10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 – Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

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

FOR THE TRANSITION PERIOD FROM                 TO

COMMISSION FILE NUMBER: 0-22689

SCM MICROSYSTEMS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) 77-0444317
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)

466 Kato Terrace, Fremont, CA 94539
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

(510) 360- 2300
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

47211 Bayside Parkway, Fremont, CA 94538
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)

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. [X]  Yes   [   ]  No

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X]   No  [  ]

At April 23, 2003, 15,495,323 shares of common stock were outstanding.

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TABLE OF CONTENTS

	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure about Market Risk Foreign Currencies
	Item 4. Controls and Procedures
PART II: OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT INDEX
EXHIBIT 10.21
EXHIBIT 10.22
EXHIBIT 99.1

Item 1. Financial Statements

SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)

			Three Months
			Ended March 31,
			2003			2002
Net revenue			$	31,026		$	43,429
Cost of revenue				21,256			28,849
Gross profit				9,770			14,580
Operating expenses:
	Research and development			3,451			2,851
	Selling and marketing			7,050			6,427
	General and administrative			3,214			4,147
	Amortization of intangible assets			409			289
	Restructuring and infrequent charges			353			789
		Total operating expenses		14,477			14,503
Income (loss) from operations				(4,707	)		77
Interest and other, net				1,089			(172	)
		Loss before income taxes		(3,618	)		(95	)
Benefit (provision) for income taxes				(106	)		208
Net income (loss)			$	(3,724	)	$	113
Basic net income (loss) per share			$	(0.24	)	$	0.01
Diluted net income (loss) per share			$	(0.24	)	$	0.01
Shares used to compute basic net income (loss) per share				15,551			15,542
Shares used to compute diluted net income (loss) per share				15,551			16,211
Comprehensive income (loss):
	Net income (loss)		$	(3,724	)	$	113
Unrealized gain on investments, net of deferred taxes				133			24
	Foreign currency translation adjustment			(670	)		203
		Total comprehensive income(loss)	$	(4,261	)	$	340

See notes to condensed consolidated financial statements.

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SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)

				March 31,			December 31,
				2003			2002
ASSETS
Current assets:
	Cash and cash equivalents			$	51,300		$	50,133
	Short-term investments				4,557			5,384
	Accounts receivable, net of allowances of $4,554 and $5,327 as of March 31, 2003 and December 31, 2002, respectively				19,645			31,254
	Inventories				40,919			39,114
	Other current assets				6,444			6,629
		Total current assets			122,865			132,514
Property and equipment, net					9,146			9,124
Investments					429			—
Intangible assets, net					3,966			4,317
Other assets					2,881			2,662
Total assets				$	139,287		$	148,617
			LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	17,310		$	21,470
	Accrued compensation and related benefits				3,990			3,206
	Accrued restructuring and infrequent charges				7,399			8,175
	Accrued sales and marketing promotions				2,412			3,163
	Other accrued expenses				9,910			9,989
	Income taxes payable				2,603			2,514
		Total current liabilities			43,624			48,517
Stockholders’ equity:
	Common stock, $0.001 par value: 40,000 shares authorized; 15,495 and 15,582 shares issued and outstanding as of March 31, 2003 and December 31, 2002, respectively				16			16
	Additional paid-in capital				225,608			225,608
	Treasury stock				(923	)		(674	)
	Deferred stock compensation				(344	)		(417	)
	Accumulated deficit				(127,206	)		(123,482	)
	Other cumulative comprehensive loss				(1,488	)		(951	)
		Total stockholders’ equity			95,663			100,100
Total liabilities and stockholders’ equity				$	139,287		$	148,617

See notes to condensed consolidated financial statements.

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SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

				Three Months
				Ended March 31,
				2003			2002
Cash flows from operating activities:
	Net income (loss)			$	(3,724	)	$	113
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Deferred income taxes			—			31
		Depreciation and amortization			1,181			1,059
		Loss on disposal of fixed assets			30			—
		Amortization of deferred stock compensation			73			88
		Changes in operating assets and liabilities:
			Accounts receivable		11,563			4,044
			Inventories		(1,723	)		(4,582	)
			Other assets		99			(36	)
			Accounts payable		(4,116	)		(983	)
			Accrued expenses		(1,082	)		403
			Income taxes payable		82			(257	)
			Net cash provided by (used in) operating activities		2,383			(120	)
Cash flows from investing activities:
	Capital expenditures				(790	)		(438	)
	Proceeds from disposal of fixed assets				—			13
	Purchase of long-term investments				(432	)		—
	Maturities of short-term investments				960			—
	Purchases of short-term investments				—			(2,597	)
			Net cash used in investing activities		(262	)		(3,022	)
Cash flows from financing activities:
	Proceeds from issuance of equity securities, net				—			26
	Repurchase of common stock				(248	)		—
			Net cash provided by (used in) financing activities		(248	)		26
Effect of exchange rates on cash and cash equivalents					(706	)		666
Net increase (decrease) in cash and cash equivalents					1,167			(2,450	)
Cash and cash equivalents at beginning of period					50,133			59,421
Cash and cash equivalents at end of period				$	51,300		$	56,971
Supplemental disclosures of cash flow information - cash paid for:
	Income taxes			$	6		$	208
	Interest			$	4		$	7

See notes to condensed consolidated financial statements.

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SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they 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. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in SCM Microsystems’ (“SCM”) December 31, 2002 Annual Report on Form 10-K.

     Reclassifications – Certain reclassifications have been made to the 2002 financial statement presentation to conform to the 2003 presentation.

2. SHORT-TERM AND STRATEGIC INVESTMENTS

     The Company’s available-for-sale short-term investments are as follows (in thousands):

	March 31, 2003						December 31, 2002
			Unrealized		Estimated				Unrealized			Estimated
	Cost		Gain		Value		Cost		Gain (Loss)			Value
Corporate notes	$	2,774	$	12	$	2,786	$	3,769	$	(25	)	$	3,744
U.S. government agencies		520		1		521		520		3			523
Total	$	3,294	$	13	$	3,307	$	4,289	$	(22	)	$	4,267

     Strategic investments consist of corporate equity securities and investments in privately held companies, in which SCM holds less than 20% ownership and does not have the ability to exercise control, are accounted for by the cost method. Corporate securities are included in either short-term investments or long-term investments and stated at fair value based on quoted market price. Investments in privately held companies are included in long-term investments.

     Strategic investments designated as short-term consist of the following (in thousands):

	March 31,		December 31,
	2003		2002
Investment in SmartDisk, at fair value	$	101	$	121
Investment in ActivCard, at fair value		1,149		996
Total	$	1,250	$	1,117

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     Strategic investments designated as long-term consist of the following (in thousands):

	March 31,		December 31,
	2003		2002
Investment in Cryptovision, at cost	$	429	$	—

     During each quarter, the Company evaluates its investments for possible asset impairment by examining a number of factors including the current economic conditions and markets for each investment, as well as their cash position and anticipated cash needs for the short- and long-term. During 2002, because of the continued deterioration of general economic conditions, changes in specific market conditions for each investment and difficulties by SmartDisk in obtaining additional funding, SCM determined that investments in SmartDisk and ActivCard were impaired. Accordingly, SCM wrote down these investments to their fair market value as of September 2002.

3. INVENTORIES

     Inventories consist of (in thousands):

	March 31,		December 31,
	2003		2002
Raw materials	$	18,336	$	16,733
Finished goods		22,583		22,381
	$	40,919	$	39,114

4. GOODWILL AND OTHER INTANGIBLE ASSETS

     SCM adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. As defined by SFAS No. 142, the Company identified two reporting units which constitute components of SCM’s business that included goodwill. As of January 1, 2002, the fair value of these two reporting units was assessed and compared to the respective carrying amounts. Upon completion of the transitional impairment test, the fair value for each of SCM’s reporting units approximated or exceeded the reporting units carrying amount and no impairment was indicated.

     The changes in the carrying amount of goodwill for the year ended December 31, 2002 and the three months ended March 31, 2003 are as follows (in thousands):

				Digital
				Media and
	Security			Video			Total
Balance as of January 1, 2002	$	5,342		$	6,612		$	11,954
Reclassification of assembled workforce in accordance with SFAS No. 142		88			58			146
Goodwill acquired during the period		860			—			860
Impairment loss		(6,290	)		(6,670	)		(12,960	)
Balance as of December 31, 2002		—			—			—
Goodwill acquired during the period		—			—			—
Balance as of March 31, 2003	$	—		$	—		$	—

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     Intangible assets consist of the following (in thousands):

				March 31, 2003							December 31, 2002
		Gross							Gross
	Amortization	Carrying		Accumulated					Carrying		Accumulated			Impairment
	Period	Value		Amortization			Net		Value		Amortization			Loss			Net
Core technology	60 months	$	6,799	$	(4,224	)	$	2,575	$	6,764	$	(3,949	)	$	—		$	2,815
Customer relations	60 months		2,470		(1,161	)		1,309		2,439		(1,033	)		—			1,406
Trade name	Indefinite		—		—			—		4,191		(1,703	)		(2,488	)		—
Non-compete agreements	24 months		862		(780	)		82		858		(762	)		—			96
Total intangible assets		$	10,131	$	(6,165	)	$	3,966	$	14,252	$	(7,447	)	$	(2,488	)	$	4,317

     Amortization of intangible assets in the first quarter of 2003 was $0.4 million compared with $0.3 million for the same period of 2002.

     Estimated future amortization expense is as follows (in thousands):

Fiscal Year	Amount
2003 (remaining 9 months)	$	1,128
2004		1,130
2005		891
2006		575
2007		242
Total	$	3,966

     Under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company recorded an impairment charge of $15.4 million in the fourth quarter of 2002 related to the goodwill and trade names acquired in past acquisitions in order to adjust goodwill and intangible assets to their estimated fair value as of December 31, 2002.

5. RESTRUCTURING AND INFREQUENT CHARGES

     In the first quarter of 2003 and 2002, SCM incurred net restructuring and infrequent charges of approximately $0.4 million and $0.8 million, respectively.

     Restructuring costs for the three months ended March 31, 2003 consisted of approximately $0.1 million for severance costs and asset write downs related to the closure and relocation of certain SCM facilities. These charges were in accordance with SFAS 146 and represent the total amount expected to be incurred in the restructuring action. The severance costs related to the reduction in force of approximately 11 employees. Approximately eight of these employees were from Operations, two from Research and Development and one from General and Administrative functions. Approximately 10 were from Asia and one from Europe. Restructuring costs for the three months ended March 31, 2002 consisted of approximately $0.3 million of severance costs relating to the termination of nine employees, eight in the United States and one in Europe. Approximately four employees were from Sales and Marketing, two from Operations, two from General and Administrative functions and one from Research and Development.

     Infrequent charges for the three months ended March 31, 2003 and March 31, 2002 consisted primarily of costs relating to the announced separation of the Digital Media and Video division of approximately $0.3 million and $0.4 million, respectively, for legal, accounting and professional fees. Infrequent charges for the three months ended March 31, 2002 also included $0.1 million of asset impairment.

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     Accrued liabilities related to restructuring actions and infrequent activities during the first quarter of 2003 and during 2002 consist of the following (in thousands):

							Asset
	Legal			Lease			Write						Other
	Settlements			Commitments			Downs			Severance			Costs			Total
Balances as of January 1, 2002	$	578		$	1,515		$	43		$	307		$	273		$	2,716
Provision for 2002		756			2,037			1,031			958			7,305			12,087
Changes in estimates		(183	)		(229	)		2			(16	)		(30	)		(456	)
		573			1,808			1,033			942			7,275			11,631
Payments or write offs in 2002		(817	)		(425	)		(1,019	)		(902	)		(3,009	)		(6,172	)
Balances as of December 31, 2002		334			2,898			57			347			4,539			8,175
Provision for Q1 2003		—			—			17			111			234			362
Changes in estimates		—			(25	)		16			—			—			(9	)
		—			(25	)		33			111			234			353
Payments or write offs in Q1 2003		(334	)		(223	)		(32	)		(400	)		(140	)		(1,129	)
Balances as of March 31, 2003	$	—		$	2,650		$	58		$	58		$	4,633		$	7,399

6. RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for the Company’s fiscal year beginning January 1, 2003. The Company adopted the disclosure requirements of SFAS No. 148 in 2002. The Company has not yet determined the impact, if any, that SFAS No. 148 may have on its financial position or results of operations.

     In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, (FIN No. 45). FIN No. 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The Company adopted the disclosure requirements of FIN No. 45 in 2002. (See Note 10 concerning the reserve for warranty costs.) The recognition and measurement provisions apply to guarantees issued or modified after December 31, 2002. The Company does not expect the adoption of the recognition and measurement provisions to have a material effect on our financial position, results of operations or cash flows.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost, as defined in Issue No. 94-3, was recognized at the date of an entity’s commitment to an exit plan. This statement also establishes that the liability should initially be measured and recorded at fair value. In 2003, the Company adopted the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002 and the adoption did not have an impact on the historical results of operations or cash flows.

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7. ACQUISITIONS

     Towitoko AG

     On May 22, 2002, SCM paid $4.5 million in cash in exchange for all the outstanding share capital of Towitoko AG, a privately held smart card-based security solutions company based in Munich, Germany. The acquisition has been accounted for under the purchase method of accounting and the results of operations were included in SCM’s results of operations since the date of the acquisition. In connection with the acquisition, SCM incurred acquisition costs of approximately $0.1 million.

     A valuation of the intangible assets related to the acquisition was finalized in December 2002. A summary of the allocation of the purchase price is as follows (in thousands):

Cash		$	483
Tangible assets			2,476
Assumed liabilities			(1,854	)
Trade name			259
Customer relations			1,120
Core technology			1,270
Non-compete agreements			119
Goodwill			775
	Total	$	4,648

     Intangible assets and goodwill from the acquisition approximated $3.5 million and represented the excess of the purchase price over the fair value of the tangible assets acquired less the liabilities assumed. The goodwill and trade name of $1.1 million were evaluated for impairment in accordance with SFAS No. 142 in the fourth quarter of 2002 and were written off. Intangible assets with definite lives are being amortized over their useful lives which range from two to five years.

     Pro forma results of operations to reflect the acquisition as if it had occurred on the first date of all periods presented would not be significantly different than SCM’s results of operations as stated.

8. STOCK BASED COMPENSATION

     The Company accounts for its employee stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (FIN No. 44). Accordingly, no compensation is recognized for employee stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at date of grant. If the exercise price is less than the market value at the date of grant, the difference is recognized as deferred compensation expense, which is amortized over the vesting period of the options. The Company accounts for stock options issued to non-employees in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and EITF Issue No. 96-18 under the fair value based method.

     Pursuant to FIN No. 44, options assumed in a purchase business combination are valued at the date of acquisition at their fair value calculated using the Black-Scholes option pricing model. The fair value of the assumed options is included as part of the purchase price. The intrinsic value attributable to the unvested options is recorded as unearned stock-based compensation and amortized over the remaining vesting period of the related options. Options assumed by the Company related to the business acquisitions made subsequent to July 1, 2000 (the effective date of FIN No. 44) have been accounted for pursuant to FIN No. 44.

     For purposes of pro forma disclosure under SFAS No. 123, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting period, using the multiple option method. Pro forma information is as follows (in thousands, except per share amounts):

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	Three months ended
	March 31,
	2003			2002
Net income (loss), as reported	$	(3,724	)	$	113
Add: Stock-based compensation included in reported net income (loss), net of related tax effects		73			51
Less: Stock-based compensation expense determined under fair value method for all awards, net of related tax effects		(2,224	)		(9	)
Pro forma net income (loss)	$	(5,875	)	$	155
Net income (loss) per share, as reported - basic	$	(0.24	)	$	0.01
Net income (loss) per share, as reported - diluted	$	(0.24	)	$	0.01
Pro forma income (loss) per share, as reported - basic	$	(0.38	)	$	0.01
Pro forma income (loss) per share, as reported - diluted	$	(0.38	)	$	0.01

9. STOCK REPURCHASE PROGRAM

     In October 2002, the Company’s Board of Directors approved a stock repurchase program in which up to $5.0 million may be used to purchase shares of the Company’s common stock on the open market in the United States or Germany from time to time over the next two years, depending on market conditions, share prices and other factors. Repurchases during the three months ended March 31, 2003 totaled approximately $0.2 million and the total repurchases made by the Company under this program totaled $0.9 million as of March 31, 2003.

10. COMMITMENTS

     The Company leases its facilities, certain equipment, and automobiles under noncancelable operating lease agreements. These agreements expire at various dates during the next fourteen years.

     The Company provides warranties on certain product sales (generally one year) and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair or to replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line combined with liability estimates based on the prior twelve months’ sales activities. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to recognize additional cost of sales may be required in future periods.

     Components of the reserve for warranty costs during the three months ended March 31, 2003 and the year ended December 31, 2002 were as follows (in thousands):

Balance at January 1, 2002	$	747
Additions related to current period sales		646
Warranty costs incurred in the current period		(563	)
Adjustments to accruals related to prior period sales		(141	)
Balance at December 31, 2002		689
Additions related to current period sales		164
Warranty costs incurred in the current period		(214	)
Adjustments to accruals related to prior period sales		(53	)
Balance at March 31, 2003	$	586

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     11. SEGMENT REPORTING, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

     SCM adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, in 1998. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within SCM for making operating decisions and assessing financial performance. Our chief operating decision maker is considered to be our executive staff, consisting of the Chief Executive Officer and Chief Financial Officer.

     Beginning in 2002 and going forward, we have structured our operations around two businesses: Security, which comprises our digital TV and PC security products, and Digital Media and Video, which comprises our digital media and digital video products. In the first quarter of 2003 and 2002, the executive staff reviewed financial information and business performance along these two reportable segments based on contribution or loss from operations before amortization of deferred compensation and intangible assets, interest and income taxes, not including non-recurring gains and losses. We do not include intercompany transfers between segments for management purposes.

     Summary information by segment for the quarters ended March 31, 2003 and 2002 is as follows (in thousands):

		Three Months Ended March 31,
		2003			2002
Security:
	Revenues	$	16,085		$	22,381
	Gross profit		6,779			9,103
	Divisional operating expenses		7,187			6,456
	Operating contribution (loss)		(408	)		2,647
DMV:
	Revenues	$	14,941		$	21,048
	Gross profit		2,991			5,477
	Divisional operating expenses		6,455			6,881
	Operating loss		(3,464	)		(1,404	)
Total:
	Revenues	$	31,026		$	43,429
	Gross profit		9,770			14,580
	Divisional operating expenses		13,642			13,337
	Operating contribution (loss)		(3,872	)		1,243

     A reconciliation of the totals reported for the reportable segments to the applicable line items in the condensed consolidated financial statements is set forth below (in thousands):

		Three Months Ended March 31,
		2003			2002
Total operating contribution from reportable segments		$	(3,872	)	$	1,243
	Amortization of deferred stock compensation		73			88
	Amortization of intangible assets		409			289
	Restructuring and infrequent charges		353			789
	Income (loss) from operations		(4,707	)		77
	Interest and other, net		1,089			(172	)
Loss before income taxes			(3,618	)		(95	)
	Benefit (provision) for income taxes		(106	)		208
Net income (loss)		$	(3,724	)	$	113

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     Geographic revenues are based on the country where the revenue is recognized. Information regarding revenues by geographic region for the three months ended March 31, 2003 and 2002 is as follows (in thousands):

	Three Months Ended March 31,
	2003		2002
United States	$	13,431	$	19,158
Europe		13,657		16,494
Asia-Pacific		3,938		7,777
	$	31,026	$	43,429

     Long-lived assets by geographic location as of March 31, 2003 and December 31, 2002, are as follows (in thousands):

		March 31,		December, 31
		2003		2002
Property and equipment, net:
	United States	$	1,735	$	1,732
	Europe		2,818		3,042
	Asia-Pacific		4,593		4,350
	Total	$	9,146	$	9,124
Intangible assets, net:
	United States	$	1,513	$	1,763
	Europe		2,453		2,554
	Total	$	3,966	$	4,317

     Two customers represented 13% and 10% of SCM’s total net revenue for the quarter ended March 31, 2003. One customer represented 16% of SCM’s total net revenue for the quarter ended March 31, 2002.

12. RELATED PARTY TRANSACTIONS

     During the three months ended March 31, 2003 and 2002, SCM has recognized revenue of approximately $2.0 million and $0.2 million, respectively, from sales to ActivCard Corporation, a digital identity management software company. As of March 31, 2003 and December 31, 2002, accounts receivable amounts due from ActivCard were $1.5 million and $0.7 million, respectively. Although SCM is not a sole supplier of specific products to ActivCard, the companies do share the services of Steven Humphreys. Mr. Humphreys is both the Chairman and Chief Executive Officer of ActivCard and the Chairman of SCM’s Board of Directors. Mr. Humphreys is not directly compensated for revenue transactions between the two companies.

     During the three months ended March 2003 and 2002, SCM has recognized revenue of approximately $0.2 million and $0.4 million, respectively, from sales to Conax AS, a company engaged in the development and provision of smart-card based systems. As of March 31, 2003, there were no accounts receivable amounts due from Conax and as of December 31, 2002, the accounts receivable amounts due were $0.3 million. Oystein Larsen serves as the Executive Vice President, Business Development and New Business, of Conax and is a board director of SCM Microsystems. Mr. Larsen is not directly compensated for revenue transactions between the two companies.

     During 2002, the Company discontinued sales of media and storage products as part of its announced separation of its Digital Media and Video division. This discontinuation included the sale of on hand, media and storage inventory to Pexagon, a company based in Connecticut. SCM recognized no revenue from these sales. As of March 31, 2003 and December 31, 2002, the Company had an accounts receivable due from Pexagon of $2.3 million and $2.9 million, respectively. Brian Campbell, an executive vice president of the Company is the majority shareholder

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of Pexagon. SCM and Pexagon continue to have an ongoing trading relationship, in the form of inventory transactions which are expected to have no material revenue or earnings impact on the results of operations of SCM.

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

     This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical facts included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, financial position, estimated revenues or losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “will,” “believe,” “anticipate,” “estimate,” “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements that we make in this Quarterly Report on Form 10-Q are reasonable, we can give no assurance these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under “Factors That May Affect Future Operating Results.” These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

     The following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this quarterly report. We also urge readers to review and consider our disclosures describing various factors that could effect our business, including the disclosures under Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors and the audited financial statements and notes thereto contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 26, 2003.

Overview

     SCM Microsystems designs, develops and sells hardware, software and silicon that enables people to conveniently and securely access digital content and services, including content and services that have been protected through digital encryption. We were organized in Delaware in 1996. We sell our products primarily into two broad markets: security and digital media. Our target customers vary by market. For the security market, our target customers are primarily manufacturers in the consumer electronics, computer and conditional access system industries. For the digital media market, our target customers are end user consumers as well as manufacturers in the computer and consumer electronics industries. We sell and license our products through a direct sales and marketing organization, both to the retail channel and to original equipment manufacturers, or OEMs. We also sell through distributors, value added resellers and systems integrators worldwide.

     On February 28, 2002, we announced our intention to separate our Digital Media and Video business as an independent entity and make our Security business the core focus of our strategy going forward. During 2002 we evaluated various strategies to separate the Digital Media and Video business, including a spin-off or sale. On October 25, 2002, we further announced that difficult market conditions had led us to conclude that the full value of the Digital Media and Video business was not realizable at that time. We continue to evaluate market and other conditions for the advisability of pursuing, and may elect to pursue, a possible spin-off or sale of the division, or a sale to management.

Critical Accounting Policies and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses SCM’s 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 assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to product returns, customer incentives, bad debts, inventories, asset impairment, deferred tax assets, accrued warranty reserves, restructuring costs, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various

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other factors 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 apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Management believes the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

• SCM recognizes product revenue upon shipment, net of estimated returns, provided that risk and title have transferred, a purchase order has been received, collection is determined to be probable and no significant obligations remain. Product return from distributors is subject to agreements allowing limited rights of return, rebates, and price protection. Accordingly, we reduce revenue recognized for estimated future returns, price protection when given, and rebates, at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel, and other related factors. The estimates and reserves for rebates and price protection are based on historical rates. While management believes we can make reliable estimates for these matters, nevertheless unsold products in these distribution channels are exposed to rapid changes in consumer preferences or technological obsolescence, product updates or competing products. Accordingly, it is possible that these estimates will change in the near future or that the actual amounts could vary materially from our estimates and that the amounts of such changes could seriously harm our business.

• SCM maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of SCM’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

• SCM writes down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If the level of total demand is less favorable than the projections or the mix of sales between products is different to that projected by management, additional inventory write-downs may be required. In 2002 SCM wrote down approximately $4.0 million of inventory based on such judgments.

• SCM holds minority interests in companies having operations or technologies in areas within or adjacent to our strategic focus. Some of these investments are in publicly traded companies and some are in non-publicly traded companies, whose value is difficult to determine. SCM records an investment’s impairment when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investment that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. In 2002 SCM realized impairment charges of approximately $1.8 million related to our investments.

• In assessing the recoverability of our goodwill and other intangibles, SCM must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. On January 1, 2002, SCM adopted SFAS No. 142, Goodwill and Other Intangibles Assets, and is required to analyze our goodwill and intangible assets for impairment issues on a periodic basis. In the fourth quarter of 2002 we recorded $15.4 million of asset impairment based on conclusions that the goodwill and intangible assets from past acquisitions were impaired.

• The carrying value of the SCM’s net deferred tax assets reflects that we have been unable to generate sufficient taxable income in certain tax jurisdictions. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before we are able to realize their benefit, or that future deductibility is uncertain. Management evaluates the realizability of the deferred tax assets on a quarterly basis. In 2002, we reevaluated the realizability of the deferred tax assets and recorded an additional valuation allowance of $12.7 million, reducing our 2002 net income. The deferred tax assets are still available for us to use in the future to offset taxable income, which would result in the recognition of a tax benefit and a reduction in our effective tax rate.

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• SCM accrues the estimated cost of product warranties during the period of sale. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by actual warranty costs, including material usage or service delivery costs incurred in correcting a product failure. If actual material usage or service delivery costs differ from our estimates, revisions to our estimated warranty liability would be required.

• On January 1 2003, we adopted SFAS No. 146, which requires that a liability for a cost associated with an exit or disposal activity initiated after December 31, 2002 be recognized when the liability is incurred and that the liability be measured at fair value. During 2002 the accounting for restructuring costs required us to record provisions and charges when we had a formal and committed plan. In connection with plans we had adopted, we recorded estimated expenses for severance and outplacement costs, lease cancellations, asset write-offs and other restructuring costs. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Recent Accounting Pronouncements

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for our fiscal year beginning January 1, 2003. We adopted the disclosure requirements of SFAS No. 148 in 2002. We have not yet determined the impact, if any, that SFAS No. 148 may have on our financial position or results of operations.

     In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45). FIN No. 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. SCM adopted the disclosure requirements of FIN No. 45 in 2002. The recognition and measurement provisions will be applied to guarantees issued or modified after December 31, 2002. We do not expect the adoption of the recognition and measurement provisions to have a material effect on our financial position, results of operations or cash flows.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost as defined in Issue No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. This statement also establishes that the liability should initially be measured and recorded at fair value. In 2003, SCM adopted the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002, and the adoption did not have an impact on the historical results of operations or cash flows.

Acquisitions

     During 2002 we made the following acquisition:

Towitoko AG

     On May 22, 2002, SCM paid $4.5 million in cash in exchange for all the outstanding share capital of Towitoko AG, a privately held smart card-based security solutions company based in Munich, Germany. The acquisition has been accounted for under the purchase method of accounting and the results of operations were included in our

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results of operations since the date of acquisition. In connection with the acquisition, SCM incurred acquisition costs of approximately $0.1 million. At the time of the acquisition, Towitoko had no significant research and development projects that were incomplete.

     Intangible assets and goodwill from the acquisition approximated $3.5 million and represented the excess of the purchase price over the fair value of the tangible assets acquired less the liabilities assumed. Non-compete agreements entered into in connection with the acquisition are being amortized on a straight-line basis over the term of the agreements of two years. The trade name and goodwill of $1.1 million were evaluated for impairment in the fourth quarter of 2002 and were written off. All other intangible assets are being amortized on a straight-line basis over an estimated useful life of five years.

