holds this Note on the Defeasance Date will not, as a result of the Defeasance, fail to maintain its status as a “real estate mortgage investment conduit” within the meaning of Section 860D of the Code;
(vi)	a certificate, addressed to Lender and all Rating Agencies, from a firm of independent certified public accountants reasonably acceptable to Lender, subject only to customary assumptions, qualifications and exceptions, certifying that the Defeasance Collateral satisfies the requirements of Section 14.3 d.(ii) above and certifying that in no fiscal year of the Successor Borrower will the interest earned on the Defeasance Collateral exceed the interest payable for the same period on the Loan under this Note or, for a partial Defeasance, on the New Note;
(vii)	if this Note is held by a REMIC, written evidence from all of the Rating Agencies that originally rated the pool, that the Defeasance will not result in a downgrading, withdrawal or qualification of the respective ratings in effect immediately prior to the Defeasance for any securities representing interests in such REM IC which are then outstanding;
(viii)	for a partial Defeasance, an endorsement to Lender’s title insurance policy reflecting the Defeasance and otherwise reflecting no material adverse change in the title to the Property which remains subject to the lien of the Deed of Trust;
(ix)	such other certificates, opinions, documents or instruments as are customary in commercial mortgage defeasance transactions to effect the Defeasance.

e.	Partial Release Conditions. For a partial Defeasance, all other conditions specified in the Note or the Deed of Trust for a release of any Individual Property shall have been satisfied except payment to Lender of any portion of the outstanding principal balance of the Loan.
f.	Release of Lien. Upon satisfaction of all condition, specified above, the Property or, for a partial Defeasance, the Individual Property shall be released from the lien of the Deed of Trust and the other Loan Documents, and the Defeasance Collateral and the proceeds thereof shall constitute the only collateral securing the obligations of Borrower under this Note and the other Loan Documents or, for a partial Defeasance, under the New Note and the Defeasance Security Agreements. Lender shall, at Borrower’s expense, prepare, execute and deliver any agreements reasonably necessary to release the lien of the Deed of Trust from the Property or the India dual Property, as applicable.
g.	Assignment and Assumption. In connection with the Defeasance, Borrower shall, at the request of Lender, assign al]. of its right, title and interest in and to the pledged Defeasance Collateral and all its obligations and rights under this Note or, for a partial. Defeasance, the New Note, and the Defeasance Security Agreements to the Successor Borrower. The Successor Borrower shall execute an assumption agreement in form and substance customary in commercial mortgage defeasance transactions, pursuant to which it shall assume Borrower’s obligations under this Note or, for a partial Defeasance, the New

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Note, and the Defeasance Security Agreements. On the Defeasance Date, a fee of 1% of the outstanding balance of the Loan shall be paid by Borrower to Successor Borrower in consideration of Successor Borrower’s assumption of such obligations of Borrower. As conditions to such assignment and assumption, Borrower shall (i) deliver to Lender opinions of counsel addressed to Lender and all Rating Agencies, in form and substance customary in commercial defeasance transactions and delivered by counsel reasonably satisfactory to Lender, and subject only to customary assumptions, qualifications and exceptions, stating, among other things, that such assumption agreement is enforceable against Borrower and Successor Borrower in accordance with its terms and that this Note or, for a partial Defeasance, the New Note, and the Defeasance Security Agreements, as so assumed, are enforceable against Successor Borrower in accordance with their respective terms, and that the bankruptcy of any affiliate of Successor Borrower will not affect the ii ssets of the Successor Borrower; and (ii) pay all costs and expenses incurred by Lender or its agents in connection with such assignment and assumption (including, without limitation, the formation or review of the Successor Borrower and the preparation of the assumption agreement and related documentation). Upon such assumption, Borrower shall be relieved of its obligations under this Note or, for a partial Defeasance, under the New Note, the Defeasance Security Agreements and the other Loan Documents (but in a partial Defeasance, only to the extent applicable to the Individual Property affected by the Defeasance) other than (iii) representations and warranties made in connection with the Defeasance, (iv) the obligation to effect the Defeasance in accordance with this Section 14, and to provide further assurances as necessary to do so, (v) liability for losses to Lender resulting from an avoidance, rescission or set-aside of the Defeasance as a result of actions taken or suffered by Borrower, and (vi) those obligations which are specifically intended to survive the payment of the Loan or other termination, satisfaction or assignment of this Note, the Defeasance Security Agreements or the other Loan Documents or Lender’s exercise of its rights and remedies under any of such documents and instruments.

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15. WAIVER OF JURY TRIAL. LENDER AND BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR AR][SING OUT OF, UNDER, OR IN CONNECTION WITH, THIS NOTE OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WR][TTEN), OR ACTIONS OF LENDER OR BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN TO BORROWER.

“BORROWER”
BARBER LANE ASSOCIATES L.P., a California limited partnership
By:	Menlo Equities Associates V LLC, a California limited liability company, General Partner
	By:	Menlo Equities LLC, a California limited liability company, Managing Member
		By:	Menlo Equities, Inc., a California corporation, Managing Member
			By:	/s/ Henry D. Bullock
				Henry D. Bullock,
				President
		By:	Diamant Investments LLC, a Delaware limited liability company, Member
			By:	/s/ Richard J. Hollstrom
				Richard J. Hollstrom,
				Managing Member

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LoanNo.31-0900266A

EXHIBIT A TO PROMISSORY NOTE
Additional Terms And Conditions

     This Exhibit A is attached to and forms a part of that Promissory Note (“Note”) executed by BARBER LANE ASSOCIATES L. P. , a California limited partnership (“Borrower”) in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Lender”).

     DISBURSEMENT OF LOAN PROCEEDS; LIMITATION OF LIABILITY. Borrower hereby authorizes Lender to disburse the proceeds of the Loan, after deducting any and all fees owed by Borrower to Lender in connection with the Loan, to Commonwealth Land Title Inst:_rance Company. With respect to such disbursement, Borrower understands and agrees that Lender does not accept responsibility for errors, acts or omissions of others, including, without limitation, the escrow company, other banks, communications carriers or clearinghouses through which the transfer of Loan proceeds may be made or through which Lender receives or transmits information, and no such entity shall be deemed Lender’s agent. As a consequence, Lender shall not be liable to Borrower for any actual (whether direct or indirect), consequential or punitive damages which may arise with respect to the disbursement of Loan proceeds, whether or not (a) any claim for such damages is based on tort or contract, or (b) either Lender or Borrower knew or should have known of the likelihood of such damages in any situation.

2. FINANCIAL STATEMENTS.

2.1 Statements Required. During the term of the Loan and while any liabilities of Borrower to Lender under any of the Loan Documents remain outstanding and unless Lender otherwise consents in writing, Borrower shall provide to Lender the following:

a.	Operating Statement. Not later than 10 days after and as of the end of each calendar month during the period prior to any sale of the Loan, and thereafter not later than 30 days after and as of the end of each calendar quarter, an operating statement, signed and dated by Borrower, in a form acceptable to Lender, showing all revenues and expenses during such month or quarter and year-to-date, relating to the Property, including, without limitation, all information requested under any of the Loan Documents;
b.	Rent Roll. Not later than 10 days after and as of the end of each calendar month during the period prior to any sale of the Loan, and thereafter not later than 30 days after and as of the end of each calendar quarter, a rent roll signed and dated by Borrower,, in a form acceptable to Lender, showing the following lease information with regard to each tenant: the name of the tenant, monthly or other periodic rental amount, dates of commencement and expiration of the lease, and payment status;
c.	Balance Sheet. If requested by Lender, not later than 90 days after and as of the end of each fiscal year, a balance sheet, signed and dated by Borrower, in a form acceptable to Lender (or audited financial statements if Borrower obtains them), showing all assets and liabilities of Borrower; and
d.	Other Information. From time to time, upon Lender’s delivery to Borrower of at least 30 days’ prior written notice, such other information with regard to Borrower, principals of Borrower, guarantors or the Property as Lender may reasonably request in writing.

2.2 Form; Warranty. Borrower agrees that all financial statements to be delivered to Lender pursuant to Section 2.1 shall: (a) be materially complete and correct:; (b) present fairly the financial condition of the party; (c) disclose all liabilities that are required to be reflected or reaerved against; and (d) be prepared in accordance with the same accounting standard used by Borrower to prepare the fmancial statements delivered to and approved by Lender in connection with the making of the loan or other accounting standards acceptable to Lender. Borrower shall be deemed to warrant and represent that, as of the date of delivery of any such financial statement, there has been no material adverse change in financial condition, nor have any assets or properties been sold, transferred, assigned, mortgaged, pledged or encumbered since the date of such financial statement except as disclosed by Borrower in a writing delivered to Lender. Borrower agrees that all rent rolls and other information to be delivered to Lender pursuant to Section 2.1 shall not contain any misrepresentation or omission of a material fact.

EXHIBIT A

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2.3 Late Charge. If any financial statement, leasing schedule or other item required to be delivered to Lender pursuant to Section 2.1 is not timely delivered, Borrower shall promptly pay to Lender, as a late charge, the sum of $500 per item. In addition, Borrower shall promptly pay to Lender an additional late charge of $500 per item for each full month during which such item remains undelivered following written notice from Lender. Borrower acknowledges that Lender will incur additional expenses as a result of any such late deliveries, which expenses would be impracticable to quantify, and that Borrower’s payments under this Section 2.3 are a reasonable estimate of such expenses.

3. IMPOUNDS.

3.1 Amounts. Borrower shall deposit with Lender, the amounts (“Impounds”) stated below on the dates stated below, for the purpose of paying the costs stated below:

a.	Taxes. (i) $15,110.00 on the Disbursement Date, and (ii) on the first payment date on which both principal and interest under the Loan are payable and on each payment date thereafter, an amount estimated from time to time by Lender in its sole discretion to be sufficient to pay for taxes and other liabilities payable by Borrower under Section 6.9 of the Deed of Trust. The initial estimated monthly amount to be deposited by Borrower on each payment date is $3,022.00.
b.	Insurance. (i) $6,392.00 on the Disbursement Date, and (ii) on the first payment date on which both principal and interest under the Loan are payable and on each payment date thereafter, an amount estimated from time to time by Lender in its sole discretion to be sufficient to pay for premiums for insurance payable by Borrower under Section 6.10 of the Deed of Trust. The initial estimated monthly amount to be deposited by Borrower on each payment date is $799.00.
c.	Tenant Improvements. $3,758.00 on the first payment date on which both principal and interest under the Loan are payable and on each payment date thereafter for tenant improvements, brokerage commissions and other leasing costs that may he required for new tenants in the Property. Notwithstanding, the foregoing, if tenant has not exercised its renewal option by the end of the sixth lease year, then Borrower shall enter into a Restricted Account Agreement (defined in Section 5)
d.	Capital Expenditures. $659.00 on the first payment date on which both principal and interest under the Loan are payable and on each payment cate thereafter for payment or reimbursement of Capital Expenditures (defined below).

3.2 Application.

a.	Taxes. If no Default exists, Lender shall apply the Impounds to the payment of the taxes and other liabilities stated above.
b.	Insurance. If no Default exists, Lender shall apply the Impounds to the payment of the insurance premiums stated above.
c.	Tenant Improvements. If no Default exists, Lender shall release the Impounds to Borrower once a month, no less than $5,000.00 per release, to pay or reimburse Borrower for the tenant improvements, brokerage commissions, and leasing costs stated above; provided, however, that Lender shall have received and approved each of the following For each tenant for which such costs were incurred:

(i)	Borrower’s written request for such release, including the name of the tenant, the location and net rentable area of the premises leased by such tenant and a description and cost breakdown in reasonable detail of the costs covered by the request;
(ii)	Borrower’s certification that the tenant improvements have been completed lien-free and in a workmanlike manner;
(iii)	a fully executed lease, or extension or renewal ef the current lease;

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(iv)	prior to the last release of Impounds for each space, an estoppel certificate executed by the tenant including its acknowledgment that all tenant improvements have been satisfactorily completed; and
(v)	such other information with respect to such costs as Lender may request.

d. Capital Expenditures. If no Default exists, Lender shall release the Impounds to Borrower once a month, in increments of no less than $5,000.00 per release, to pay or reimburse Borrower for the Capital Expenditures; provided, however, that Lender shall have received and approved each of the following:

(i)	Borrower’s written request for such release, including a description of the Capital Expenditures and Borrower’s certification that all Capital Expenditures have been paid or incurred by Borrower for work completed lien-free and in a workmanlike manner;
(ii)	copies of invoices supporting the request for such release; and
(iii)	an inspection report if required by Lender, signed by an inspector selected by Lender, whose fees and expenses shall be paid by Borrower and deducted from requested release of Impounds, and such other evidence as Lender shall require, confirming Borrower’s certification.

3.3 General. Any portion of the Impounds that exceeds the amount required for payment of the foregoing costs shall be repaid to Borrower upon Borrower^‘s compliance with the foregoing. Reference is made to Section 6.12(b) of the Deed of Trust for a description of the account into which the Impounds shall be deposited and for a description of certain rights and reme dies of Lender with respect to amounts in such account. Notwithstanding anything to the contrary in the Deed of Trust, all accounts containing Impounds for tenant improvements shall bear interest at a rate established by Lender or its servicing agent, which may or may not be the highest rate then available.

3.4 Maintenance and Construction.

a.	Tenant Improvements. Borrower shall constrict all tenant improvements in a workmanlike manner and in accordance with all applicable laws, ordinances, rules and regulations.
b.	Capital Expenditures. Borrower shall complete the lien-free performance or installation of the Capital Expenditures (as defined below) from time to time as necessary, in a workmanlike manner and in accordance with all applicable laws, ordinances, rules and regulations. “Capital Expenditures” shall mean major repairs and replacements to maintain or improve the Property, including, without limitation, structural repairs, roof replacements, HVAC repairs and replacements, mechanical and plumbing repairs and replacements and boiler repair and replacements.
c.	Right of Inspection. Lender shall have the right to enter upon the Property at all reasonable times to inspect all work for the purpose of verifying information disclosed or required pursuant to this Note. Notwithstanding the foregoing, Lender shall not be obligated to supervise or inspect any work or to inform Borrower or any third party regarding any aspect of any work.

3.5 Release. Lender shall release any Impounds to Borrower through a funds transfer of such Impounds initiated by Lender to the following account or such other account as Borrower specifies in a notice to Lender:

Bank Name:	Wells Fargo Impound Distribution
ABA Routing Nc.:	122242173
Account Name:	40302954
Reference:	Barber Lane Associates LP         _
Advise:	Controller (650) 326-9300                __________

Lender shall determine the funds transfer system and other means to be used in making each such release. Borrower agrees that each such funds transfer initiated by Lender shall be deemed to be a funds transfer

EXHIBIT A

12

properly authorized by Borrower, even if the transfer is not actually properly authorized by Borrower. Borrower acknowledges that Lender shall rely on the account number and ABA routing number set forth above or specified in a notice from Borrower to Lender, even if such account number identifies an account with a name different from the name so specified, or the routing number identifies a bank different from the bank so specified. If Borrower learns of any error in the transfer of any Impounds or of any transfer which was not properly authorized, Borrower shall notify Lender as soon as possible in writing but in no case more than 14 days after Lender’s first confirmation to Borrower of such transfer.

4. ONE-TIME RIGHT OF TRANSFER OF PROPERTY. Notwithstanding anything to the contrary contained in Section 6.15 of the Deed of Trust, Lender shall, one time only, consent to the voluntary sale or exchange of all of the Property by Trustor (as defined in the Deed of Trust) to a bona-fide third party purchaser, without any modification of the terms of this Note or the other Loan Documents, if no Default has occurred and is continuing and all of the following conditions have been satisfied:

4.1	Lender’s reasonable determination that the proposed purchaser, the proposed guarantor, if any, and the Property all satisfy Lender’s then applicable credit review and undervYrifng standards, taking into consideration, among other things, (a) any decrease in the Property’s cash flow which would result from any increase in real property taxes due to any anticipated reassessment of the Property for tax purposes and (b) any requirement of Lender that the proposed borrowing entity satisfy Lender’s then applicable criteria for a single purpose bankruptcy remote entity;
4.2	Lender’s reasonable determination that the proposed purchaser possesses satisfactory recent experience in the ownership and operation of properties comparable to the Property;
4.3	if required by Lender, payment to Lender of sufficient funds to establish an Impound Account for Deferred Maintenance, Capital Improvements and proposed purchaser‘s agreement to pay monthly Impound payment;
4.4	the execution and delivery to Lender of such documents and instruments as Lender shall reasonably require, in form and content reasonably satisfactory to Lender, including, without limitation, (i) an assumption agreement under which the purchaser assumes all obligations and liabilities of Borrower under this Note and the other Loan Documents and agrees to periodically pay such new or additional Impounds to Lender as Lender may reasonably require, and (ii) a consent to the transfer by any existing guarantor and a reaffirmation of such guarantor’s obligations and liabilities under any guaranty made in connection with the Loan or a new guaranty executed by a new guarantor reasonably satisfactory to Lender;
4.5	if required by Lender, delivery to Lender of evidence of title insurance reasonably satisfactory to Lender insuring Lender that the lien of the Deed of Trust and the priority thereof will not be impaired or affected by reason of such transfer or exchange of the Property;
4.6	payment to Lender of an assumption fee equal to 1% of the then outstanding principal balance of this Note;
4.7	reimbursement to Lender of any and all costs and expenses paid or incurred by Lender in connection with such transfer or exchange, including, without limitation, all in-house or outside counsel attorneys’ fees, title insurance fees, appraisal fees, inspection fees, environmental consultant’s fees and any fees or charges of the applicable rating agencies; and
4.8	if required by Lender, delivery to Lender of written evidence from the applicable rating agencies that such transfer or exchange will not result in a downgrading, withdrawal or qualification of the respective ratings in effect immediately prior to the transfer or exchange for any securities issued in connection with the securitization of the Loan which are then outstanding.

Lender shall fully release Borrower and any existing guarantor from any further obligation or liability to Lender under this Note and the other Loan Documents upon the assumption by the purchaser and any new guarantor of all such obligations and liabilities and the satisfaction of all other conditions precedent to a transfer or exchange in accordance with the provisions of this Section.

5. R:EMEC INC. LEASE. If on or before the end of the sixth (6^th) lease year, Remec Inc. (“Remec”) does not exercise its option to extend its lease tenn pursuant to the Lease dated April 14, 2000 by and between Barber Lane Associates L.P., a California limited partnership (“Landlord”) and REMEC, Inc., a California corporation (“Tenant”) (said lease

being referred to herein as the “Remec Lease”), then Borrower and Lender shall enter into a Restricted Account Agreement (in form and substance acceptable to Lender attached as Exhibit A-1) which shall provide, in part, that (a) Remec will make all payments due under the Remec Lease directly into a pledged account (without check writing privileges) maintained by Lender (the “Restricted Account^"), (b) the Restricted Account shall be in the name of Borrower, with Lender named as pledgee, and such account shall bear interest at a rate established by Lender or its servicing agent, which may or may not be the highest rate then available, (c) Borrower shall cause all payments made by Remec to be deposited into the Restricted Account on the date that principal and interest payments are due, (d) Lender shall debit the Restricted Account for all payments due under this Note on the date said amounts are due, provided immediate available funds are on deposit in the account, (e) Lender shall disburse funds on deposit in the Restricted Account (no more than once per calendar month) upon Borrower’s written request to cover the payment of operating expenses (such operating expenses to be evidenced to Lender’s satisfaction) and (f) on the last Business Day of every calendar month the balance on deposit in the Restricted Account shall be transferred to the tenant improvement impound account. If at any time the balance on deposit in the tenant improvement impound account is greater than or equal to $532,800 (the “TI Floor Amount”), then (g) Remec shall no longer be required to make payments directly into the Restricted Account, (h) Remec shall make payments to Borrower, (i) the Restricted Account shall be closed and (j) Borrower shall not be required to make tenant improvement impound deposits under Section 3.1(c) of this Exhibit A to Promisory Note. If at any time thereafter the balance in the tenant improvement impound account is less than the TI Floor Amount, Borrower shall promptly resume making tenant improvement impound deposits under said Section 3.1(c). All amounts on deposit in the Restricted Account shall constitute Impounds hereunder and reference is made to Section 6.12(b) of the Deed of Trust for a description of Lender’s rights and remedies with respect to such amounts.

6. LETTER OF CREDIT.

6.1

Deliveries to Lender. Prior to the closing of the Loan, Borrower shall deliver to Lender an irrevocable standby letter of credit (the “Initial Letter of Credit") in the aggregate principal amount of $569,192.40 issued by Union Bank of California, N.A. in favor of Borrower, guaranteeing the performance of Remec under the Remec Lease. The term “Letter of Credit”, as used herein, shall mean the Initial Letter of Credit and any replacement or renewal letters of credit. Subject to the provisions of this Section 6, Lender shall retain custody of the Letter of Credit until such time as the Loan is repaid in full (other than through judicial or nonjudicial foreclosure of the Deed of Trust or deed in lieu thereof) or until Remec is entitled to have the Letter of Credit returned to it in accordance with the Remec Lease.

6.2

Letter of Credit. The Letter of Credit shall be drawable in accordance with its terms and, solely as between Borrower and Lender, the additional terms of this Section:

a.

Pre-Foreclosure. Until such time, if ever, as Lender acquires title to the Property and succeeds to the interest of Borrower, as lessor under the Remec Lease, by judicial or nonjudicial foreclosure or deed in lieu thereof, not more than ten (10) Business Days’ after Lender’s receipt of (1) Borrower’s written request that Lender deliver the Letter of Credit to Borrower for draw in a specified amount, (2) Borrower’s written certification to Lender that there exists a default under the Remec Lease, that Remec has not cured the default and that the amount requested for draw is due Borrower under the Remec Lease and (3) a non-refundable $250 processing fee, Lender shall deliver the Letter of Credit, to Borrower for draw. Notwithstanding the foregoing, Borrower shall have the right to request no more than one (1) such drawing per month. If any such draw is a partial draw, Borrower shall be permitted to retain the funds, but Borrower shall promptly return the Letter of Credit to Lender. If any such draw is a draw of the entire amount remaining to be drawn under the Letter of Credit, then Borrower shall deposit such amount (the “LC Proceeds”) into the Cash Deposit Account (defined below).

b.

Post- Foreclosure:. If Lender acquires title to the Property and succeeds to the interest of Borrower, as lessor under the Remec Lease, by judicial or nonjudiciial foreclosure of the Deed of Trust or deed in lieu thereof, Lender shall have the sole right thereafter, at :any time and from time to time, to have the Letter of Credit reissued in favor of Lender and to draw upon the Letter of Credit in accordance with the terms thereof and Borrower shall have no further rights to request draws under the Letter of Credit. In such circumstances, the proceeds of any draw under the Letter of Credit by Lender shall be and remain the sole property of Lender and shall be applied by Lender[ to such purposes as Lender shall determine in its sole and absolute discretion.

6.3 Cash Deposit Account.

EXHIBIT A

a.

Deposits. Promptly upon receipt, Lender shall deposit any LC Proceeds into an account in the name of Lender, as pledgee of Borrower, established and maintained by Lender at Lender or Lender’s servicer (“Cash Deposit Account”). The Cash Deposit Account shall be under the sole control of Lender but subject to Borrower’s rights under this Section 6.3. Borrower acknowledges that the Cash Deposit Account shall be and remain “Collateral” under the Deed of Trust and shall be subject to the security interest granted by Borrower to Lender in Article 4 of the Deed of Trust. Upon any Default, Lender shall have the right, in addition to any other rights of Lender under the Loan Documents, to foreclose its security interest in the Cash Deposit Account and apply the sums in the Cash Deposit Account to the repayment of the indebtedness outstanding under this Note in such order as Lender shall determine. At any time and from time to time, promptly upon Lender’s request, Borrower shall execute such additional documents and instruments as Lender shall reasonably deem necessary or desirable for the purpose of confirming and perfecting Lender’s security interest in the Cash Deposit Account. The Cash Deposit Account will be interest bearing at the money market rate and the interest will be paid to the Borrower.

b.

Disbursements for Tenant Improvements. If no Default exists, Lender shall release amounts on deposit in Cash Deposit Account to pay or reimburse Borrower for the tenant improvements, brokerage commissions and other leasing costs that are incurred in connection with new tenants at the Property, provided, Lender shall have received and approved each of the following for each tenant for which such costs were incurred:

(i)	a fully executed lease (such lease and the tenant thereunder are subject to the prior written approval of Lender);
(ii)	Borrower’s written request for such release, stating the name, location and net rentable area of the tenant and a description and cost breakdown of the leasing costs or tenant improvements covered by the request;
(iii)	Borrower’s certification that the tenant improvements have been completed lien-free and in a workmanlike manner;
(iv)	an estoppel certificate executed by the tenant including its acknowledgment that all tenant improvements have been satisfactorily completed; and
(v)	such other information with respect to such costs as Lender may request.

c. Disbursements for Debt Service. If no Default exists, Lender shall release amounts on deposit in the Cash Deposit Account to pay the debt service on the Loan, to pay operating expenses or to be used as a consequence of the default under the Remec Lease or other matter that gave rise to the right to draw under the Letter of Credit, provided, that all of the following conditions are satisfied:

(i)	in the case of debt service, Borrower delivers a direction to Lender directing Lender to pay itself debt service on the Loan (the direction shall state the amount that Lender is to pay);
(ii)	in the case of operating expenses, Borrower delivers a direction to Lender directing Lender to disburse funds to Borrower for the payment of operating expenses (the direction shall state the amount to be disbursed and shall evidence to Lender’s satisfaction the amount of the operating expenses); and
(iii)	in the case of a consequence of a default or other matter under the Remec Lease, Borrower delivers a direction to Lender directing Lender to disburse funds to Borrower and describing the matter to which the funds are to be applied (the direction shall state the amount to be disbursed and shall evidence to Lender’s satisfaction the amount requested).

d. Disbursements Generally. With respect to the disbursements provided for in paragraphs (b) and (c) above (i) it shall be a condition to each disbursement that Lender is satisfied that Borrower has a right to use such funds under the terms of the Remec Lease, (ii) Lender shall not be obligated to make the requested disbursement until after all of the conditions have been satisfied, (iii) Lender shall receive a

non-refundable processing fee of $250 in connection with each request and (iv) Borrower shall have the right to no more than one (1) disbursement per month.

6.4

Transfer and Refund to Borrower. Promptly after the Loan is repaid in full (other than through judicial or nonjudicial foreclosure of the Deed of Trust or deed in lieu thereof), Lender shall surrender the Letter of Credit to Borrower and refund to Borrower all sums contained in the Cash Deposit Account. Additionally, upon a permitted transfer of the Property by Borrower, Lender shall cause the Cash Deposit Account to be transferred into the name of Lender, as pledgee for the transferee, provided Borrower and such transferee execute any documents reasonably requested by Lender with respect to such transfer of the Cash Deposit Account.

6.5

Sale or Transfer of the Property. If Borrower sells or otherwise transfers the Property (a) the Letter of Credit shall be assigned to Lender and Lender shall become the beneficiary thereunder and (b) the Loan Documents shall be modified accordingly to provide for the mechanism for drawings to be made under the Letter of Credit.

7.

PERMITTED TRANSFERS. Notwithstanding anything to the contrary contained in Section 6.15 of the Mortgage, any sale, exchange, transfer or conveyance of any direct or indirect ownership interests in DIAMANT INVESTMENTS LLC, a Delaware limited liability company or MENLO EQUITIES, INC., a California corporation shall be permitted and shall be freely transferable to immediate farrrily members or entities created for the benefit of such family members, for estate planning purposes so long as (a) MENLO EQUITIES LLC, a California limited liability company co!rtinues to be liable as guarantor under the Limited Guaranty of even date herewith and continues to be the managing member of the general partner of Borrower, and (b) MENLO EQUITIES, INC., a California corporation continues co be the sole managing member of MENLO EQUITIES LLC, a California limited liability company, and (c) Henry D. Bullock and/or his immediate family members or entities created for such family members for estate planning purposes continue to own 100% of MENLO EQUITIES, INC., a California corporation (“Permitted Transfer”). Borrower agrees that it shall provide to Lender a certificate in a form acceptable to Lender, signed and dated by Borrower, listing all the names of the parties holding an ownership interest in Borrower and the percentage interests held by each such party within 5 days after Lender’s written request for such information.

With respect to any Permitted Transfers the following conditions precedent must also be satisfied in addition to the requirements set forth above:

7.1	Lender’s receipt of at least 30 days’ prior written notice from Borrower of the proposed transfer together with documentation reasonably satisfactory to Lender regarding the ownership structure of the proposed transferee;
7.2	if required by Lender, the execution and delivery to Lender of such documents and instruments as Lender shall reasonably require, in form and substance reasonably satisfactory to Lender, including, without limitation, (i) an assumption agreement under which the transferee assumes all obligations and liabilities of Borrower under the Note and the other Loan Documents, and (ii) a consent to the Permitted Transfer by any existing guarantor and a reaffirmation of such guarantor’s obligations and liabilities under any guaranty made in connection with the Loan;
7.3	Lender’s receipt of a transfer fee in the amount of $500.00; and

reimbursement to Lender of any and all costs and expenses paid or incurred by Lender in connection with such transfer, including, without limitation, all in-house or outside counsel attorneys’ fees.

EXHIBIT A

EX-10.5

Exhibit 10.5

Recording Requested by and
when recorded return to:

WELLS FARGO BANK, N.A.
Commercial Mortgage Origination
MAC # A0194-093
45 Fremont Street, 9th Floor
San Francisco, California 94105

Attention: CMO Loan Admin.
Loan No. : 31-0900266A

DEED OF TRUST
and
ABSOLUTE ASSIGNMENT OF RENTS
AND LEASES
and
SECURITY AGREEMENT
(AND FIXTIURE FILING)

The parties to this DEED OF TRUST AND ABSOLUTE ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT (AND FIXTURE FILING) (“Deed of Trust”), dated as of De Cembe r 21, 2 0 0 0 are BARBER LANE ASSOCIATES L.P., a California limited partnership (“Trustor”), with a mailing address at 490 California Ave .4th Floor~Palo Alto_LCA 943 01, AMERICAN SECURITIES COMPANY, a California corporation (“Trustee”), with a mailing address at 1320 Willow Pass Road, Suite 205, Concord, California 94520, and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Beneficiary”), with a mailing address at 1320 Willow Pass Road, Suite 205, Concord, California 94520.

RECITALS

A. BARBER LANE ASSOCIATES L.P., a California limited partnership (“Borrower”) proposes to borrow from Beneficiary, and Beneficiary proposes to lend to Borrower the principal sum of EIGHT MILLION AND NO/100THS DOLLARS ($8,000,000.00) (“Loan”). The Loan is evidenced by a promissory note (“Note”) executed by Borrower, dated the date of this Deed of Trust, payable to the order of Beneficiary in the principal amount of the Loan. The maturity date of the loan is February 1, 201:L.