RESULTS OF OPERATIONS

     Net Revenue. Net revenue for the quarter ended March 31, 2003 was $31.0 million, compared with $43.4 million for the first three months of 2002, a decrease of 29%. The decrease in revenue in the first quarter of 2003 compared with the same quarter in 2002 was due to decreased shipments of both our Security products and our Digital Media and Video products.

     Summary information by segment for the three months ended March 31, 2003 and 2002 is as follows (in thousands):

		Three months ended
		March 31,
		2003			2002
Security:
	Revenues	$	16,085		$	22,381
	Gross profit		6,779			9,103
	Gross profit %		42	%		41	%
Digital Media and Video:
	Revenues	$	14,941		$	21,048
	Gross profit		2,991			5,477
	Gross profit %		20	%		26	%
Total:
	Revenues	$	31,026		$	43,429
	Gross profit		9,770			14,580
	Gross profit %		31	%		34	%

     Revenue from our Security division was $16.1 million in the first quarter of 2003, down $6.3 million, or 28%, from revenue of $22.4 million in the first quarter of 2002. This decrease reflects weaker demand across our Security business, including our conditional access modules used in European digital TV broadcast decryption as well as our smart card reader products, which are sold both to the U.S. government and to corporations and financial institutions worldwide. Sales of our smart card readers decreased primarily due to lower orders related to the U.S. government’s Common Access Program, which slowed deployments in the first quarter. Revenue from our Digital Media and Video division was $14.9 million in the first quarter of 2003, down $6.1 million, or 29%, from revenue of $21.0 million in the first quarter of 2002. Decreased sales in this division reflect a generally weaker retail market, especially in North America and the U.K.

     Sales to SCM’s top 10 customers accounted for 60% and 50% of total net revenues in the first quarter of 2003 and 2002, respectively.

     Gross Profit. Gross profit for the first quarter of 2003 was $9.8 million, or 31% of total net revenue, compared with $14.6 million, or 34%, for the first quarter of 2002. The decrease in gross profit in both absolute dollars and

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percentage of revenues was due to lower revenues in the 2003 quarter, as well as higher costs of products sold, in the Digital Media and Video division arising from high redemption rates on rebate programs run during the quarter. Gross profit for our Security products was $6.8 million, or 42% in the first quarter of 2003, and gross profit for our Digital Media and Video products was $3.0 million, or 20% of revenue. Our gross profit has been and will continue to be affected by a variety of factors, including competition, the volume of sales in any given quarter, product configuration and mix, the availability of new products, product enhancements, software and services, and the cost and availability of components. Accordingly, gross profit percentages are expected to fluctuate from period to period.

     Research and Development. Research and development expenses consist primarily of employee compensation and fees for the development of prototype products. To date, the period between achieving technological feasibility and completion of software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, SCM has not capitalized any software development costs. For the first quarter of 2003, research and development expenses were $3.5 million, compared with $2.9 million in the first quarter of 2002, an increase of 21%. As a percentage of total net revenue, research and development expenses were 11% and 7% in the first quarter of 2003 and 2002, respectively. The increase in absolute amounts was primarily due to increased investment in our Security division’s Indian and European research centers. Research and development costs as a percentage of net revenue are expected to fluctuate from period to period.

     Selling and Marketing. Selling and marketing expenses consist primarily of employee compensation and advertising and other marketing costs. Selling and marketing expenses for the first quarter of 2003 were $7.1 million, or 23% of net revenues, compared with $6.4 million in the first quarter of 2002, or 15% of net revenues, an increase of 10%. This increase in absolute amounts of $0.6 million in 2003 is primarily due to increased headcount in selling and marketing costs in our Security Division in the U.S. and Europe, as well as promotional activities in our Digital Media and Video division.

     General and Administrative. General and administrative expenses consist primarily of compensation expenses for employees performing SCM’s administrative functions, professional fees such as legal, audit, tax and consulting fees, and changes to allowances for doubtful accounts receivable. In the first quarter of 2003, general and administrative expenses were $3.2 million, a decrease of 22% compared with $4.1 million in the first quarter of 2002, and representing 10% of total net revenue in the each of the first quarters of 2003 and 2002. This decrease in the absolute amount in 2003 compared to the same quarter in 2002 was primarily due to a decrease in expense for allowances of doubtful accounts receivable of $0.5 million, combined with reduced office administration and associated expenses related to the restructuring activities completed in 2002. We expect that general and administrative costs will fluctuate as a percentage of total net revenue.

     Segment Operating Expenses. Throughout 2002, SCM organized, reported and measured our operating performance within two separate divisions: Security, and Digital Media and Video. Segment operating expenses include research and development, sales and marketing, and general and administrative. Operating expenses that are directly attributable to a division have been reported within that division. Shared operating expenses, such as facility and general and administrative costs have been allocated by management using consistent and reasonable assumptions. For detail of segment operating expenses prepared in accordance with G.A.A.P., see Note 11 in Item 1.

Security operating expenses for the first quarter of 2003 were $7.2 million, compared with $6.5 million in the first quarter of 2002, an increase of 11%. The increase was primarily due to higher headcount and associated personnel costs in both sales and marketing and research and development functions.

Digital Media and Video expenses for the first quarter of 2003 were $6.5 million, compared with $6.9 million in the first quarter of 2002, a decrease of 6%. This decrease was primarily due to reduced sales and marketing costs resulting from lower revenue levels for the period.

     Amortization of Intangible Assets. Amortization of intangible assets in the first quarter of 2003 was $0.4 million compared with $0.3 million for the same period of 2002. Since our adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, we have ceased to amortize goodwill and indefinite-lived intangible assets that resulted from business combinations completed prior to June 30, 2001. Amortization of intangibles for all of fiscal 2003 is expected to be approximately $1.5 million.

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     Restructuring and Infrequent Charges. During the first quarter of 2003, SCM incurred restructuring and infrequent charges of $0.4 million. These expenses were primarily related to legal and consulting costs of $0.3 million related to the announced separation of our Digital Media and Video Division and $0.1 million relating to severance and other costs relating to reduction in workforce. During the first quarter of 2002, SCM incurred restructuring and infrequent charges of $0.8 million. These expenses consisted of $0.4 million related to legal and consulting costs in connection with the announced separation of our Digital Media and Video division, $0.3 million related to severance and other costs, and $0.1 million related to an asset impairment.

     Interest and Other, Net. Interest and other, net consists of interest earned on invested cash, offset by interest paid or accrued on outstanding debt and foreign currency gains or losses. In the first quarter of 2003, interest and other income net, was $1.1 million, compared to a net expense of $0.2 million in the first quarter of 2002. Net interest income for the first quarter of 2003 was $0.2 million compared to $0.3 million for the same period in 2002. The decrease was primarily the result of lower average investable cash balances and lower interest rates. Foreign currency transaction gains for the first quarter of 2003 were $1.0 million compared to losses of $0.4 million for the first quarter of 2002. Gains in the first quarter of 2003 were primarily a result of favorable rate changes for the U.S. dollar compared to the Singapore dollar and the euro. The foreign exchange loss in the first quarter of 2002 was primarily due to unfavorable rate changes for the Singapore dollar and the British pound compared to the United States dollar. These gains and losses resulted primarily from the revaluation of receivables (especially U.S. dollar denominated receivables) to the functional currency of the subsidiary.

     Benefit/Provision for Income Taxes. The provision for income taxes in the first quarter of 2003 was $0.1 million, compared to an income tax benefit of $0.2 million in the first quarter of 2002. The charge for the period was a result of taxes payable in foreign jurisdictions, which are not offset by operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 2003, our working capital, which is defined as current assets less current liabilities, was $79.2 million compared to our working capital of $84.0 million as of December 31, 2002. Working capital decreased in the first quarter of 2003 by approximately $4.8 million, due to a decrease in accounts receivable of $11.6 million, partially offset by an increase in inventory of $1.7 million and a decrease in current liabilities of $5.1 million.

     Cash and cash equivalents increased by $1.2 million during the first quarter of 2003, primarily due to cash provided by operating activities of $2.4 million being partially offset by cash used in investing activities of $0.3 million and in financing activities of $0.2 million, and the effect of exchange rates on cash and cash equivalents of $0.7 million. Cash provided by operations of $2.4 million was primarily due to a $3.7 million net loss, the adding back of depreciation and amortization of $1.2 million, and the amortization of deferred stock compensation of $0.1 million, decreases in accounts receivable of $11.6 million and in other assets of $0.1 million, and an increase in income taxes payable of $0.1 million. These were offset by an increase in inventories of $1.7 million and decreases in accounts payable of $4.1 million and accrued expenses of $1.1 million. Cash used in investing activities was primarily for capital expenditures of $0.8 million offset by $0.5 million provided by net short-term investments. Cash used in financing activities was primarily for the repurchase of common stock of $0.2 million.

     We have a revolving line of credit with a bank in Germany providing total borrowings of up to 0.8 million Euro (approximately $0.8 million as of March 31, 2003). The German line has no expiration date and bears interest at 6%. Borrowings under this line of credit are unsecured. We have an unsecured line of credit in France of 0.3 million euros (approximately $0.3 million as of March 31, 2003) which bears interest at 3.86% and has no expiration date. In addition, the Company has three separate overdraft facilities for the Company’s manufacturing facility of 4.0 million, 1.2 million and 5.9 million Singapore dollars (approximately $2.3 million, $0.7 million and $3.3 million as of March 31, 2003) with base interest rates of 4.8%, 6.5% and 7.0% respectively. All of the facilities are unsecured and due upon demand. There were no amounts outstanding under any of these credit facilities as of March 31, 2003.

     During the fourth quarter of 2002, our Board of Directors authorized a stock repurchase program under which up to $5 million may be used to purchase shares of SCM’s stock on the open market in the United States or Germany

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from time to time over the next two years, depending on market conditions, share prices and other factors. Such repurchases could be used to offset the issuance of additional shares resulting from employee stock option exercises and the sale of shares under the employee stock purchase plan. As of March 21, 2003, we had repurchased 199,400 shares of our common stock for an aggregate of $0.9 million pursuant to this program.

     We currently expect that our current capital resources and available borrowings should be sufficient to meet our operating and capital requirements through at least the next twelve months. We may, however, seek additional debt or equity financing prior to that time. There can be no assurance that additional capital will be available to SCM on favorable terms or at all. The sale of additional debt or equity securities may cause dilution to existing stockholders.

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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

     If any of the following risks actually occur, our business, financial condition, results of operations or product market share could be materially adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment.

We have incurred operating losses and may not achieve profitability.

     We have a history of losses with an accumulated deficit of $127.2 million as of March 31, 2003. We may continue to incur losses in the future and may be unable to achieve or maintain profitability.

Our quarterly operating results will likely fluctuate.

     Our quarterly operating results have varied greatly in the past and will likely vary greatly in the future depending upon a number of factors. Many of these factors are beyond our control. Our revenues, gross margins and operating results may fluctuate significantly from quarter to quarter due to, among other things:

• business and economic conditions overall and in our markets,

• the timing and amount of orders we receive from our customers that, in the case of our consumer products, products sold to the U.S. government or large enterprises and products sold to customers in the digital television market, may be tied to seasonal demand, budgetary cycles or equipment roll-out schedules, respectively;

• cancellations or delays of customer product orders, or the loss of a significant customer;

• our backlog and inventory levels;

• our customer and distributor inventory levels and product returns;

• new product announcements or introductions by us or our competitors;

• our ability to develop, introduce and market new products and product enhancements on a timely basis, if at all;

• the sales volume, product configuration and mix of products that we sell;

• our success in expanding our sales and marketing organization and programs;

• technological changes in the market for our products;

• increased competition or reductions in the average selling prices that we are able to charge;

• fluctuations in the value of foreign currencies against the U.S. dollar;

• the timing and amount of marketing and research and development expenditures;

• our investment experience related to our strategic minority equity investments; and

• costs related to events such as acquisitions, litigation and write-off of investments.

     Due to these and other factors, our revenues may not increase or remain at their current levels. Because a high percentage of our operating expenses are fixed, a small variation in our revenue can cause significant variations in our earnings from quarter to quarter and our operating results may vary significantly in future periods. Therefore, our historical results may not be a reliable indicator of our future performance.

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A number of factors make it difficult to estimate operating results prior to the end of a quarter.

     We do not typically maintain a significant level of backlog. As a result, revenue in any quarter depends on contracts entered into or orders booked and shipped in that quarter. In recent periods, customers, including distributors of our consumer products, have tended to make a significant portion of their purchases towards the end of the quarter, in part because they are able, or believe that they are able, to negotiate lower prices and more favorable terms. This trend makes predicting revenues difficult. The timing of closing larger orders increases the risk of quarter-to-quarter fluctuation. If orders forecasted for a specific group of customers for a particular quarter are not realized or revenues are not otherwise recognized in that quarter, our operating results for that quarter could be materially adversely affected.

Weakness in the economy could decrease demand for our products or for our customers’ products, decreasing our revenue and causing customers to decrease or cancel orders to us or to delay payment.

     Over the past several quarters, economic conditions in the United States have resulted in decreased demand and constrained growth in demand from end users for many companies’ products, including ours. In our Security business, decreased demand in the European digital television market has contributed to declining and lower than expected revenue. If this trend continues, future revenues and results of operation in our Security business will be adversely affected. Also, current market forecasts for consumer spending in 2003 indicate that demand may decrease for our digital media and video products sold through the retail and OEM channels. Actual reductions or constrained rate of growth in consumer spending impacts our OEM business as well as our retail business because our OEM customers may reduce or cancel orders for our products if their own visibility of future orders is compromised by decreased demand or if increased pricing pressures force them to reduce costs by ceasing to bundle our products along with their own. Decreased or lower than expected sales will most likely adversely affect our stock price. Also, reduced or canceled orders for our products could lead to decreased sales in a particular period and, because many of our products are custom made for particular customers, could also cause us to write off inventory. In some cases, customers could delay payment or be unable to pay for orders made to us, causing us to increase our allowance for doubtful accounts or to write off certain receivables. In addition, if we anticipate that demand for our products will not increase, we may decide to reduce our operating expense base in order to maintain or reach profitability. Decreased sales, expense base decreases or any write-offs, or any combination of these, could have a material adverse effect on our operating results.

There are risks associated with our decision to separate our Digital Media and Video business and our Security business.

     On February 28, 2002, we announced our intention to create two distinct businesses within SCM, a Security business and a Digital Media and Video business. In addition, we announced our intention to separate our Digital Media and Video business as an independent entity and make our Security business the core focus of our strategy going forward. During 2002, we restructured our internal organization in order to manage separately our Security and Digital Media and Video businesses. On October 25, 2002, we further announced that difficult market conditions had led us to conclude that the full value of the Digital Media and Video business was not realizable at that time. We have continued to evaluate various options to separate the Digital Media and Video business, including trade sale, a spin-off or a sale of the business to management, in order to determine which will maximize value for our stockholders. Continued weak performance in the capital markets has made it difficult to predict the timing and success of either of these options. If the capital markets do not stabilize, we may not be able to successfully create a public market for the Digital Media and Video business, and potential acquirers may not be able to secure funding to purchase the business. Other factors, such as the Digital Media and Video business’s operating performance, may affect our ability to sell or spin off the business.

     If we are unable to properly implement the separation, our revenue and results of operations and our stock price could be adversely affected. The implementation requires management to make and effect several administrative and employment-related decisions efficiently. If we do not implement these decisions efficiently, our operating results could be adversely affected. Furthermore, there is no assurance that, if we do implement the separation efficiently, we will realize the benefits we contemplate from it. If we do not realize these benefits, our operations could be adversely affected and our stock price could decline. Risks related to our separation strategy include:

• the separation process and results thereof occupy a significant portion of senior management time and effort and may distract management and employees from the operation of our businesses;

• the separation could be further delayed or cancelled;

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• we may incur accounting charges in connection with the separation;

• as a result of the separation, or our customers’ perceptions about the announced separation, we may be unable to sell and required to write off some of our existing Digital Media and Video inventory;

• as a result of the separation, or our customers’ perceptions about the announced separation, we may be unable to collect and required to write off some of our existing accounts receivable;

• our separation strategy could be perceived negatively by our customers or cause them to choose our competitors’ products instead of ours;

• implementation of the separation strategy could make it more difficult for us to retain employees and may otherwise adversely affect employee morale; and

• adverse market perception of the separation or the delay in separation may cause our stock price to decline.

Our listing on the Prime Standard of the Frankfurt Stock Exchange exposes our stock price to additional risks of fluctuation.

     Our common stock currently experiences a significant volume of trading on the Prime Standard of the Frankfurt Stock Exchange. Because of this, factors that would not otherwise affect a stock traded solely on Nasdaq may cause our stock price to fluctuate. Investors outside the United States may react differently and more negatively than investors in the United States to events such as acquisitions, one-time charges and lower than expected revenue or earnings announcements. Any negative reaction by investors in Europe to such events could cause our stock price to decrease. The European economy and market conditions in general, or downturns on the Prime Standard specifically, regardless of the Nasdaq market conditions, could negatively impact our stock price.

Our stock price has been and is likely to remain volatile.

     The stock market has recently experienced significant price and volume fluctuations that have particularly affected the market prices of the stocks of technology companies. During the 12-month period from April 24, 2002 to April 23, 2003, the reported sale prices for our common stock on the Nasdaq market ranged between $13.90 and $2.50 per share. Volatility in our stock price may result from a number of factors, including:

• variations in our or our competitors’ financial and/or operational results;

• the fluctuation in market value of comparable companies in any of our markets;

• comments and forecasts by securities analysts;

• expected or announced relationships with other companies;

• trading patterns of our stock on the Nasdaq Stock Market or Prime Standard of the Frankfurt Stock Exchange;

• any loss of key management;

• announcements of technological innovations or new products by us or our competition;

• developments related to our decision to separate our Digital Media and Video business and focus on our Security business as a core strategy;

• litigation developments; and

• general market downturns.

     In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of our management’s attention and resources.

Sales of our products depend on the development of several emerging markets.

     We sell our products primarily to emerging markets that have not yet reached a stage of mass adoption or deployment. If demand for products in these markets does not develop and grow sufficiently, revenue and gross profit margins in either or both of our Security or our Digital Media and Video businesses could level off or decline.

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We cannot predict the future growth rate, if any, or size or composition of the market for our products in any of these markets. The demand and market acceptance for our products, as is common for new technologies, will be subject to high levels of uncertainty and risk and may be influenced by several factors, including general economic conditions.

     In our Security business, these factors also include the following:

• the slow pace and uncertainty of adoption in Europe and Asia of open systems digital television platforms that require conditional access modules, such as ours, to decrypt pay-TV broadcasts;

• the strength of entrenched security and set-top receiver suppliers in the United States who may resist the use of removable conditional access modules, such as ours, and prevent or delay opening the U.S. digital television market to greater competition;

• the uncertainty of adoption of smart cards by the U.S. government for large scale security programs beyond those in place today; and

• the ability of financial institutions, corporate enterprises and the U.S. government to create and deploy smart card-based applications that will drive demand for smart card readers such as ours.

     For instance, we believe that, over time, the European digital television industry will transition to removable, modular security, and that our Security business will benefit from this transition. However, as this transition occurs, we believe that large television operators in Europe are struggling financially because of their high-cost delivery models and that smaller operators have also been adversely affected by turmoil in the industry. We believe these factors have contributed to revenue declines over the past year in our Security business. If these conditions continue, the revenue and results of operations in our Security business could continue to be adversely affected.

     In our Digital Media and Video business, demand for our products will also be influenced by the following:

• the ability of flash memory card manufacturers to develop higher capacity memory cards that will drive demand for digital media readers, such as ours, that enable rapid transfer of large amounts of data;

• the availability of low cost hardware and software OEM solutions to allow expansion in the PC OEM market; and

• increased consumer acceptance of DVDs, CDs and DVD players and readers that will drive demand for solutions such as ours to create and publish digital media content.

If we do not achieve our targeted levels of revenues or anticipate the correct mix of products that will be sold we may be required to record further charges related to excess inventories.

     Due to the unpredictable nature of the demand for our products in both our Security and Digital Media and Video businesses we are required to place orders with our suppliers for components, finished products and services in advance of actual customer commitments to purchase these products. Significant unanticipated fluctuations in demand could result in costly excess production or inventories. In order to minimize the negative financial impact of this excess production we may be required to significantly reduce the sales price of the product to increase demand which in turn could result in a reduction in the value of the original inventory purchase. This could result in a charge adversely impacting our cost of revenues and financial condition.

     During 2002 we recorded charges related to inventory in our Digital Media and Video division due in part to the reduced demand for specific products. The relatively large number of products in the portfolio of this division increases the complexity of forecasting which in turn increases the risk that certain products may be purchased that become excess to demand. The announced separation of the Digital Media and Video Division may impact further our ability within that division to effectively execute adequate inventory forecasting and management, and failure of execution may result in further inventory related charges.

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We rely heavily on our strategic relationships.

     If we are unable to anticipate market trends and the price, performance and functionality requirements for our products, we may not be able to develop and sell products that are commercially viable and widely accepted. We must collaborate closely with our customers, suppliers and other strategic partners to ensure that critical development, marketing and distribution projects proceed in a coordinated manner. Also, this collaboration is important because these relationships increase our exposure to information necessary to anticipate trends and plan product development. If any of our current relationships terminate or otherwise deteriorate, or if we are unable to enter into future alliances that provide us with comparable insight into market trends, our product development and marketing efforts may be adversely affected.

     Furthermore, a number of our Digital Media and Video products incorporate technology developed by strategic third party technology providers. Reliance on these third parties exposes us to a number of risks:

• our technology providers often may have limited financial resources and operating histories;

• we may be unable to adequately control or influence the technology development and engineering process and must rely on these providers to timely deliver properly working technology meeting our specifications;

• our customers may prefer that we develop and own all our technology;

• we may acquire the technology only on a non-exclusive basis; and

• we must rely on our third party providers to protect their technology rights and ensure that they do not infringe the rights of others.

Our future success will depend on our ability to keep pace with technological change and meet the needs of our target markets and customers.

     The markets for our Security and Digital Media and Video products are characterized by rapidly changing technology and the need to differentiate our products through technological enhancements. Our customers’ needs change and new products are introduced frequently. Product life cycles are short and industry standards are still evolving. These rapid changes in technology, or the adoption of new industry standards, could render our existing products obsolete and unmarketable. If one of our products is deemed to be obsolete or unmarketable, then we might have to reduce revenue expectations or write off inventories for that product. Our future success will depend upon our ability to enhance our current products and to develop and introduce new products on a timely basis that address the increasingly sophisticated needs of our customers and that keep pace with technological developments, new competitive product offerings and emerging industry standards. In addition, in cases where we are selected to supply products based on features or capabilities that are still under development, we must be able to complete our product design and delivery process in a timely basis, or risk losing current and any future business from our customers.

     For example, our Secure Card, Secure PINpad, Secure Retail and Secure Trusted Reader product families are designed to provide smart card-based security for PCs. Smart cards are beginning to be widely deployed by the U.S. government and to a lesser degree by financial institutions, corporations and other large organizations, in some cases in advance of anticipated security-oriented applications. However, standards for smart card readers are still emerging. We may not be able to comply with emerging standards in a timely manner or at all. If we cannot meet the standards requirements of the market or our prospective customers, we would likely lose orders to competitors.

     Because we operate in markets for which industry-wide standards have not yet been fully set, it is possible that any standards eventually adopted could prove disadvantageous to or incompatible with our business model and product lines. If any of the standards supported by us do not achieve or sustain market acceptance, our business and operating results would be materially and adversely affected.

Our markets are highly competitive, and our customers may purchase products from our competitors.

     The markets for our products are intensely competitive and characterized by rapidly changing technology. We believe that the principal competitive factors affecting the markets for our products include:

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• the extent to which products support existing industry standards and provide interoperability;

• technical features;

• ease of use;

• quality and reliability;

• level of security;

• brand name, particularly in retail channels;

• strength of distribution channels; and

• price.

     We believe that competition in our markets is likely to intensify as a result of increasing demand for the type of products we offer. We currently experience competition from a number of companies. In our Security business, our competitors include:

• Advanced Card Systems, Gemplus, O2Micro, OmniKey and STMicroelectronics in smart card readers, ASICs and universal smart card reader interfaces.

     In our Digital Media and Video business, our competitors include:

• Carry Computer Engineering, DataFab, Lexar, SanDisk, Simple Technology and SmartDisk for digital media readers; and

• ADS, Canopus, Pinnacle Systems, Roxio and ULead for digital video capture and editing products.

     We also experience indirect competition from some of our customers who sell alternative products or are expected to introduce competitive products in the future. We may in the future face competition from these competitors and new competitors, such as Motorola, that develop digital security products. In addition, the market for our products may ultimately include technological solutions other than ours and our competitors.

     Many of our current and potential competitors have significantly greater financial, technical, marketing, purchasing and other resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or standards and to changes in customer requirements. Our competitors may also be able to devote greater resources to the development, promotion and sale of products and may be able to deliver competitive products at a lower end user price. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. Therefore, new competitors, or alliances among competitors, may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced operating margins and loss of market share.

Seasonal trends in sales of our products may affect our quarterly operating results.

     Our business and operating results normally reflect seasonal trends. We have typically experienced lower revenue and operating income in the first quarter and second quarter and higher revenue in the third quarter and fourth quarter of each calendar year. The seasonal trends in our business and operating results are primarily due to the retail selling cycles of our consumer-oriented products, including our Digital Media and Video products. Because the market for consumer products is stronger in the second half of the year, we generally expect that our sales to retail distributors and to consumer-oriented OEMs will increase during that period. Revenue in our Digital Media and Video business was higher during the second half of 2002 than during the first half of the year. However, revenue in our Security business declined during the second half of 2002. Because of the seasonal aspect of our business and other factors, there is no assurance that we can sustain the quarterly revenue increases we had in our Digital Media and Video business. Because of the current unpredictability of the U.S. and world economies, there is no assurance that demand for any of our products will increase or remain as strong in 2003.

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Revenues in our Security division depend on U.S. government budgetary allocations for information technology (IT) projects.

     We sell a significant proportion of our Security products to the U.S. government. Expenditures on IT projects has varied in the past and we expect it to continue in the future. As a result of shifting defense priorities, U.S. government spending may be reallocated away from IT projects, such as the Common Access Card Program. For example, sales of our smart card readers decreased during the first quarter of 2003 because the U.S. government’s Common Access Program slowed deployments. The slowing of such government projects could negatively impact our sales.

A significant portion of our sales comes from a small number of customers and the loss of one of more of these customers could negatively impact our operating results.

     Our products are generally targeted at OEM customers in the consumer electronics, computer, digital appliance, digital media and television broadcasting industries, and to retail distributors. Sales to a relatively small number of customers historically have accounted for a significant percentage of our total sales. For example, sales to our top 10 customers accounted for approximately 60% of our total net revenue in the three months ended March 31, 2003. We expect that sales of our products to a limited number of customers will continue to account for a high percentage of our total sales for the foreseeable future. The loss or reduction of orders from a significant OEM or retail customer, including losses or reductions due to manufacturing, reliability or other difficulties associated with our products, changes in customer buying patterns, or market, economic or competitive conditions in the digital information security business or digital media and video business, could result in decreased revenues and/or inventory or receivables write-offs and otherwise harm our business and operating results.

We face risks related to our dependence on a retail distribution model for distribution of our Digital Media and Video products.

     We now sell a significant percentage of our Digital Media and Video products through our retail channel. Direct retail distribution creates risks for us including:

• exposure to demand cycles caused as a result of seasonal or economic trends;

• generally lower margins for products due to, among other factors, greater price competition and increased promotional and distribution costs;

• higher cost of revenue than projected as a result of unexpectedly high levels of participation in rebate or other promotional programs we use to stimulate sales;

• the need to develop, and the related marketing expense of developing brand recognition for our Dazzle branded products;

• reliance on our retail distributors maintaining appropriate levels of our products to meet consumer demand;

• difficulties associated with assessing appropriate product return reserves;

• the risk that, if we lower our prices, we would have to compensate distributors or retailers who bought our products at higher prices;

• risks associated with retailers and distributors selling our competitors’ products, including the risk that retailers and distributors may not recommend, or continue to recommend, our products;

• the need to protect the reputation of our brands for quality and value; and

• the need to successfully and cost-effectively maintain current retail channels and develop new retail distribution channels for these products.