B. The loan documents include this Deed of Trust, the Note and the other documents described in the Note as Loan Documents (“Loan Documents”).

ARTICLE 1. DEED OF TRUST

1.1 GRANT. For the purposes of and upon the terms and conditions of this Deed of Trust, Trustor irrevocably grants, conveys and assigns to Trustee, in trust for the benefit of Beneficiary, with power of sale and right of

entry and possession, all cstatc, right, title and interest which Trustor now has or may hereafter acquire in, to, under or derived from any or all of the following:

a.	That real property (“Land”) located in Milpitas, county of Santa Clara, state of California, and more particularly described on Exhibit A attached hereto;
b.	All appurtenances, easements, rights of way, water and water rights, pumps, pipes, flumes and ditches and ditch rights, water stock, ditch and/or reservoir stock or interests, royalties, development rights and credits, air rights, minerals, oil rights, and gas rights, now or later used or useful in connection with, appurtenant to or related to the Land;
c.	All buildings, structures, facilities, other improvements and fixtures now or hereafter located on the Land;
d.	All apparatus, equipment, machinery and appliances and all accessions thereto and renewals and replacements thereof and substitutions therefor used in the operation or occupancy of the Land, it being intended by the parties that all such items shall be conclusively considered to be a part of the Land, whether or not attached or affixed to the Land;
e.	All land lying in the right-of-way of any street, road, avenue, alley or right-of-way opened, proposed or vacated, and all sidewalks, strips and gores of land adjacent to or used in connection with the Land;
f.	All additions and accretions to the property described above;
g.	All licenses, authorizations, certificates, variances, consents, approvals and other permits now or hereafter pertaining to the Land and all estate, right, title and interest of Trustor in, to, under or derived from all tradenames or business names relating to the Land or the present or future development, construction, operation or use of the Land; and
h.	All proceeds of any of the foregoing.

All of the property described above is hereinafter collectively defined as the “Property”. The listing of specific rights or property shall not be interpreted as a limitation of general terms.

ARTICLE 2. OBLIGATIONS SECURED

2.1 OBLIGATIONS SECURED. Trustor makes the foregoing grant and assignment for the purpose of securing the following obligations (“Secured Obligations”):

a.	Full and punctual payment to Beneficiary of all sums at any time owing under the Note;
b.	Payment and performance of all covenants and obligations of Trustor under this Deed of Trust including, without limitation, indemnification obligations and advances made to protect the Property;
c.	Payment and performance of all additional covenants and obligations of Borrower and Trustor under the Loan Documents;
d.	Payment and performance of all covenants and obligations, if any, which any rider attached as an exhibit to this Deed of Trust recites are secured hereby;
e.	Payment and performance of all future advances and other obligations that the then record owner of all or part of the Property may agree to pay and/or perform (whether as principal, surety or guarantor) for

	the benefit of Beneficiary, when the obligation is evidenced by a writing which recites that it is secured by this Deed of Trust;
f.	All interest and charges on all obligations secured hereby including, without ltation, prepayment charges, late charges and loan fees; and
g.	All modifications, extensions and renewals of any of the obligations secured hereby, however evidenced, including, without limitation: (i) modifications of the required principal payment dates or interest payment dates or both, as the case may be, deferring or accelerating payment dates wholly or partly; and (ii) modifications, extensions or renewals at a different rate of interest whether or not any such modification, extension or renewal is evidenced by a new or additional promissory note or notes.

2.2 OBLIGATIONS. The term “obligations” is used herein in its broadest and most comprehensive sense and shall be deemed to include, without limitation, all interest and charges, prepayment charges, late charges and loan fees at any time accruing or assessed on any of the Secured Obligations.

2.3 INCORPORATION. All terms and conditions of the documents which evidence any of the Secured Obligations are incorporated herein by this reference. All perso::rs who may have or acquire an interest in the Property shall be deemed to have notice of the terms of the Secured Obligations and to have notice that the rate of interest on one or more Secured Obligation may vary from time to time.

ARTICLE 3. ABSOLUTE ASSIGNMENT OF RENTS AND LEASES

3.1 ASSIGNMENT. Trustor irrevocably assigns to Beneficiary all of Trustor’s right, title and interest in, to and under: (a) all present and future leases of the Property or any portion thereof, all licenses and agreements relating to the management, leasing or operation of the Property or any portion thereof, and all other agreements of any kind relating to the use or occupancy of the Property or any portion thereof, whether such leases, licenses and agreements are now existing or entered into after the date hereof (“Leases”); and (b) the rents, issues, deposits and profits of the Property, including, without limitation, all amounts payable and all rights and benefits accruing to Trustor under the Leases (“Payn:.ents”). The term “Leases” shall also include all guarantees of and security for the tenants^‘ performance thereunder, and all amendments, extensions, renewals or modifications thereto which are permitted hereunder. This is a present and absolute assignment, not an assignment for security purposes only, and Beneficiary’s right to the Leases and Payments is not contingent upon, and may be exercised without possession of, the Property.

3.2 GRANT OF LICENSE. Notwithstanding anything to the contrary in this Deed of Trust, Beneficiary confers upon Trustor a revocable license (^"License^") to collect and retain the Payments as they become due and payable and to exercise and enjoy all of its benefits and privileges of landlord under the Lease(s), until the occurrence of a Default (as hereinafter defined). Upon a Default, the License shall be automatically revoked and Beneficiary may collect and apply the Payments pursuant to the terms hereof without notice and without taking possession of the Property. Upon Tmstors cure of the Default, Beneficiary shall re-confer, upon Trustor a revocable license to collect and retain the Payments as they become due and payable, until the occurrence of a Default (as herein defined). All Payments thereafter collected by Tmstor shall be held by Trustor as trustee under a constructive trust for the benefit of Beneficiary. Trustor hereby irrevocably authorizes and directs the tenants under the Leases to rely upon and comply with any notice or demand by Beneficiary for the payment to Beneficiary of any rental or other sums which may at any time become due under the Leases, or for the performance of any of the tenants^‘ undertakings under the Leases, and the tenants shall have no right or duty to inquire as to whether any Default has actually occurred or is then existing. Trustor hereby relieves the tenants from any liability to Trustor by reason of relying upon and complying with any such notice or demand by Beneficiary. Beneficiary may apply, in its sole discretion, any Payments so collected by Beneficiary against any Secured Obligation or any other obligation of Borrower, Trustor or any other person or entity, under any document or instrument related to or executed in cormection with the Loan Documents, whether existing on the date hereof or hereafter

arising. Collection of any Payments by Beneficiary shall not cure or waive any Default or notice of Default or invalidate any acts done pursuant to such notice.

3.3

EFFECT OF ASSIGNMENT. The foregoing irrevocable assignment shall not cause Beneficiary to be: (a) a mortgagee in possession; (b) responsible or liable for the control, care, management or repair of the Property or for performing any of the terms, agreements, undertakings, obligations, representations, warranties, covenants and conditions of the Leases; (c) responsible or liable for any waste committed on the Property by the tenants under any of the Leases or by any other parties; for any dangerous or defective condition of the Property; or for any negligence in the management, upkeep, repair or control of the Property resulting in loss or injury or death to any tenant, licensee, employee, invitee or other person; or (d) responsible for or impose upon Beneficiary any duty to produce rents or profits. Except for the gross negligence or willfull misconduct of Beneficiary, Beneficiary shall not directly or indirectly be liable to Trustor or any other person as a consequence of: (e) the exercise or failure to exercise any of the rights, remedies or powers granted to Beneficiary hereunder; or (f) the failure or refusal of Beneficiary to perform or discharge any obligation, duty or liability of Trustor arising under the Leases.

3.4 COVENANTS-LONG TERM LEASES.

a. All Leases. Trusto.r shall, at Trustor’s sole cost and expense:

(i)	perform all obligations of the landlord under the Leases and use reasonable efforts to enforce performance by the tenants of all obligations of the tenants under the Leases;
(ii)	use reasonable efforts to keep the Property leased at all times to tenants which Trustor reasonably and in good faith believes are creditworthy at rents not less than the fair market rental value (including, but not limited to, free or discounted rents to the extent the market so requires);
(iii)	promptly upon Beneficiary’s request, deliver to Beneficiary a copy of each requested Lease and all amendments thereto and waivers thereof; and
(iv)	promptly upon Beneficiary’s request, execute and record any additional assignments of landlord’s interest under any Lease to Beneficiary and specific subordination of any Lease to this Deed of Trust, in form and substance satisfactory to Beneficiary.

Unless consented to in writing by Beneficiary or otherwise permitted under any other provision of the Loan Documents, Tmstor shall not:

(v)	grant any tenant under any Lease any option, right of first refusal or other right to purchase all or any portion of the Property under any circumstances;
(vi)	grant any tenant under any Lease any right to prepay rent more than I month in advance;
(vii)	except upon Beneficiary’s request, execute any assignment of landlord’s interest in any Lease; or
(viii)	collect rent or other sums due under any Lease in advance, other than to collect rent 1 month in advance of the time when it becomes due.

Any such attempted action in violation of the provisions of this Section shall be null and void.

Trustor shall deposit with Beneficiary to be held by Beneficiary in an interest-bearing account for the benefit of Trustor any sums received by Trustor in consideration of any termination, modification or amendment of any Lease or any release or discharge of any tenant under any Lease from any obligation thereunder and any such sums received by Trustor shall be held in trust by Trustor for such purpose.

Notwithstanding the foregoing, so long as no Default exists, the portion of any such sum received by Trustor with respect to any Lease which is less than $50,000 shall be payable to Trustor. All such sums received by Beneficiary with respect to any Lease shall be deemed “Impounds” (as defined in Section 6.12b) and shall be deposited by Beneficiary into a pledged account in accordance with Section 6.12b. If no Default exists, Beneficiary shall release such Impounds to Trustor once a month as necessary to pay or reimburse Trustor for such tenant improvements, brokerage commissions and other leasing costs as may be required to re-tenant the affected space; provided, however, Beneficiary shall have received and approved each of the following for each tenant for which such costs were incurred; (1) Trustor’s written request for such release, including the name of the tenant, the location and net rentable area of the space and a description and cost breakdown of the tenant improvements or other leasing costs covered by the request; (2) Trustor’s certification that any portions of the tenant improvements or the portions requested have been completed lien-free and in a workmanlike manner; (3) a fully executed Lease, or extension or :renewal of the current Lease; (4) upon the final disbursement an estoppel certificate executed by the tenant including its acknowledgement that all tenant improvements have been satisfactorily completed; and (5) such other information with respect to such costs as Beneficiary may require. Following the re-tenanting of all affected space (including, without limitation, the completion of all tenant improvements), and provided no Default exists, Beneficiary shall release any remaining such Impounds relating to the affec ted space to Trustor. Tmstor shall construct all tenant improvements in a workmanlike manner and in accordance with all applicable laws, ordinances, rules and regulations.

b. Manor Leases. Trustor shall, at Trustor’s sole cost and expense, give Beneficiary prompt written notice of any material default by landlord or tenant under any Major Lease (as defined below). Unless consented to in writing by Beneficiary or otherwise permitted under any other provision of the Loan Documents, Trustor shall not:

(i)	enter into any Major Lease which (aa) is not on fair market terms (which terms may include free or discounted rent to the extent the market so requires); (bb) does not contain a provision requiring the tenant to execute and deliver to the landlord an estoppel certificate in form and substance satisfactory to the landlord promptly upon the landlord’s request; or (cc) allows the tenant to assign or sublet the premises without the landlord’s consent;
(ii)	reduce any rent or other sums due from the tenant under any Major Lease;
(iii)	ternunate or materially modify or amend any Major Lease; or
(iv)	release or discharge the tenant or any guarantor under any Major Lease from any material obligation thereunder.

Any such attempted action in violation of the provisions of this Section shall be null and void.

“Major Lease”, as used herein, shall mean any Lease, which is, at any time: (1) a Lease of more than 20% of the total rentable area of the Property, as reasonably determined by Beneficiary; or (2) a Lease which generates a gross base monthly rent exceeding 20% of the total gross base monthly rent generated by all Leases (excluding all Leases under which the tenant: is then in default), as reasonably determined by Beneficiary. Trustor’s obligations with respect to Major Leases shall be governed by the provisions of Section 3.4a as well as by the provisions of this Section.

c. Failure to Deny Request. Beneficiary’s failure to deny any written request by Trustor for Beneficiary’s consent under the provisions of Sections 3.4a or 3.4b within 10 Business Days after Beneficiary’s receipt of such request (and all documents and information reasonably related thereto) shall be deemed to constitute Beneficiary’s consent to such request.

3.5

ESTOPPEL CERTIFICATES. Within 30 days after request by Beneficiary, Trustor shall deliver to Beneficiary and to any party designated by Beneficiary, estoppel certificates relating to the Leases executed by Trustor and by each of the tenants, in form and substance acceptable to Beneficiary; provided, however, if any tenant shall fail or refuse to so execute and deliver any such estoppel certificate upon request, Trustor shall use reasonable efforts to cause such tenant to execute and deliver such estoppel certificate but such tenant’s continued failure or refusal to do so, despite T:rustor-’s reasonable efforts, shall not constitute a default by Trustor under this Section.

3.6

RIGHT OF SUBORDINATION. Beneficiary may at any time and from time to time by specific written instrument intended for the purpose unilaterally subordinate the lien of this Deed of Trust to any Lease, without joinder or consent of, or notice to, Tmstor, any tenant or any other person. Notice is hereby given to each tenant under a Lease of such right to subordinate. No subordination referred to in this Section shall constitute a subordination to any lien or other encumbrance, whenever arising, or improve the right of any junior lienholder. Nothing herein shall be construed as subordinating this Deed of Trust to any Lease.

ARTICLE 4. SECURITY AGREEMENT AND FIXTURE FILING

4.1 SECURITY INTEREST. Trustor grants and assigns to Beneficiary a security interest to secure payment and performance of all of the Secured Obligations, in all of the following described personal property in which Trustor now or at any time hereafter has any interest (“Collateral”):

All goods, building and other materials, supplies, work in process, equipment, machinery, fixtures, furniture, furnishings, signs and other personal property, wherever situated, which are or are to be incorporated into, used in connection with or appropriated for use on the Property; all rents, issues, deposits and profits of the Property (to the extent, if any, they are not subject to the Absolute Assignment of Rents and Leases); all inventory, accounts, cash receipts, deposit accounts, impounds, accounts receivable, contract rights, general intangibles, chattel paper, instruments, documents, notes, drafts, letters of credit, insurance policies, insurance and condemnation awards and proceeds, any other rights to the payment of money, trade names, trademarks and service marks arising from or related to the Property or any business now or hereafter conducted thereon by Trustor; all permits, consents, approvals, licenses, authorizations and other rights granted by, given by or obtained from, any governmental entity with respect to the Property; al.[ deposits or other security now or hereafter made with or given to utility companies by Trustor with respect to the Property; all advance payments of insurance premiums made by Trustor with respect to the Property; all plans, drawings and specifications relating to the Property; all loan funds held by Beneficiary, whether or not disbursed; all funds deposited with Beneficiary pursuant to any Loan Document, all reserves, deferred payments, deposits, accounts, refunds, cost savings and payments of any kind related to the Property or any portion thereof, including, without limitation, all “Impounds” as defined herein; together with all replacements and proceeds of, and additions and accessions to, any of the foregoing, and all books, records and files relating to any of the foregoing.

As to all of the above described personal property which is or which hereafter becomes a “fixture” under applicable law, this Deed of Trust constitutes a fixture filing under the California Uniform Commercial Code, as amended or recodified from time to time (“UCC”).

4.2 RIGHTS OF BENEFICIARY. In addition to Beneficiary’s rights as a “Secured Party” under the UCC, Beneficiary may, but shall not be obligated to, at any time without notice and at the expense of Trustor:

(a) give notice to any person of Beneficiary^‘s rights hereunder and enforce such rights at law or in equity;

(b) insure, protect, defend and preserve the Collateral or any rights or interests of Beneficiary therein; and

(c) inspect the Collateral. Notwithstanding the above, in no event shall Beneficiary be deemed to have accepted any property other than cash in satisfaction of any obligation of Trustor to Beneficiary unless Beneficiary shall make an express written election of said remedy under the UCC or other applicable law.

4.3 ADDITIONAL RIGHTS OF BENEFICIARY UPON DEFAULT. Upon the occurrence of a Default hereunder, then in addition to all of Beneficiary’s rights as a “Secured Party” under the UCC or otherwise at law:

a.

Sale of Collateral. Beneficiary may: (i) upon written notice, require Trustor to assemble any or all of the Collateral and make it available to Beneficiary at a place designated by Beneficiary; (ii) without prior notice, enter upon the Property or other place where any of the Collateral may be located and take possession of, collect, sell and dispose of any or all of the Collateral, and store the same at locations acceptable to Beneficiary at Trustor’s expense; or (iii) sell, assign and deliver at any place or in any lawful manner all or any part of the Collateral and bid and become purchaser at any such sales; and

b.

Other Rights. Beneficiary may, for the account of Trustor and at Trustor‘s expense: (i) operate, use, consume, sell or dispose of the Collateral as Beneficiary deems appropriate for the purpose of performing any or all of the Secured Obligations; (ii) enter into any agreement, compromise or settlement including insurance claims, which Beneficiary may deem desirable or proper with respect to any of the Collateral; and (iii) endorse and deliver evidences of title for, and receive, enforce and collect by legal action or otherwise, all indebtedness and obligations now or hereafter owing to Trustor in connection with or on account of any or all of the Collateral.

Trustor acknowledges and agrees that a disposition of the Collateral in accordance with Beneficiary’s rights and remedies as heretofore provided is a disposition thereof in a commercially reasonable manner and that 5 days prior notice of such disposition is commercially reasonable notice. Tmstor further agrees that any sale or other disposition of all or any portion of the Collateral may be applied by Beneficiary first to the reasonable expenses in connection therewith, including reasonable attorneys’ fees and disbursements, and then to the payment of the Secured Obligations.

4.4 POWER OF ATTORNEY. Trustor hereby irrevocably appoints Beneficiary as Trustor’s attorney-in-fact (such agency being coupled with an interest), and as such attorney-in-fact, Beneficiary may, without the obligation to do so, in Beneficiary’s name or in the name of Trus tor, but prior to a Default only if Tmstor fails to do so within ten (10) days after written notice from Beneficiary prepare, execute, file and record financing statements, continuation statements, applications for registration and like papers necessary to create, perfect or preserve any of Beneficiary’s security interests and rights in or to any of the Collateral, and upon a Default hereunder, take any other action required of Trustor; provided, however, that Beneficiary as such attorney-infact shall be accountable only for such funds as are actually received by Beneficiary.

ARTICLE 5. REPRESENTATIONS AND WARRANTIES

5.1 REPRESENTATIONS AND WARRANTIES. Tmstor represents and warrants to Beneficiary that, to Tmstor’s current actual knowledge after reasonable investigation and inquiry, the following statements are true and correct as of the Effective Date:

a.	Legal Status. Tmstor and Borrower are duly organized and existing and in good standing under the laws of the state(s) in which Trustor and Borrower are organized. Tmstor and Borrower are qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required.
b.	Permits. Trustor and Borrower possess all permits, franchises and licenses and all rights to all trademarks, trade names, patents and fictitious names, if any, necessary to enable Trustor and Borrower to conduct the business(es) in which Trustor and Borrower are now engaged in compliance with applicable law.

c.	Authorization and Validity. The execution and delivery of the Loan Documents have been duly authorized and the Loan Documents constitute valid and binding obligations of Trustor, Borrower or the party which executed the same, enforceable in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other laws affecting the enforcement of creditors’ rights, or by the application of rr les of equity.
d.	Violations. The execution, delivery and performance b y Trustor and Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or result in any breach or default under any contract, obligation, indenture or other instrument to which Trustor or Borrower is a party or by which Trustor or Borrower is bound.
e.	Litigation. There are no pending or threatened actions, claims, investigations, suits or proceedings before any governmental authority, court or administrative agency which may adversely affect the financial condition or operations of Trustor or Borrower other than those previously disclosed in writing by Tmstor or Borrower to Beneficiary.
f.	Financial Statements. The fmancial statements of Trustor and Borrower, of each general partner (if Trustor or Borrower is a partnership), of each member (if Trustor or Borrower is a limited liability company) and of each guarantor, if any, previously delivered by Trustor or Borrower to Beneficiary: (i) are materially complete and correct; (ii) present fairly the fmancial condition of such party; and (iii) have been prepared in accordance with the same accounting standard used by Trustor or Borrower to prepare the financial statements delivered to and approved by Beneficiary in connection with the making of the Loan, or other accounting standards approved by Beneficiary. Since the date of such financial statements, there has been no material adverse change in such financial condition, nor have any assets or properties reflected on such financial statements been sold, transferred, assigned, mortgaged, pledged or encumbered except as previously disclosed in writing by Trustor or Borrower to Beneficiary and approved in writing by Beneficiary.
g.	Reports. All reporl:s, documents, instruments and information delivered to Beneficiary in connection with the Loan: (i) are materially correct and sufficiently complete to give Beneficiary accurate knowledge of their subject matter; and (ii) do not contain any misrepresentation of a material fact or omission of a material fact which omission makes the provided information misleading.
h.	Income Taxes. There are no pending assessments or adjustments of Trustor’s or Borrower’s income tax payable with respect to any year.
	Subordination. There is no agreement or instrument to which Borrower is a party or by which Borrower is bound that would require the subordination in right of payment of any of Borrower’s obligations under the Note to an obligation owed to another party.
	Title. Trustor lawfully holds and possesses fee simple title to the Property, without limitation on the right to encumber same. This Deed of Trust is a first lien on the Property prior and superior to all other liens and encumbrances on the Property except: (i) liens for real estate taxes and assessments not yet due and payable; (ii.) senior exceptions previously approved by Beneficiary and shown in the title insurance policy insuring the lien of this Deed of Trust; and (iii) other matters, if any, previously disclosed to Beneficiary by Trustor in a writing specifically referring to this representation and warranty.
k.	Mechanics’ Liens. There are no mechanics’ or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under law could give rise to any such liens) affecting the Property which are or maybe prior to or equal to the lien of this Deed of Trust.

1. Encroachments. Except as shown in the survey, if any, previously delivered to Beneficiary, none of the buildings or other improvements which were included for the purpose of determining the appraised

value of the Property lies outside of the boundaries or building restriction lines of the Property and no buildings or other improvements located on adjoining properties encroach upon the Property.

m.	Leases. All existing Leases are in full force and effect and are enforceable in accordance with their respective terms. No material breach or default by any party, or event which would constitute a material breach or default by any party after notice or the passa,,e of time, or both, exists under any existing Lease. None of the landlord’s interests under any of the Leases, including, but not limited to, rents, additional rents, charges, issues or profits, has been transferred or assigned. No rent or other payment under any existing Lease has been paid by any tenant for more than 1 month in advance.
n.	Collateral. Trustor has good title to the existing Collateral, free and clear of all liens and encumbrances except those, if any, previously disclosed to Beneficiary by Trustor in writing specifically referring to this representation and warranty. Trustor’s principal place of business is located at the address shown in this Deed of Trust.
o.	Condition of Propt. Except as shown in the property condition survey or other engineering reports, if any, previously delivered to or obtained by Beneficiary, the Property is in good condition and repair and is free from any damage that would materially and adversely affect the value of the Property as security for the Loan or the intended use of the Property.
P.	Hazardous Materials. Except as shown in the enviromnental assessment report(s), if any, previously delivered to or obtained by Beneficiary, the Property is not and has not been a site for the use, generation, manufacture, storage, treatment, release, threatened release, discharge, disposal, transportation or presence of Hazardous Materials (as hereinafter defined) except as otherwise previously disclosed in writing by Tmstor to Beneficiary.
q.	Hazardous Materials Laws. The Property complies with all Hazardous Materials Laws (as hereinafter defined).
r.	Hazardous Materials Claims. Trustor has received no notice of any pending or threatened Hazardous Materials Claims (as hereinafter defined).
s.	Wetlands. Except as previously disclosed to Beneficiary, no part of the Property consists of or is classified as wetlands, tidelands or swamp and overflow lands.
t.	Compliance With ]Laws. All federal, state and local laws, rules and regulations applicable to the Property, including, without limitation, all zoning and building requirements and all requirements of the Americans With Disabilities Act of 1990, as amended fro:n time to time (42 U. S. C. Section 12101 et seq.) have been satisfied or complied with. Trustor is in possession of all certificates of occupancy and all other licenses, permits and other authorizations required by applicable law for the existing use of the Property. All such certificates of occupancy and other licenses, permits and authorizations are valid and in full force and effect.
u.	Property Taxes and Other Liabilities. All taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, and ground rents, if any, which previously became due and owing in respect of the Property have been paid.
v.	Condemnation. There is no proceeding pending or threatened for the total or partial condemnation of the Property.
w.	Homestead. There is no homestead or other exemption available to Trustor which would materially interfere with the right to sell the Property at a trustee’s sale or the right to foreclose this Deed of Trust.

x.

Solvency. None of the transactions contemplated by the Loan will be or have been made with an actual intent to hinder, delay or defraud any present or future creditors of Trustor, and Trustor, on the Effective Date, will have received fair and reasonably equivalent value in good faith for the grant of the liens or security interests effected by the Loan Documents. On the Effective Date, Trustor will be solvent and will not be rendered insolvent by the transactions contemplated by the Loan Documents. Trustor is able to pay its debts as they become due.

Y.

Separate Tax Parcel(s). The Property is assessed for the real estate tax purposes as one or more wholly independent tax parcels, separate from any other real property, and no other real property is assessed and taxed together with the Property or any portion thereof.

5.2 REPRESENTATIONS, WARRANTIES AND COVENANTS_, REGARDING STATUS (LEVEL II SPE). Trustor hereby represents, warrants and covenants to Beneficiary as follows:

a.	such entity was organized solely for the purpose of owning the Property;
b.	such entity will not engage in any business unrelated to the ownership of the Property;
c.	such entity will not have any assets other than the Property (and personal property incidental to the ownership and operation of the Property);
d.	such entity has not and will not engage in, seek or consent to any dissolution, winding up, liquidation, consolidation, merger, asset sale, or amendment of its articles of incorporation, articles of organization, certificate of formation, operating agreement or limited partnership agreement, as applicable;
e.	such entity, without the unanimous consent of all of its directors, general partners or members, as applicable, shall not file or consent to the filing of any bankruptcy or insolvency petition or otherwise institute insolvency proceedings;
f.	such entity has no indebtedness (and will have no indebtedness) other than (i) the Loan; and (ii) unsecured trade debt which is not evidenced by a note and is incurred in the ordinary course of Trustor’s business in connection with owning, operating and maintaining the Property and is paid within thirty (30) days from the date incurred;
g.	such entity has not and will not fail to correct any known misunderstanding regarding the separate identity of such entity;
h.	such entity has maintained and will maintain its accounts, books and records separate from any other person or entity;
	such entity has maintained and will maintain its books, records, resolutions and agreements as official records;
J.	such entity (i) has not and will not commingle its funds or assets with those of any other entity; and (ii) has held and will hold its assets in its own name;
k.	such entity has conducted and will conduct its business in its own name;
1.	such entity has maintained and will maintain its accounting records and other entity documents separate from any other person or entity;

m.	such entity has prepared and will prepare separate tax returns and financial statements, or if part of a consolidated group., is shown as a separate member of such group;
n.	such entity has paid and will pay its own liabilities and expenses out of its own funds and assets;
o.	such entity has held and will hold regular meetings, as appropriate, to conducts its business and has observed and will observe all corporate., partnership or limited liability company formalities and record keeping, as applicable;
p.	such entity has not and will not assume or guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of any other entity;
q.	such entity has not and will not acquire obligations or securities of its shareholders, partners or members, as applicable;
r.	such entity has allocated and will allocate fairly and reasonably the costs associated with common employees and any overhead for shared office space and such entity has used and will use separate stationery, invoices and checks;
s.	such entity has not and will not pledge its assets for the benefit of any other person or entity;
t.	such entity has held and identified itself and will hold itself out and identify itself as a separate and distinct entity under its own name and not as a division or part of any other person or entity;
u.	such entity has not made and will not make loans to any person or entity;
v.	such entity has not and will not identify its shareholders, partners or members, as applicable, or any affiliates of any of the foregoing, as a division or part of it;
w.	such entity has not entered into and will not enter into or be a party to, any transaction with its shareholders, partners or members, as applicable, or any affiliates of any of the foregoing, except in the ordinary course of its business pursuant to written agreements and on terms which are intrinsically fair and are no less favorable to it than would be obtained in a comparable arm’s-length transaction with an unrelated third party;
x.	if any such entity is a corporation, the directors of such entity shall consider the interests of the creditors of such entity in connection with all corporate action;
y.	such entity has paid and will pay the salaries of its oven employees and has maintained and will maintain a sufficient number of employees in light of its contemplated business operations;
z.	such entity has maintained and will maintain adequate capital in light of its contemplated business operations;
aa.	if any such entity is a limited partnership with more than one general partner, its limited partnership agreement requires the remaining partners to continue the partnership as long as one solvent general partner exists; and
bb.	if any such entity is a limited liability company, its operating agreement, if any such entity is a limited partnership, its limited partnership agreement and if any such entity is a corporation, to the fullest extent permitted by applicable law, its articles of incorporation, contain the provisions set forth in this Section 5.2 and such entity shall conduct its business and operations in strict compliance with the terms contained therein.

ART][CLE 6. RIGHTS AND DUTIES OF THE PARTIES

6.1 MAINTENANCE AND ;PRESERVATION OF THE PROPERTY. Trustor shall: (a) keep the Property in good condition and repair; (b) complete or restore promptly and in workmanlike manner the Property or any part thereof which may be damaged or destroyed (unless, if and to the extent permitted under Section 6.11, Beneficiary elects to require that insurance proceeds be used to reduce the Secured Obligations and after such repayment the ratio of Secured Obligations to the value of the Property, as reasonably determined by Beneficiary is the same as or flower than it was immediately before the loss or taking occurred); (c) comply and cause the Property to comply with (i) all laws, ordinances, regulations and standards, (ii) all covenants, conditions, restrictions and equitable servitudes, whether public or private, of every kind and character and (iii) all requirements of insurance companies and any bureau or agency which establishes standards of insurability, which laws, covenants or requirements affect the Property and pertain to acts committed or conditions existing thereon, including, without limitation, any work of alteration, improvement or demolition as such laws, covenants or requirements mandate; (d) operate and manage the Property at all times in a professional manner and do all other acts which from the character or use of the Property may be reasonably necessary to maintain and preserve its value; (e) promptly after execution, deliver to Beneficiary a copy of any management agreement concerning the Property and all amendments thereto and waivers thereof; and (f) execute and acknowledge all further documents, instruments and other papers as Beneficiary or Trustee deems necessary or appropriate to preserve, continue, perfect and enjoy the benefits of this Deed of Trust and perform Trustor’s obligations,, including, without limitation, statements of the amount secured hereby then owing and statements of no offset. Trustor shall not: (g) remove or demolish all or any material part of the Property; (h) alter either (i) the exterior of the Property in a manner which materially and adversely affects the value of the Property or (ii) the roof or other structural elements of the Property in a manner which requires a building permit except for tenant improvements required under the Leases; (i) initiate or acquiesce in any change in any zoning or other land classification which affects the Property; (j) materially alter the type of occupancy or use of all or any part of the Property; or (k) commit or permit waste of the Property.