     For instance, in the first quarter of 2003 cost of revenues in our Digital Media and Video division were adversely affected by high redemption rates on rebate programs we ran during the quarter.

     We sell a substantial portion of our Digital Media and Video products through retailers, including Best Buy, Circuit City, CompUSA, Dixons/PC World, Fry’s Electronics, Office Depot, Radio Shack, Staples and Sears. These retail distributors may have limited capital to invest in inventory, and their decisions to purchase our products are partly a function of pricing, terms and special promotions offered by our competitors over which we have no control and which we can not predict. We could lose market share if the retailers that carry our products do not grow as quickly as retailers that carry our competitors’ products. If retailers choose not to purchase our products or choose to purchase less than what we expect, our sales will decrease or not grow at the rate we expect. We also sell our

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Digital Media and Video products through distributors, including Ingram Micro, Northamber and Tech Data. Our distributor agreements are generally nonexclusive and may be terminated by either party without cause. If these agreements are terminated, we may not be able to find other distributors willing to purchase our Digital Media and Video products. Certain distributors have experienced financial difficulties in the past. Distributors that account for significant sales of our consumer products may experience financial difficulties in the future, which could lead to reduced sales or write-offs.

     Because of competition in the retail market for shelf space and because a large percentage of our Digital Media and Video sales are to a small number of customers that are primarily retailers or distributors, this can exert pressure on our revenue generated from these customers. As a result of this pricing pressure, we have reduced and may need to continue to reduce the prices of some of our Digital Media and Video products. Any reduction in prices will negatively impact our gross margins unless we are able to reduce our costs. Also, some customers request that we sell our products to them on a consignment basis. If we agree to these arrangements, our inventory levels will increase, and this will increase our costs and the risk of inventory write-offs.

We may have to take back unsold inventory from our customers.

     Although our contractual obligations to accept returned products from our retail, distributor and OEM customers are limited, if consumer demand is less than anticipated these customers may ask that we accept returned products that the customers do not believe they can sell. We may determine that it is in our best interest to accept returns in order to maintain good relations. While we have experienced some product returns to date, returns may increase beyond present levels in the future. Once these products have been returned, and although the products are in good working order, we may be required to take additional inventory reserves to reflect the decreased market value of slow-selling returned inventory.

We have global operations, which require significant managerial and administrative resources.

     Operating in diverse geographic locations imposes significant burdens on our managerial resources. In particular, our management must:

• divert a significant amount of time and energy to manage employees and contractors from diverse cultural backgrounds and who speak different languages;

• manage different product lines for different markets;

• manage our supply and distribution channels across different countries and business practices; and

• coordinate these efforts to produce an integrated business effort, focus and vision.

     In addition, we are subject to the difficulties associated with operating in a number of time zones, which may subject us to additional unforeseen difficulties or logistical barriers. Operating in widespread geographic locations requires us to implement and operate complex information and operational systems. In the future we may have to exert managerial resources and implement new systems that may be costly. Any failure or delay in implementing needed systems, procedures and controls on a timely basis or in expanding current systems in an efficient manner could have a material adverse effect on our business and operating results.

Our key personnel are critical to our business, and such key personnel may not remain with us in the future.

     We depend on the continued employment of our senior executive officers and other key management and technical personnel. If any of our key personnel leave and are not adequately replaced, our business would be adversely affected. We provide compensation incentives such as bonuses, benefits and option grants, which are typically subject to vesting over four years, to attract and retain qualified employees. In addition, certain of our executive officers are subject to one-year non-compete agreements. Non-compete agreements are, however, generally difficult to enforce. Retention of employees and key management may become more difficult because of the uncertainty associated with the separation of our Security and Digital Media and Video businesses. Even though we provide competitive compensation arrangements to our executive officers and other employees, we cannot be certain that we will be able to retain them, including those individuals that are subject to non-compete agreements.

     We believe that our future success will depend in large part on our continuing ability to attract and retain highly qualified technical and management personnel. Competition for such personnel is intense, and we may not be able to

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retain our key technical and management employees or to attract, assimilate or retain other highly qualified technical and management personnel in the future.

Our OEM customers may develop technology similar to ours, resulting in a reduction in related customer purchases, canceled orders and direct competition from these customers.

     We sell our products to many OEMs who incorporate our products into their offerings or who resell our products in order to provide a more complete solution to their customers. If our OEM customers develop their own products to replace ours, this would result in a loss of sales to those customers as well as increased competition for our products in the marketplace. For example, in the past, SanDisk Corporation purchased various digital media reader/writer products from us and marketed them under the SanDisk brand. In the first quarter of 2001, SanDisk began marketing digital media reader/writers that they had developed internally and canceled orders for our products. In addition, these OEM customers could cancel outstanding orders for our products, which could cause us to write down inventory already designated for those customers.

The increased size and complexity of our businesses may create significant burdens on our systems.

     Our business has grown substantially, with net revenue increasing from $23.6 million in 1995 to $177.7 million in 2002. We have expanded our Security business from solutions for the PC platform to include solutions for the digital television platform and have entered into the digital media and video markets. During 2002, we reorganized our internal operations into two distinct business divisions to better address the demands of our different markets and prepare for the separation of our Digital Media and Video business. These two divisions are led by separate management teams and share only a few employees and operational resources. Managing them independently requires skilled management and substantial resources. To address our need for additional resources and because of various acquisitions, we have increased in size from 67 employees at December 31, 1995 to 480 as of March 31, 2003.

     Although our revenue did not increase in 2002, our business model contemplates continued revenue growth in certain markets. If this growth occurs and we do not manage it effectively, our stock price and financial condition could be materially and adversely affected. Our growth and our growth plans have placed and are likely to continue to place a significant burden on our operating and financial systems and increase responsibility for senior management and other personnel. Our existing management or any new members of management may not be able to improve our existing systems and controls or implement new systems and controls in response to our anticipated growth. In addition, our intention to reduce or re-deploy personnel to reduce expenses from time to time may limit our capacity to grow.

Any delays in our normally lengthy sales cycle could result in significant fluctuations in our quarterly operating results.

     Our initial sales cycle for a new OEM customer or retail distributor usually takes six to nine months. During this sales cycle, we may expend substantial financial resources and our management’s time and effort with no assurance that a sale will ultimately result. The length of a new customer’s sales cycle depends on a number of factors that we may not be able to control. These factors include the customer’s product and technical requirements and the level of competition we face for that customer’s business. Any delays in the sales cycle for new customers would limit our receipt of new revenue and might cause us to expend more resources to obtain new customer wins.

We face risks associated with our past and future acquisitions.

     A component of our business strategy is to seek to buy businesses, products and technologies that complement or augment our existing businesses, products and technologies. In the second quarter of 2002, we acquired Towitoko AG, a leading supplier of smart card-based security solutions for home banking and private PC access in the German-speaking market. We may buy or make investments in additional complementary companies, products and technologies. Any acquisition could expose us to significant risks.

Use of Cash or Issuance of Securities

     A potential investment is likely to result in the use of our limited cash balances or require that we issue debt or equity securities to fund the acquisition. Future equity financings would be dilutive to the existing holders of our

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common stock. Our ability to use future equity financings to fund acquisitions may be limited by certain tax rules and we may be required to use debt financing instead. Future debt financings could involve restrictive covenants, and we may be unable to obtain debt financing on favorable terms or at all.

Acquisition Charges

     We may incur acquisition-related charges in connection with any acquisition.

Integration Risks

     Integration of an acquired company or technology frequently is a complex, time consuming and expensive process. The successful integration of an acquisition requires, among other things, that we:

• integrate and train key management, sales and other personnel;

• integrate the acquired products into our product offerings both from an engineering and a sales and marketing perspective;

• integrate and support pre-existing supplier, distributor and customer relationships;

• coordinate research and development efforts; and

• consolidate duplicate facilities and functions.

     The geographic distance between the companies, the complexity of the technologies and operations being integrated, and the disparate corporate cultures being combined may increase the difficulties of integrating an acquired company or technology. Management’s focus on the integration of operations may distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts. In addition, it is common in the technology industry for aggressive competitors to attract customers and recruit key employees away from companies during the integration phase of an acquisition.

     Unanticipated Assumption of Liabilities

     If we buy a company, we may have to incur or assume that company’s liabilities, including liabilities that are unknown at the time of the acquisition.

We conduct a significant portion of our operations outside the United States. Economic, political, regulatory and other risks associated with international sales and operations could have an adverse effect on our business sales.

     We were originally a German corporation, and we continue to conduct a substantial portion of our business in Europe. Approximately 48%, 58% and 48% of our revenues for the years ended December 31, 2002, 2001 and 2000, respectively, and approximately 57% and 56% of our revenues for the three months ended March 31, 2003 and 2002, respectively, were derived from customers located outside the United States. Because a significant number of our principal customers are located in other countries, we anticipate that international sales will continue to account for a substantial portion of our revenues. As a result, a significant portion of our sales and operations may continue to be subject to certain risks, including:

• changes in foreign currency exchange rates;

• changes in a specific country’s or region’s political or economic conditions and stability, particularly in emerging markets;

• unexpected changes in foreign laws and regulatory requirements;

• potentially adverse tax consequences;

• longer accounts receivable collection cycles;

• difficulty in managing widespread sales and manufacturing operations; and

• less effective protection of intellectual property.

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We could lose money and our stock price could decrease as a result of write downs of our strategic investments.

     We have made strategic minority investments in private and public companies and in the future we may make additional strategic minority investments. Our strategic investments involve a number of risks and we have written down a number of these investments, including ActivCard, SmartDisk, Spyrus and Satup. We may not realize the expected benefits of these transactions and we may lose all or a portion of our investment, particularly in the case of our private investments. If we were to lose these investments or if the investments were determined to be impaired, we would be forced to write off all or a portion of these investments, which would have a negative impact on our earnings in any given quarter. Total strategic investments were $1.7 million at March 31, 2003.

Our products may have defects, which could damage our reputation, decrease market acceptance of our products, cause us to lose customers and revenue and result in liability to us, including costly litigation.

     Highly complex products such as our Digital Media and Video hardware and software products may contain defects for many reasons, including defective design or defective material. Often, these defects are not detected until after the products have been shipped. If any of our products contain defects or have reliability, quality or compatibility problems, our reputation might be damaged significantly, we could lose or experience a delay in market acceptance of the affected product or products, and we might be unable to retain existing customers or attract new customers. In addition, these defects could interrupt or delay sales. We may have to invest significant capital, technical, managerial and other resources to correct potential problems and potentially divert these resources from other development efforts. If we fail to provide solutions to potential problems, we could also incur product recall, repair or replacement or even litigation costs. These potential problems might also result in claims against us by our customers or others.

     In addition, customers of our Security business rely on our token-based security products to prevent unauthorized access to their digital information. A malfunction of or design defect in our products could result in legal or warranty claims. Although we place warranty disclaimers and liability limitation clauses in our sales agreements and maintain product liability insurance, these measures may be ineffective in limiting our liability. Liability for damages resulting from security breaches could be substantial and the adverse publicity associated with this liability could adversely affect our reputation. These costs could have a material adverse effect on our business and operating results. In addition, a well-publicized security breach involving token-based and other security systems could adversely affect the market’s perception of products like ours in general, or our products in particular, regardless of whether the breach is actual or attributable to our products. In that event, the demand for our products could decline, which would cause our business and operating results to suffer.

Our business could suffer if we or our third-party manufacturers cannot meet their performance obligations.

     Most of our products are manufactured outside the United States because we believe that global sourcing enables us to achieve greater economies of scale, improve gross margins and maintain uniform quality standards for our products. Any significant delay in our ability to obtain adequate supplies of our products from our current or alternative sources would materially and adversely affect our business and operating results. In an effort to reduce our manufacturing costs, we have shifted volume production of many of our Security division product components to our wholly owned subsidiary in Singapore. More recently we have transferred our Digital Media and Video product production to independent contract manufacturers in Asia. Foreign manufacturing poses a number of risks, including:

• difficulties in staffing;

• currency fluctuations;

• potentially adverse tax consequences;

• unexpected changes in regulatory requirements;

• tariffs and other trade barriers;

• political and economic instability;

• lack of control over the manufacturing process and ultimately over the quality of our products;

• late delivery of our products, whether because of limited access to our product components, transportation delays and interruptions, difficulties in staffing, or disruptions such as natural disasters;

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• capacity limitations of our manufacturers, particularly in the context of new large contracts for our products, whether because our manufacturers lack the required capacity or are unwilling to produce the quantities we desire; and

• obsolescence of our hardware products at the end of the manufacturing cycle.

     If we or any of our contract manufacturers cannot meet our production requirements, we may have to rely on other contract manufacturing sources or identify and qualify new contract manufacturers. Despite efforts to do so, we may be unable to identify or qualify new contract manufacturers in a timely manner and these new manufacturers may not allocate sufficient capacity to us in order to meet our requirements.

     We design and manufacture new products and technologies to address emerging markets that are early in their life cycles. In many cases, our products are the first of their kind to address the evolving business requirements of our customers. While we perform initial beta testing on all our products, in certain cases we are unable to test the efficacy of the design or functionality of our products for mass production. If we are successful in securing large contracts for our products, we cannot be certain that we will be able to produce them in sufficient quantities and that they will meet customer specifications.

We must manage and coordinate our relationships with our third-party distribution service properly.

     We have recently contracted with a third-party distribution service to package and distribute our Digital Media and Video products to the retail channel. Timely distribution to our retail customers requires coordination between our third-party distribution service, SCM and our contract manufacturers. Our failure to coordinate the logistics of product production, pack-out and distribution for our customers, or our failure to manage the relationship between ourselves and our contract distributor, could result in late or incorrect shipments to customers, and this could harm our business.

We have a limited number of suppliers of key components.

     We rely upon a limited number of suppliers of several key components of our products. For example, we currently utilize the foundry services of TEMIC, Philips and Atmel to produce our ASICs for our digital TV modules, we utilize the foundry services of Atmel and Samsung to produce our ASICS for our smart cards readers, and we purchase digital video compression chips from Zoran and LSI Logic and digital video editing software from Main Concept, DVD Cre8 and Cineform. Our reliance on a limited number of suppliers could impose several risks, including an inadequate supply of components, price increases, late deliveries and poor component quality. Some of these suppliers have experienced and are continuing to experience financial difficulties. Disruption or termination of the supply of these components or software could delay shipments of our products. These delays could have a material adverse effect on our business and operating results and could also damage relationships with current and prospective customers.

We may be exposed to risks of intellectual property infringement by third parties.

     Our success depends significantly upon our proprietary technology. We currently rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect our proprietary rights. Our software, documentation and other written materials are protected under trade secret and copyright laws, which afford only limited protection. We generally enter into confidentiality and non-disclosure agreements with our employees and with key vendors and suppliers.

     Our Dazzle, Dazzle Digital Video Creator, SmartOS and SwapSmart trademarks are registered in the United States, and we continuously evaluate the registration of additional trademarks as appropriate. We currently have patents issued in both the United States and Europe and have other patent applications pending worldwide. In addition, we have licenses for various other U.S. and European patents associated with our products. Although we often seek to protect our proprietary technology through patents, it is possible that no new patents will be issued, that our proprietary products or technologies are not patentable or that any issued patent will fail to provide us with any competitive advantages.

     There has been a great deal of litigation in the technology industry regarding intellectual property rights. Litigation may be necessary to protect our proprietary technology. Despite our efforts to protect our proprietary

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rights, unauthorized parties may attempt to copy aspects of our products or to use our proprietary information and software. In addition, the laws of some foreign countries do not protect proprietary and intellectual property rights to as great an extent as do the laws of the United States. Because many of our products are sold and a portion of our business is conducted overseas, primarily in Europe, our exposure to intellectual property risks may be higher. Our means of protecting our proprietary and intellectual property rights may not be adequate.

We may face claims of infringement of the intellectual rights of third parties, which could subject us to costly litigation, supplier and customer indemnification claims and the possible restriction on the use of our intellectual property.

     We have from time to time received claims that we are infringing upon third parties’ intellectual property rights.

     We expect the likelihood of infringement claims to increase as the number of products and competitors in our markets grows and as we increasingly incorporate third party technology into our products. Any claims or litigation may be time-consuming and costly, cause product shipment delays, or require us to redesign our products. Furthermore, as a result of these claims, we could be required to license intellectually property from a third party. These licenses may not be offered when we need them or on acceptable terms. If we do obtain licenses from third parties, we may be required to pay license fees or royalty payments or we may be required to license some of our intellectual property to others in return for such licenses. In addition, if we are unable to obtain a license that is necessary for us to manufacture our allegedly infringing products, we could be required to suspend the manufacture of products or stop our suppliers from using processes that may infringe the rights of third parties. We may be unsuccessful in redesigning our products or in obtaining the necessary licenses under reasonable terms or at all.

     Our suppliers and customers may also receive infringement claims based on intellectual property included in our products. We have historically agreed to indemnify suppliers and customers for alleged patent infringement. The scope of this indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorney’s fees. In the fourth quarter of 2000, we incurred a $3.8 million charge related to a customer’s alleged infringement of a third party’s patent rights. Although it was unclear that our technology violated any patent or other right or that we were obligated to do so, we elected to indemnify the customer to preserve the customer relationship. We may periodically engage in litigation as a result of these indemnification obligations. Our insurance policies exclude coverage for third party claims for patent infringement.

Our failure to promote our brand successfully and achieve strong brand recognition in our target markets could limit or reduce demand for our Digital Media and Video products.

     We believe that brand recognition will be important to our success, particularly the recognizability of our Dazzle brand. We plan to continue to market this brand to increase awareness. If we fail to promote our brand successfully, we may not be able to generate demand for our products and our results of operations could be adversely affected. The ability of our competitors to increase the recognition and acceptance of their brands may also affect the relative value of our brand. Also, if our products perform poorly or have other problems, the value of our brands will decrease.

We may experience significant amortization charges and may have future non-recurring charges as a result of past acquisitions.

     In connection with our previous acquisitions accounted for under the purchase method of accounting, in future periods we may experience significant charges related to the amortization of certain intangible assets. In addition, if we later determine that our intangible assets or goodwill are impaired, we will be required to take a related non-recurring charge to earnings. For example, in 2002 and 2001 we recorded asset impairments of approximately $15.4 million and $36.1 million respectively, based on management’s conclusions that intangible assets and goodwill from previous acquisition were impaired.

We are exposed to credit risk on our accounts receivable. This risk is heightened as economic conditions worsen.

     We distribute our products through third-party resellers and retailers and directly to certain customers. A substantial majority of our outstanding trade receivables are not covered by collateral or credit insurance. While we have procedures in place to monitor and limit exposure to credit risk on our trade and non-trade receivables, these

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procedures may not be effective in limiting credit risk and avoiding losses. Additionally, if the global economy and regional economies fail to improve or continue to deteriorate, it becomes more likely that we will incur a material loss or losses as a result of the weakening financial condition of one or more of our customers.

External factors such as the SARS virus and potential terrorist attacks could have a material adverse effect on the U.S. and global economies.

     Concerns about the SARS virus and the possibility of potential terrorist attacks could have an adverse effect upon an already weakened world economy and could cause U.S. and foreign businesses to slow spending on products and services and to delay sales cycles. The economic uncertainty resulting from these concerns may continue to negatively impact consumer as well as business confidence at least in the short term.

Factors beyond our control could disrupt our operations and increase our expenses.

We face a number of potential business interruption risks that are beyond our control. In recent periods, the State of California experienced intermittent power shortages and interruption of service to some business customers. Additionally, we may experience natural disasters that could disrupt our business. Our corporate headquarters are located near a major earthquake fault. The potential impact of a major earthquake on our facilities, infrastructure and overall operations is not known. An earthquake could seriously disturb our entire business process.

Provisions in our agreements, charter documents, Delaware law and our rights plan may delay or prevent acquisition of us, which could decrease the value of your shares.

     Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include a classified board of directors and limitations on actions by our stockholders by written consent. Delaware law imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.

     SCM has adopted a stockholder rights plan. The rights are not intended to prevent a takeover of SCM. However, the rights may have the effect of rendering more difficult or discouraging an acquisition of SCM deemed undesirable by the SCM Board of Directors. The rights would cause substantial dilution to a person or group that attempts to acquire SCM on terms or in a manner not approved by the SCM Board of Directors, except pursuant to an offer conditioned upon redemption of the rights.

     Although we believe the above provisions and the adoption of a rights plan provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders. Also, because these provisions may discourage a change of control, they could decrease the value of our common stock.

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Item 3.      Quantitative and Qualitative Disclosure about Market Risk Foreign Currencies

Foreign Currencies

     SCM transacts business in various foreign currencies, primarily in certain European countries, the U.K., Singapore and Japan. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to yen denominated sales in Japan and local currency denominated operating expenses in the UK, Europe and Singapore, where we sell in both local currencies and U.S. dollars. We assess the need to utilize financial instruments to hedge foreign currency exposure on an ongoing basis.

     SCM’s foreign currency transactional gains and losses are primarily the result of the revaluation of intercompany receivables/payables (denominated in U.S. dollars) and trade receivables (denominated in a currency other than the functional currency) to the functional currency of the subsidiary.

Fixed Income Investments

     SCM’s exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy. The policy also limits the amount of credit exposure to any one issue, issuer and type of instrument. We do not expect any material loss with respect to our investment portfolio.

     We do not use derivative financial instruments in our investment portfolio to manage interest rate risk. We do, however, limit our exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for our fixed income portfolios. At the present time, the maximum duration of all portfolios is limited to two years. The guidelines also establish credit quality standards, limits on exposure to one issue, issuer, as well as the type of instrument. Due to the limited duration and credit risk criteria we have established, our exposure to market and credit risk is not expected to be material.

     At March 31, 2003, we had $51.3 million in cash and cash equivalents and $4.6 million in short term investments. Based on our cash and cash equivalents and short term investments as of December 31, 2002, a hypothetical 10% change in interest rates along the entire interest rate yield curve would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates.

Item 4.      Controls and Procedures

Evaluation and disclosure controls and procedures

     Within 90 days prior to the date of this report (the Evaluation Date), the Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14). Based on that evaluation, these officers have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and the Company’s consolidated subsidiaries would be made known to them by others within those entities.

Changes in internal controls

     There were no significant changes in the Company’s internal controls, or to the Company’s knowledge, in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the Evaluation Date.

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PART II:     OTHER INFORMATION

Item 1.      Legal Proceedings

Not applicable.

Item 2.      Changes in Securities and Use of Proceeds

Not applicable.

Item 3.      Defaults upon Senior Securities

Not applicable.

Item 4.      Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the first quarter of 2003.

Item 5.      Other Information

Not applicable.

Item 6.      Exhibits and Reports on Form 8-K

                  (a)     Exhibits.

Exhibit
Number	Description of Document
3.1*	Fourth Amended and Restated Certificate of Incorporation.
3.2***	Amended and Restated Bylaws of Registrant.
3.3****	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of SCM Microsystems, Inc.
4.1*	Form of Registrant’s Common Stock Certificate.
4.2****	Preferred Stock Rights Agreement, dated as of November 8, 2002, between SCM Microsystems, Inc. and American Stock Transfer and Trust Company.
10.20*****	Shuttle Technology Group Unapproved Share Option Scheme
10.21	Lease dated March 3, 2003 between SCM Microsystems, Inc and CarrAmerica Realty Corporation.
10.22	Lease dated March 18, 2003 between SCM Microsystems, Inc. and CalWest Industrial Holdings, LLC.
21.1**	Subsidiaries of the Registrant.
99.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed previously as an exhibit to SCM’s Registration Statement on Form S-1 (See SEC File No. 333-29073).

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**	Filed previously as an exhibit to SCM’s Annual Report on Form 10-K for the year ended December 31, 2000 (See SEC File No. 000-22689).
***	Filed previously as an exhibit to SCM’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (see SEC File No. 000-22689).
****	Filed previously as an exhibit to SCM’s Registration Statement on Form 8-A (See SEC File No. 000-29440).
*****	Filed previously as an exhibit to SCM’s Registration Statement on Form S-8 (See SEC File No. 333-73061).

(b) Reports on Form 8-K

A current report on the Form 8-K was filed pursuant to the Securities and Exchange Act of 1934, as amended, on April 24, 2003, reporting under Item 5 the announcement that on April 24, 2003, SCM Microsystems issued a press release regarding its financial results for the first quarter of 2003.

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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.

SCM MICROSYSTEMS, INC.