6.2 HAZARDOUS MATERIALS. Without limiting any other provision of this Deed of Trust, Trustor agrees as follows:

a.	Prohibited Activities. Trustor shall not cause or permit: the Property to be used as a site for the use, generation, manufacture, storage, treatment, release, discharge, disposal, transportation or presence of any oil or other petroleum products, flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, hazardous wastes, toxic or contaminated substances or similar materials, including, without limitation, any substances which are “hazardous substances,” “hazardous wastes,” “hazardous materials” or “toxic substances” under the :Hazardous Materials Laws (defined below) and/or other applicable environmental laws, ordinances or regulations (“Hazardous Materials”).
	The foregoing to the contrary notwithstanding, (i) Ttustor may store, maintain and use on the Property janitorial and maintenance supplies, paint and other Hazardous Materials of a type and in a quantity readily available for ;purchase by the general public and normally stored, maintained and used by owners and managers of properties of a type similar to the Property; and (ii) tenants of the Property may store, maintain and use on the Property (and, if any tenant is a retail business, hold in inventory and sell in the ordinary course of such tenant‘s business) Hazardous Materials of a type and quantity readily available for purchase by the general public and normally stored, maintained and used (and, if tenant is a retail business, sold) by tenants in similar lines of business an properties similar to the Property or as otherwise permitted under the subject lease.
b.	Hazardous Materials Laws. Trustor shall comply and cause the Property to comply with all federal, state and local laws, ordinances and regulations relating to Hazardous Materials (“Hazardous

Materials Laws”), including, without limitation: the Clean Air Act, as amended, 42 U.S.C. Section 7401 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq.; the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 et seq.; the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (including the Superfund Amendments and Reauthori:i:ation Act of 1986, “CERCLA”), 42 U.S.C. Section 9601 et seq.; the Toxic Substances Control Act, as amended, 15 U.S.C. Section 2601 et seq.; the Occupational Safety and Health Act, as amended, 29 U.S.C. Section 651; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 et seq.; the Mine Safety and Health Act of 1977, as amended, 30 U.S.C. Section 801 et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; and all comparable state and local laws, laws of other jurisdictions or orders and regulations, except to the extent such compliance is modified or excused in writing by the relevant government authority to the reasonable satisfaction of the Beneficiary.

c.	Notices. Trustor shall immediately notify Beneficiary in writing of (i) the discovery of any Hazardous Materials on, under or about the Property (other than Hazardous Materials permitted under Section 6.2(a)); (ii) any knowledge by Trustor that the Property does not comply with any Hazardous Materials Laws; (iii) any claims or actions (“Hazardous Materials Claims”) pending or threatened against Trustor or I:he Property by any governmental entity or agency or any other person or entity relating to Hazardous Materials or pursuant to the Hazardous Materials Laws; and (iv) the discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Property that could cause the Property or any part thereof to become contaminated with Hazardous Materials.
d.	Remedial Action. In response to the presence of any Hazardous Materials on, under or about the Property, Trustor shall immediately take, at Trustor’s sole expense, all remedial action required by any Hazardous Materials Laws or any judgment, consent decree, settlement or compromise in respect to any Hazardous Materials Claims.
e.	Inspection By Beneficiary. Upon reasonable prior notice to Trustor, Beneficiary, its employees and agents, may from time to time (whether before or after the commencement of a nonjudicial or judicial foreclosure proceeding), enter and inspect the Property for the purpose of determining the existence, location, nature and magnitude of any past or present release or threatened release of any Hazardous Materials into, onto, beneath or from the Property.
f.	Legal Effect of Section. Trustor and Beneficiary agree that: (i) this Hazardous Materials Section is intended as Beneficiary’s written request for informati:an (and Trustor’s response) concerning the environmental condition of the real property security as required by California Code of Civil Procedure Section 726.5; and (:ii) each representation and warranty and covenant in this Section (together with any indemnity applicable to a breach of any such representation and warranty) with respect to the environmental condition of the Property is intended by Beneficiary and Trustor to be an "environmental provision" for purposes of California Code of Civil Procedure Section 736.

6.3 COMPLIANCE WITH LAWS. Trustor shall comply with all federal, state and local laws, rules and regulations applicable to the Property, including, without limitation, all zoning and building requirements and all requirements of the Americans With Disabilities Act of 1990. (42 U.S.C. Section 12101 et seq.), as amended from time to time. Trustor shall possess and maintain or cause Borrower to possess and maintain in full force and effect at all times (a) all certificates of occupancy and other licenses, permits and authorizations required by applicable law for the existing use of the Property and (b) all permits, franchises and licenses and all rights to all trademarks, trade names, patents and fictitious names, if any, required by applicable law for Trustor and Borrower to conduct the business(es) in which Trustor and Borrower are now engaged.

6.4	LITIGATION. Trustor shall promptly notify Beneficiary in writing of any litigation pending or threatened against Trustor or Borrower claiming damages in excess of $50,000 and of all pending or threatened litigation against Trustor or Borrower if the aggregate damage claims against Trustor or Borrower exceed $100,000.
6.5	MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Trustor shall not: (a) merge or consolidate with any other entity or permit Borrower to merge or consolidate with any other entity; (b) make any substantial change in the nature of Trustor’s business or structure or permit Borrower to make any substantial change in the nature of Borrower’s business or structure; (c) acquire all or substantially all of the assets of any other entity or permit Borrower to acquire all or substantially all of the assets of any other entity; or (d) sell, lease, assign, transfer or otherwise dispose of a material part of Trustor’s assets except in the ordinary course of Trustor’s business or permit Borrower to sell, lease, assign, transfer or otherwise dispose of a material part of Borrower’s assets except in the ordinary course of Borrower’s business.
6.6	ACCOUNTING RECORDS. Trustor shall maintain and cause Borrower to maintain adequate books and records in accordance with the same accounting standard used by Trustor or Borrower to prepare the financial statements delivered to and approved by Beneficiary in connection with the making of the Loan or other accounting standards approved by Beneficiary. Trustor shall permit and shall cause Borrower to permit any representative of Beneficiary, at any reasonable tirne and from time to time, to inspect, audit and examine such books and records and make copies of same.
6.7	COSTS, EXPENSES AND ATTORNEYS’ FEES. Trustor shall pay to Beneficiary the full amount of all costs and expenses, including, without limitation, reasonable attorneys’ fees and expenses of Beneficiary’s in-house or outside counsel, incurred by Beneficiary in connection with: (a) appraisals and inspections of the Property or Collateral required by Beneficiary as a result of (i) a Transfer or proposed Transfer (as defined below), or (ii) a Default; (b) appraisals and inspections of the Property or Collateral required by applicable law, including, without limitation, federal or state regulatory reporting requirements; and (c) any acts performed by Beneficiary at Trustor’s request or wholly or partially for the benefit of Trustor (including, without limitation, the preparation or review of amendments, assumptions, waivers, releases, reconveyances, estoppel certificates or statements of amounts owing under any Secured Obligation). In connection with appraisals and inspections, Trustor specifically (but not by way of limitation) acknowledges that: (aa) a formal written appraisal of the Property by a state certified or licensed appraiser may be required by federal regulatory reporting requirements on an annual or more frequent basis; and (bb) Beneficiary may require inspection of the Property by an independent supervising architect, a cost engineering specialist, or both. Trustor shall pay all indebtedness arising under this Section immediately upon demand by Beneficiary together with interest thereon following notice of such indebtedness at the rate of interest then applicable to the principal balance of the Note as specified therein.
6.8	LIENS, ENCUMBRANCES AND CHARGES. Trustor shall immediately discharge by bonding or otherwise any lien, charge or other encumbrance which attaches to the Prcperty in violation of Section 6.15. Subject to Trustor’s right to contest such matters under this Deed of Trust or as expressly petted in the Loan Documents, Trustor shall pay when due all obligations secured by or reducible to liens and encumbrances which shall now or hereafter encumber or appear to encumber all or any part of the Property or any interest therein, whether senior or subordinate hereto, including, without limitation, all claims for work or labor performed, or materials or supplies furnished, in connection with any work of demolition, alteration, repair, improvement or construction of or upon the Property, except such. as Trustor may in good faith contest or as to which a bona fide dispute may arise (provided provision is made to the satisfaction of Beneficiary for eventual payment thereof in the event that Trustor is obligated to make such payment and that any recorded claim of lien, charge or other encumbrance against the Property is immediately discharged by bonding or otherwise).
6.9	TAXES AND OTHER LL~BILITIES. Trustor shall pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real and personal and including federal and state income taxes and state and local property taxes and assessments. Trustor shall promptly provide to Beneficiary copies of all tax and assessment notices pertaining to the Property. Trustor hereby authorizes Beneficiary to obtain, at Trustor’s

	expense, a tax service contract which shall provide tax informat: on on the Property to Beneficiary for the term of the Loan and any extensions or renewals of the Loan.
6.10	INSURANCE COVERAGE. Trustor shall insure the Property against loss or damage by fire and such other hazards as Beneficiary shall from time to time require; provided, however, (a) Beneficiary, at Beneficiary’s election, may only require flood insurance if all or any portion of the improvements located on the Property is or becomes located in a special flood hazard area, and (b) Beneficiary, at Beneficiary’s election, may only require earthquake insurance if all or any portion of the Property is or becomes located in an earthquake fault zone. Trustor shall also carry public liability insurance and such ether insurance as Beneficiary may require, including, without limitation, business interruption insurance or loss of rents insurance. Such policies shall contain a standard mortgage clause naming Beneficiary and its successors in interest as a loss payee and requiring at least 30 days prior notice to the holder at termination or cancellation. Trustor shall maintain all required insurance throughout the term of the Loan and while any liabilities of Borrower or Trustor to Beneficiary under any of the Loan Documents remain outstanding at Trustor’s expense, with companies, and in substance and form satisfactory to Beneficiary. Neither Beneficiary nor Trustee, by reason of accepting, rejecting, approving or obtaining insurance shall incur any liability for: (c) the existence, nonexistence, form or legal sufficiency of any insurance; (d) the solvency of any insurer; or (e) the payment of claims.
6.11	INSURANCE AND CONDEMNATION PROCEEDS.

a.

Assignment of Claims. Trustor absolutely and irrevocably assigns to Beneficiary all of the following rights, claims and amounts (collectively, “Claims”), all of which shall be paid to Beneficiary: (i) all awards of damages and all other compensation payable directly or indirectly by reason of a condemnation or proposed condemnation for public or 1:rivate use affecting all or any part of, or any interest in, the Property; (ii) all other claims and awards for damages to or decrease in value of all or any part of, or any interest in, the Property; (iii) all proceeds of any insurance policies payable by reason of loss sustained to all or any part of the Propery; and (iv) all interest which may accrue on any of the foregoing. Trustor shall give Beneficiary prompt written notice of the occurrence of any casualty affecting, or the institution of any proceedings for eminent domain or for the condemnation of, the Property or any portion thereof. So long as no ]Default has occurred and is continuing at the time, Trustor shall have the right to adjust, compromise and settle any Claim of $100,000 or less without the consent of Beneficiary, provided, however, all awards, proceeds and other sums described herein shall continue to be payable to Beneficiary. Beneficiary may commence, appear in, defend or prosecute any Claim exceeding $100,000, and may adjust, compromise and settle all Claims (except for Claims which Trustor may settle as provided herein), but shall not be responsible for any failure to commence, appear in, defend, prosecute or collect any such Claim regardless of the cause of the failure. All awards, proceeds and other sums described herein shall be payable to Beneficiary.

b.

Application of Proceeds; No Default. So long as no Default has occurred and is continuing at the time of Beneficiary’s receipt of the proceeds of the Claims (“Proceeds”) and no Default occurs thereafter, Beneficiary shall apply the Proceeds in the following order of priority: First, to Beneficiary’s expenses in settling, prosecuting or defending the Claims; Second, to the repair or restoration of the Property; and Third, to Trustor if the repair or restoration of the Property has been completed, but to the Secured Obligations in any order without suspending, extending or reducing any obligation of Trustor to make installment payments if the repair or restoration of the Property has not been completed. Notwithstanding the foregoing, Beneficiary shall have no obligation to make any Proceeds available for the repair or restoration of the Property unless and until all the following conditions have been satisfied: (i) delivery to Beneficiary of the Proceeds plus any additional amount which is needed to pay all costs of the repair or restoration (including, without limitation, taxes, fmancing charges, insurance and rent during the repair period); (ii) establishment of an arrangement for lien releases and disbursement of funds acceptable to Beneficiary; (iii) delivery to Beneficiary in form and content acceptable to Beneficiary of all of the following: (aa) plans and specif’ cations for the work; (bb) a contract for the work, signed by a contractor acceptable to Beneficiary; (cc) a cost breakdown for the work; (dd) if

required by Beneficiary, a payment and performance bond for the work; (ee) evidence of the continuation of all Leases unless consented to in writing by Beneficiary; (ff) evidence that, upon completion of the work, the size, capacity, value, and income coverage ratios for the Property will be at least as great as those which existed immediately before the damage or condemnation occurred; and (gg) evidence of the satisfaction of any additional conditions that Beneficiary may reasonably establish to protect Beneficiary’s security. Tmstor acknowledges that the specific conditions described above are reasonable.

c.

Application of Proceeds; Default. If a Default has occurred and is continuing at the time of Beneficiary’s receipt of the Proceeds or if a Default occurs at any time thereafter, Beneficiary may, at Beneficiary’s absolute discretion and regardless of any impairment of security or lack of impairment of security, but subject to applicable law governing use of the Proceeds, if any, apply all or any of the Proceeds to Beneficiary’s expenses in settling, prosecuting or defending the Claims and then apply the balance to the Secured Obligations in any order without suspending, extending or reducing any obligation of Tmstor to make installment payments, and may release all or any part of the Proceeds to Tmstor upon any conditions Beneficiary chooses.

6.12 IMPOUNDS.

a.

Post-Default Impounds. If required by Beneficiary at any time after a Default occurs (and regardless of whether such Default is thereafter cured), Tmstor shall deposit with Beneficiary such amounts (“Post-Default Impounds”) on such dates (determined by Beneficiary as provided below) as will be sufficient to pay any or all “Costs” (as defined below) specified by Beneficiary. Beneficiary in its sole discretion shall estimate the amount of such Costs that will be payable or required during any period selected by Beneficiary not exceeding 1 year and shall determine the fractional portion thereof that Tmstor shall deposit with Beneficiary on each date specified by Beneficiary during such period. If the Post-Default Impounds paid by Tmstor are not sufficient to pay the related Costs, Tmstor shall deposit with Beneficiary upon demand an amount equal to the deficiency. All Post-Default Impounds shall be payable by Tmstor in addition to (but without duplication of) any other Impounds (as defined below).

b.

All Impounds. Post-Default Impounds and any other impounds that may be payable by Borrower under the Note are collectively called “Impounds”. All Impounds shall be deposited into one or more segregated or commingled accounts maintained by Beneficiary or its servicing agent. Except as otherwise provided in the Note, such account(s) shall not bear interest. Beneficiary shall not be a trustee, special depository or other fiduciary for Tmstor with respect to such account, and the existence of such account shall not limit Beneficiary’s rights under this reed of Trust, any other agreement or any provision of law. If no Default exists, Beneficiary shall apply all Impounds to the payment of the related Costs, or in Beneficiary’s sole discretion may release any or all Impounds to Tmstor for application to and payment of such Costs. If a Default exists, Beneficiary may apply any or all Impounds to any Secured Obligation and/or to cure such Default, whereupon Tmstor shall restore all Impounds so applied and cure all Defaults not cured by such application. The obligations of Tmstor hereunder shall not be diminished by deposits of Impounds made by Tmstor, except to the extent that such obligations have actually been met by application of such Impounds. Upon any assignment of this Deed of Trust, Beneficiary may assign all Impounds in its possession to Beneficiary’s assignee, whereupon Beneficiary and Trustee shall be released from all liability with respect to such Impounds. Within 60 days following full repayment of the Secured Obligations (other than as a consequence of foreclosure or conveyance in lieu of foreclosure) or at such earlier time as Beneficiary may elect, Beneficiary shall pay to Tmstor all Impounds in its possession, and no other party shall have any right or claim thereto. “Costs” means (i) all taxes and other liabilities payable by Tmstor under Section 6.9, (ii) all insurance premiums payable by Tmstor under Section 6.10, (iii) all other costs and expenses for which Impounds are required under the Note, and/or (iv) all other amounts that will be required to preserve the value of the Property. Tmstor shall deliver to Beneficiary, promptly upon receipt, all bills for Costs for which Beneficiary has required Post-Default Impounds. Notwithstanding the foregoing, if any such default is

current and no default exists thereafter for a period of six consecutive months, any impound amounts that were required to be deposited pursuant to Section (iv) above, will be promptly returned to the Borrower.

6.13	DEFENSE AND NOTICE OF LOSSES, CLAIMS AND ACTIONS. Trustor shall protect, preserve and defend the Property and title to and right of possession of the Pro aerty, the security of this Deed of Trust and the rights and powers of Beneficiary and Trustee hereunder at Trustor’s sole expense against all adverse claims, whether the claim: (a) is against a possessory or non-possessory interest; (b) arose prior or subsequent to the Effective Date; or (c) is senior or junior to Trustor’s or Beneficiary’s rights. Trustor shall give Beneficiary and Trustee prompt notice in writing of the assertion of any claim, of the filing of any action or proceeding, of the occurrence of any damage to the Property and of any condemnation offer or action.
6.14	RIGHT OF INSPECTION. Beneficiary and its independent contractors, agents and employees may enter the Property from time to time at any reasonable time, if no Default exists, after first providing not less than five (5) days advance notice for the purpose of inspecting the Property and ascertaining Trustor’s compliance with the terms of this Deed of Trust Beneficiary shall use reasonable efforts to assure that Beneficiary’s entry upon and inspection of the Property shall not materially and unreasonably interfere with the business or operations of Trustor or Trustor‘s tenants on the Property.
6.15	PROHIBITION OF TRANSFER OF PROPERTY OR INTERESTS IN TRUSTOR. Trustor acknowledges that Beneficiary has relied upon the principals of Trustor and Borrower and their experience in owning and operating properties similar to the Property in connection with the closing of the Loan. Accordingly, except with the prior written consent of Beneficiary or as otherwise expressly permitted in the Note, Trustor shall not cause or permit any sale, exchange, mortgage, pledge, hypothecation, assignment, encumbrance or other transfer, conveyance or disposition, whether voluntarily, involuntarily or by operation of law (“Transfer”) of all or any part of, or all or any direct or indirect interest in, the Property or the Collateral (except for equipment and inventory in the ordinary course of its business), or cause or permit a Transfer of any direct or indirect interest (whether general partnership interest, stock, non-managing member limited liability company interest, trust, or otherwise) in Tmstor or Borrower. In the event of any Transfer that is not expressly permitted in the Note and is without the prior written consent of Beneficiary, Beneficiary shall have the absolute right at its option, without prior demand or notice, to declare all of the Secured Obligations immediately due and payable, except to the extent prohibited by law, and pursue its rights and remedies under Section 7.3 herein.
	Tmstor agrees to pay any prepayment fee as set forth in the Note in the event the Secured Obligations are accelerated pursuant to the terms of this Section. Consent to one such Transfer shall not be deemed to be a waiver of the right to require the consent to future or successive Transfers. Beneficiary’s consent to any Transfer may be withheld, conditioned or delayed in Beneficiary’s sole and absolute discretion.
6.16	ACCEPTANCE OF TRUST; POWERS AND DUTIES OF TRUSTEE. Tmstee accepts this trust when this Deed of Trust is recorded. From time to time upon written request of Beneficiary and presentation of this Deed of Trust, or a certified copy thereof, for endorsement, and without affecting the personal liability of any person for payment of any indebtedness or performance of any Secured Obligation, Trustee may, without liability therefor and without notice: (a) reconvey all or any part of the Property; (b) consent to the making of any map or plat of the Property; (c) join in granting any easement on the Property; (d) join in any declaration of covenants and restrictions; or (e) join in any extension agreement or any agreement subordinating the lien or charge of this Deed of Trust. Nothing contained in the immediately preceding sentence shall be construed to limit, impair or otherwise affect the rights of Trustor in any respect. Except as may otherwise be required by applicable law, Trustee or Beneficiary may from time to time apply to any court of competent jurisdiction for aid and direction in the execution of the trusts hereunder and :he enforcement of the rights and remedies available hereunder, and Trustee or Beneficiary may obtain orders or decrees directing or confirming or approving acts in the execution of said trusts and the enforcement of said remedies. Tmstee has no obligation to notify any party of any pending sale or any action or proceeding (including, without limitation, actions in which Tmstor, Beneficiary or Tmstee shall be a party) unless held or commenced and maintained by Trustee under this Deed of Trust. Tmstee shall not be obligated to perform any act required of it hereunder unless the

	performance of the act is requested in writing and Trustee is reasonably indemnified and held harmless against loss, cost, liability and expense.
6.17	COMPENSATION OF TRUSTEE. Trustor shall pay to Trustee reasonable compensation and reimbursement for services and expenses in the administration of this trust, including, without limitation, reasonable attorneys’ fees. Trustor shall pay all indebtedness arising under this Section immediately upon demand by Trustee or Beneficiary together with interest thereon from the date the indebtedness arises at the rate of interest then applicable to the principal balance of the Note as specified therein.
6.18	EXCULPATION. Beneficiary shall not directly or indirectly be liable to Trustor or any other person as a consequence of: (a) the exercise of the rights, remedies or powers granted to Beneficiary in this Deed of Trust; (b) the failure or refusal of Beneficiary to perform or discharge any obligation or liability of Trustor under any agreement related to the Property or under this Deed of Trust; or (c) any loss sustained by Trustor or any third party resulting from Beneficiary’s failure to lease the Property after a Default (hereafter defined) or from any other act or omission of Beneficiary in managing the Property after a Default unless the loss is caused by the willful misconduct and bad faith of Beneficiary and no such liability shall be asserted or enforced against Beneficiary, all such liability being expressly waived and released by Trustor.
6.19	INDEMNITY. Without in any way limiting any other indemnity contained in this Deed of Trust, Trustor agrees to defend, indemnify and hold harmless Trustee and the Beneficiary Group from and against any claim, loss, damage, cost, expense or liability directly or indirectly arising out of: (a) the making of the Loan, except for violations of banking laws or regulations by the Beneficiary Group; (b) this Deed of Trust; (c) the execution of this trust or the performance of any act required or permitted hereunder or by law; (d) any failure of Trustor to perform Trustor’s obligations under this Deed of Trust or the other Loan Documents; (e) any alleged obligation or undertaking on the Beneficiary Group’s part to perform or discharge any of the representations, warranties, conditions, covenants or other obligations contained in any other document related to the Property; (f) any act or omission by Trustor or any contractor, agent, employee or representative of Trustor with respect to the Property; or (g) any claim, loss, damage, cost, expense or liability directly or indirectly arising out of: (i) the use, generation, manufacture, storage, treatment, release, threatened release, discharge, disposal, transportation or presence of any Hazardous Materials which are found in, on, under or about the Property (including, without limitation, underground contamination); or (ii) the breach of any covenant, representation or warranty of Trustor under Section 6.2 above. The foregoing to the contrary notwithstanding, this indemnity shall not include any claim, loss, damage, cost, expense or liability directly or indirectly arising out of the gross negligence or willful misconduct of any member of the Beneficiary Group or Trustee., or any claim, loss, damage, cost, expense or liability incurred by the Beneficiary Group or Trustee arising from any act or incident on the Property occurring after the full reconveyance and release of the lien of this Deed of Trust on the Property, or with respect to the matters set forth in clause (g) above, any claim, loss, damage, cost, expense or liability incurred by the Beneficiary Group resulting from the introduction and initial release of Hazardous Materials on the Property occurring after the transfer of title to the Property at a foreclosure sale under this Deed of Trust, either pursuant to judicial decree or the power of sale, or by deed in lieu of such foreclosure. This indemnity shall include, without limitation: (aa) all consequential damages (including, without limitation, any third party tort claims or governmental claims, fines or penalties against Trustee or the :3eneficiary Group); (bb) all court costs and reasonable attorneys’ fees (including, without limitation, expert witness fees) paid or incurred by Trustee or the Beneficiary Group; and (cc) the costs, whether foreseeable or unforeseeable, of any investigation, repair, cleanup or detoxification of the Property which is required by any governmental entity or is otherwise necessary to render the Property in compliance with all laws and regulations pertaining to Hazardous Materials. “Beneficiary Group”, as used herein, shall mean (1) Beneficiary (including, without limitation, any participant in the Loan), (2) any entity controlling, controlled by or under common control with Beneficiary, (3) the directors, officers, employees and agents of Beneficiary and such other entities, and (4) the successors, heirs and assigns of the entities and persons described in foregoing clauses (1) through (3). Trustor shall pay immediately upon Trustee’s or Beneficiary’s demand any amounts owing under this indemnity together with interest from the date the indebtedness arises until paid at the rate of interest applicable to the principal balance of the Note as specified therein. Trustor agrees to use legal counsel reasonably acceptable to Trustee and the Beneficiary

	Group in any action or proceeding arising under this indemnity. THE PROVISIONS OF THIS SECTION SHALL SURVIVE THE TERMINATION AND RECONVEYANCE OF THIS DEED OF TRUST, BUT TRUSTOR’S LIABILITY UNDER THIS INDEMNITY SHALL BE SUBJECT TO THE PROVISIONS OF THE SECTION IN THE NOTE ENTITLED “BORROWER’S LIABILITY.”
6.20	SUBSTITUTION OF TRUSTEE. From time to time, by a writing signed and acknowledged by Beneficiary and recorded in the Office of the Recorder of the County in which the Property is situated, Beneficiary may appoint another trustee to act in the place and stead of Trustee or any successor. Such writing shall set forth any information required by law. The recordation of such instrument of substitution shall discharge Trustee herein named and shall appoint the new trustee as the trustee hereunder with the same effect as if originally named trustee herein. A writing recorded pursuant to the provisions of this Section shall be conclusive proof of the proper substitution of such new trustee.
6.21	RELEASES, EXTENSIONS, MODIFICATIONS AND ADDITIONAL SECURITY. Without notice to or the consent, approval or agreement of any persons or entities having any interest at any time in the Property or in any manner obligated under the Secured Obligations ("Interested Parties"), Beneficiary may, from time to time: (a) fully or partially release any person or entity from liability for the payment or performance of any Secured Obligation; (b) extend the maturity of any Secured Obligation; (c) make any agreement with Borrower increasing the amount or otherwise altering the terms of any Secured Obligation; (d) accept additional security for any Secured Obligation; or (e) release all or any portion of the. Property, Collateral and other security for any Secured Obligation. None of the foregoing actions shall release or reduce the personal liability of any of said Interested Parties, or release or impair the priority of the lien of this Deed of Trust upon the Property.
6.22	SALE OR PARTICIPATION OF LOAN. Trustor agrees that Beneficiary may at no cost or expense to Trustor, at any time sell, assign, participate or securitize all or any portion of Beneficiary’s rights and obligations under the Loan Documents, and that any such sale, assignment, participation or securitization may be to one or more financial institutions or other entities, to private investors, and/or into the public securities market, in Beneficiary’s sole discretion. Trustor further agrees that Beneficiary may disseminate to any such actual or potential purchaser(s), assignee(s) or participant(s) all documents and financial and other information heretofore or hereafter provided to or /mown to Beneficiary with respect to: (a) the Property and its operation; and/or (b) any party connected with the Loan (including, without limitation Trustor, any partner or member of Trustor, any constituent partner or member of Trustor, any guarantor and any nonborrower trustor). In the event of any such sale, assignment, participation or securitization, Beneficiary and the other parties to the same shall share in the rights and obligations of Beneficiary set forth in the Loan Documents as and to the extent they shall agree among themselves. In connection with any such sale, assignment., participation or securitization, Trustor further agrees that the Loan Documents shall be sufficient evidence of the obligations of Trustor to each purchaser, assignee or participant, and Trustor shall, within 15 days after request by Beneficiary, deliver an estoppel certificate verifying for the benefit of Beneficiary and any other party designated by Beneficiary the status and the terms and provisions of the Loan in form and substance acceptable to Beneficiary, and enter into such amendments or modifications to the Loan Documents as may be reasonably required in order to facilitate any such sale, assignment, participation or securitization without impairing Trustor’s rights or increasing Trustor’s obligations. The indemnity obligations of Trustor under the Loan Documents shall also apply with respect to any purchaser, assignee or participant.
6.23	RECONVEYANCE. Upon Beneficiary’s written request, and upon surrender of this Deed of Trust or certified copy thereof and any note, instrument or instruments setting forth all obligations secured hereby to Trustee for cancellation, Trustee shall reconvey, without warranty, the Proper. or that portion thereof then held hereunder. The recitals of any matters or facts in any reconveyance executed hereunder shall be conclusive proof of the truthfulness thereof. To the extent permitted by law, the reconveyance may describe the grantee as “the person or persons legally entitled thereto". Neither Beneficiary nor Trustee shall have any duty to determine the rights of persons claiming to be rightful grantees of any reconveyance. When the Property has been fully reconveyed, the last such reconveyance shall operate as a reassignment of all future rents, issues and profits of the Property to the person or persons legally entitled thereto.

6.24 SUBROGATION. Beneficiary shall be subrogated to the lien of all encumbrances, whether released of record or not, paid in whole or in part by Beneficiary pursuant to this Deed of Trust or by the proceeds of any loan secured by this Deed of Trust.