Date: April 30, 2003

/s/ ANDREW WARNER Andrew Warner

Vice President, Finance and Chief Financial

Officer (Principal Financial and Accounting

                 Officer)

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SCM Microsystems, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     I, Robert Schneider, Chief Executive Officer of SCM Microsystems, Inc., certify that as of the date hereof:

1.	I have reviewed this quarterly report on Form 10-Q of SCM Microsystems, Inc.;
2.	Based on my knowledge, this quarterly 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 quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures 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 quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 30, 2003	By:	/s/ ROBERT SCHNEIDER       Robert Schneider
		Chief Executive Officer

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SCM Microsystems, Inc.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     I, Andrew Warner, Vice President, Finance and Chief Financial Officer of SCM Microsystems, Inc., certify that as of the date hereof:

1.	I have reviewed this quarterly report on Form 10-Q of SCM Microsystems, Inc.;
2.	Based on my knowledge, this quarterly 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 quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures 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 quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 30, 2003	By:	/s/ ANDREW WARNER       Andrew Warner
		Vice President, Finance and Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
10.21	Lease dated March 3, 2003 between SCM Microsystems, Inc and CarrAmerica Realty Corporation.
10.22	Lease dated March 18, 2003 between SCM Microsystems, Inc. and CalWest Industrial Holdings, LLC.
99.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

41 of 41 EX-10.21 3 f89710exv10w21.txt EXHIBIT 10.21 EXHIBIT 10.21 10/31/01 CALWESTMTIN CALIFORNIA FORM 1/03 LEASE CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY Landlord and SCM MICROSYSTEMS, INC., A DELAWARE CORPORATION Tenant TABLE OF CONTENTS

PAGE 1. USE AND RESTRICTIONS ON USE.................................................................................... 1 2. TERM........................................................................................................... 2 3. RENT........................................................................................................... 3 4. RENT ADJUSTMENTS............................................................................................... 4 5. SECURITY DEPOSIT............................................................................................... 7 6. ALTERATIONS.................................................................................................... 7 7. REPAIR......................................................................................................... 9 8. LIENS.......................................................................................................... 10 9. ASSIGNMENT AND SUBLETTING...................................................................................... 10 10. INDEMNIFICATION................................................................................................ 13 11. INSURANCE...................................................................................................... 13 12. WAIVER OF SUBROGATION.......................................................................................... 14 13. SERVICES AND UTILITIES......................................................................................... 14 14. HOLDING OVER................................................................................................... 14 15. SUBORDINATION.................................................................................................. 14 16. RULES AND REGULATIONS.......................................................................................... 15 17. REENTRY BY LANDLORD............................................................................................ 15 18. DEFAULT........................................................................................................ 16 19. REMEDIES....................................................................................................... 17 20. TENANT'S BANKRUPTCY OR INSOLVENCY.............................................................................. 18 21. QUIET ENJOYMENT................................................................................................ 19 22. CASUALTY....................................................................................................... 19 23. EMINENT DOMAIN................................................................................................. 20 24. SALE BY LANDLORD............................................................................................... 20 25. ESTOPPEL CERTIFICATES.......................................................................................... 20 26. SURRENDER OF PREMISES.......................................................................................... 21 27. NOTICES........................................................................................................ 21 28. TAXES PAYABLE BY TENANT........................................................................................ 22 29. INTENTIONALLY OMITTED.......................................................................................... 22 30. DEFINED TERMS AND HEADINGS..................................................................................... 22 31. TENANT'S AUTHORITY............................................................................................. 22 32. FINANCIAL STATEMENTS AND CREDIT REPORTS........................................................................ 22 33. COMMISSIONS.................................................................................................... 23 34. TIME AND APPLICABLE LAW........................................................................................ 23 35. SUCCESSORS AND ASSIGNS......................................................................................... 23 36. ENTIRE AGREEMENT............................................................................................... 23 37. EXAMINATION NOT OPTION......................................................................................... 23

i 38. RECORDATION.................................................................................................... 23 39. LIMITATION OF LANDLORD'S LIABILITY............................................................................. 23 40. RENEWAL OPTION................................................................................................. 23 41. SIGNAGE........................................................................................................ 23 42. INTENTIONALLY OMITTED.......................................................................................... 23 43. ROOF RIGHTS FOR DEVICE......................................................................................... 23 EXHIBIT A - FLOOR PLAN DEPICTING THE PREMISES EXHIBIT A-1 - SITE PLAN DEPICTING THE PREMISES EXHIBIT B - INITIAL ALTERATIONS EXHIBIT C - COMMENCEMENT DATE MEMORANDUM EXHIBIT D - RULES AND REGULATIONS EXHIBIT E - SIGN SPECIFICATIONS EXHIBIT F- FORM OF SUBORDINATION, NONDISTRUBANCE AND ATTORNMENT AGREEMENT ii MULTI-TENANT INDUSTRIAL NET LEASE REFERENCE PAGES BUILDING: Scott Creek Business Park LANDLORD: CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY LANDLORD'S ADDRESS: 5934 Gibraltar Drive, Suite 102 Pleasanton, CA 94588 WIRE INSTRUCTIONS AND/OR ADDRESS CalWest Industrial Holdings, LLC FOR RENT PAYMENT: File #30077 P.O. Box 60000 San Francisco, CA 94160-0001 LEASE REFERENCE DATE: March 18, 2003 TENANT: SCM MICROSYSTEMS, INC., A DELAWARE CORPORATION TENANT'S NOTICE ADDRESS: (a) As of beginning of Term: 466 Kato Terrace Fremont, CA 94539 Attention: Chief Financial Officer (b) Prior to beginning of 47211 Bayside Parkway Term (if different): Fremont, CA 94538 Attention: Chief Financial Officer PREMISES ADDRESS: 466 Kato Terrace, Fremont, California PREMISES RENTABLE AREA: approximately 18,322 sq. ft. (for outline of Premises see Exhibit A) USE: General office use, video software design, software engineering, laboratory, warehouse, engineering, sales and related uses in conformity with the municipal zoning requirements of the City of Fremont. SCHEDULED COMMENCEMENT DATE: April 15, 2003 TERM OF LEASE: Approximately thirty-six (36) months and sixteen (16) days beginning on the Commencement Date and ending on the Termination Date. TERMINATION DATE: April 30, 2006 -iii- ANNUAL RENT and MONTHLY INSTALLMENT OF RENT(Article 3)

- ------------------------------------------------------------------------------------------------------- PERIOD RENTABLE SQUARE ANNUAL RENT MONTHLY INSTALLMENT FROM THROUGH FOOTAGE PER SQUARE FOOT ANNUAL RENT OF RENT - ------------------------------------------------------------------------------------------------------- 4/15/2003 4/30/2004 18,322 $8.40 $153,904.80 $12,825.40 - ------------------------------------------------------------------------------------------------------- 5/1/2004 4/30/2005 18,322 $8.64 $158,302.08 $13,191.84 - ------------------------------------------------------------------------------------------------------- 5/1/2005 4/30/2006 18,322 $8.88 $162,699.36 $13,558.28 - -------------------------------------------------------------------------------------------------------

INITIAL ESTIMATED MONTHLY INSTALLMENT $ 6,229.00 OF RENT ADJUSTMENTS (Article 4) TENANT'S PROPORTIONATE SHARE: 46.8% SECURITY DEPOSIT: $ 20,000.00 ASSIGNMENT/SUBLETTING FEE $ 1,000.00 REAL ESTATE BROKER DUE COMMISSION: Colliers International Cornish and Carey Commercial TENANT'S SIC CODE: 7372 The Reference Pages information is incorporated into and made a part of the Lease. In the event of any conflict between any Reference Pages information and the Lease, the Lease shall control. This Lease includes Exhibits A through F, all of which are made a part of this Lease. LANDLORD: TENANT: CALWEST INDUSTRIAL HOLDINGS, LLC, SCM MICROSYSTEMS, INC., A DELAWARE LIMITED LIABILITY COMPANY A DELAWARE CORPORATION By: RREEF Management Company, a Delaware corporation, its Property Manager By: ______________________________ By: _________________________ Name: Timothy DeGoosh Name: _______________________ Title: District Manager Title: ______________________ Dated: _______________________, 2003 Dated: _________________, 2003 iv LEASE By this Lease Landlord leases to Tenant and Tenant leases from Landlord the Premises in the Building as set forth and described on the Reference Pages. The Premises are depicted on the floor plan attached hereto as Exhibit A, and the Building is depicted on the site plan attached hereto as Exhibit A-1. The Reference Pages, including all terms defined thereon, are incorporated as part of this Lease. 1. USE AND RESTRICTIONS ON USE. 1.1 The Premises are to be used solely for the purposes set forth on the Reference Pages and for no other uses without Landlord's prior written consent which may be withheld in Landlord's sole discretion. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure, annoy, or disturb them, or allow the Premises to be used for any improper, immoral, unlawful, or objectionable purpose, or commit any waste. Tenant shall not do, permit or suffer in, on, or about the Premises the sale of any alcoholic liquor without the written consent of Landlord first obtained. Tenant shall comply with all governmental laws, ordinances and regulations applicable to the use of the Premises and its occupancy and shall promptly comply with all governmental orders and directions for the correction, prevention and abatement of any violations in the Building or appurtenant land, caused or permitted by, or resulting from the specific use by, Tenant, or in or upon, or in connection with, the Premises, all at Tenant's sole expense. Tenant shall not do or permit anything to be done on or about the Premises or bring or keep anything into the Premises which will in any way increase the rate of, invalidate or prevent the procuring of any insurance protecting against loss or damage to the Building or any of its contents by fire or other casualty or against liability for damage to property or injury to persons in or about the Building or any part thereof. Landlord will, at Landlord's expense, perform all acts required to comply with laws, rules or regulations in effect as of the date of this Lease and as interpreted and enforced in the county in which the Premises is located, with respect to the foregoing as the same affect the Premises and the Building. Landlord will perform all acts required to comply with laws, rules or regulations in effect after the date of this Lease with respect to the foregoing as the same affect the Building and the common areas and such costs shall be a part of Expenses as provided in Article 4 of this Lease. Landlord will perform all acts required to comply with laws, rules or regulations in effect after the date of this Lease with respect to the foregoing as the same affect the Premises and such costs shall be the sole responsibility of Tenant. To the extent the foregoing is a cost that is the responsibility of Tenant as provided herein, Tenant shall pay to Landlord, within 10 days following Landlord's written demand therefor, which demand shall be accompanied by documented evidence reasonably acceptable to Tenant reflecting all such costs, the costs and expenses related to such compliance work, plus any and all third-party costs actually incurred by Landlord in connection with such work. Notwithstanding the foregoing, Landlord shall have the right to contest any alleged violation of any laws, rule or regulation in good faith, including, without limitation, the right to apply for and obtain a waiver or deferment of compliance, the right to assert any and all defenses allowed by law and the right to appeal any decisions, judgments or rulings to the fullest extent permitted by law. Landlord, after the exhaustion of any and all rights to appeal or contest, will make all repairs, additions, alterations or improvements necessary to comply with the terms of any final order or judgment, provided that if Landlord elects not to contest any alleged violation, Landlord will promptly make necessary all repairs, additions, alterations or improvements. Notwithstanding anything to the contrary contained herein, Tenant, not Landlord, shall be responsible for the correction of any violations that arise out of or in connection with the specific nature of Tenant's business in the Premises (other than general office use), the acts or omissions of Tenant, its agents, employees or contractors, Tenant's arrangement of any furniture, equipment or other property in the Premises, any repairs, alterations, additions or improvements performed by or on behalf of Tenant and any design or configuration of the Premises. 1.2 Tenant shall not, and shall not direct, suffer or permit any of its agents, contractors, employees, licensees or invitees (collectively, the "Tenant Entities") to at any time handle, use, manufacture, store or dispose of in or about the Premises or the Building any (collectively "Hazardous Materials") flammables, explosives, radioactive materials, hazardous wastes or materials, toxic wastes or materials, or other similar substances, petroleum products or derivatives or any substance subject to regulation by or under any federal, state and local laws and ordinances relating to the protection of the environment or the keeping, use or disposition of environmentally hazardous materials, substances, or wastes, presently in effect or hereafter adopted, all amendments to any of them, and all rules and regulations issued pursuant to any of such laws or ordinances (collectively "Environmental Laws"), nor shall Tenant suffer or permit any Hazardous Materials to be used in any manner not fully in compliance with all Environmental Laws, in the Premises or the Building and, if the same may affect or impact the Building and/or the parcel of land upon which the Building is located, or any portions of land benefiting the foregoing by easement, license or other similar rights, any appurtenant land, or allow the environment to become contaminated with any Hazardous Materials if the same may affect or impact the Building and/or the parcel of land upon which the Building is located, or any portions of land benefiting the foregoing by easement, license or other similar rights. Notwithstanding the foregoing, Tenant may handle, store, use or dispose of products containing small quantities of Hazardous Materials (such as aerosol cans containing insecticides, toner for copiers, paints, paint remover and the like) to the extent customary and necessary for the use of the Premises for general office purposes; provided that Tenant shall always handle, store, use, and dispose of any such Hazardous Materials in a safe and lawful manner and never allow such Hazardous Materials to contaminate the Premises, Building and appurtenant land or the environment. Tenant shall protect, defend, indemnify and hold each and all of the Landlord Entities (as defined in Article 30) harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of any actual or asserted failure of Tenant to fully comply with all applicable Environmental Laws, or the presence, handling, use or disposition in or from the Premises of any Hazardous Materials by Tenant or any Tenant Entity (even though permissible under all applicable Environmental Laws or the provisions of this Lease), or by reason of any actual or asserted failure of Tenant to keep, observe, or perform any provision of this Section 1.2. As of the date hereof, Landlord has not received notice from any governmental agencies that the Building is in violation of any Environmental Laws. Further, to Landlord's actual knowledge, there are no Hazardous Materials at the Building other than small quantities of Hazardous Materials (such as aerosol cans containing insecticides, toner for copiers, paints, paint remover and the like) to the extent customary and necessary for the use of the Premises for general office purposes. For purposes of this Section, "Landlord's actual knowledge" shall be deemed to mean and limited to the current actual knowledge of Nicole Aamoth, Property Manager for the Building, at the time of execution of the Lease and not any implied, imputed, or constructive knowledge of said individual or of Landlord or any parties related to or comprising Landlord and without any independent investigation or inquiry having been made or any implied duty to investigate or make any inquiries; it being understood and agreed that such individual shall have no personal liability in any manner whatsoever hereunder or otherwise related to the transactions contemplated hereby. 1.3 Tenant and the Tenant Entities will be entitled to the non-exclusive use of the common areas of the Building as they exist from time to time during the Term, including the parking facilities, subject to Landlord's reasonable rules and regulations regarding such use. The rules and regulations shall be generally applicable, and generally applied in the same manner, to all tenants of the Building. However, in no event will Tenant or the Tenant Entities park more vehicles in the parking facilities than Tenant's Proportionate Share of the total parking spaces available for common use. Landlord hereby grants to Tenant and persons designated by Tenant a license to use up to 73 non-reserved parking spaces in the surface parking facility servicing the Building on a nonexclusive basis. The foregoing shall not be deemed to provide Tenant with an exclusive right to any parking spaces or any guaranty of the availability of any particular parking spaces or any specific number of parking spaces. 2. TERM. 2.1 The Term of this Lease shall begin on the date ("Commencement Date") which shall be the later of the Scheduled Commencement Date as shown on the Reference Pages and the date that Landlord shall tender possession of the Premises to Tenant, and shall terminate on the date as shown on the Reference Pages ("Termination Date"), unless sooner terminated by the provisions of this Lease. Notwithstanding the foregoing, if the Termination Date, as determined herein, does not occur on the last day of a calendar month, the Term shall be deemed automatically extended by the number of days necessary to cause the Termination Date to occur on the last day of the last calendar month of the Term. Tenant shall pay the Monthly Installment of Rent and Additional Rent proportionately applicable to such additional days at the same rate payable for the portion of the last calendar month immediately preceding such extension. Landlord shall deliver possession of the Premises to Tenant vacant and in broom-clean condition. Except to the extent caused by Tenant, or any of Tenant's related parties, agents, employees, invitees, customers or contractors, as of the date Landlord delivers possession of the Premises to Tenant, the base Building electrical, heating, ventilation and air conditioning, mechanical and plumbing systems servicing the Premises shall be in good order and satisfactory condition. Tenant shall have sixty (60) days from the date 2 Landlord delivers possession of the Premises to Tenant in which to discover and notify Landlord of any latent defects in the Premises. Except to the extent caused or exacerbated by Tenant or any of Tenant's employees, invitees, agents, licensees or contractors, Landlord shall be responsible for the cost and correction of any such latent defects with respect to which it received timely notice from Tenant. Tenant shall, at Landlord's request, execute and deliver a memorandum agreement provided by Landlord in the form of Exhibit C attached hereto, setting forth the actual Commencement Date, Termination Date and, if necessary, a revised rent schedule. Should Tenant fail to do so within thirty (30) days after Landlord's request, the information set forth in such memorandum provided by Landlord shall be conclusively presumed to be agreed and correct. Notwithstanding the foregoing, the Commencement Date shall be extended beyond the Scheduled Commencement Date only as a result of any actual delay in Substantial Completion (as defined in Exhibit B to this Lease) of the Improvements beyond the Scheduled Commencement Date which delay results directly from an act or omission by Landlord; provided, however, that Tenant shall provide to Landlord prior written notice of such delay at the time it occurs (but in no event later than two (2) business days thereafter) and Landlord shall have one (1) business day after its receipt of Tenant's notice to cure such delay prior to the extension of the Commencement Date beyond the Scheduled Commencement Date. 2.2 Tenant agrees that in the event of the inability of Landlord to deliver possession of the Premises on the Scheduled Commencement Date for any reason, Landlord shall not be liable for any damage resulting from such inability, but Tenant shall not be liable for any rent until the time when Landlord can, after notice to Tenant, deliver possession of the Premises to Tenant. No such failure to give possession on the Scheduled Commencement Date shall affect the other obligations of Tenant under this Lease, except that if Landlord is unable to deliver possession of the Premises within one hundred twenty (120) days after the Scheduled Commencement Date (other than as a result of strikes, shortages of materials, holdover tenancies or similar matters beyond the reasonable control of Landlord and Tenant is notified by Landlord in writing as to such delay), Tenant shall have the option to terminate this Lease unless said delay is as a result of: (a) Tenant's failure to agree to plans and specifications and/or construction cost estimates or bids; (b) Tenant's request for materials, finishes or installations other than Landlord's standard except those, if any, that Landlord shall have expressly agreed to furnish without extension of time agreed by Landlord; (c) Tenant's change in any plans or specifications; or, (d) performance or completion by a party employed by Tenant (each of the foregoing, a "Tenant Delay"). If any delay is the result of a Tenant Delay, the Commencement Date and the payment of rent under this Lease shall be accelerated by the number of days of such Tenant Delay. In the event Tenant terminates this Lease in accordance with the foregoing, any monies previously paid by Tenant to Landlord shall be reimbursed to Tenant. 2.3 In the event Landlord permits Tenant, or any agent, employee or contractor of Tenant, to enter, use or occupy the Premises prior to the Commencement Date, such entry, use or occupancy shall be subject to all the provisions of this Lease other than the payment of the Monthly Installment of Rent, including, without limitation, Tenant's compliance with the insurance requirements of Article 11. Said early possession shall not advance the Termination Date. Tenant shall pay Tenant's Proportionate Share of Expenses and Taxes during any early entry upon the Premises prior to the Commencement Date. Landlord hereby grants Tenant the right to enter the Premises, at Tenant's sole risk, following execution of this Lease solely for the purpose of construction of Tenant's Improvements (as defined in Exhibit B). 3. RENT. 3.1 Tenant agrees to pay to Landlord the Annual Rent in effect from time to time by paying the Monthly Installment of Rent then in effect on or before the first day of each full calendar month during the Term, except that the first Monthly Installment of Rent and the Security Deposit shall be paid upon the execution of this Lease. The Monthly Installment of Rent in effect at any time shall be one-twelfth (1/12) of the Annual Rent in effect at such time. Rent for any period during the Term which is less than a full month shall be a prorated portion of the Monthly Installment of Rent based upon the number of days in such month. Said rent shall be paid to Landlord, without deduction or offset and without notice or demand, at the Rent Payment Address, as set forth on the Reference Pages, or to such other person or at such other place as Landlord may from time to time designate in writing. If an Event of Default occurs three (3) times or more in any twelve (12) month period during the Term, Landlord may require that Tenant submit Base Rent and Tenant's Proportionate Share of Expenses and Taxes to Landlord on a quarterly basis (due on or before the first day of each calendar quarter) for the following 12 month period. Unless specified in this 3 Lease to the contrary, all amounts and sums payable by Tenant to Landlord pursuant to this Lease shall be deemed additional rent. 3.2 Tenant recognizes that late payment of any rent or other sum due under this Lease will result in administrative expense to Landlord, the extent of which additional expense is extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if rent or any other sum is not paid when due and payable pursuant to this Lease, a late charge shall be imposed in an amount equal to the greater of: (a) Fifty Dollars ($50.00), or (b) five percent (5%) of the unpaid rent or other payment; provided that Tenant shall be entitled to a grace period of 5 days for the first 1late payment of rent or other sum due in a given calendar year. The amount of the late charge to be paid by Tenant shall be reassessed and added to Tenant's obligation for each successive month until paid. The provisions of this Section 3.2 in no way relieve Tenant of the obligation to pay rent or other payments on or before the date on which they are due, nor do the terms of this Section 3.2 in any way affect Landlord's remedies pursuant to Article 19 of this Lease in the event said rent or other payment is unpaid after date due. 4. RENT ADJUSTMENTS. 4.1 For the purpose of this Article 4, the following terms are defined as follows: 4.1.1 LEASE YEAR: Each fiscal year (as determined by Landlord from time to time) falling partly or wholly within the Term. 4.1.2 EXPENSES: All costs of operation, maintenance, repair, replacement and management of the Building, as determined in accordance with generally accepted accounting principles, including the following costs by way of illustration, but not limitation: water and sewer charges; insurance charges of or relating to all insurance policies and endorsements deemed by Landlord to be reasonably necessary or desirable and relating in any manner to the protection, preservation, or operation of the Building or any part thereof; utility costs, including, but not limited to, the cost of heat, light, power, steam, gas; waste disposal; the cost of janitorial services; the cost of security and alarm services (including any central station signaling system); costs of cleaning, repairing, replacing and maintaining the common areas, including parking and landscaping, window cleaning costs; labor costs; costs and expenses of managing the Building including management and/or administrative fees (subject to the limitations expressly set forth below); air conditioning maintenance costs; elevator maintenance fees and supplies; material costs; equipment costs including the cost of maintenance, repair and service agreements and rental and leasing costs; purchase costs of equipment; current rental and leasing costs of items which would be capital items if purchased; tool costs; licenses, permits and inspection fees; wages and salaries for personnel below the level of vice president (provided that if any employee performs services in connection with the Building and other buildings, costs associated with such employee may be proportionately included in Expenses based on the percentage of time such employee spends in connection with the operation, maintenance and management of the Building); employee benefits and payroll taxes; accounting and legal fees; any sales, use or service taxes incurred in connection therewith. In addition, Landlord shall be entitled to recover, as additional rent (which, along with any other capital expenditures constituting Expenses, Landlord may either include in Expenses or cause to be billed to Tenant along with Expenses and Taxes but as a separate item), Tenant's Proportionate Share of: (i) an allocable portion of the cost of capital improvement items which are reasonably calculated to reduce operating expenses; (ii) the cost of fire sprinklers and suppression systems and other life safety systems (provided that to the extent the foregoing is a capital improvement, the cost thereof shall be amortized over the reasonable life of such expenditures as provided in the following clause (iii)); and (iii) other capital expenses which are required under any governmental laws, regulations or ordinances which were not applicable to the Building as of the date of this Lease; but the costs described in this sentence shall be amortized over the reasonable life of such expenditures in accordance with such reasonable life and amortization schedules as shall be determined by Landlord in accordance with generally accepted accounting principles, with interest on the unamortized amount at one percent (1%) in excess of the Wall Street Journal prime lending rate announced from time to time. Expenses shall not include depreciation or amortization of the Building or equipment in the Building except as provided herein, loan principal payments, costs of alterations of tenants' premises, leasing commissions, 4 interest expenses on long-term borrowings, advertising costs including the cost of brochures and marketing supplies, legal fees in negotiating and preparing lease documents, and construction, improvement and decorating costs in preparing space for initial occupancy by a specific tenant. The following items are also excluded from Expenses and in no event shall Tenant have any obligation to perform, pay directly or reimburse Landlord for any of the following except to the extent expressly provided herein: (a) Sums paid to subsidiaries or other affiliates of Landlord for services on or to the Building and/or Premises, but only to the extent that the costs of such services exceed the competitive cost for such services rendered by persons or entities of similar skill, competence and experience. (b) Any fines, penalties or interest resulting from the negligence or willful misconduct of the Landlord or its agents, contractors, or employees. (c) Fines, costs or penalties incurred as a result and to the extent of a violation by Landlord or other tenants of the project of which Building is a part of any applicable laws. (d) Landlord's charitable and political contributions. (e) Ground lease rental. (f) Attorney's fees and other expenses incurred in connection with negotiations or disputes with prospective tenants or tenants or other occupants of the Building. (g) The cost or expense of any services or benefits provided generally to other tenants in the Building and not provided or available to Tenant. (h) All costs of purchasing or leasing major sculptures, paintings or other major works or objects of art (as opposed to decorations purchased or leased by Landlord for display in the common areas of the Building). (i) Any expenses for which Landlord has received actual reimbursement (other than through Expenses). (j) Costs incurred by Landlord in connection with the correction of defects in design and original construction of the Building. (k) Any cost or expense related to removal, cleaning, abatement or remediation of Hazardous Materials in or about the Building or the common areas, including, without limitation, hazardous substances in the ground water or soil, except to the extent such removal, cleaning, abatement or remediation is related to the general repair and maintenance of the Building and the common areas. (l) Costs incurred by Landlord in connection with the correction of defects in design and original construction of the Building. (m) Any costs, fines or penalties incurred due to violations by Landlord of any law, order, rule or regulations of any governmental authority which was in effect (and as interpreted and enforced) as of the date of this Lease. (n) Penalties, interest and other costs incurred by Landlord in connection with Landlord's failure to comply with conditions, covenants and restrictions applicable to the Building. (o) The cost of repairs and maintenance equitably allocated by Landlord to buildings other than the Building. (p) Principal payments of mortgage debt of Landlord. 5 (q) Interest (except as provided in this Lease for the amortization of capital improvements). (r) Costs of capital improvements except to the extent expressly set forth in this Lease. (s) Expense reserves. 4.1.3 TAXES: Real estate taxes and any other taxes, charges and assessments which are levied with respect to the Building or the land appurtenant to the Building, or with respect to any improvements, fixtures and equipment or other property of Landlord, real or personal, located in the Building and used in connection with the operation of the Building and said land, any payments to any ground lessor in reimbursement of tax payments made by such lessor; and all fees, expenses and costs incurred by Landlord in investigating, protesting, contesting or in any way seeking to reduce or avoid increase in any assessments, levies or the tax rate pertaining to any Taxes to be paid by Landlord in any Lease Year. Taxes shall not include any corporate franchise, capital levy, capital stock, gift, estate, inheritance or net income tax, or tax imposed upon any transfer by Landlord of its interest in this Lease or the Building, any property taxes allocated to buildings other than the Building and any taxes to be paid by Tenant pursuant to Article 28. In the event that Landlord may elect to pay a special assessment in one payment or over a period of time, regardless of Landlord's election, any such assessment shall be included in Taxes only to the extent it would have been due over time. 4.2 Tenant shall pay as additional rent for each Lease Year Tenant's Proportionate Share of Expenses and Taxes incurred for such Lease Year. As of the date of this Lease, Landlord's current estimate of Tenant's Proportionate Share of Expenses and Taxes for the Building is $0.34 per rentable square foot of the Premises. 4.3 The annual determination of Expenses shall be made by Landlord and shall be binding upon Landlord and Tenant, subject to the provisions of this Section 4.3. During the Term, Tenant may review, at Tenant's sole cost and expense, the books and records supporting such determination in an office of Landlord, or Landlord's agent, during normal business hours, upon giving Landlord five (5) days advance written notice within ninety (90) days after receipt of such determination, but in no event more often than once in any one (1) year period, subject to execution of a confidentiality agreement acceptable to Landlord, and provided that if Tenant utilizes an independent accountant to perform such review it shall be one of national standing which is reasonably acceptable to Landlord, is not compensated on a contingency basis and is also subject to such confidentiality agreement. Tenant shall be solely responsible for all costs, expenses and fees incurred for such review. However, notwithstanding the foregoing, if Landlord and Tenant determine that Expenses for the Building for the year in question were less than stated by more than 5%, Landlord, within 30 days after its receipt of paid invoices therefor from Tenant, shall reimburse Tenant for the reasonable amounts paid by Tenant to third parties in connection with such review by Tenant. If Tenant fails to object to Landlord's determination of Expenses within ninety (90) days after receipt, or if any such objection fails to state with specificity the reason for the objection, Tenant shall be deemed to have approved such determination and shall have no further right to object to or contest such determination. In the event that during all or any portion of any Lease Year or Base Year, the Building is not fully rented and occupied Landlord shall make an appropriate adjustment in occupancy-related Expenses for such year for the purpose of avoiding distortion of the amount of such Expenses to be attributed to Tenant by reason of variation in total occupancy of the Building, by employing consistent and sound accounting and management principles to determine Expenses that would have been paid or incurred by Landlord had the Building been at least ninety-five percent (95%) rented and occupied, and the amount so determined shall be deemed to have been Expenses for such Lease Year. 4.4 Prior to the actual determination thereof for a Lease Year, Landlord may from time to time estimate Tenant's liability for Expenses and/or Taxes under Section 4.2, Article 6 and Article 28 for the Lease Year or portion thereof. Landlord will give Tenant written notification of the amount of such estimate and Tenant agrees that it will pay, by increase of its Monthly Installments of Rent due in such Lease Year, additional rent in the amount of such estimate. Any such increased rate of Monthly Installments of Rent pursuant to this Section 4.4 shall remain in effect until further written notification to Tenant pursuant hereto. 6 4.5 When the above mentioned actual determination of Tenant's liability for Expenses and/or Taxes is made for any Lease Year and when Tenant is so notified in writing, then: 4.5.1 If the total additional rent Tenant actually paid pursuant to Section 4.3 on account of Expenses and/or Taxes for the Lease Year is less than Tenant's liability for Expenses and/or Taxes, then Tenant shall pay such deficiency to Landlord as additional rent in one lump sum within thirty (30) days of receipt of Landlord's bill therefor; and 4.5.2 If the total additional rent Tenant actually paid pursuant to Section 4.3 on account of Expenses and/or Taxes for the Lease Year is more than Tenant's liability for Expenses and/or Taxes, then Landlord shall credit the difference against the then next due payments to be made by Tenant under this Article 4, or, if the Lease has terminated, refund the difference in cash. 4.6 If the Commencement Date is other than January 1 or if the Termination Date is other than December 31, Tenant's liability for Expenses and Taxes for the Lease Year in which said Date occurs shall be prorated based upon a three hundred sixty-five (365) day year. 5. SECURITY DEPOSIT. Tenant shall deposit the Security Deposit with Landlord upon the execution of this Lease. Landlord may commingle the Security Deposit with other funds and shall in no event be required to pay interest or any other charges or fees to Tenant with respect to the Security Deposit. Said sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this Lease to be kept and performed by Tenant and not as an advance rental deposit or as a measure of Landlord's damage in case of Tenant's default. If Tenant defaults with respect to any provision of this Lease beyond the expiration of any applicable notice and cure periods, Landlord may use any part of the Security Deposit for the payment of any rent or any other sum in default, or for the payment of any amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion is so used, Tenant shall within five (5) days after written demand therefor, deposit with Landlord an amount sufficient to restore the Security Deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Except to such extent, if any, as shall be required by law, Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant at such time after termination of this Lease when Landlord shall have determined that all of Tenant's obligations under this Lease have been fulfilled. If Tenant is not in default at the termination of this Lease, Landlord shall return any unapplied balance of the Security Deposit to Tenant within 30 days after Tenant surrenders the Premises to Landlord in accordance with this Lease. In addition to any other deductions Landlord is entitled to make pursuant to the terms hereof, Landlord shall have the right to make a good faith estimate of any unreconciled Expenses and/or Taxes as of the Termination Date and to deduct any anticipated shortfall from the Security Deposit. Such estimate shall be final and binding upon Tenant. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, or any similar or successor Regulations or other laws now or hereinafter in effect to the extent the same conflicts with any of the terms and conditions of this Lease. 6. ALTERATIONS. 6.1 Except for those, if any, specifically provided for in Exhibit B to this Lease, Tenant shall not make or suffer to be made any alterations, additions, or improvements, including, but not limited to, the attachment of any fixtures or equipment in, on, or to the Premises or any part thereof or the making of any improvements as required by Article 7, without the prior written consent of Landlord. So long as the same do not affect the structure of the Building or any of the Building systems, Tenant may install non-attached trade fixtures in the Premises without Landlord's prior consent but otherwise in accordance with the terms of this Article 6. When applying for such consent, Tenant shall, if requested by Landlord, furnish complete plans and specifications for such alterations, additions and improvements. Landlord's consent shall not be unreasonably withheld with respect to alterations which (i) are not structural in nature, (ii) are not visible from the exterior of the Building, (iii) do not affect or require modification of the Building's electrical, mechanical, plumbing, HVAC or other systems, and (iv) in aggregate do not cost more than $5.00 per rentable square foot of that portion of the Premises affected by the alterations in question. Notwithstanding the foregoing, Landlord's consent shall not be required for any alteration that satisfies all of the following criteria (a "Permitted Alteration"): (1) is not reasonably visible from the exterior of the Premises or 7 Building; (2) will not affect the systems or structure of the Building; (3) does not require work to be performed inside the walls or above the ceiling of the Premises; and (4) all such alterations cost less than $30,000.00 in the aggregate in any 12 month period during the Term. However, even though consent is not required, the performance of Permitted Alterations shall be subject to all the other provisions of this Article 6. 6.2 In the event Landlord consents to the making of any such alteration, addition or improvement by Tenant, the same shall be made by using either Landlord's contractor or a contractor reasonably approved by Landlord, in either event at Tenant's sole cost and expense. If Tenant shall employ any contractor other than Landlord's contractor and such other contractor or any subcontractor of such other contractor shall employ any non-union labor or supplier, Tenant shall be responsible for and hold Landlord harmless from any and all delays, damages and extra costs suffered by Landlord as a result of any dispute with any labor unions concerning the wage, hours, terms or conditions of the employment of any such labor. In any event, with respect to alterations other than Permitted Alterations only, Landlord may charge Tenant a construction management fee not to exceed five percent (5%) of the cost of such work to cover its overhead as it relates to such proposed work, plus third-party costs actually incurred by Landlord in connection with the proposed work and the design thereof, with all such amounts being due five (5) days after Landlord's demand. 6.3 All alterations, additions or improvements proposed by Tenant shall be constructed in accordance with all government laws, ordinances, rules and regulations, using Building standard materials where applicable, and Tenant shall, prior to construction, provide the additional insurance required under Article 11 in such case, and also all such assurances to Landlord as Landlord shall reasonably require to assure payment of the costs thereof, including but not limited to, notices of non-responsibility, waivers of lien and surety company performance bonds and to protect Landlord and the Building and appurtenant land against any loss from any mechanic's, materialmen's or other liens. Tenant shall pay in addition to any sums due pursuant to Article 4, any increase in real estate taxes attributable to any such alteration, addition or improvement for so long, during the Term, as such increase is ascertainable; at Landlord's election said sums shall be paid in the same way as sums due under Article 4. 6.4 Notwithstanding anything to the contrary contained herein, so long as Tenant's written request for consent for a proposed alteration or improvements contains the following statement in large, bold and capped font "PURSUANT TO SECTION 6 OF THE LEASE, IF LANDLORD CONSENTS TO THE SUBJECT ALTERATION, LANDLORD SHALL NOTIFY TENANT IN WRITING (1) WHETHER OR NOT LANDLORD WILL REQUIRE SUCH ALTERATION TO BE REMOVED AT THE EXPIRATION OR EARLIER TERMINATION OF THE LEASE AND, (2) IF SUCH REMOVAL IS REQUIRED, WHETHER OR NOT TENANT SHALL BE REQUIRED TO DEPOSIT WITH LANDLORD THE AMOUNT REASONABLY ESTIMATED BY LANDLORD AS SUFFICIENT TO COVER THE COST OF REMOVING SUCH ALTERATIONS OR IMPROVEMENTS AND RESTORING THE PREMISES AND, IF SO, SUCH ESTIMATED AMOUNT.", at the time Landlord gives its consent for any alterations or improvements, if it so does, Tenant shall also be notified (i) whether or not Landlord will require that such alterations or improvements be removed upon the expiration or earlier termination of this Lease and, (ii) to the extent that such removal is required, whether Landlord shall require Tenant to deposit with Landlord the amount reasonably estimated by Landlord as sufficient to cover the cost of removing such alterations or improvements and restoring the Premises, to the extent required under Section 26.2, and the estimated amount thereof. Notwithstanding anything to the contrary contained in this Lease, at the expiration or earlier termination of this Lease and otherwise in accordance with Article 26 hereof, Tenant shall be required to remove all alterations or improvements made to the Premises except for any such alterations or improvements which Landlord expressly indicates or is deemed to have indicated shall not be required to be removed from the Premises by Tenant. If Tenant's written notice strictly complies with the foregoing and if Landlord fails to so notify Tenant whether Tenant shall be required to remove the subject alterations or improvements at the expiration or earlier termination of this lease, Tenant is entitled to deliver to Landlord a second written notice (the "Second Notice") in compliance with the foregoing requirements but also stating in large, bold and capped font the following: "THIS IS TENANT'S SECOND NOTICE TO LANDLORD. LANDLORD FAILED TO RESPOND TO TENANT'S FIRST NOTICE IN ACCORDANCE WITH THE TERMS OF ARTICLE 6 OF THE LEASE. IF LANDLORD FAILS TO RESPOND TO THIS NOTICE IN FIVE BUSINESS DAYS WITH RESPECT TO THE DEPOSIT OF REMOVAL AND RESTORATION FUNDS, TENANT SHALL 8 HAVE NO OBLIGATION TO DEPOSIT WITH LANDLORD THE AMOUNT REASONABLY ESTIMATED BY LANDLORD AS SUFFICIENT TO COVER THE COST OF REMOVING SUCH ALTERATIONS OR IMPROVEMENTS AND RESTORING THE PREMISES. IF LANLDORD FAILS TO REPSOND TO THIS NOTICE IN FIVE BUSINESS DAYS WITH RESPECT TO TENANT'S OBLIGATION TO REMOVE THE SUBJECT ALTERATION, TENANT SHALL HAVE NO OBLIGATION TO REMOVE THE SUBJECT ALTERATION AT THE EXPIRATION OR EARLIER TERMINATION OF ITS LEASE". If Landlord fails to respond to the Second Notice within five business days of Landlord's receipt thereof, it shall be assumed that, with respect to Tenant's obligation to remove the subject alterations or improvements, Landlord shall not require the removal of the subject alterations or improvements. If Landlord fails to respond to the Second Notice within five business days of Landlord's receipt thereof, it shall be assumed that, with respect to Tenant's obligation to deposit sufficient funds with Landlord for the removal of the subject alterations or improvements, Landlord shall not require any such deposit from Tenant with respect thereto. 7. REPAIR. 7.1 Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises except that Landlord shall repair and maintain the following, the cost of which may be included in Expenses as provided in Article 4 of this Lease: the structural portions of the roof, the roof membrane, the common areas, foundation and walls of the Building and the Building mechanical, sprinkler/life safety systems, electrical and plumbing systems servicing the project in general (not specifically servicing the Premises, the repair and maintenance of which shall be Tenant's responsibility hereunder); provided, however, that, subject to the terms hereof, Tenant, not Landlord shall repair and maintain the heating, ventilating and air conditioning unit(s) servicing the Premises. Notwithstanding the foregoing, Landlord's repair and maintenance obligations with respect to the following shall be at Landlord's sole cost and expense: the foundation and the exterior walls of the Building. By taking possession of the Premises, Tenant accepts them as being in good order, condition and repair and in the condition in which Landlord is obligated to deliver them except as otherwise expressly stated in this Lease. It is hereby understood and agreed that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant, except as specifically set forth in this Lease. Landlord shall not be liable for any failure to make any repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Notwithstanding the foregoing, Landlord shall perform and construct, and Tenant shall have no responsibility to perform or construct, any repair, maintenance or improvements (a) necessitated by the negligence or willful misconduct of Landlord, and (b) which Landlord shall determine to be capital improvement (the cost thereof may be an Expense pursuant to Section 4.1.2 of this Lease). 7.2 To the extent the same is not an express obligation of Landlord pursuant to Section 7.1 above, Tenant shall at its own cost and expense keep and maintain all parts of the Premises and such portion of the Building and improvements as are within the exclusive control of Tenant (including, without limitation, electrical and plumbing systems servicing the Premises) in good condition, promptly making all necessary repairs and replacements, whether ordinary or extraordinary, with materials and workmanship of the same character, kind and quality as the original (including, but not limited to, repair and replacement of all fixtures installed by Tenant, water heaters serving the Premises, windows, glass and plate glass, doors, exterior stairs, skylights, if any, any special office entries, interior walls and finish work, floors and floor coverings, heating and air conditioning systems serving the Premises, electrical systems and fixtures, sprinkler systems, dock boards, truck doors, dock bumpers, plumbing work and fixtures, and performance of regular removal of trash and debris). Tenant as part of its obligations hereunder shall keep the Premises in a clean and sanitary condition. Tenant will, as far as possible keep all such parts of the Premises from falling temporarily out of repair, and upon termination of this Lease in any way Tenant will yield up the Premises to Landlord in good condition and repair, loss by fire or other casualty excepted (but not excepting any damage to glass). Subject to the waiver of subrogation provided in Section 12, Tenant shall, at its own cost and expense, repair any damage to the Premises or the Building resulting from and/or caused in whole or in part by the negligence or misconduct of Tenant, its agents, employees, contractors, invitees, or any other person entering upon the Premises as a result of Tenant's business activities or caused by Tenant's default hereunder 7.3 Except as provided in Article 22, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or 9 improvements in or to any portion of the Building or the Premises or to fixtures, appurtenances and equipment in the Building. Tenant hereby waives any and all rights under and benefits of subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code, or any similar or successor Regulations or other laws now or hereinafter in effect. Except in emergency situations as determined by Landlord, Landlord shall exercise reasonable efforts not to unreasonably interfere with the conduct of the business of Tenant in the Premises. 7.4 Tenant shall, at its own cost and expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor approved by Landlord for servicing all heating and air conditioning systems and equipment serving the Premises (and a copy thereof shall be furnished to Landlord). The service contract must include all services suggested by the equipment manufacturer in the operation/maintenance manual and must become effective within thirty (30) days of the date Tenant takes possession of the Premises. At Landlord's election, Landlord may, upon notice to Tenant, enter into such a maintenance/ service contract on behalf of Tenant or perform the work and in either case, charge Tenant the cost thereof along with a reasonable amount for Landlord's overhead. 7.5 If applicable, Landlord shall coordinate any repairs and other maintenance of any railroad tracks serving the Building and, if Tenant uses such rail tracks, Tenant shall reimburse Landlord or the railroad company from time to time upon demand, as additional rent, for its share of the costs of such repair and maintenance and for any other sums specified in any agreement to which Landlord or Tenant is a party respecting such tracks, such costs to be borne proportionately by all tenants in the Building using such rail tracks, based upon the actual number of rail cars shipped and received by such tenant during each calendar year during the Term. 8. LIENS. Tenant shall keep the Premises, the Building and appurtenant land and Tenant's leasehold interest in the Premises free from any liens arising out of any services, work or materials performed, furnished, or contracted for by Tenant, or obligations incurred by Tenant. In the event that Tenant fails, within ten (10) days following the imposition of any such lien, to either cause the same to be released of record or provide Landlord with insurance against the same issued by a major title insurance company or such other protection against the same as Landlord shall accept (such failure to constitute an Event of Default), Landlord shall have the right to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith shall be payable to it by Tenant within five (5) days after Landlord's demand. 9. ASSIGNMENT AND SUBLETTING. 9.1 Tenant shall not have the right to assign or pledge this Lease or to sublet the whole or any part of the Premises whether voluntarily or by operation of law, or permit the use or occupancy of the Premises by anyone other than Tenant, and shall not make, suffer or permit such assignment, subleasing or occupancy without the prior written consent of Landlord, such consent not to be unreasonably withheld, and said restrictions shall be binding upon any and all assignees of the Lease and subtenants of the Premises. In the event Tenant desires to sublet, or permit such occupancy of, the Premises, or any portion thereof, or assign this Lease, Tenant shall give written notice thereof to Landlord at least thirty (30) days prior to the proposed commencement date of such subletting or assignment, which notice shall set forth the name of the proposed subtenant or assignee, the relevant terms of any sublease or assignment and copies of financial reports and other relevant financial information of the proposed subtenant or assignee. To the extent reasonably necessary, upon written request by Tenant, Landlord shall enter into a commercially reasonable confidentiality agreement covering any confidential information that is disclosed by Tenant with respect to the financial reports and other relevant financial information of the proposed subtenant or assignee. 9.2 Notwithstanding any assignment or subletting, permitted or otherwise, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of the rent specified in this Lease and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. Upon the occurrence of an Event of Default, if the Premises or any part of them are then assigned or sublet, Landlord, in addition to any other remedies provided in this Lease or provided by law, may, at its option, collect directly from such assignee or subtenant all rents due and becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord from Tenant under this 10 Lease, and no such collection shall be construed to constitute a novation or release of Tenant from the further performance of Tenant's obligations under this Lease. 9.3 In addition to Landlord's right to approve of any subtenant or assignee, Landlord shall have the option, in its sole discretion, in the event of any proposed assignment of this Lease, or with respect to a subletting, (i) for a term which is for more than 50% of the then remaining Term of this Lease (as the same may have been extended) or (ii) of 30% or more of the Premises, to terminate this Lease, or in the case of a proposed subletting of less than the entire Premises, to recapture the portion of the Premises to be sublet, as of the date the subletting or assignment is to be effective. The foregoing shall not apply to Permitted Transfers, Affiliated Parties, and any Corporate Successors (as each such term is defined in Paragraph 9.8 below). The option shall be exercised, if at all, by Landlord giving Tenant written notice given by Landlord to Tenant within twenty (20) days following Landlord's receipt of Tenant's written notice as required above. However, if Tenant notifies Landlord, within five (5) days after receipt of Landlord's termination notice, that Tenant is rescinding its proposed assignment or sublease, the termination notice shall be void and the Lease shall continue in full force and effect. If this Lease shall be terminated with respect to the entire Premises pursuant to this Section, the Term of this Lease shall end on the date stated in Tenant's notice as the effective date of the sublease or assignment as if that date had been originally fixed in this Lease for the expiration of the Term. If Landlord recaptures under this Section only a portion of the Premises, the rent to be paid from time to time during the unexpired Term shall abate proportionately based on the proportion by which the approximate square footage of the remaining portion of the Premises shall be less than that of the Premises as of the date immediately prior to such recapture. Tenant shall, at Tenant's own cost and expense, discharge in full any outstanding commission obligation which may be due and owing as a result of any proposed assignment or subletting, whether or not the Premises are recaptured pursuant to this Section 9.3 and rented by Landlord to the proposed tenant or any other tenant. 9.4 In the event that Tenant sells, sublets, assigns or transfers this Lease, Tenant shall pay to Landlord as additional rent an amount equal to seventy-five percent (75%) of any Increased Rent (as defined below), less the Costs Component (as defined below), when and as such Increased Rent is received by Tenant. As used in this Section, "Increased Rent" shall mean the excess of (i) all rent and other consideration which Tenant is entitled to receive by reason of any sale, sublease, assignment or other transfer of this Lease, over (ii) the rent otherwise payable by Tenant under this Lease at such time. For purposes of the foregoing, any consideration received by Tenant in form other than cash shall be valued at its fair market value as determined by Landlord in good faith. The "Costs Component" is that amount which, if paid monthly, would fully amortize on a straight-line basis, over the entire period for which Tenant is to receive Increased Rent, the reasonable costs incurred by Tenant for legal fees, leasing commissions and tenant improvements constructed by or on behalf of Tenant and performed solely to bring about such sublease, assignment or other transfer. 9.5 Notwithstanding any other provision hereof, it shall be considered reasonable for Landlord to withhold its consent to any assignment of this Lease or sublease of any portion of the Premises if at the time of either Tenant's notice of the proposed assignment or sublease or the proposed commencement date thereof, there shall exist any uncured event of Default of Tenant or matter which will become an Event of Default of Tenant with passage of time unless cured, or if the proposed assignee or sublessee is an entity: (a) with which Landlord is already in negotiation; (b) is already an occupant of the Building unless Landlord is unable to provide the amount of space required by such occupant; (c) is a governmental agency; (d) is incompatible with the character of occupancy of the Building; (e) with which the payment for the sublease or assignment is determined in whole or in part based upon its net income or profits; or (f) would subject the Premises to a use which would: (i) involve increased wear upon the Building; (ii) violate any exclusive right granted to another tenant of the Building; (iii) require any addition to or modification of the Premises or the Building in order to comply with building code or other governmental requirements; or, (iv) involve a violation of Section 1.2. Tenant expressly agrees that for the purposes of any statutory or other requirement of reasonableness on the part of Landlord, Landlord's refusal to consent to any assignment or sublease for any of the reasons described in this Section 9.5, shall be conclusively deemed to be reasonable. 9.6 Upon any request to assign or sublet, Tenant will pay to Landlord the Assignment/Subletting Fee plus, on demand, a sum equal to all of Landlord's costs, including reasonable attorney's fees, incurred in investigating, considering reviewing and documenting any proposed or purported assignment or pledge of this Lease or sublease of any of the Premises (the "Review Reimbursement" and together with the 11 Assignment/Subletting Fee, collectively, the "Total Reimbursement"), regardless of whether Landlord shall consent to, refuse consent, or determine that Landlord's consent is not required for, such assignment, pledge or sublease. Except as otherwise expressly provided herein, the Total Reimbursement shall not exceed $1,000.00 (the "Cap"). Any purported sale, assignment, mortgage, transfer of this Lease or subletting which does not comply with the provisions of this Article 9 shall be void. Landlord shall notify Tenant if Landlord reasonably estimates that the Total Reimbursement shall exceed the Cap and shall inform Tenant of the amount of Landlord's reasonable estimate of the Total Reimbursement (the "Estimated Fees"). If the Estimated Fees exceed the Cap, then the Cap shall not apply and Tenant shall pay to Landlord the amount of the Total Reimbursement up to an amount not to exceed 120% of the amount of the Estimated Fees. 9.7 If Tenant is a corporation, limited liability company, partnership or trust, any transfer or transfers of or change or changes within any twelve (12) month period in the number of the outstanding voting shares of the corporation or limited liability company, the general partnership interests in the partnership or the identity of the persons or entities controlling the activities of such partnership or trust resulting in the persons or entities owning or controlling a majority of such shares, partnership interests or activities of such partnership or trust at the beginning of such period no longer having such ownership or control shall be regarded as equivalent to an assignment of this Lease to the persons or entities acquiring such ownership or control and shall be subject to all the provisions of this Article 9 to the same extent and for all intents and purposes as though such an assignment; provided, however, to the extent Tenant is a corporation, the foregoing shall not apply to a single transfer (or series of related transfers that are part of the same general transaction and which proximately occur) of all or substantially all of the capital stock of Tenant to one recipient (whether an individual or an entity) so long as there is no diminution of the Tenant's tangible net worth as a result thereof. 9.8 So long as Tenant is not entering into the Permitted Transfer (as defined herein) for the purpose of avoiding or otherwise circumventing the remaining terms of this Article 9, Tenant may assign its entire interest under this Lease, without the consent of Landlord, to (i) an affiliate, subsidiary, or parent of Tenant, or a corporation, partnership or other legal entity wholly owned by Tenant (collectively, an "Affiliated Party"), or (ii) a successor to Tenant by purchase, merger, consolidation or reorganization (a "Corporate Successor"), provided that all of the following conditions are satisfied (each such transfer a "Permitted Transfer"): (1) Tenant is not in default under this Lease; (2) the Permitted Use does not allow the Premises to be used for retail purposes; (3) Tenant shall give Landlord written notice at least 15 days prior to the effective date of the proposed Permitted Transfer; provided, however, that to the extent that Tenant is prohibited by any applicable law, rule, regulation, ordinance of code from providing the foregoing notice, Tenant shall provide notice to Landlord as soon as is reasonably possible but in no event later than two (2) business days following the effective date of any such Permitted Transfer; (4) with respect to a proposed Permitted Transfer to an Affiliated Party, the proposed transferee has a tangible net worth, financial standing and financial resources, as evidenced by current financial statements satisfactory to Landlord and certified by an independent certified public accountant, prepared in accordance with generally accepted accounting principles that are consistently applied, reasonably sufficient, taking into account all expected obligations of the transferee with respect to the proposed transfer and all of its other contingent and noncontingent obligations, to service when due the obligations of the transferee with respect to the proposed Permitted Transfer; and (5) with respect to a purchase, merger, consolidation or reorganization or any Permitted Transfer which results in Tenant ceasing to exist as a separate legal entity, (a) Tenant's successor shall own all or substantially all of the assets of Tenant, and (b) Tenant's successor shall have a tangible net worth which is at least equal to Ten Million Dollars ($10,000,000.00) as evidenced by current financial statements satisfactory to Landlord and certified by an independent certified public accountant, prepared in accordance with generally accepted accounting principles that are consistently applied. Tenant's notice to Landlord shall include information and documentation showing that each of the above conditions has been satisfied. If requested by Landlord, Tenant's successor shall sign a commercially reasonable form of assumption agreement. As used herein, (A) "parent" shall mean a company which owns a majority of Tenant's voting equity; (B) "subsidiary" shall mean an entity wholly owned by Tenant or at least 51% of whose voting equity is owned by Tenant; and (C) "affiliate" shall mean an entity controlled, controlling or under common control with Tenant. Notwithstanding the foregoing, if any parent, affiliate or subsidiary to which this Lease has been assigned or transferred subsequently sells or transfers its voting equity or its interest under this Lease other than to another parent, subsidiary or affiliate 12 of the original Tenant named hereunder, such sale or transfer shall be deemed to be a transfer requiring the consent of Landlord hereunder. 10. INDEMNIFICATION. None of the Landlord Entities shall be liable and Tenant hereby waives all claims against them for any damage to any property or any injury to any person in or about the Premises or the Building by or from any cause whatsoever (including without limiting the foregoing, rain or water leakage of any character from the roof, windows, walls, basement, pipes, plumbing works or appliances, the Building not being in good condition or repair, gas, fire, oil, electricity or theft), except to the extent caused by or arising from the active negligence or willful misconduct of Landlord or its agents, employees or contractors, or a breach of this lease by Landlord. Tenant shall protect, indemnify and hold the Landlord Entities harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of (a) any damage to any property (including but not limited to property of any Landlord Entity) or any injury (including but not limited to death) to any person occurring in, on or about the Premises or the Building to the extent that such injury or damage shall be caused by or arise from any actual or alleged act, neglect, fault, or omission by or of Tenant or any Tenant Entity to meet any standards imposed by any duty with respect to the injury or damage; (b) the conduct or management of any work or thing whatsoever done by the Tenant in or about the Premises or from transactions of the Tenant concerning the Premises; (c) Tenant's failure to comply with any and all governmental laws, ordinances and regulations applicable to the condition or use of the Premises or its occupancy; or (d) any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of the Tenant to be performed pursuant to this Lease. The provisions of this Article shall survive the termination of this Lease with respect to any claims or liability accruing prior to such termination. 11. INSURANCE. 11.1 Tenant shall keep in force throughout the Term: (a) a Commercial General Liability insurance policy or policies to protect the Landlord Entities against any liability to the public or to any invitee of Tenant or a Landlord Entity incidental to the use of or resulting from any accident occurring in or upon the Premises with a limit of not less than $1,000,000 per occurrence and not less than $2,000,000 in the annual aggregate, or such larger amount as Landlord may prudently require from time to time so long as such larger amounts are typically carried by similar commercial tenants in similar buildings and in the same geographic area in which the Building is located, covering bodily injury and property damage liability and $1,000,000 products/completed operations aggregate; (b) Business Auto Liability covering owned, non-owned and hired vehicles with a limit of not less than $1,000,000 per accident; (c) insurance protecting against liability under Worker's Compensation Laws with limits at least as required by statute; (d) Employers Liability with limits of $1,000,000 each accident, $1,000,000 disease policy limit, $1,000,000 disease--each employee; (e) All Risk or Special Form coverage protecting Tenant against loss of or damage to Tenant's alterations, additions, improvements (including the Improvements), carpeting, floor coverings, panelings, decorations, fixtures, inventory and other business personal property situated in or about the Premises to the full replacement value of the property so insured, (f) Business Interruption Insurance for 100% of the 12 months actual loss sustained, and (g) Excess Liability in the amount of $5,000,000. 11.2 The aforesaid policies shall (a) be provided at Tenant's expense; (b) name the Landlord Entities as additional insureds (General Liability) and loss payee (Property--Special Form); (c) be issued by an insurance company with a minimum Best's rating of "A:VII" during the Term; and (d) provide that said insurance shall not be canceled unless thirty (30) days prior written notice (ten days for non-payment of premium) shall have been given to Landlord; a certificate of Liability insurance on ACORD Form 25 and a certificate of Property insurance on ACORD Form 27 shall be delivered to Landlord by Tenant upon the Commencement Date and at least twenty (20) days prior to each renewal of said insurance. 11.3 Whenever Tenant shall undertake any alterations, additions or improvements in, to or about the Premises ("Work") the aforesaid insurance protection must extend to and include injuries to persons and damage to property arising in connection with such Work, without limitation including liability under any applicable structural work act, and such other insurance as Landlord shall require; and the policies of or certificates evidencing such insurance must be delivered to Landlord prior to the commencement of any such Work. 11.4 Landlord shall keep in force throughout the Term Commercial General Liability Insurance and All Risk or Special Form coverage insuring the Landlord and the Building, in such amounts and with such deductibles 13 as Landlord determines from time to time in accordance with sound and reasonable risk management principles. The cost of all such insurance is included in Expenses. 12. WAIVER OF SUBROGATION. Notwithstanding anything in this Lease to the contrary, Landlord and Tenant hereby waive, and shall cause their respective insurance carriers to waive, any and all rights of recovery, claim, action or causes of action against the other and their respective trustees, principals, beneficiaries, partners, officers, directors, agents, and employees, by subrogation, to the extent the same is insured against (or is required to be insured against under the terms hereof) for any loss or damage that may occur to Landlord or Tenant or any party claiming by, through or under Landlord or Tenant, as the case may be, with respect to Tenant's personal property, the Premises, the Building, the project of which the Building is a part, any additions or improvements to the Premises, the Building or the project of which the Building is a part, or any contents thereof, including all rights of recovery, claims, actions or causes of action arising out of the negligence of Landlord or any parties related to or comprising Landlord or the negligence of Tenant or parties related to or comprising Tenant, which loss or damage is (or would have been, had the insurance required by this Lease been carried and as if the All Risk or Special Form coverage insuring the Landlord and the Building and required to be carried by Landlord pursuant to Paragraph 12 above is carried at full replacement value) covered by property damage insurance. 13. SERVICES AND UTILITIES. Tenant shall pay for all water, gas, heat, light, power, telephone, sewer, sprinkler system charges and other utilities and services used on or from the Premises, together with any taxes, penalties, and surcharges or the like pertaining thereto and any maintenance charges for utilities. Tenant shall furnish all electric light bulbs, tubes and ballasts, battery packs for emergency lighting and fire extinguishers. Landlord hereby represents to Tenant that the Premises as initially configured in this Lease is separately metered. Tenant will not, without the written consent of Landlord, contract with a utility provider to service the Premises with any utility, including, but not limited to, telecommunications, electricity, water, sewer or gas, which is not previously providing such service to other tenants in the Building. Landlord shall in no event be liable for any interruption or failure of utility services on or to the Premises. Notwithstanding the foregoing, if Tenant is prevented from using, and does not use, all or part of the Premises (the "Affected Area") as a result of a Essential Services Interruption Event as defined below, and the remaining portions of the Premises are not reasonably sufficient to allow Tenant to conduct its business in the Premises and if this Essential Services Interruption Event continues for three (3) consecutive business days after Landlord's receipt of notice from Tenant of the Essential Services Interruption Event (the "Eligibility Period"), the Rent payable under this Lease shall be abated after the expiration of the Eligibility Period for such time that Tenant continues to be prevented from using, and does not use, the Affected Area in the proportion that the rentable area of the Affected Area bears to the total rentable area of the Premises. If, however, Tenant reoccupies any portion of the Premises during this period, the Rent allocable to this reoccupied portion (based on the proportion that the rentable area of the reoccupied portion of the Premises bears to the total rentable area of the Premises) shall be payable by Tenant from the date on which Tenant reoccupies this portion of the Premises. An "Essential Services Interruption Event" shall mean the failure of or interruption in essential services required to be supplied by Landlord to the Premises during ordinary business hours of generally recognized business days which occurs solely as a result of Landlord's active negligence or willful misconduct. In the event of a stoppage or interruption of services, Landlord shall diligently attempt to resume such services as promptly as practicable. 14. HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains possession of the Premises or part of them after termination of this Lease by lapse of time or otherwise at the rate ("Holdover Rate") which shall be One Hundred Fifty Percent (150%) of the greater of (a) the amount of the Annual Rent for the last period prior to the date of such termination plus all Rent Adjustments under Article 4; and (b) the then market rental value of the Premises as determined by Landlord assuming a new lease of the Premises of the then usual duration and other terms, in either case, prorated on a daily basis, and also pay all damages sustained by Landlord by reason of such retention. If Landlord gives notice to Tenant of Landlord's election to such effect, such holding over shall constitute renewal of this Lease for a period from month to month or one (1) year, whichever shall be specified in such notice, in either case at the Holdover Rate, but if the Landlord does not so elect, no such renewal shall result notwithstanding acceptance by Landlord of any sums due hereunder after such termination; and instead, a tenancy at sufferance at the Holdover Rate shall be deemed to have been created. In any event, no provision of this Article 14 shall be deemed to waive Landlord's right of reentry or any other right under this Lease or at law. 15. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to ground or underlying leases and to the lien of any mortgages or deeds of trust now or hereafter placed on, against or affecting the Building, 14 Landlord's interest or estate in the Building, or any ground or underlying lease; provided, however, that if the lessor, mortgagee, trustee, or holder of any such mortgage or deed of trust elects to have Tenant's interest in this Lease be superior to any such instrument, then, by notice to Tenant, this Lease shall be deemed superior, whether this Lease was executed before or after said instrument. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver within ten (10) days of Landlord's request such further instruments evidencing such subordination or superiority of this Lease as may be required by Landlord. As of the date hereof, a lien encumbers Landlord's interest in the Building in favor of LaSalle Bank N. A., as Trustee for the holders of Calwest Industrial Trust Commercial Mortgage Pass-Through Certificates Series 2002-CALW. At Tenant's cost, Landlord shall provide Tenant with a non-disturbance, subordination, and attornment agreement in favor of Tenant in the form attached hereto as Exhibit F (the "SNDA") within 45 days following Tenant's execution and delivery thereof to Landlord. 16. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with all the rules and regulations as set forth in Exhibit D to this Lease and all reasonable and non-discriminatory modifications of and additions to them from time to time put into effect by Landlord, provided that any such modification and/or additions shall not materially increase Tenant's obligations or decrease Tenant's rights or parking ratio as provided in this Lease. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Building of any such rules and regulations. If there is a conflict between this Lease and any rules and regulations enacted after the date of this Lease, the terms of this Lease shall control. The rules and regulations shall be generally applicable, and generally applied in the same manner, to all tenants of the Building. 17. REENTRY BY LANDLORD. 17.1 Landlord reserves and shall at all times have the right to re-enter the Premises to inspect the same, to show said Premises to prospective purchasers or mortgagees, and to alter, improve or repair the Premises and any portion of the Building, and, during the last 9 months of the Term, to show said Premises to prospective tenants, without abatement of rent, and may for that purpose erect, use and maintain scaffolding, pipes, conduits and other necessary structures and open any wall, ceiling or floor in and through the Building and Premises where reasonably required by the character of the work to be performed, provided entrance to the Premises shall not be blocked thereby, and further provided that the business of Tenant shall not be interfered with unreasonably. Except in emergencies, Landlord shall provide Tenant with reasonable prior notice of entry into the Premises, which may be given orally. During any entry by Landlord to the Premises as provided herein, Landlord shall comply with all reasonable security measures pertaining to the Premises and of which Tenant has provided reasonable advance written notice to Landlord. Landlord shall have the right at any time to change the arrangement and/or locations of entrances, or passageways, doors and doorways, and corridors, windows, elevators, stairs, toilets or other public parts of the Building and to change the name, number or designation by which the Building is commonly known. Landlord shall use reasonable efforts to give Tenant at least 60 days prior notice with respect to a change in the Building's street address that will prohibit Tenant from receiving mail at its current address, and if Landlord fails to provide Tenant with such prior notice, Landlord shall reimburse Tenant for the cost of replacing all business stationery and business cards on hand (not to exceed a 2 month supply) at the effective date of such change. Landlord shall provide to Tenant at least 30 days prior notice before any change is made to the name, number or designation by which the Building is commonly known. In the event that Landlord damages any portion of any wall or wall covering, ceiling, or floor or floor covering within the Premises, Landlord shall repair or replace the damaged portion to match the original as nearly as commercially reasonable but shall not be required to repair or replace more than the portion actually damaged. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned by any action of Landlord authorized by this Article 17; provided, however, that Tenant shall not be entitled to receive any consequential, special or indirect damages based upon a claim that Landlord violated the terms and conditions of this Section 17.1. Instead, any such claim of Tenant shall be limited to the foreseeable, direct and actual damages incurred by Tenant. 17.2 For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in the Premises, excluding Tenant's vaults and safes or special security areas (designated in advance), and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency to obtain entry to any portion of the Premises. As to any portion to which access cannot be had by means of a key or keys in Landlord's possession, Landlord is authorized to gain 15 access by such means as Landlord shall elect and the cost of repairing any damage occurring in doing so shall be borne by Tenant and paid to Landlord within five (5) days of Landlord's written demand. 18. DEFAULT. 18.1 Except as otherwise provided in Article 20, the following events shall be deemed to be Events of Default under this Lease: 18.1.1 Tenant shall fail to pay when due any sum of money becoming due to be paid to Landlord under this Lease, whether such sum be any installment of the rent reserved by this Lease, any other amount treated as additional rent under this Lease, or any other payment or reimbursement to Landlord required by this Lease, whether or not treated as additional rent under this Lease, and such failure shall continue for a period of five (5) days after written notice that such payment was not made when due, but if any such notice shall be given, more than two (2) times in such twelve (12) month period commencing with the date of such notice, the failure to pay within five (5) days after due any additional sum of money becoming due to be paid to Landlord under this Lease the third (3rd) time during such period shall be an Event of Default, without notice. So long as a notice delivered to Tenant pursuant to this Section 18.1.1 is in compliance with California Code of Civil Procedure Section 1161 or any successor statute, such notice shall concurrently satisfy the statutory requirement as well as the notice requirement of this Lease described in this Section 18.1.1. 18.1.2 Tenant shall fail to comply with any term, provision or covenant of this Lease which is not provided for in another Section of this Article and shall not cure such failure within thirty (30) days (forthwith, if the failure involves a hazardous condition) after written notice of such failure to Tenant provided, however, that such failure shall not be an event of default if such failure could not reasonably be cured during such thirty (30) day period, Tenant has commenced the cure within such thirty (30) day period and thereafter is diligently pursuing such cure to completion, but the total aggregate cure period shall not exceed ninety (90) days. 18.1.3 Tenant shall fail to vacate the Premises immediately upon termination of this Lease, by lapse of time or otherwise, or upon termination of Tenant's right to possession only. 18.1.4 Tenant shall become insolvent, admit in writing its inability to pay its debts generally as they become due, file a petition in bankruptcy or a petition to take advantage of any insolvency statute, make an assignment for the benefit of creditors, make a transfer in fraud of creditors, apply for or consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, or file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws, as now in effect or hereafter amended, or any other applicable law or statute of the United States or any state thereof. 18.1.5 A court of competent jurisdiction shall enter an order, judgment or decree adjudicating Tenant bankrupt, or appointing a receiver of Tenant, or of the whole or any substantial part of its property, without the consent of Tenant, or approving a petition filed against Tenant seeking reorganization or arrangement of Tenant under the bankruptcy laws of the United States, as now in effect or hereafter amended, or any state thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within sixty (60) days from the date of entry thereof. 16 19. REMEDIES. 19.1 Upon the occurrence of any Event or Events of Default under this Lease, whether enumerated in Article 18 or not, Landlord shall have the option to pursue any one or more of the following remedies without any notice (except as expressly prescribed herein) or demand whatsoever (and without limiting the generality of the foregoing, Tenant hereby specifically waives notice and demand for payment of rent (except to the extent required herein) or other obligations and waives any and all other notices or demand requirements imposed by applicable law): 19.1.1 Terminate this Lease and Tenant's right to possession of the Premises and recover from Tenant an award of damages equal to the sum of the following: 19.1.1.1 The Worth at the Time of Award of the unpaid rent which had been earned at the time of termination; 19.1.1.2 The Worth at the Time of Award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rent loss that Tenant affirmatively proves could have been reasonably avoided; 19.1.1.3 The Worth at the Time of Award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rent loss that Tenant affirmatively proves could be reasonably avoided; 19.1.1.4 Any other amount necessary to compensate Landlord for all the detriment either proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which in the ordinary course of things would be likely to result therefrom; and 19.1.1.5 All such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time under applicable law. The "Worth at the Time of Award" of the amounts referred to in parts 19.1.1.1 and 19.1.1.2 above, shall be computed by allowing interest at the lesser of a per annum rate equal to: (i) the greatest per annum rate of interest permitted from time to time under applicable law, or (ii) the Prime Rate plus 5%. For purposes hereof, the "Prime Rate" shall be the per annum interest rate publicly announced as its prime or base rate by a federally insured bank selected by Landlord in the State of California. The "Worth at the Time of Award" of the amount referred to in part 19.1.1.3, above, shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%; 19.1.2 Employ the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's breach and abandonment and recover rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations); or 19.1.3 Notwithstanding Landlord's exercise of the remedy described in California Civil Code Section 1951.4 in respect of an Event or Events of Default, at such time thereafter as Landlord may elect in writing, to terminate this Lease and Tenant's right to possession of the Premises and recover an award of damages as provided above in Section 19.1.1. 19.2 The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No waiver by Landlord of any breach hereof shall be effective unless such waiver is in writing and signed by Landlord. 19.3 TENANT HEREBY WAIVES ANY AND ALL RIGHTS CONFERRED BY SECTION 3275 OF THE CIVIL CODE OF CALIFORNIA AND BY SECTIONS 1174 (c) AND 1179 OF THE CODE OF CIVIL PROCEDURE OF CALIFORNIA AND ANY AND ALL OTHER REGULATIONS AND RULES OF LAW FROM TIME TO TIME IN EFFECT DURING THE TERM PROVIDING THAT TENANT SHALL HAVE ANY RIGHT TO REDEEM, REINSTATE OR RESTORE THIS LEASE FOLLOWING ITS TERMINATION BY REASON OF TENANT'S BREACH. TENANT ALSO 17 HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY LITIGATION ARISING OUT OF OR RELATING TO THIS LEASE. 19.4 No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing by agreement, applicable law or in equity. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief, or to a decree compelling performance of any of the covenants, agreements, conditions or provisions of this Lease, or to any other remedy allowed to Landlord at law or in equity. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an Event of Default shall not be deemed or construed to constitute a waiver of such Default. 19.5 This Article 19 shall be enforceable to the maximum extent such enforcement is not prohibited by applicable law, and the unenforceability of any portion thereof shall not thereby render unenforceable any other portion.. 19.6 If more than one (1) Event of Default occurs during the Term or any renewal thereof, Tenant's renewal options, expansion options, purchase options and rights of first offer and/or refusal, if any are provided for in this Lease, shall be null and void. 19.7 Service of any statutory notices required in connection with any rights of the parties hereto shall be completed in a manner mandated by the applicable law, including California Code of Civil Procedure Section 1162 or any similar or successor statute. 20. TENANT'S BANKRUPTCY OR INSOLVENCY. 20.1 If at any time and for so long as Tenant shall be subjected to the provisions of the United States Bankruptcy Code or other law of the United States or any state thereof for the protection of debtors as in effect at such time (each a "Debtor's Law"): 20.1.1 Tenant, Tenant as debtor-in-possession, and any trustee or receiver of Tenant's assets (each a "Tenant's Representative") shall have no greater right to assume or assign this Lease or any interest in this Lease, or to sublease any of the Premises than accorded to Tenant in Article 9, except to the extent Landlord shall be required to permit such assumption, assignment or sublease by the provisions of such Debtor's Law. Without limitation of the generality of the foregoing, any right of any Tenant's Representative to assume or assign this Lease or to sublease any of the Premises shall be subject to the conditions that: 20.1.1.1 Such Debtor's Law shall provide to Tenant's Representative a right of assumption of this Lease which Tenant's Representative shall have timely exercised and Tenant's Representative shall have fully cured any default of Tenant under this Lease. 20.1.1.2 Tenant's Representative or the proposed assignee, as the case shall be, shall have deposited with Landlord as security for the timely payment of rent an amount equal to the larger of: (a) three (3) months' rent and other monetary charges accruing under this Lease; and (b) any sum specified in Article 5; and shall have provided Landlord with adequate other assurance of the future performance of the obligations of the Tenant under this Lease. Without limitation, such assurances shall include, at least, in the case of assumption of this Lease, demonstration to the satisfaction of the Landlord that Tenant's Representative has and will continue to have sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that Tenant's Representative will have sufficient funds to fulfill the obligations of Tenant under this Lease; and, in the case of assignment, submission of current financial statements of the proposed assignee, audited by an independent certified public accountant reasonably acceptable to Landlord and showing a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by such assignee of all of the Tenant's obligations under this Lease. 18 20.1.1.3 The assumption or any contemplated assignment of this Lease or subleasing any part of the Premises, as shall be the case, will not breach any provision in any other lease, mortgage, financing agreement or other agreement by which Landlord is bound. 20.1.1.4 Landlord shall have, or would have had absent the Debtor's Law, no right under Article 9 to refuse consent to the proposed assignment or sublease by reason of the identity or nature of the proposed assignee or sublessee or the proposed use of the Premises concerned. 21. QUIET ENJOYMENT. Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, while paying the rental and performing its other covenants and agreements contained in this Lease within applicable notice and cure periods, shall peaceably and quietly have, hold and enjoy the Premises for the Term without hindrance or molestation from Landlord subject to the terms and provisions of this Lease. Landlord shall not be liable for any interference or disturbance by other tenants or third persons, nor shall Tenant be released from any of the obligations of this Lease because of such interference or disturbance. 22. CASUALTY 22.1 In the event the Premises or the Building are damaged by fire or other cause and in Landlord's reasonable estimation such damage can be materially restored within one hundred eighty (180) days, Landlord shall forthwith repair the same and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate abatement in rent from the date of such damage. Such abatement of rent shall be made in proportion to the extent to which the damage and the making of such repairs shall interfere with the Permitted Use and occupancy by Tenant of the Premises from time to time. Within forty-five (45) days from the date of such damage, Landlord shall notify Tenant, in writing, of Landlord's reasonable estimation of the length of time within which material restoration can be made, and Landlord's determination shall be binding on Tenant. For purposes of this Lease, the Building or Premises shall be deemed "materially restored" if they are in a substantially similar condition as of the date of this Lease, reasonable wear and tear excepted, and provided that Landlord shall have no obligation to restore and/or replace the Improvements or any alterations or other improvements made to the Premises. 22.2 If such repairs cannot, in Landlord's reasonable estimation, be made within one hundred eighty (180) days days, Landlord and Tenant shall each have the option of giving the other, at any time within ninety (90) days after such damage, notice terminating this Lease as of the date of such damage. In the event of the giving of such notice, this Lease shall expire and all interest of the Tenant in the Premises shall terminate as of the date of such damage as if such date had been originally fixed in this Lease for the expiration of the Term. In the event that neither Landlord nor Tenant exercises its option to terminate this Lease, then Landlord shall repair or restore such damage, this Lease continuing in full force and effect, and the rent hereunder shall be proportionately abated as provided in Section 22.1. Landlord shall not in bad faith terminate this Lease pursuant to the terms of this Section 22.2 solely for the purpose of replacing Tenant with a successor tenant. 22.3 Landlord shall not be required to repair or replace any damage or loss by or from fire or other cause to any panelings, decorations, partitions, additions, railings, ceilings, floor coverings, office fixtures or any other property or improvements installed on the Premises by, or belonging to, Tenant. Any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or Premises shall be for the sole benefit of the party carrying such insurance and under its sole control. 22.4 In the event that Landlord should fail to complete such repairs and material restoration within ninety (90) days after the date estimated by Landlord therefor as extended by this Section 22.4, Tenant may at its option and as its sole remedy terminate this Lease by delivering written notice to Landlord, within fifteen (15) days after the expiration of said period of time, whereupon the Lease shall end on the date of such notice or such later date fixed in such notice as if the date of such notice was the date originally fixed in this Lease for the expiration of the Term; provided, however, that if construction is delayed because of changes, deletions or additions in construction requested by Tenant, strikes, lockouts, casualties, Acts of God, war, material or labor shortages, government regulation or control or other causes beyond the reasonable control of Landlord, the period for restoration, repair or rebuilding shall be extended for the amount of time Landlord is so delayed. 19 22.5 Notwithstanding anything to the contrary contained in this Article: (a) Landlord shall not have any obligation whatsoever to repair, reconstruct, or restore the Premises when the damages resulting from any casualty covered by the provisions of this Article 22 occur during the last twelve (12) months of the Term or any extension thereof, but if Landlord determines not to repair such damages Landlord shall notify Tenant and if such damages shall render any material portion of the Premises untenantable Tenant shall have the right to terminate this Lease by notice to Landlord within fifteen (15) days after receipt of Landlord's notice; and (b) in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises or Building requires that any insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon this Lease shall end on the date of such damage as if the date of such damage were the date originally fixed in this Lease for the expiration of the Term. 22.6 In the event of any damage or destruction to the Building or Premises by any peril covered by the provisions of this Article 22, it shall be Tenant's responsibility to properly secure the Premises and upon notice from Landlord to remove forthwith, at its sole cost and expense, such portion of all of the property belonging to Tenant or its licensees from such portion or all of the Building or Premises as Landlord shall request. 22.7 Tenant hereby waives any and all rights under and benefits of Sections 1932(2) and 1933(4) of the California Code of Civil Procedure, or any similar or successor Regulations or other laws now or hereinafter in effect. 23. EMINENT DOMAIN. If all or any substantial part of the Premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, or conveyance in lieu of such appropriation, either party to this Lease shall have the right, at its option, of giving the other, at any time within thirty (30) days after such taking, notice terminating this Lease, except that Tenant may only terminate this Lease by reason of taking or appropriation, if such taking or appropriation shall be so substantial as to materially interfere with Tenant's use and occupancy of the Premises. If neither party to this Lease shall so elect to terminate this Lease, the rental thereafter to be paid shall be adjusted on a fair and equitable basis under the circumstances and based upon the proportion of the Premises so taken. In addition to the rights of Landlord above, if any substantial part of the Building shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, and regardless of whether the Premises or any part thereof are so taken or appropriated, Landlord shall have the right, at its sole option, to terminate this Lease. Landlord shall be entitled to any and all income, rent, award, or any interest whatsoever in or upon any such sum, which may be paid or made in connection with any such public or quasi-public use or purpose, and Tenant hereby assigns to Landlord any interest it may have in or claim to all or any part of such sums, other than any separate award which may be made with respect to Tenant's trade fixtures, moving expenses and the value of leasehold improvements to the extent paid for solely by Tenant (except for those alterations approved by Landlord and which will become the property of Landlord upon the expiration or termination of this Lease); Tenant shall make no claim for the value of any unexpired Term. Tenant hereby waives any and all rights under and benefits of Section 1265.130 of the California Code of Civil Procedure, or any similar or successor Regulations or other laws now or hereinafter in effect. 24. SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the Building, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions, expressed or implied, contained in this Lease in favor of Tenant and in such event Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease. In the event of a sale, such successor-in-interest shall assume in writing Landlord's obligations under this Lease. Except as set forth in this Article 24, this Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. If any security has been given by Tenant to secure the faithful performance of any of the covenants of this Lease, Landlord shall transfer or deliver said security, as such, to Landlord's successor in interest and thereupon Landlord shall be discharged from any further liability with regard to said security. 25. ESTOPPEL CERTIFICATES. Within ten (10) days following any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord or mortgagee or prospective mortgagee a sworn statement certifying: (a) the date of commencement of this Lease; (b) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications to this Lease, that this lease is in full force and effect, as modified, and stating the date and nature of such modifications); (c) the date to which the rent and other sums 20 payable under this Lease have been paid; (d) the fact that there are no current defaults under this Lease by either Tenant or, to Tenant's actual knowledge, Landlord, except as specified in Tenant's statement; and (e) such other matters as may be reasonably requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Article 25 may be relied upon by any mortgagee, beneficiary or purchaser, and Tenant shall be liable for all loss, cost or expense resulting from the failure of any sale or funding of any loan caused by any material misstatement contained in such estoppel certificate. Tenant irrevocably agrees that if Tenant fails to execute and deliver such certificate within such ten (10) day period, such certificate as prepared by Landlord shall be deemed executed by Tenant and accordingly shall be fully binding on Tenant. The parties agree that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of this Lease, and shall be an Event of Default (without any cure period that might be provided under this Lease) if Tenant fails to fully comply or makes any material misstatement in any such certificate. 26. SURRENDER OF PREMISES. 26.1 Landlord shall arrange to meet Tenant for two (2) joint inspections of the Premises, the first to occur at least ten (10) days (but no more than sixty (60) days) before the last day of the Term, and the second to occur not later than five (5) days after Tenant has vacated the Premises. In the event of Landlord's failure to arrange such joint inspections or Tenant's failure to participate in either such inspection, Landlord's inspection at or after Tenant's vacating the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. 26.2 All alterations, additions, and improvements in, on, or to the Premises made or installed by or for Tenant, including carpeting (collectively, "Alterations"), shall be and remain the property of Tenant during the Term. Upon the expiration or sooner termination of the Term, all Alterations shall become a part of the realty and shall belong to Landlord without compensation, and title shall pass to Landlord under this Lease as by a bill of sale. At the end of the Term or any renewal of the Term or other sooner termination of this Lease, Tenant will peaceably deliver up to Landlord possession of the Premises, together with all Alterations by whomsoever made, in the same conditions received or first installed, broom clean and free of all debris, excepting only ordinary wear and tear and damage by fire or other casualty. Notwithstanding the foregoing, and subject to the terms of Article 6 of this Lease, if Landlord elects by notice given to Tenant at least ten (10) days prior to expiration of the Term, Tenant shall, at Tenant's sole cost, remove any Alterations, including carpeting, so designated by Landlord's notice, and repair any damage caused by such removal. Further, nothing contained in this Section 26.2 shall increase Tenant's obligation to remediate or remove Hazardous Materials as the same is expressly provided in this Lease. Tenant must, at Tenant's sole cost, remove upon termination of this Lease, any and all of Tenant's furniture, furnishings, movable partitions of less than full height from floor to ceiling and other trade fixtures and personal property (collectively, "Personalty"). The Personalty shall be and remain the property of Tenant during the Term. Personalty not so removed shall be deemed abandoned by the Tenant and title to the same shall thereupon pass to Landlord under this Lease as by a bill of sale, but Tenant shall remain responsible for the cost of removal and disposal of such Personalty, as well as any damage caused by such removal. If Tenant fails to remove such alterations or Tenant's trade fixtures or furniture or the Personalty, Landlord may keep and use them or remove any of them and cause them to be stored or sold in accordance with applicable law, at Tenant's sole expense. 26.3 All obligations of Tenant under this Lease not fully performed as of the expiration or earlier termination of the Term shall survive the expiration or earlier termination of the Term To the extent Tenant has failed to do the same, upon the expiration or earlier termination of the Term, Tenant shall pay to Landlord the amount, as reasonably estimated by Landlord, necessary to repair and restore the Premises as provided in this Lease and/or to discharge Tenant's obligation for unpaid amounts due or to become due to Landlord. All such amounts shall be used and held by Landlord for payment of such obligations of Tenant, with Tenant being liable for any additional costs upon demand by Landlord, or with any excess to be promptly returned to Tenant after all such obligations have been determined and satisfied. Any otherwise unused Security Deposit shall be credited against the amount payable by Tenant under this Lease. 27. NOTICES. Any notice or document required or permitted to be delivered under this Lease shall be addressed to the intended recipient, by fully prepaid registered or certified United States Mail return receipt requested, or by reputable independent contract delivery service furnishing a written record of attempted or actual delivery, and shall be deemed to be delivered when tendered for delivery to the addressee at its address set forth on the Reference 21 Pages, or at such other address as it has then last specified by written notice delivered in accordance with this Article 27, or if to Tenant at either its aforesaid address or its last known registered office or home of a general partner or individual owner, whether or not actually accepted or received by the addressee. Any such notice or document may also be personally delivered if a receipt is signed by and received from, the individual, if any, named in Tenant's Notice Address. 28. TAXES PAYABLE BY TENANT. In addition to rent and other charges to be paid by Tenant under this Lease, Tenant shall reimburse to Landlord, upon demand, any and all taxes payable by Landlord (other than net income taxes) whether or not now customary or within the contemplation of the parties to this Lease: (a) upon or measured by the Tenant's gross receipts or payroll or the value of Tenant's equipment, furniture, fixtures and other personal property of Tenant or leasehold improvements, alterations or additions located in the Premises; or (b) upon this transaction or any document to which Tenant is a party creating or transferring any interest of Tenant in this Lease or the Premises. If due to a future change in the method of taxation, any franchise, income or profit or other tax shall be levied in substitution in whole or in part or in lieu of any tax which would otherwise constitute a part of Taxes under this Lease, such franchise, income, profit or other tax shall be deemed to be a part of Taxes for the purposes of this Lease. In addition to the foregoing, Tenant agrees to pay, before delinquency, any and all taxes levied or assessed against Tenant and which become payable during the term hereof upon Tenant's equipment, furniture, fixtures and other personal property of Tenant located in the Premises. In addition to and wholly apart from Tenant's obligation to pay Tenant's Proportionate Share of Expenses and Taxes, Tenant shall be responsible for and shall pay prior to delinquency any taxes or governmental service fees, possessory interest taxes, fees or charges in lieu of any such taxes, capital levies, or other charges imposed upon, levied with respect to or assessed against its fixtures or Personalty, on the value of any alterations or other improvements within the Premises, and on Tenant's interest pursuant to this Lease, or any increase in any of the foregoing based on such alterations and/or improvements. 29. INTENTIONALLY OMITTED. 30. DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease are for convenience of reference and shall in no way define, increase, limit or describe the scope or intent of any provision of this Lease. Any indemnification or insurance of Landlord shall apply to and inure to the benefit of all the following "Landlord Entities", being Landlord, Landlord's investment advisors, and the trustees, boards of directors, officers, general partners, beneficiaries, stockholders, employees and agents of each of them. Any option granted to Landlord shall also include or be exercisable by Landlord's trustee, beneficiary, agents and employees, as the case may be. In any case where this Lease is signed by more than one person, the obligations under this Lease shall be joint and several. The terms "Tenant" and "Landlord" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their and each of their respective successors, executors, administrators and permitted assigns, according to the context hereof. The term "rentable area" shall mean the rentable area of the Premises or the Building as calculated by the Landlord on the basis of the plans and specifications of the Building including a proportionate share of any common areas. Tenant hereby accepts and agrees to be bound by the figures for the rentable square footage of the Premises and Tenant's Proportionate Share shown on the Reference Pages; however, Landlord may adjust either or both figures if there is manifest error, addition or subtraction to the Building or any business park or complex of which the Building is a part, remeasurement or other circumstance reasonably justifying adjustment. The term "Building" refers to the structure in which the Premises are located and the common areas (parking lots, sidewalks, landscaping, etc.) appurtenant thereto. If the Building is part of a larger complex of structures, the term "Building" may include the entire complex, where appropriate (such as shared Expenses or Taxes) and subject to Landlord's reasonable discretion. 31. TENANT'S AUTHORITY. If Tenant signs as a corporation, partnership, trust or other legal entity, Tenant represents and warrants that each of the persons executing this Lease on behalf of Tenant has been and is qualified to do business in the state in which the Building is located, that the entity has full right and authority to enter into this Lease, and that all persons signing on behalf of the entity were authorized to do so by appropriate actions. 32. FINANCIAL STATEMENTS AND CREDIT REPORTS. At Landlord's request, Tenant shall deliver to Landlord a copy, certified by an officer of Tenant as being a true and correct copy, of Tenant's most recent audited financial statement, or, if unaudited, certified by Tenant's chief financial officer as being true, complete and correct in all material respects. Tenant hereby authorizes Landlord to obtain one or more credit reports on Tenant at any time, and shall execute such further authorizations as Landlord may reasonably require in order to obtain a credit 22 report. The foregoing shall not apply to the extent Tenant is a publicly traded entity on the "over-the-counter" market or any recognized national or international securities exchange and, accordingly, Tenant's audited financial statements are available to the public. 33. COMMISSIONS. Each of the parties represents and warrants to the other that it has not dealt with any broker or finder in connection with this Lease, except as described on the Reference Pages. Tenant shall indemnify and hold Landlord and its employees and affiliates harmless from all claims of any other brokers claiming to have represented Tenant in connection with this Lease. Landlord agrees to indemnify and hold Tenant and its employees and affiliates harmless from all claims of any brokers claiming to have represented Landlord in connection with this Lease. 34. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all of its provisions. This Lease shall in all respects be governed by the laws of the state in which the Building is located. 35. SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the terms, covenants and conditions contained in this Lease shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators and assigns of the parties to this Lease. 36. ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all agreements of the parties to this Lease and supersedes any previous negotiations. There have been no representations made by the Landlord or any of its representatives or understandings made between the parties other than those set forth in this Lease and its exhibits. This Lease may not be modified except by a written instrument duly executed by the parties to this Lease. 37. EXAMINATION NOT OPTION. Submission of this Lease shall not be deemed to be a reservation of the Premises. Landlord shall not be bound by this Lease until it has received a copy of this Lease duly executed by Tenant and has delivered to Tenant a copy of this Lease duly executed by Landlord, and until such delivery Landlord reserves the right to exhibit and lease the Premises to other prospective tenants. Notwithstanding anything contained in this Lease to the contrary, Landlord may withhold delivery of possession of the Premises from Tenant until such time as Tenant has paid to Landlord any security deposit required by Article 5, the first month's rent as set forth in Article 3 and any sum owed pursuant to this Lease. 38. RECORDATION. Tenant shall not record or register this Lease or a short form memorandum hereof without the prior written consent of Landlord, and then shall pay all charges and taxes incident such recording or registration. 39. LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against Landlord under this Lease shall be limited to and enforceable only against and to the extent of Landlord's interest in the Building. The obligations of Landlord under this Lease are not intended to be and shall not be personally binding on, nor shall any resort be had to the private properties of, any of its or its investment manager's trustees, directors, officers, partners, beneficiaries, members, stockholders, employees, or agents, and in no case shall Landlord be liable to Tenant hereunder for any lost profits, damage to business, or any form of special, indirect or consequential damages. 40. RENEWAL OPTION. Tenant shall, provided the Lease is in full force and effect and Tenant is not in default under any of the other terms and conditions of the Lease at the time of notification or commencement, have one (1) option to renew this Lease for a term of three (3) years, for the portion of the Premises being leased by Tenant as of the date the renewal term is to commence, on the same terms and conditions set forth in the Lease, except as modified by the terms, covenants and conditions as set forth below: 40.1 If Tenant elects to exercise said option, then Tenant shall provide Landlord with written notice no earlier than the date which is 365 days prior to the expiration of the then current term of the Lease but no later than the date which is 180 days prior to the expiration of the then current term of this Lease. If Tenant fails to provide such notice, Tenant shall have no further or additional right to extend or renew the term of the Lease. 40.2 The Annual Rent and Monthly Installment in effect at the expiration of the then current term of the Lease shall be increased to reflect the current fair market rental for comparable space in the Building and in other similar buildings in the same rental market as of the date the renewal term is to commence, taking into account the specific provisions of the Lease which will remain constant and, unless it is not the case, taking into account that there will be no free rent and no tenant improvement allowances or other concessions. 23 Landlord shall advise Tenant of the new Annual Rent and Monthly Installment for the Premises no later than thirty (30) days after receipt of Tenant's written request therefor. Said request shall be made no earlier than thirty (30) days prior to the first date on which Tenant may exercise its option under this Paragraph. Said notification of the new Annual Rent may include a provision for its escalation to provide for a change in fair market rental between the time of notification and the commencement of the renewal term. If Tenant and Landlord are unable to agree on a mutually acceptable rental rate not later than one hundred eighty (180) days prior to the expiration of the then current term, then either (i) Tenant may, by providing written notice to Landlord on or before the date which is one hundred seventy (170) days prior to the expiration of the then current term, rescind its notice of exercise of the renewal option, or (ii) Landlord and Tenant shall each appoint a qualified MAI appraiser doing business in the area, in turn those two independent MAI appraisers shall appoint a third MAI appraiser and the majority shall decide upon the fair market rental for the Premises as of the expiration of the then current term. Landlord and Tenant shall equally share in the expense of this appraisal except that in the event the Annual Rent and Monthly Installment is found to be within fifteen percent (15%) of the original rate quoted by Landlord, then Tenant shall bear the full cost of all the appraisal process. In no event shall the Annual Rent and Monthly Installment for any option period be less than the Annual Rent and Monthly Installment in the preceding period. 40.3 Except with respect to Permitted Transfers and transfers to Affiliated Parties and Corporate Successors which are approved by Landlord at the time of such transfer in accordance with Article 9 of this Lease, this option is not transferable; the parties hereto acknowledge and agree that they intend that the aforesaid option to renew this Lease shall be "personal" to Tenant as set forth above and that in no event will any assignee or sublessee have any rights to exercise the aforesaid option to renew. 40.4 As each renewal option provided for above is exercised, the number of renewal options remaining to be exercised is reduced by one and upon exercise of the last remaining renewal option Tenant shall have no further right to extend the term of the Lease. 41. SIGNAGE. Tenant shall not place, install, affix, paint or maintain any signs, notices, graphics or banners whatsoever or any window decor which is visible in or from public view or corridors, the common areas or the exterior of the Premises or the Building, in or on any exterior window or window fronting upon any common areas or service area or upon any truck doors or man doors without Landlord's prior written approval which Landlord shall have the right to withhold in its absolute and sole discretion; provided that Tenant's name shall be included in any Building-standard door and directory signage, if any, in accordance with Landlord's Building signage program, including without limitation, payment by Tenant of any fee charged by Landlord for maintaining such signage, which fee shall constitute additional rent hereunder. Any installation of signs, notices, graphics or banners on or about the Premises approved by Landlord shall be subject to any applicable laws, codes, ordinances, rules, the Sign Specifications attached to this Lease as Exhibit E and to any other reasonable requirements imposed by Landlord. Tenant shall remove all such signs or graphics by the expiration or any earlier termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury to or defacement of the Premises and the Building and any other improvements contained therein, and Tenant shall repair any injury or defacement including without limitation discoloration caused by such installation or removal. 42. INTENTIONALLY OMITTED. 43. ROOF RIGHTS FOR DEVICE. 43.1 Tenant shall have the right, in consideration for payments of $0 per month (the "Device Payments") for the initial Term of this Lease, to lease space on the roof of the Building for the purpose of installing (in accordance with the alterations provision of the Lease), operating and maintaining one 18 inch dish/antenna or other communication device approved by the Landlord (the "Device"). Following the initial Term of this Lease, Landlord shall have the right to charge and Tenant shall pay Landlord the prevailing monthly charges established from time to time for the leasing of space on the roof on the Building, payable in advance, with Tenant's payment of the Monthly Installment of Rent. The Device Payments, if any, shall constitute Additional Rent under the terms of the Lease and Tenant shall be required to make these payments in strict compliance with the terms of the Lease. The exact location of the space on the roof to be leased by Tenant shall be designated by Landlord and shall not exceed 9 square feet (the "Roof Space"). Landlord reserves the right to relocate the Roof Space as reasonably necessary during the Term. Landlord's designation shall take into account Tenant's use of the Device. Notwithstanding the foregoing, Tenant's right to install the Device shall be subject to the approval rights of Landlord and Landlord's architect and/or engineer with 24 respect to the plans and specifications of the Device, the manner in which the Device is attached to the roof of the Building and the manner in which any cables are run to and from the Device. The precise specifications and a general description of the Device along with all documents Landlord reasonably requires to review the installation of the Device (the "Plans and Specifications") shall be submitted to Landlord for Landlord's written approval no later than 20 days before Tenant commences to install the Device. Tenant shall be solely responsible for obtaining all necessary governmental and regulatory approvals and for the cost of installing, operating, maintaining and removing the Device. Tenant shall notify Landlord upon completion of the installation of the Device. If Landlord determines that the Device equipment does not comply with the approved Plans and Specifications, that the Building has been damaged during installation of the Device or that the installation was defective, Landlord shall notify Tenant of any noncompliance or detected problems and Tenant immediately shall cure the defects. If the Tenant fails to immediately cure the defects, Tenant shall pay to Landlord upon demand the cost, as reasonably determined by Landlord, of correcting any defects and repairing any damage to the Building caused by such installation. If at any time Landlord, in its reasonable discretion, deems it necessary, Tenant shall provide and install, at Tenant's sole cost and expense, appropriate aesthetic screening, reasonably satisfactory to Landlord, for the Device (the "Screening"). 43.2 Landlord agrees that Tenant, upon reasonable prior written notice to Landlord, shall have access to the roof of the Building and the Roof Space for the purpose of installing, maintaining, repairing and removing the Device, the appurtenances and the Screening, if any, all of which shall be performed by Tenant or Tenant's authorized representatives, engineers or contractors, and authorized FCC (as defined below) inspectors which shall be approved by Landlord, at Tenant's sole cost and risk. Tenant further agrees to keep to a minimum the number of people having access to the roof of the Building and the Roof Space and the frequency of their visits. 43.3 It is further understood and agreed that the installation, maintenance, operation and removal of the Device, the appurtenances and the Screening, if any, is not permitted to damage the Building or the roof thereof, or interfere with the use of the Building and roof by Landlord. Tenant agrees to be responsible for any damage caused to the roof or any other part of the Building, which may be caused by Tenant or any of its agents or representatives. 43.4 Tenant agrees to install only equipment of types and frequencies which will not cause unreasonable interference to Landlord or existing tenants of the Building. In the event Tenant's equipment causes such interference, Tenant will change the frequency on which it transmits and/or receives and take any other steps necessary to eliminate the interference. If said interference cannot be eliminated within a reasonable period of time, in the reasonable judgment of Landlord, then Tenant agrees to remove the Device from the Roof Space. 43.5 Tenant shall, at its sole cost and expense, and at its sole risk, install, operate and maintain the Device in a good and workmanlike manner, and in compliance with all Building, electric, communication, and safety codes, ordinances, standards, regulations and requirements, now in effect or hereafter promulgated, of the Federal Government, including, without limitation, the Federal Communications Commission (the "FCC"), the Federal Aviation Administration ("FAA") or any successor agency of either the FCC or FAA having jurisdiction over radio or telecommunications, and of the state, city and county in which the Building is located. Under this Lease, the Landlord and its agents assume no responsibility for the licensing, operation and/or maintenance of Tenant's equipment. Tenant has the responsibility of carrying out the terms of its FCC license in all respects. Neither Landlord nor its agents shall be liable to Tenant for any stoppages or shortages of electrical power furnished to the Device or the Roof Space because of any act, omission or requirement of the public utility serving the Building, or the act or omission of any other tenant, invitee or licensee or their respective agents, employees or contractors, or for any other cause beyond the reasonable control of Landlord, and Tenant shall not be entitled to any rental abatement for any such stoppage or shortage of electrical power. Neither Landlord nor its agents shall have any responsibility or liability for the conduct or safety of any of Tenant's representatives, repair, maintenance and engineering personnel while in or on any part of the Building or the Roof Space. 43.6 The Device, the appurtenances and the Screening, if any, shall remain the personal property of Tenant, and shall be removed by Tenant at its own expense at the expiration or earlier termination of this Lease or Tenant's right to possession hereunder. Tenant agrees that at all times during the Term, it will keep the 25 roof of the Building and the Roof Space free of all trash or waste materials produced by Tenant or Tenant's agents, employees or contractors. 43.7 Tenant must provide Landlord with prior written notice of any such installation, removal or repair and coordinate such work with Landlord in order to avoid voiding or otherwise adversely affecting any warranties granted to Landlord with respect to the roof. In the event the Landlord contemplates roof repairs that could affect Tenant's Device, or which may result in an interruption of the Tenant's telecommunication service, Landlord shall formally notify Tenant at least 30 days in advance (except in cases of an emergency) prior to the commencement of such contemplated work in order to allow Tenant to make other arrangements for such service. 43.8 Tenant shall not use the Roof Space and/or Device to provide communication services to an unaffiliated tenant, occupant or licensee of another building, or to facilitate the provision of communication services on behalf of another communication services provider to an unaffiliated tenant, occupant or licensee of the Building or any other building. Tenant specifically acknowledges and agrees that the terms and conditions of the Lease respecting Tenant's indemnity obligation of Landlord and the waiver of subrogation shall apply with full force and effect to the Roof Space and any other portions of the roof accessed or utilized by Tenant, its representatives, agents, employees or contractors. 43.9 If Tenant defaults under any of the terms and conditions of this Section or the Lease, and Tenant fails to cure said default within the time allowed by the terms and conditions of the Lease, Landlord shall be permitted to exercise all remedies provided under the terms of the Lease, including removing at tenant's sole cost and expense the Device, the appurtenances and the Screening, if any, and, at tenant's sole cost and expense, restoring the Building and the Roof Space to the condition that existed prior to the installation of the Device, the appurtenances and the Screening, if any. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and the year stated below. LANDLORD: TENANT: CALWEST INDUSTRIAL HOLDINGS, LLC, SCM MICROSYSTEMS, INC., A DELAWARE LIMITED LIABILITY COMPANY A DELAWARE CORPORATION By: RREEF Management Company, A Delaware corporation, its Property Manager By: _______________________________ By: _______________________ Name: Timothy DeGoosh Name: _____________________ Title: District Manager Title: ____________________ Dated: _______________________, 2003 Dated: ______________, 2003 26 EXHIBIT A - FLOOR PLAN DEPICTING THE PREMISES ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, AS LANDLORD, AND SCM MICROSYSTEMS, INC., A DELAWARE CORPORATION, AS TENANT Exhibit A is intended only to show the general layout of the Premises as of the beginning of the Term of this Lease. It does not in any way supersede any of Landlord's rights set forth in Article 17 with respect to arrangements and/or locations of public parts of the Building and changes in such arrangements and/or locations. It is not to be scaled; any measurements or distances shown should be taken as approximate. 466 Kato Terrace, Fremont, California 94539 Approximately 18,322 square feet Initials A-1 EXHIBIT A-1 - SITE PLAN ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE CORPORATION, AS TENANT Exhibit A-1 is intended only to show the general layout of the Premises as of the beginning of the Term of this Lease. It does not in any way supersede any of Landlord's rights set forth in Article 17 with respect to arrangements and/or locations of public parts of the Building and changes in such arrangements and/or locations. It is not to be scaled; any measurements or distances shown should be taken as approximate. [SITE PLAN] 466 Kato Terrace, Fremont, California 94539 Approximately 18,322 square feet Initials A-2 EXHIBIT B -- IMPROVEMENTS ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE CORPORATION, AS TENANT a. Landlord shall provide a leasehold improvement allowance for improvement of the Premises in an amount not to exceed $45,000.00 (the "Leasehold Improvement Allowance"). The Leasehold Improvement Allowance shall be used for Tenant's costs incurred in the design and construction of the Improvements (as hereinafter defined) in the Premises, including, without limitation, (i) payment of the fees of any architect or engineers employed by Tenant, (ii) the cost of construction of such Improvements, and (iii) the cost to construct any permanent fixtures. Notwithstanding anything herein to the contrary, Landlord shall not be obligated to disburse any portion of the Leasehold Improvement Allowance during the continuance of an uncured default by Tenant under the Lease, and Landlord's obligation to disburse shall only resume when and if such default is cured. b. Tenant shall have no right to credit or otherwise offset any unused portion of the Leasehold Improvement Allowance against any monthly installment of Annual Rent, Additional Rent, or any other amounts payable by Tenant to Landlord under this Lease. In no event shall the Leasehold Improvement Allowance be used for the purchase of equipment, furniture or other items of personal property of Tenant. If Tenant does not submit a request for payment of the entire Allowance to Landlord in accordance with the provisions contained in this Improvement Agreement by June 30, 2003, any unused amount shall accrue to the sole benefit of Landlord, it being understood that Tenant shall not be entitled to any credit, abatement or other concession in connection therewith. Tenant shall be responsible for all applicable state sales or use taxes, if any, payable in connection with the Improvements and/or Allowance. c. Tenant has inspected the Premises and, subject to the terms and conditions of the Lease, agrees (i) to accept possession of the Premises in the condition existing as of the Commencement Date of this Lease, "as is", (ii) that neither Landlord nor Landlord's agents have made any representations or warranties with respect to the Premises or the Building except as expressly set forth herein, and (iii) except for the Leasehold Improvement Allowance, Landlord has no obligation to perform any work, supply any materials, incur any expense or make any alterations or improvements to the Premises for Tenant's occupancy. This Section c. shall be subject to the provisions of Section h. below. d. All Improvements shall be constructed by a general contractor selected by Tenant and approved by Landlord in Landlord's reasonable discretion (the "General Contractor"). Landlord hereby approves Qualogy Construction, Inc. as the General Contractor. Additionally, Landlord shall approve all subcontractors employed by Tenant and/or its general contractor, which consent (except as to any Major Subcontractor (as hereinafter defined)), shall not be unreasonably withheld or delayed. Landlord's approval of any Major Subcontractor may be withheld or conditioned in Landlord's sole and absolute discretion. "Major Subcontractor" shall mean any subcontractor responsible for mechanical, electrical, structural, sprinkler, fire, life and safety, or ACM, as designated by Landlord. e. Tenant shall perform improvements to the Premises in accordance with the plans prepared by Interior Architects, dated February 19, 2003 as Job Number 123103.00 (the "Final Plans"). The improvements to be performed by Tenant in accordance with the Final Plans are hereinafter referred to as the "Improvements." Tenant shall not be required to remove the Improvements at the expiration or earlier termination of the Lease. All Final Plans shall comply with all applicable statutes, ordinances, regulations, laws, and codes and with the requirements of Landlord's fire insurance underwriters. Neither review nor approval by Landlord of the Final Plans shall constitute a representation or warranty by Landlord that such plans either (i) are complete or suitable for their intended purpose, or (ii) comply with applicable laws, ordinances, codes, regulations, or any insurance requirements. Tenant shall not make any changes in the Final Plans without Landlord's prior written approval, which shall be either reasonably approved or disapproved, in writing, within five (5) business days following submission by Tenant. f. In the event Tenant desires to change the Final Plans, Tenant shall deliver notice (the "Final Plans Change Notice") of the same to Landlord, setting forth in detail the changes (the "Tenant Change") Tenant desires to make to the Final Plans. Landlord shall, within five (5) business days of receipt of the Final Plans Change Notice, either (i) approve the Tenant Change, or (ii) disapprove the Tenant Change and deliver a notice to Tenant specifying in detail the reasons for Landlord's disapproval' provided, however, that Landlord may only disapprove of the Tenant Change if the Tenant Change contains a Initials Design Problem (as hereinafter defined). Any additional costs which arise in connection with such Tenant Change in excess of the Leasehold Improvement Allowance shall be paid by Tenant. For the purposes of this Section e., a "Design Problem" shall mean a change in the Final Plans which has an adverse affect on the exterior appearance of the Building, serves to create an unreasonable burden upon one or more of the various Building systems, creates excessive structural loads, or threatens the integrity of the roof. g. Tenant, at its sole cost and expense, shall file the Final Plans with the governmental agencies having jurisdiction over the Improvements. Tenant shall not commence the Improvements until the required governmental authorizations for such work are obtained. h. All work performed by Tenant shall be performed with a minimum of interference with other tenants and occupants of the Property and shall conform to the Building rules and regulations attached to the Lease and those reasonable, nondiscriminatory rules and regulations governing construction in the Building as Landlord may impose. Tenant will take all reasonable and customary precautionary steps to protect its facilities and the facilities of others affected by the Improvements and to properly police same and Landlord shall have no responsibility for any loss by theft or otherwise. Construction equipment and materials are to be located in confined areas and delivery and loading of equipment and materials shall be done at such reasonable locations and at such time as Landlord shall direct so as not to burden the operation of the Building or the Property. Landlord shall advise Tenant in advance of any special delivery and loading dock requirements. Tenant shall at all times keep the Premises and adjacent areas free from accumulations of waste materials or rubbish caused by its suppliers, contractors or workmen. At the completion of the Improvements, Tenant's contractors shall forthwith remove all rubbish and all tools, equipment and surplus materials from and about the Premises and Building. Any damage caused by Tenant's contractors to any portion of the Building or to any property of Landlord or other tenants shall be repaired forthwith after written notice from Landlord to its condition prior to such damage by Tenant at Tenant's expense. i. The General Contractor shall assume responsibility for the prevention of accidents to its agents and employees and shall take all reasonable safety precautions with respect to the work to be performed and shall comply with all reasonable safety measures initiated by the Landlord and with all applicable laws, ordinances, rules, regulations and orders of any public authority for the safety of persons or property. Tenant shall advise the Tenant's contractors to report to Landlord any injury to any of its agents or employees and shall furnish Landlord a copy of the accident report filed with its insurance carrier within three (3) days of its occurrence. Tenant shall cause the General Contractor to secure, pay for, and maintain during the performance of the construction of the Improvements, insurance in the following minimum coverages and limits of liability: (i) Workers' Compensation and Employer's Liability Insurance as required by law. (ii) Comprehensive General Liability Insurance (including Owner's and Contractors' Protective Liability) in an amount not less than One Million Dollars ($1,000,000) per occurrence, whether involving bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof with a minimum aggregate limit of Two Million Dollars ($2,000,000), and with umbrella coverage with limits not less than Five Million Dollars ($5,000,000). Such insurance shall provide for explosion and collapse, completed operations coverage with a two-year extension after completion of the work, and broad form blanket contractual liability coverage and shall insure Tenant's contractors against any and all claims for bodily injury, including death resulting therefrom and damage to the property of others and arising from its operations under the contracts whether such operations are performed by Tenant's contractors, or by anyone directly or indirectly employed by any of them. (iii) Comprehensive Automobile Liability Insurance, including the ownership, maintenance, and operation of any automotive equipment, owned, hired, or non-owned in an amount not less than One Million Dollars ($1,000,000) for each person in one accident, and One Million Dollars ($1,000,000) for injuries sustained by two or more persons in any one accident and property damage liability in an amount not less than One Million Dollars ($1,000,000) for each accident. Such insurance shall insure Tenant's contractors against any and all claims for bodily injury, including death resulting therefrom, and damage to the property of others arising from its operations under the contracts, whether such operations are performed by Tenant's contractors, or by anyone directly or indirectly employed by any of them. The Improvements shall be constructed in a first-class manner using only first-class grades of material and in compliance with the Final Plans, all insurance requirements, applicable laws and ordinances and rules and regulations of governmental departments or agencies and the rules and regulations adopted by Landlord for the Building. The Improvements shall be deemed to be "Substantially Complete" on the date that the Improvements have been performed, other than any details of Initials B-2 construction, mechanical adjustment or any other similar matter, the noncompletion of which does not materially interfere with Tenant's use of the Premises. j. The Allowance may only be used for hard costs in connection with the Improvements. The Allowance shall be paid to Tenant or, at Landlord's option, to the order of the general contractor that performed the Improvements, within 30 days following receipt by Landlord of (1) receipted bills covering all labor and materials expended and used in the Improvements; (2) a sworn contractor's affidavit from the general contractor and a request to disburse from Tenant containing an approval by Tenant of the work done; (3) full and final releases and waivers of lien, in form and content satisfactory to Landlord, from all persons and entities providing work or materials covered by such statement; (4) as-built plans of the Improvements; and (5) the certification of Tenant and its architect that the Improvements have been installed in a good and workmanlike manner in accordance with the approved plans, and in accordance with applicable laws, codes and ordinances and that the same are substantially complete. The Leasehold Improvement Allowance shall be disbursed in the amount reflected on the receipted bills meeting the requirements above. Landlord's obligation to disburse the Leasehold Improvement Allowance shall be subject to verification that the work described in the disbursement request has been completed in accordance with the requirements of the Lease, as determined by Landlord's construction manager; provided, however, that such verification shall not constitute an acceptance of the work by Landlord or a waiver by Landlord of any right against Tenant in the event the work has not been completed as required by the terms of the Lease. k. Following Substantial Completion of the Improvements, Tenant shall comply with the following: (i) Tenant shall obtain and deliver to Landlord a copy of the certificate of occupancy for the Improvements from the governmental agency having jurisdiction thereof; (ii) Tenant shall promptly cause a notice of completion to be validly recorded for the Improvements; (iii) Tenant shall furnish Landlord with unconditional waivers of lien in statutory form from all parties performing labor and/or supplying equipment and/or materials in connection with the Improvements, including Tenant's architect(s); (iv) Tenant shall deliver to Landlord a certificate of Tenant's architect(s) certifying completion of the Improvements in substantial accordance with the Final Plans; (v) Tenant shall deliver to Landlord a certificate of Tenant's contractor(s) certifying completion of the Improvements in substantial accordance with the construction contract(s) approved by Landlord; (vi) Tenant shall deliver to Landlord a full set of reproducible as-built drawings (signed and dated by the General Contractor and each responsible subcontractor) for the Improvements; and (vii) Tenant shall deliver to Landlord copies of all written construction and equipment warranties related to the Improvements. l. Should Landlord fail to pay within sixty (60) days of Tenant's written demand and Tenant's compliance with its obligations under the Lease and this Improvement Agreement any portion of the Leasehold Improvement Allowance, Tenant shall have the right, on ten (10) business days' notice, to deduct any and all sums owing to Tenant (any portion of the Leasehold Improvement Allowance in dispute not being a sum owing to Tenant) from the next due Monthly Installment of Rent and each subsequent installment of Monthly Installment of Rent until Tenant is fully reimbursed. This exercise of set-off shall not constitute an election of remedies except any amounts so recovered shall not be subsequently recovered from Landlord. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Initials B-3 EXHIBIT C - COMMENCEMENT DATE MEMORANDUM ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, AS LANDLORD, AND SCM MICROSYSTEMS, INC., A DELAWARE CORPORATION, AS TENANT COMMENCEMENT DATE MEMORANDUM THIS MEMORANDUM, made as of _____, 2003 by and between CalWest Industrial Holdings, LLC, a Delaware limited liability company ("Landlord") and SCM Microsystems, Inc., a Delaware Corporation ("Tenant"). Recitals: A. Landlord and Tenant are parties to that certain Lease, dated for reference March 18, 2003 (the "Lease") for certain premises (the "Premises") consisting of approximately 18,322 square feet at the building commonly known as 466 Kato Terrace, Fremont, California. B. Tenant is in possession of the Premises and the Term of the Lease has commenced. C. Landlord and Tenant desire to enter into this Memorandum confirming the Commencement Date, the Termination Date and other matters under the Lease. NOW, THEREFORE, Landlord and Tenant agree as follows: 1. The actual Commencement Date is ___________, 20__. 2. The actual Termination Date is __________, 20__. 3. The schedule of the Annual Rent and the Monthly Installment of Rent set forth on the Reference Pages is deleted in its entirety, and the following is substituted therefor: [INSERT RENT SCHEDULE] 4. Capitalized terms not defined herein shall have the same meaning as set forth in the Lease. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Initials C-1 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date and year first above written. LANDLORD: TENANT: CALWEST INDUSTRIAL HOLDINGS, LLC, SCM MICROSYSTEMS, INC., A DELAWARE LIMITED LIABILITY COMPANY A DELAWARE CORPORATION By: RREEF Management Company, a Delaware corporation, its Property Manager By: ______________________________ By: _________________________ Name: Timothy DeGoosh Name: _______________________ Title: District Manager Title: ______________________ Dated: _______________________, 2003 Dated: ________________, 2003 Initials EXHIBIT D - RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE CORPORATION, AS TENANT 1. No sign, placard, picture, advertisement, name or notice (collectively referred to as "Signs") shall be installed or displayed on any part of the outside of the Building without the prior written consent of the Landlord which consent shall be in Landlord's sole discretion. All approved Signs shall be printed, painted, affixed or inscribed at Tenant's expense by a person or vendor approved by Landlord and shall be removed by Tenant at Tenant's expense upon vacating the Premises. Landlord shall have the right to remove any Sign installed or displayed in violation of this rule at Tenant's expense and without notice. 2. If Landlord objects in writing to any curtains, blinds, shades or screens attached to or hung in or used in connection with any window or door of the Premises or Building, Tenant shall immediately discontinue such use. No awning shall be permitted on any part of the Premises. Tenant shall not place anything or allow anything to be placed against or near any glass partitions or doors or windows which may appear unsightly, in the opinion of Landlord, from outside the Premises. 3. Tenant shall not alter any lock or other access device or install a new or additional lock or access device or bolt on any door of its Premises without the prior written consent of Landlord. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys or other means of access to all doors. 4. If Tenant requires telephone, data, burglar alarm or similar service, the cost of purchasing, installing and maintaining such service shall be borne solely by Tenant. No boring or cutting for wires will be allowed without the prior written consent of Landlord. Landlord shall direct electricians as to where and how telephone, data, and electrical wires are to be introduced or installed. The location of burglar alarms, telephones, call boxes or other office equipment affixed to the Premises shall be subject to the prior written approval of Landlord. 5. Tenant shall not place a load upon any floor of its Premises, including mezzanine area, if any, which exceeds the load per square foot that such floor was designed to carry and that is allowed by law. Heavy objects shall stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 6. Tenant shall not install any radio or television antenna, satellite dish, loudspeaker or other device on the roof or exterior walls of the Building without Landlord's prior written consent which consent shall be in Landlord's sole discretion. 7. Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork, plaster or drywall (except for pictures and general office uses) or in any way deface the Premises or any part thereof. Tenant shall not affix any floor covering to the floor of the Premises or paint or seal any floors in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. 8. No cooking shall be done or permitted on the Premises, except that Underwriters' Laboratory approved microwave ovens or equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations. 9. Tenant shall not use any hand trucks except those equipped with the rubber tires and side guards, and may use such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. Forklifts which operate on asphalt areas shall only use tires that do not damage the asphalt. 10. Tenant shall not use the name of the Building or any photograph or other likeness of the Building in connection with or in promoting or advertising Tenant's business except that Tenant may include the Building name in Tenant's address. Landlord shall have the right, exercisable without notice and without liability to any tenant, to change the name and address of the Building. Initials D-1 11. All trash and refuse shall be contained in suitable receptacles at locations approved by Landlord. Tenant shall not place in the trash receptacles any personal trash or material that cannot be disposed of in the ordinary and customary manner of removing such trash without violation of any law or ordinance governing such disposal. 12. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governing authority. 13. Tenant assumes all responsibility for securing and protecting its Premises and its contents including keeping doors locked and other means of entry to the Premises closed. 14. Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord without Landlord's prior written consent. 15. No person shall go on the roof without Landlord's permission. 16. Tenant shall not permit any animals, other than seeing-eye dogs, to be brought or kept in or about the Premises or any common area of the property. 17. Tenant shall not permit any motor vehicles to be washed or mechanical work or maintenance of motor vehicles to be performed on any portion of the Premises or parking lot. 18. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of any premises in the Building. Landlord may waive any one or more of these Rules and Regulations for the benefit of any tenant or tenants, and any such waiver by Landlord shall not be construed as a waiver of such Rules and Regulations for any or all tenants. 19. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order in and about the Building. Tenant agrees to abide by all such rules and regulations herein stated and any additional rules and regulations which are adopted. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 20. Any toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown into them. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees, shall have caused it. 21. Tenant shall not permit smoking or carrying of lighted cigarettes or cigars in areas reasonably designated by Landlord or any applicable governmental agencies as non-smoking areas. 22. Any directory of the Building or project of which the Building is a part ("Project Area"), if provided, will be exclusively for the display of the name and location of tenants only and Landlord reserves the right to charge for the use thereof and to exclude any other names. 23. Canvassing, soliciting, distribution of handbills or any other written material in the Building or Project Area is prohibited and each tenant shall cooperate to prevent the same. No tenant shall solicit business from other tenants or permit the sale of any goods or merchandise in the Building or Project Area without the written consent of Landlord. 24. Any equipment belonging to Tenant which causes noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Building shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate the noise or vibration. 25. Driveways, sidewalks, halls, passages, exits, entrances and stairways ("Access Areas") shall not be obstructed by tenants or used by tenants for any purpose other than for ingress to and egress from their respective premises. Access areas are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by Initials D-2 all persons whose presence, in the judgment of Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building or its tenants. 26. Landlord reserves the right to designate the use of parking areas and spaces. Tenant shall not park in visitor, reserved, or unauthorized parking areas. Tenant and Tenant's guests shall park between designated parking lines only and shall not park motor vehicles in those areas designated by Landlord for loading and unloading. Vehicles in violation of the above shall be subject to being towed at the vehicle owner's expense. Vehicles parked overnight without prior written consent of the Landlord shall be deemed abandoned and shall be subject to being towed at vehicle owner's expense. Tenant will from time to time, upon the request of Landlord, supply Landlord with a list of license plate numbers of vehicles owned or operated by its employees or agents. 27. No trucks, tractors or similar vehicles can be parked anywhere other than in Tenant's own truck dock area. Tractor-trailers which must be unhooked or parked with dolly wheels beyond the concrete loading areas must use steel plates or wood blocks under the dolly wheels to prevent damage to the asphalt paving surfaces. No parking or storing of such trailers will be permitted in the parking areas or on streets adjacent thereto. 28. During periods of loading and unloading, Tenant shall not unreasonably interfere with traffic flow and loading and unloading areas of other tenants. All products, materials or goods must be stored within the Tenant's Premises and not in any exterior areas, including, but not limited to, exterior dock platforms, against the exterior of the Building, parking areas and driveway areas. Tenant agrees to keep the exterior of the Premises clean and free of nails, wood, pallets, packing materials, barrels and any other debris produced from their operation. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] Initials D-3 EXHIBIT E - SIGN SPECIFICATIONS ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE CORPORATION, AS TENANT Scott Creek Business Park shares the City of Fremont's concern that all signage be harmonious with a building's architecture and done in a tasteful manner. These guidelines address Primary Signs and Secondary Signs. All signage installation must be approved by Landlord, as well as by the City of Fremont. PRIMARY SIGN GUIDELINES - - These signs shall be reserved for offering corporate identity to Scott Creek Business Park's major tenants, to be determined by Landlord. - - These signs shall be located on the parapet wall at the top elevation of the building. No more than one (1) Primary Sign shall be allowed per building. - - Sign shall be a maximum of 60 square feet, with maximum letter height shall be 18 inches. These sizes are maximums. The owner and the City of Fremont will ensure that each application is compatible with the architectural features and proportions of the building. These maximums may vary with each building. - - The sign color will be the building standard black or dark grey / green (to match Benjamin Moore #1491). - - These signs will be 1/2" thick solid routed acrylic letters, painted with acrylic polyurethane and will be flush-mounted to building face using VHB tape and silicone adhesive. - - Tenant's corporate identity marks (logo mark or signature) shall be approved on a case-by-case basis by Landlord. - - The above is presented as guidelines for signage. All signage plans must be submitted to the Landlord for approval prior to installation. SECONDARY SIGN GUIDELINES - - These signs are reserved for tenants only and are limited to one (1) per Lease. - - These signs shall be located on the free standing wall in front of tenant entrances in the 2' high by 9' wide entry area painted Egret (white). - - Letter font of the signage shall be Highway Gothic "D" (caps only). Exceptions may be approved by the Landlord, on a case-by-case basis, to use Highway Gothic "C" (lower and upper case letters). - - These signs shall be a maximum of approximately 18 square feet, which will fit within the specified area. This is approximately 22 letters. If a sign has more than 22 letters, the overall sign size shall be reduced accordingly to fit within the specified area. - - These signs will be 1/2" thick solid routed acrylic letters with a maximum size of 10" each, painted with acrylic polyurethane and will be flush-mounted to building face using VHB tape and silicone adhesive. - - The sign color will be the building standard dark grey / green color (to match Benjamin Moore #1491). - - Tenant's corporate identity marks (logo mark or signature) shall be approved on a case-by-case basis by Landlord. - - The above is presented as guidelines for signage. All signage plans must be submitted to the Landlord for approval prior to installation. Initials E-1 EXHIBIT F FORM OF SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE CORPORATION, AS TENANT FORM OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this "Agreement") made as of the [___] day of [______], 2003, by and among LASALLE BANK NATIONAL ASSOCIATION, as Trustee for Calwest Industrial Trust Commercial Pass-Through Certificates Series 2002-CALW, whose Servicer is Midland Loan Services, Inc., whose mailing address is 10851 Mastin, Suite 300, Overland Park, KS 66210 (together with its successors and assigns, the "Lender"), SCM MICROSYSTEMS, INC., a Delaware corporation ("Tenant") and CALWEST INDUSTRIAL HOLDINGS, LLC, a Delaware limited liability company ("Landlord"). WITNESSETH: WHEREAS, Lender, as successor-in-interest to Secore Financial Corporation ("Secore"), is the mortgagee or beneficiary under a mortgage or deed of trust (the "Mortgage") of even date herewith made by Landlord to Lender covering the land (the "Land") described on Exhibit A attached hereto and all improvements (the "Improvements") now or hereafter located on the land (the Land and the Improvements hereinafter collectively referred to as the "Property"), which Mortgage secures all amounts payable by Landlord to Lender under that certain Loan Agreement of even date herewith between Lender's predecessor-in-interest, Secore, Landlord and CALWEST INDUSTRIAL HOLDINGS, LLC (the "Loan Agreement"); and WHEREAS, by a lease dated as of March 18, 2003 (which lease, as the same may have been amended and supplemented, is hereinafter called the "Lease"), Landlord or Landlord's predecessor-in-interest leased to Tenant certain space located in the Improvements (the "Premises"); and WHEREAS, the parties hereto desire to make the Lease subject and subordinate to the Mortgage and the Loan Agreement; NOW, THEREFORE, the parties hereto, in consideration of the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby agree as follows: 1. The Lease, as the same may hereafter be modified, amended or extended, and all of Tenant's right, title and interest in and to the Premises and all rights, remedies and options of Tenant under the Lease, are and shall be unconditionally subject and subordinate to the Mortgage and the lien thereof, to all the terms, conditions and provisions of the Mortgage and the Loan Agreement, to each and every advance made or hereafter made under the Loan Agreement, and to all renewals, modifications, consolidations, replacements, substitutions and extensions of the Mortgage and/or the Loan Agreement, so that at all times the Mortgage shall be and remain a lien on the Property prior and superior to the Lease for all purposes; provided, however, and Lender agrees, that so long as (A) no event has occurred and no condition exists, which would entitle Landlord to terminate the Lease or would cause, without further action of Landlord, the termination of the Lease or would entitle Landlord to dispossess Tenant from the Premises, (B) Tenant shall duly confirm its attornment to Lender or its successor or assign by written instrument reasonably acceptable to Lender and Tenant as set forth in Paragraph 3 hereof, and (C) then Tenant's leasehold estate under the Lease shall not be terminated, Tenant's possession of the Premises shall not be disturbed by Lender and Lender will accept the attornment of Tenant. Initials 2. Notwithstanding anything to the contrary contained in the Lease, Tenant hereby agrees that in the even of any act, omission or default by Landlord or Landlord's agents, employees, contractors, licensees or invitees which would give Tenant the rights, either immediately or after the lapse of a period of time, to terminate the Lease, Tenant will not exercise any such right (i) until it has given written notice of such act, omission or default to Lender by delivering notice of such act, omission or default, in accordance with Paragraph 8 hereof, and (ii) until a period of not less than thirty (30) days for remedying such act, omission or default shall have elapsed following the giving of such notice. Notwithstanding the foregoing, in the case of any default of Landlord which cannot be cured within such thirty (30) day period, if Lender shall within such period proceed promptly to cure the same (including such time as may be necessary to acquire possession of the Premises if possession is necessary to effect such cure) and thereafter shall prosecute the curing of such default with diligence, then the time within which such default may be cured by Lender shall be extended for such period as may be necessary to complete the curing of the same with diligence (but in no event shall such period extend beyond sixty (60) days following the giving of such notice). Lender's cure of Landlord's default shall not be considered an assumption by Lender of Landlord's other obligations under the Lease. If Lender or any successor or assign becomes obligated to perform as Landlord under the Lease, such person or entity will be released from those obligations when such person or entity assigns, sells or otherwise transfers its interest in the Premises or the Property with respect to obligations accruing after the date of such assignment, sale or other transfer. 3. In the event that Lender succeeds to the interest of Landlord or any successor to Landlord, then subject to the provisions of this Agreement including, without limitation, Paragraph 1 above, the Lease shall nevertheless continue in full force and effect, Tenant's possession of the Premises shall not be disturbed by Lender and Tenant shall and does hereby agree to attorn to and accept Lender and to recognize Lender as its Landlord under the Lease for the then remaining balance of the term thereof, and upon request of Lender, Tenant shall execute and deliver to Lender an agreement of attornment reasonably satisfactory to Lender and Tenant. 4. If Lender succeeds to the interest of Landlord or any successor to Landlord, in no event shall Lender have any liability for any act or omission of any prior landlord under the Lease which occurs prior to the date Lender succeeds to the rights of Landlord under the Lease. In no event shall Lender have any personal liability as successor to Landlord and Tenant shall look only to the estate and property of Lender in the Land and the Improvements for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money in the event of any default by Lender as Landlord under the Lease, and no other property or assets of Lender shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to the Lease. 5. Tenant agrees that no prepayment of rent or additional rent due under the Lease of more than one month in advance, and no amendment, modification, voluntary surrender or voluntary cancellation of the Lease, and no waiver or consent by Landlord under the terms of the Lease, shall be binding upon or as against Lender, as holder of the Mortgage, and as Landlord under the Lease if it succeeds to that position, unless consented to in writing by Lender (which consent shall not be unreasonably withheld or delayed with respect to any amendment or modification of the Lease). Tenant further agrees with Lender that Tenant will not voluntarily subordinate the Lease to any lien or encumbrance without Lender's prior written consent. 6. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute and be construed as one and the same instrument. 7. All remedies which Lender may have against Landlord provided herein, if any, are cumulative and shall be in addition to any and all other rights and remedies provided by law and by other agreements between Lender and Landlord or others. If any party consists of multiple individuals or entities, each of same shall be jointly and severally liable for the obligations of such party hereunder. 8. All notices to be given under this Agreement shall be in writing and shall be deemed served upon receipt by the addressee if served personally or, if mailed, upon the first to occur of receipt or the refusal of delivery as shown on a return receipt, after deposit in the United States Postal Service certified mail, Initials postage prepaid, addressed to the address of Landlord, Tenant or Lender appearing below, or, if sent by telegram, when delivered by or refused upon attempted delivery by the telegraph office. Such addresses may be changed by notice given in the same manner. If any party consists of multiple individuals or entities, then notice to any one of the same shall be deemed notice to such party. Lender's Address: Midland Loan Services, Inc. Asset Management Department 10851 Mastin Suite 300 Overland Park, KS 66210 Landlord's Address: Calwest Industrial Holdings, LLC c/o Global Securitization Services 103 Foulk Road Suite 205-11 Wilmington, Delaware 19803 Attention: Andrew L. Stidd Telecopier: (302) 652-8667 With a copy to: RREEF Management Company 6759 Sierra Court, Suite E Dublin, California 94568 Attention: Eric Russell Telecopier: (925) 556-5590 Tenant's Address: Name: _____________________________________________ Address: __________________________________________ __________________________________________ __________________________________________ Attention: ________________________________________ 9. This Agreement shall be interpreted and construed in accordance with and governed by the laws of the state in which the Property is located. 10. This Agreement shall apply to, bind and inure to the benefit of the parties hereto and their respective successors and assigns. As used herein "Lender" shall include any subsequent holder of the Mortgage. 11. Tenant acknowledges that Landlord has assigned to Lender its right, title and interest in the Lease and to the rents, issues and profits of the Property and the Property pursuant to the Mortgage, and that Landlord has been granted the license to collect such rents provided no Event of Default has occurred under, and as defined in, the Mortgage. Tenant agrees to pay all rents and other amounts due under the Lease directly to Lender Initials upon receipt of written demand by Lender, and Landlord hereby consents thereto. The assignment of the Lease to Lender, or the collection of rents by Lender pursuant to such assignment, shall not obligate Lender to perform Landlord's obligations under the Lease unless Lender succeeds to the interest of Landlord under the Lease. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Lender: LaSalle Bank N. A., as Trustee for the holders of Calwest Industrial Trust Commercial Mortgage Pass-Through Certificates Series 2002-CALW, by and through its Master Servicer and Attorney-in-fact, Midland Loan Services, Inc., a Delaware corporation By:_______________________________________________ Authorized Signatory Landlord: Calwest Industrial Holdings, LLC, a Delaware limited liability company By:_______________________________________________ Name:_____________________________________________ Its:______________________________________________ Tenant: Tenant Name:______________________________________ By:_______________________________________________ Authorized Signatory Initials EX-10.22 4 f89710exv10w22.txt EXHIBIT 10.22 EXHIBIT 10.22 * * * * * * * * * * * * * * * * * * * * LEASE VALLEY BUSINESS PARK II * * * * * * * * * * * * * * * * * * * * BETWEEN SCM MICROSYSTEMS, INC. (TENANT) AND CARRAMERICA REALTY CORPORATION (LANDLORD) TABLE OF CONTENTS