ARTICLE 7. DEFAULT

7.1 DEFAULT. For all purposes hereof, “Default” shall mean either an “Optional Default” (as defined below) or an “Automatic Default” (as defined below).

a. Optional Default. An “Optional Default” shall occur, at Beneficiary’s option, upon the occurrence of any of the following events:

(i)	Monetary. Borrower or Trustor shall fail to (aa) pay when due any sums which by their express terms require immediate payment without any grace period or sums which are payable on the Maturity Date, or (bb) pay within 5 days when due any other sums payable under the Note, this Deed of Trust or any of the other Loan Documents, including without limitation, any monthly payment due under the Note.
(ii)	Failure to Perform. Borrower or Trustor shall fail to observe, perform or discharge any of Borrower’s or Trustor’s obligations, covenants, conditions or agreements, other than Borrower’s or Trustor‘s payment obligations, under the Note, this Deed of Trust or any of the other Loan Documents, and (aa) such failure shall remain uncured for 30 days after written notice thereof shall have been given to Borrower or Tmstor, as the case may be, by Beneficiary or (bb) if such failure is of such a nature that it cannot be cured within such 30 day period, Borrower or Trustor shall fail to commence to cure such failure withir.. such 30 day period or shall fail to diligently prosecute such curative action thereafter.
(iii)	Representations and Warranties. Any representation, warranty, certificate or other statement (financial or otherwise) made or furnished by or on behalf of Borrower, Trustor, or a guarantor, if any, to Beneficiary or in connection with any of the Loan Documents, or as an inducement to Beneficiary to make the Loan, shall be false, incon-ect, incomplete or misleading in any material respect when made or furnished.
(iv)	Condemnation; Attachment. The condemnation, seizure or appropriation of any material portion (as reasonably determined by Beneficiary) of the Property; or the sequestration or attachment of, or levy or execution upon any of the Property, the Collateral or any other collateral provided by Borrower or Trustor under any of the Loan Documents, or any material portion of the other assets of Borrower or Trustor, which sequestration, attachment, levy or execution is not released or dismissed within 45 days after its occurrence; or the sale of any assets affected by any of the foregoing.
(v)	Uninsured Casualty. The occurrence of an uninsured casualty with respect to any material portion (as reasonably determined by Beneficiary) of the Property unless: (aa) no other Default has occurred and is continuing at the time of such casualty or occurs thereafter; (bb) Trustor promptly notifies Beneficiary of the occurrence of such casualty; and (cc) not more than 45 days after the occurrence of such casualty, Trustor delivers to Beneficiary immediately available funds in an amount sufficient, in Beneficiary’s reasonable opinion, to pay all costs of the repair or restoration (including, without limitation, taxes, fmancing charges, insurance and rent during the repair period). So long as no Default has occurred and is continuing at the time of Beneficiary’s receipt of such funds and no Default occurs thereafter, Beneficiary shall make such funds available for the repair or restoration of the Property. Notwithstanding the foregoing, Beneficiary

	shall have no obligation to make any funds available for repair or restoration of the Property unless and until all the conditions set forth in clauses (ii) and (iii) of the second sentence of Section 6.11(b) of this Deed of Trust have been satisfied. Trustor acknowledges that the specific conditions described above are reasonable.
	Adverse Financial Change. Any material adverse change in the financial condition of Borrower or any general partner or managing member of Borrower or any guarantor, and which change Beneficiary reasonably determines will have a material adverse effect on (aa) the business, operations or condition of the Property; or (bb) the ability of Borrower or Trustor to pay or perform Borrower’s or Trustor’s obligations in accordance with the terms of the Note, this Deed of Trust, and the other Loan Documents.
(vii)	Key Person or Entity. The retirement, death., incapacity or material reduction in current management authority or duties, if any, of            HENRY D. BULLOCK and RICHARD J . HOLMSTROM and Trustor’s failure to provide a substitute or replacement acceptable to Beneficiary within 30 days after the occurrence of any such event.

b. Automatic Default. An “Automatic Default” shall occur automatically upon the occurrence of any of the following events:

(i)	Voluntary Bankruptcy, Insolvency, Dissolution. (aa) Borrower’s filing a petition for relief under the Bankruptcy Reform Act of 1978, as amended or recodified (“Bankruptcy Code”), or under any other present or future state or federal law regarding bankruptcy, reorganization or other relief to debtors (collectively, “Debtor Relief Law”); or (bb) Borrower’s filing any pleading in any involuntary proceeding under the Bankruptcy Code or other Debtor Relief Law which admits the jurisdiction of a court to regulate Borrower or the Property or the petition’s material allegations regarding Borrower’s insolvency; or (cc) Borrower’s making a general assignment for the benefit of creditors; or (dd) Bcrrower‘s applying for, or the appointment of, a receiver, trustee, custodian or liquidator of Borrower or any of its property; or (ee) the filing by or against Borrower of a petition seeking the liquidation or dissolution of Borrower or the commencement of any other procedure to liquidate or dissolve Borrower.
(ii)	Involuntary Bankruptcy. Borrower’s failure to effect a full dismissal of any involuntary petition under the Bankruptcy Code or other Debtor Relief Law that is filed against Borrower or in any way restrains or limits Borrower or Beneficiary regarding the Loan or the Property, prior to the earlier of the entry of any order granting relief sought in the involuntary petition or 45 days after the date of filing of the petition.
(iii)	Partners, Guarantors. The occurrence of an event specified in Sections (i) or (ii) as to Trustor, any general partner or managing member of Borrower or Trustor, or any guarantor or other person or entity in any manner obligated to Beneficiary under the Loan Documents.

7.2	ACCELERATION. Upon. the occurrence of an Optional Default, Beneficiary may, at its option, declare all sums owing to Beneficiary under the Note and the other Loan Documents immediately due and payable. Upon the occurrence of an Automatic Default, all sums owing to Beneficiary under the Note and the other Loan Documents shall automatically become immediately due and payable.
7.3	RIGHTS AND REMEDIES. In addition to the rights and remedies in Section 7.2 above, at any time after a Default, Beneficiary shall have all of the following rights and remedies:

a. Entry on Property. With or without notice, and without releasing Trustor from any Secured Obligation, and without becoming a mortgagee in possession, to enter upon the Property from time to time and to do such acts and things as Beneficiary or Trustee deem necessary or desirable in order to

	inspect, investigate, assess and protect the security hereof or to cure any Default, including, without limitation: (i) to take and possess all documents, books, records, papers and accounts of Trustor, Borrower or the then owner of the Property which relate to the Property; (ii) to make, terminate, enforce or modify leases of the Property upon such terms and conditions as Beneficiary deems proper; (iii) to make repairs, alterations and improvements to the Property necessary, in Trustee’s or Beneficiary’s sole judgment, to protect or enhance the security hereof; (iv) to appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee hereunder; (v) to pay, purchase, contest or compromise any encumbrance, charge, lien or claim of lien which, in the sole judgment of either Beneficiary or Trustee, is or may be senior in priority hereto, the judgment of Beneficiary or Trustee being conclusive as between the parties hereto; (vi) to obtain insurance; (vii) to pay any premiums or charges with respect to insurance required to be carried hereunder; (viii) to obtain a court order to enforce Beneficiary’s right to enter and inspect the Property for Hazardous Materials, in which regard the decision of Beneficiary as to whether there exists a release or threatened release of Hazardous Materials onto the Property shall be deemed reasonable and conclusive as between the parties hereto; (ix) to have a receiver appointed pursuant to applicable law to enforce Beneficiary‘s rights to enter and inspect the Property for Hazardous Materials; and/or (x) to employ legal counsel, accountants, engineers, consultants, contractors and other appropriate persons to assist them;
b.	Appointment of Receiver. With. or without notice o;- hearing, to apply to a court of competent jurisdiction for and obtain appointment of a receiver, trustee, liquidator or conservator of the Property, for any purpose, including, without limitation, to enforce Beneficiary‘s right to collect Payments and to enter on and inspect the Property for Hazardous Materials, as a matter of strict right and without regard to: (i) the adequacy of the security for the repayment of the Secured Obligations; (ii) the existence of a declaration that the Secured Obligations are immediately due and payable; (iii) the filing of a notice of default; or (iv) the solvency of Trustor, Borrower or any guarantor or other person or entity in any manner obligated to Beneficiary under the Loan Documen:s;
c.	Judicial Foreclosure; Injunction. To commence and maintain an action or actions in any court of competent jurisdiction to foreclose this instrument as a mortgage or to obtain specific enforcement of the covenants of Trustor hereunder, and Trustor agrees that such covenants shall be specifically enforceable by injunction or any other appropriate equitable remedy and that for the purposes of any suit brought under this subparagraph, Trustor waives the defense of lathes and any applicable statute of limitations;
d.	Nonjudicial Foreclosure. To execute a written notice of such Default and of the election to cause the Property to be sold to satisfy the Secured Obligations. Trustee shall give and record such notice as the law then requires as a condition precedent to a trustee‘s sale. When the minimum period of time required by law after such notice has elapsed, Trustee, without notice to or demand upon Trustor except as required by law, shall sell the Property at the time and place of sale fixed by it in the notice of sale, at one or several sales, either as a whole or in separate parcels and in such manner and order, all as Beneficiary in its sole discretion may determine, at public auction to the highest bidder for cash, in lawful money of the United States, payable at time of sale. Neither Trustor nor any other person or entity other than Beneficiary shall have the right to direct the order in which the Property is sold. Subject to requirements and limits imposed by law, Trustee may, from time to time postpone sale of all or any portion of the Property by public announcement at such time and place of sale, and from time to time may postpone the sale by public announcement at the time and place fixed by the preceding postponement. A sale of less than the whole of the Property or any defective or irregular sale made hereunder shall not exhaust the power of sale provided for herein. Trustee shall deliver to the purchaser at such sale a deed conveying the Property or portion thereof so sold, but without any covenant or warranty, express or implied. The recitals in the deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustee, Trustor or Beneficiary may purchase at the sale;

	Upon sale of the Property at any judicial or nonjudicial foreclosure, Beneficiary may credit bid (as determined by Beneficiary in its sole and absolute discretion) all or any portion of the Secured Obligations. In determining such credit bid, Beneficiary may, but is not obligated to, take into account all or any of the following: (i) appraisals of the Property as such appraisals may be discounted or adjusted by Beneficiary in its sole and absolute underwriting discretion; (ii) expenses and costs incurred by Beneficiary with respect to the Property prior to foreclosure; (iii) expenses and costs which Beneficiary anticipates will be incurred with respect to the Property after foreclosure, but prior to resale, including, without limitation, costs of structural reports and other due diligence, costs to carry the Property prior to resale, costs of resale (e.g. commissions, attorneys’ fees, and taxes), costs of any Hazardous Materials clean-up and monitoring, costs of deferred maintenance, repair, refurbishment and retrofit, costs of defending or settling litigation affecting the Property, and lost opportunity costs (if any), including the time value of money during any anticipated holding period by Beneficiary; (iv) declg trends in real property values generally and with respect to properties similar to the Property; (v) anticipated discounts upon resale of the Property as a distressed or foreclosed property; (vi) the fact of additional collateral (if any), for the Secured Obligations; and (vii) such other factors or matters that Beneficiary (in its sole and absolute discretion) deems appropriate. In regard to the above, Trustor acknowledges and agrees that: (viii) Beneficiary is not required to use any or all of the foregoing factors to determine the amount of its credit bid; (ix) this paragraph does not impose upon Beneficiary any additional obligations that are not imposed by law at the time the credit bid is made; (x) the amount of Beneficiary’s credit bid need not have any relation to any loan-to-value ratios specified in the Loan Documents or previously discussed between Trustor and Beneficiary; and (xi) Beneficiary’s credit bid may be (at Beneficiary’s sole and absolute discretion) higher or lower than any appraised value of the Property;
e.	Multiple Foreclosures. To resort to and realize upon the security hereunder and any other security now or later held by Beneficiary concurrently or successively and in one or several consolidated or independent judicial actions or lawfully taken nonjudicial proceedings, or both, and to apply the proceeds received upon the Secured Obligations all in such order and manner as Trustee and Beneficiary or either of them determine in their sole discretion;
f.	Rights to Collateral. To exercise all rights Trustee or Beneficiary may have with respect to the Collateral under this Deed of Trust, the UCC or otherwise at law; and
g.	Other Rights. To exercise such other rights as Trustee or Beneficiary may have at law or in equity or pursuant to the terms and conditions of this Deed of Trust or any of the other Loan Documents.

     In connection with any sale or sales hereunder, Beneficiary may elect to treat any of the Property which consists of a right in action or which is property that can be severed from the Property (including, without limitation, any improvements forming a part thereof) without causing structural damage thereto as if the same were personal property or a fixture, as the case may be, and dispose of the same in accordance with applicable law, separate and apart from the sale of the Property. Any sale of Collateral hereunder shall be conducted in any manner permitted by the UCC.

7.4 APPLICATION OF FORECLOSURE SALE PROCEEDS. If any foreclosure sale is effected, Trustee shall apply the proceeds of such sale in the following order of priority: First, to the costs, fees and expenses of exercising the power of sale and of sale, including, without limitation, the payment of the Trustee’s fees and attorneys’ fees permitted pursuant to subdivision (b) of California Civil Code Section 2924d and subdivision (b) of Section 2924k; Second, to the ;payment of the Secured Obligations which are secured by this Deed of Trust, in such order as Beneficiary shall determine in its sole discretion; Third, to satisfy the outstanding balance of obligations secured by any junior liens or encumbrances in the order of their priority; and Fourth, to the Trustor or the Trustor’s successor in interest, or in the event the Property has been sold or transferred to another, to the vested owner of record at the time of the Trustee’s sale.

7.5	WAIVER OF MARSHALING RIGHTS. Trustor, for itself and for all parties claiming through or under Trustor, and for all parties who may acquire a lien on or interest in the Property, hereby waives all rights to have the Property and/or any other property, including, without limitation, the Collateral, which is now or later may be security for any Secured Obligation, marshaled upon any foreclosure of this Deed of Trust or on a foreclosure of any other security for any of the Secured Obligaticns.
7.6	NO CURE OR WAIVER. Neither Beneficiary’s nor Trustee’s nor any receiver’s entry upon and taking possession of all or any part of the Property, nor any collection of rents, issues, profits, insurance proceeds, condemnation proceeds or damages, other security or proceeds of other security, or other sums, nor the application of any collected sum to any Secured Obligation, nor the exercise of any other right or remedy by Beneficiary or Trustee or any receiver shall cure or waive any Default or notice of default under this Deed of Trust, or nullify the effect of any notice of default or sale (unless all Secured Obligations then due have been paid or performed and Trustor has cured all other Defaults hereunder), or impair the status of the security, or prejudice Beneficiary or Trustee in the exercise of any right or remedy, or be construed as an affirmation by Beneficiary of any tenancy, lease or option or a subordination of the lien of this Deed of Trust.
7.7	PAYMENT OF COSTS, EXPENSES AND ATTORNEYS’ FEES. Trustor agrees to pay to Beneficiary immediately and upon demand all costs and expenses incurred by Trustee and Beneficiary in the enforcement of the terms and conditions of this Deed of Trust (including, without limitation, statutory trustee’s fees, court costs and attorneys’ fees, whether incurred in litigation or not) with interest from the date of expenditure until said sums have been paid at the rate of interest applicable to the principal balance of the Note as specified therein.
7.8	POWER TO FILE NOTICES AND CURE DEFAULTS. Trustor hereby irrevocably appoints Beneficiary and its successors and assigns, as its attorney-in-fact, which agency is coupled with an interest, to perform any obligation of Trustor hereunder upon the occurrence of an event, act or omission which, with notice or passage of time or both, would constitute a Default, provided, however, that: (a) Beneficiary as such attorney-in-fact shall only be accountable for such funds as are actually received h y Beneficiary; and (b) Beneficiary shall not be liable to Trustor or any other person or entity for any failure to act under this Section.
7.9	REMEDIES CUMULAT][VE. All rights and remedies of Beneficiary and Trustee provided hereunder are cumulative and are in addition to all rights and remedies provided by applicable law (including specifically that of foreclosure of this instrument as though it were a mortgage) or in any other agreements between Trustor and Beneficiary. Beneficiary may enforce any one or more remedies or rights hereunder successively or concurrently.