Page ---- 1. LEASE AGREEMENT............................................................................. 1 2. RENT........................................................................................ 2 3. PREPARATION AND CONDITION OF PREMISES; TENANT'S POSSESSION; REPAIRS AND MAINTENANCE......... 10 4. SERVICES AND UTILITIES...................................................................... 11 5. ALTERATIONS AND REPAIRS..................................................................... 12 6. USE OF PREMISES............................................................................. 15 7. GOVERNMENTAL REQUIREMENTS AND BUILDING RULES................................................ 17 8. WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE................................................ 19 9. FIRE AND OTHER CASUALTY..................................................................... 22 10. EMINENT DOMAIN.............................................................................. 22 11. RIGHTS RESERVED TO LANDLORD................................................................. 23 12. DEFAULTS.................................................................................... 24 13. LANDLORD REMEDIES........................................................................... 26 14. SURRENDER................................................................................... 28 15. HOLDOVER.................................................................................... 28 16. SUBORDINATION TO GROUND LEASES AND MORTGAGES................................................ 29 17. ASSIGNMENT AND SUBLEASE..................................................................... 30 18. CONVEYANCE BY LANDLORD...................................................................... 33 19. ESTOPPEL CERTIFICATE........................................................................ 33 20. LEASE DEPOSIT............................................................................... 34 21. TENANT'S PERSONAL PROPERTY AND FIXTURES..................................................... 35 22. NOTICES..................................................................................... 35 23. QUIET POSSESSION............................................................................ 36 24. REAL ESTATE BROKERS......................................................................... 36 25. MISCELLANEOUS............................................................................... 36 26. UNRELATED BUSINESS INCOME................................................................... 39 27. BUILDING RENOVATIONS........................................................................ 39 28. HAZARDOUS SUBSTANCES........................................................................ 40 29. EXCULPATION................................................................................. 41 30. COMMUNICATIONS AND COMPUTER LINES........................................................... 42 31. OPTION TO EXTEND............................................................................ 42 32. PERSONAL PROPERTY........................................................................... 44 32. EXISTING TENANT............................................................................. 44