ARTICLE 8. MISCELLANEOUS PROVISIONS

8.1

ADDITIONAL PROVISIONS. The Loan Documents contain or incorporate by reference the entire agreement of the parties with respect to matters contemplated herein and supersede all prior negotiations. The Loan Documents grant further rights to Beneficiary and contain further agreements and affirmative and negative covenants by Trustor which apply to this Deed of Trust and to the Property and such further rights and agreements are incorporated herein by this reference. THE OBLIGATIONS AND LIABILITIES OF TRUSTOR UNDER THIS DEED OF TRUST AND THE OTHER LOAN DOCUMENTS ARE SUBJECT TO THE PROVISIONS OF THE SECTION IN THE NOTE ENTITLED “BORROWER’S LIABILITY.”

8.2

NON-WAIVER. By accepting payment of any amount secured hereby after its due date or late performance of any other Secured Obligation, Beneficiary shall not waive its right against any person obligated directly or indirectly hereunder or on any Secured Obligation, either to require prompt payment or performance when due of all other sums and obligations so secured or to declare default for failure to make such prompt payment or performance. No exercise of any right or remedy by Beneficiary or Trustee hereunder shall constitute a waiver of any other right or remedy herein contained or provided by law. No failure by Beneficiary or Trustee to exercise any right or remedy hereunder arising upon any Default s hall be construed to prejudice Beneficiary’s or

	Trustee’s rights or remedies upon the occurrence of any other or subsequent Default. No delay by Beneficiary or Trustee in exercising any such right or remedy ;shall be construed to preclude Beneficiary or Trustee from the exercise thereof at any time while that Default is continuing. Ne notice to nor demand on Tmstor shall of itself entitle Tmstor to any other or further notice or demand in similar or other circumstances.
8.3	CONSENTS AND APPROVALS. Wherever Beneficiary’s consent, approval, acceptance or satisfaction is required under any provision of this Deed of Trust or any of the other Loan Documents, such consent, approval, acceptance or satisfaction shall not be unreasonably withheld, conditioned or delayed by Beneficiary unless such provision expressly so provides.
8.4	PERMITTED CONTESTS. After prior written notice to Beneficiary, Tmstor may contest, by appropriate legal or other proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any lien, levy, tax or assessment, or any lien of any laborer, mechanic, materialman, supplier or vendor, or the application to Tmstor or the Property of any law or the validity thereof, the assertion or imposition of which, or the failure to pay when due, would constitute a Default; provided that (a) Tmstor pursues the contest diligently, in a manner which Beneficiary determines is not prejudicial to Beneficiary, and does not impair the lien of this Deed of Trust; (b) the Property, or any part hereof or estate or interest therein, shall not be in any danger of being sold, forfeited or lost by reason of such proceedings; (c) in the case of the contest of any law or other legal requirement, Beneficiary shall not be in any danger of any civil or criminal liability; and (d) if required by Beneficiary, Tmstor deposits with Beneficiary any funds or other forms of assurance (including a bond or letter of credit) satisfactory to Beneficiary to protect Beneficiary from the consequences of the contest being unsuccessful. Trustor’s right to contest pursuant to the terms of this provision shall in no way relieve Tmstor or Borrower of its obligations under the Loan or to make payments to Beneficiary as and when due.
8.5	FURTHER ASSURANCES. Tmstor shall, upon demand by Beneficiary or Trustee, execute, acknowledge (if appropriate) and deliver any and all documents and instruments and do or cause to be done all further acts reasonably necessary or appropriate to effectuate the provisions hereof.
8.6	ATTORNEYS’ FEES. If any legal action, suit or proceeding is commenced between Tmstor and Beneficiary regarding their respective rights and obligations under this Deed of Trust or any of the other Loan Documents, the prevailing party shall be entitled to recover, in addition to damages or other relief, costs and expenses, reasonable attorneys’ fees and court costs (including, without li station, expert witness fees). As used herein the term “prevailing party" shall mean the party which obtains the principal relief it has sought, whether by compromise settlement or judgment. If the party which commenced or instituted the action, suit or proceeding shall dismiss or discontinue it without the concurrence of the other party, such other party shall be deemed the prevailing party.
8.7	TRUSTOR AND BENEFICIARY DEFINED. The term “Tmstor” includes both the original Tmstor and any subsequent owner or owners of any of the Property, and the term “Beneficiary” includes the original Beneficiary and any future owner or holder, including assignees, pledges and participants, of the Note or any interest therein.
8.8	DISCLAIMERS.

a. Relationship. The relationship of Tmstor and Beneficiary under this Deed of Trust and the other Loan Documents is, and shall at all times remain, solely that of borrower and lender; and Beneficiary neither undertakes nor assumes any responsibility or duty to Tmstor or to any third party with respect to the Property. Notwithstanding any other provisions of this Deed of Tmst and the other Loan Documents: (i) Beneficiary is not, and shall not be constmed to be, a partner, joint venturer, member, alter ego, manager, controlling person or other business associate or participant of any kind of Tmstor, and Beneficiary does not intend to ever assume such status; (ii) Beneficiary^‘s activities in connection with this Deed of Tmst and the other Loan Documents shall not be “outside the scope of

activities of a lender of money” within the meaning of California Civil Code Section 3434, as amended or recodified from time to time, and Beneficiary does not intend to ever assume any responsibility to any person for the quality, suitability, safety or condition of the Property; and (iii) Beneficiary shall not be deemed responsible for or a participant in any acts, omissions or decisions of Trustor.

b. No Liability. Except as otherwise provided in the Loarl Documents, Beneficiary shall not be directly or indirectly liable or responsible for any loss, claim, cause of action, liability, indebtedness, damage or injury of any kind or character to any person or property arising from any construction on, or occupancy or use of, the Property., whether caused by or arising from: (i) any defect in any building, structure, grading, fill, landscaping or other improvements thereon or in any on-site or off-site improvement or other facility therein or thereon; (ii) any act or omission of Trustor or any of Trustor’s agents, employees, independent contractors, licensees or invitees; (iii) any accident in or on the Property or any fire, flood or other casualty or hazard thereon; (iv) the failure of Trustor or any of Trustor’s licensees, employees, invitees, agents, independent contractors or other representatives to maintain the Property in a safe condition; or (v) any nuisance made or suffered on any part of the Property.

8.9	SEVERABILITY. If any term of this Deed of Trust, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder o f this Deed of Trust, or the application of such term to persons or circumstances other than those as to which it it invalid or unenforceable, shall not be affected thereby, and each term of this Deed of Trust shall be valid and enforceable to the fullest extent permitted by law.
8.10	RELATIONSHIP OF ARTICLES. The rights, remedies and interests of Beneficiary under the deed of trust established by Article 1 and the security agreement established by Article 4 are independent and cumulative, and there shall be no merger of any lien created by the deed of trust with any security interest created by the security agreement. Beneficiary may elect to exercise or enforce any of its rights, remedies or interests under either or both the deed of trust or the security agreement as Beneficiary may from time to time deem appropriate. The absolute assignment of rents and leases established by Article 3 is similarly independent of and separate from the deed of trust and the security agreement.
8.11	MERGER. No merger shall occur as a result of Beneficiary’s a cquiring any other estate in, or any other lien on, the Property unless Beneficiary consents to a merger in writing.
8.12	OBLIGATIONS OF TRUSTOR, JOINT AND SEVERAL. If more than one person has executed this Deed of Trust as “Tmstor”, the obligations of all such persons hereunder shall be joint and several.
8.13	SEPARATE AND COMMUNITY PROPERTY. Any married person who executes this Deed of Trust as a Trustor agrees that any money judgment which Beneficiary or Trustee obtains pursuant to the terms of this Deed of Trust or any other obligation of that married person secured by this Deed of Trust may be collected by execution upon any separate property or community property of that person.
8.14	INTEGRATION; INTERPRETATION•. The Loan Documents contain or expressly incorporate by reference the entire agreement of the parties with respect to the matters contemplated therein and supersede all prior negotiations or agreements, written or oral. The Loan Documents shall not be modified except by written instrument executed by all parties. Any reference in any of the Loan Documents to the Property or Collateral shall include all or any part of the Property or Collateral. Any reference to the Loan Documents includes any amendments, renewals or extensions now or hereafter approved by Beneficiary in writing. When the identity of the parties or other circumstances make it appropriate, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural.

8.15	CAPITALIZED TERMS Capitalized terms not otherwise defined herein shall have the meanings set forth in the Note.
8.16	SUCCESSORS IN INTEREST. The terms, covenants, and conditions herein contained shall be binding upon and inure to the benefit of the heirs, successors and assigns of the parties hereto. The foregoing sentence shall not be construed to permit Trustor to assign the Loan except as otherwise permitted under the Note or the other Loan Documents.
8.17	GOVERNING LAW. This Deed of Trust was accepted by Beneficiary in the state of California and the proceeds of the Note secured hereby were disbursed from the state of California, which state the parties agree has a substantial relationship to the parties and to the underlying transaction embodied hereby. Accordingly, in all respects, including, without limiting the generality of the foregoing, matters of construction, validity, enforceability and performance, this Deed of Trust, the No:e and the other Loan Documents and the obligations arising hereunder and thereunder shall be governed by, and construed in accordance with, the laws of the state of California applicable to contracts made and performed in such state and any applicable law of the United States of America, except that at all times the provisions for enforcement of Beneficiary’s STATUTORY POWER OF SALE granted hereunder and the creation, perfection and enforcement of the security interests created pursuant thereto and pursuant to the other Loan Documents shall be governed by and construed according to the law of the state where the Property is located. Except as provided in the immediately preceding sentence, Trustor hereby unconditionally and irrevocably waives, to the fullest extent permitted by law, any claim to assert that the law of any jurisdiction other than California governs this Deed of Trust, the Note and other Loan Documents.
8.18	CONSENT TO JURISDICTION. Tmstor irrevocably submits to the jurisdiction of: (a) any state or federal court sitting in the state of California over any suit, action, or proceeding, brought by Trustor against Beneficiary, arising out of or relating to this Deed of Trust, the Note or the Loan; (b) any state or federal court sitting in the state where the Property is located or the state in which Trustor’s principal place of business is located over any suit, action or proceeding, brought by Beneficiary against Tmstor, arising out of or relating to this Deed of Trust, the Note or the Loan; and (c) any state court sitting in the county of the state where the Property is located over any suit, action, or proceeding, brought by Beneficiary to exercise its STATUTORY POWER OF SALE under this Deed of Trust or any action brought by Beneficiary to enforce its rights with respect to the Collateral. Trustor irrevocably waives, to the fullest extent permitted by law, any objection that Tmstor may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum.
8.19	EXHIBITS. Exhibit A is incorporated into this Deed of Trust by this reference.
8.20	ADDRESSES; REQUEST FOR NOTICE. All notices and other communications that are required or permitted to be given to a party under this Deed of Trust shall be in writing, refer to the Loan number, and shall be sent to such party, either by personal delivery, by overnight delivery service, by certified first class mail, return receipt requested, or by facsimile transmission to the addressee or facsimile number below. All such notices and communications shall be effective upon receipt of such delivery or facsimile transmission. The addresses of the parties are set forth on page 1 of this Deed of Trust and the facsimile numbers for the parties are as follows:

Beneficiary:	Trustee:
WELLS FARGO BANK, N.A.	AMERICAN SECURITIES COMPANY
FAX No.: (925) 691-5947	FAX No.: (925) 691-5947

Trustor:	With copies to:
BARBER LANE ASSOCIATES L.P.	Cooley Godward LLP
FAXNo.: (650) 326-9333	Attn: Paul Churchill, Esq.
	(415) 951-3699

Trustor’s principal place of business is at the address set forth on page 1 of this Deed of Trust.

Any Trustor whose address is set forth on page 1 of this Deed of Trust hereby requests that a copy of notice of default and notice of sale be delivered to it at that address. Failure to insert an address shall constitute a designation of Trustor’s last known address as the address for such notice. Any party shall have the right to change its address for notice hereunder to any other location within the conrinental United States by giving 30 days notice to the other parties in the manner set forth above.

8.21 COUNTERPARTS. This Deed of Trust may be executed in any number of counterparts, each of which, when executed and delivered, will be deemed an original and all of which taken together, wi11 be deemed to be one and the same instrument.

8.22 WAIVER OF JURY TRIAL. BENEFICIARY AND TRUSTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WA[VE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS DEED OF TRUST OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEAL[NG, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF BENEFICIARY OR TRUSTOR. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BENEFICIARY TO ENTER INTO THIS DEED OF TRUST.

IN WITNESS WHEREOF, Trustor has executed this Deed of Trust as of the day and year set forth above.

“TRUSTOR”
BARBER LANE ASSOCIATES L.P.,
a California limited partnership
By:	Menlo Equities Associates V LLC,
	a California limited liability company,
	General Partner
	By:	Menlo Equities LLC,
		a California limited liability company,
		Managing Member
		By:	Menlo Equities, Inc.,
			a Californ corporation,
			Managing -rnber
			By:	/s/ Henry D. Bullock
				Henry D. Bullock, President
		By:	Diamant Investments LLC,
			a Delaware limited liability company,
			Member
			By:	/s/ Richard J. Holmstrom
				Richard J. Holmstrom,
				Managing Member

(ALL SIGNATURES MUST BE ACKNOWLEDGED)

LoanNo.31-0900266A

EXHIBIT A

Description Of Land

Exhibit A to DEED OF TRUST AND ABSOLUTE ASSIGNMENT OF RENTS AND LEASES AND SECURITY AGREEMENT (AND FIXTURE FILING) (“Deed of Trust^") among BARBER LANE ASSOCIATES L. P. , a California limited partnership, as “Trustor”, AMERICAN SECURITIES COMPANY, as “Trustee”, and WELLS FARGO BANK, NATIONAL ASSOCIATION, as “Beneficiary”.

Description of Land. The Land referred to in this Deed of Trust is situated in the county of Santa Clara, state of California and is described as follows:

Situated in the City of Milpitas

PARCEL 2, as shown on Parcel Map filed November 4, 1998 in Book 709 of Maps, at Page(s) 41 and 42, Santa Clara County Records.

Assessor’s Parcel Number: 086-03-085

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Nathan Zommer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IXYS Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2007

/s/ Nathan Zommer  

Nathan Zommer 

President, Chief Executive Officer and Chairman
(Principal Executive Officer) 

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Uzi Sasson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IXYS Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2007

/s/ Uzi Sasson  

Uzi Sasson 

Chief Operating Officer, Chief Financial Officer and
Vice President (Principal Financial Officer) 

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. Section 1350, as adopted) (the Sarbanes-Oxley Act of 2002), Nathan Zommer, the Chief Executive Officer of IXYS Corporation (the “Company”), and Uzi Sasson, the Chief Operating Officer and Chief Financial Officer of the Company, each hereby certifies that, to his knowledge:

1. The Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the periods covered by the Periodic Report and results of operations of the Company for the periods covered by the Periodic Report.

Dated: November 7, 2007

/s/ Nathan Zommer  

Nathan Zommer 

Chief Executive Officer 

/s/ Uzi Sasson  

Uzi Sasson 

Chief Operating Officer
Chief Financial Officer