i LEASE THIS LEASE (the "Lease") is dated as of March 3, 2003 (for reference purposes only) between CARRAMERICA REALTY CORPORATION, a Maryland corporation ("Landlord") and the Tenant as named in the Schedule below. The term "Project" means the six (6) buildings, the land appurtenant thereto ("Land"), and other improvements located thereon commonly known as "Valley Business Park II", located in San Jose, California. The "Premises" means that portion of the Project leased to Tenant and described in the Schedule and outlined on Exhibit A attached hereto. The building in which the Premises is located shall be referred to herein as the "Building". The following schedule (the "Schedule") is an integral part of this Lease. Terms defined in this Schedule shall have the same meaning throughout the Lease. SCHEDULE 1. TENANT: SCM Microsystems, Inc., a Delaware corporation 2. PREMISES: 225 Charcot Avenue, San Jose, California 3. BUILDING: 225-231 Charcot Avenue, San Jose, California 4. RENTABLE SQUARE FOOTAGE OF THE PREMISES: Approximately 13,494 rentable square feet 5. TENANT'S PROPORTIONATE SHARE: 49.1% (based upon a total of 27,488 rentable square feet in the Building) 6. LEASE DEPOSIT: Prepaid Rent equal to $12,144.60 and Security Deposit equal to $13,494.00, totaling $25,638.60 7. PERMITTED USE: General office, software and hardware design, engineering, sales, warehouse, light assembly and manufacturing, research and development 8. TENANT'S REAL ESTATE BROKER FOR THIS LEASE: Cornish and Carey Commercial 9. LANDLORD'S REAL ESTATE BROKER FOR THIS LEASE: None 10. TENANT IMPROVEMENTS: See Section 3.A and the Tenant Improvement Agreement attached hereto as Exhibit C 11. COMMENCEMENT DATE: The Commencement Date shall be sixty (60) days following the later of (a) the "Substantial Completion Date" of the "Tenant Improvements" (each as defined in Exhibit C attached hereto), and (b) the date Landlord has tendered possession of the Premises in the condition required under this Lease and Tenant shall be able to legally occupy the Premises except to the extent that any work being performed by the Tenant in the Premises delays or interferes with obtaining any applicable permits or approvals from the appropriate governmental authorities required for the legal occupancy of the Premises by Tenant. ii 12. TERM/TERMINATION DATE: The Term of this Lease shall be for three (3) years commencing on the Commencement Date and expiring on the calendar day preceding the third (3rd) anniversary of the Commencement Date; provided, however, that if the Commencement Date shall occur on a date other than the first day of a calendar month, the Termination Date shall be the last day of the calendar month in which the third (3rd) anniversary of the Commencement Date occurs 13. PARKING STALLS: Forty-Eight (48) unassigned stalls, and four (4) stalls (as reasonably designated by Landlord and Tenant prior to the Commencement Date) shall be designated as "Reserved Spaces", subject to applicable Governmental Requirements (as defined in Section 5.1.4(c) below), including any applicable transportation management program applicable to the Project. Such Reserved Spaces shall be designated by signs or other markings to be installed by Tenant at its expense, but subject to Landlord's approval thereof in accordance with the provisions of Section 6.2 below. 14. BASE RENT:

Period Monthly Base Rent Annual Base Rent ------ ----------------- ---------------- 1st Lease Year $12,144.60 $145,735.20 2nd Lease Year $12,819.30 $153,831.60 3rd Lease Year $13,494.00 $161,928.00

15. RENEWAL OPTION: One (1) option to extend for a period of three (3) additional years Exhibit A - OUTLINE OF THE PREMISES Exhibit B - RULES AND REGULATIONS Exhibit C - TENANT IMPROVEMENT AGREEMENT Exhibit D - COMMENCEMENT DATE CONFIRMATION (see Section 1.A) Exhibit E - ENVIRONMENTAL QUESTIONNAIRE Exhibit F - TENANT IMPROVEMENT GUIDELINES Exhibit G - SIGNAGE Exhibit H - INITIAL ALTERATIONS Exhibit I - BILL OF SALE iii 1. LEASE AGREEMENT. On the terms stated in this Lease, Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, for the Term beginning on the Commencement Date and ending on the Termination Date unless extended or sooner terminated pursuant to this Lease. This Lease shall be effective on the date that this Lease is fully executed and delivered by Landlord to Tenant (the "Effective Date"). A. Commencement Date. 1. The commencement date ("Commencement Date") for this Lease is the date set forth in the Schedule, provided that if the Commencement Date (as defined below) does not occur on or before the date which is ninety (90) days following the Effective Date (the "Premises Delivery Deadline"), Tenant, as its sole remedy, shall have the right to cancel this Lease by giving written notice of such cancellation to Landlord at any time after the Premises Delivery Deadline and prior to the date Landlord delivers possession of the Premises to Tenant, in which case this Lease shall be cancelled effective thirty (30) days after Landlord's receipt of Tenant's cancellation notice, unless Landlord delivers possession of the Premises to Tenant within said thirty (30) day period; provided, however, that the Premises Delivery Deadline shall be extended by the number of days that the Substantial Completion Date is delayed due to any Force Majeure Delay (as defined below). In the event of such cancellation by Tenant, neither party shall have any obligations to the other under this Lease, except for obligations arising before such cancellation and Landlord shall return to Tenant the Security Deposit and any other payments made by Tenant which are applicable to any period of time following the effective date of the cancellation of this Lease. Following the Commencement Date, Landlord shall prepare and deliver to Tenant a Commencement Date Confirmation substantially in the form attached hereto as Exhibit D that sets forth both the Commencement Date and Termination Date for this Lease. Tenant shall execute the Commencement Date Confirmation and deliver the executed original of the same to Landlord within three (3) business days of Tenant's receipt thereof. Tenant's failure to timely execute and return the Commencement Date Confirmation document to Landlord shall be conclusive evidence of Tenant's agreement with the information as set forth therein. This Lease shall be a binding contractual obligation effective upon execution and delivery hereof by Landlord and Tenant, notwithstanding the later commencement of the Lease Term. For purposes of this Lease, the term "Force Majeure Delay" means any delay attributable to one or more of the following causes: strike, lockout or other labor disturbance, civil disturbance, fire, flood, lightning, earthquake, or other act of God or the public enemy, war, riot, sabotage, blockade, embargo, accident, interruption of utilities or services, inability to obtain necessary materials, supplies or labor, action or inaction on the part of any government or regulatory body, or any other similar cause which is beyond the reasonable control of Landlord. 2. If Landlord is delayed in completing Landlord's Work or in delivering possession of the Premises to Tenant as a result of any Tenant Delay (as defined below), (a) the Substantial Completion Date shall be deemed to have occurred on the date the Substantial Completion Date would have occurred in the absence of such Tenant Delay, as reasonably determined by Landlord or Landlord's architect, and (b) Tenant shall be responsible for and shall pay any costs and expenses incurred by Landlord in connection with, or as a consequence of, any Tenant Delay. For purposes of this Lease, the term "Tenant Delay" means a delay in the substantial completion of Landlord's Work or the delivery of possession of the Premises to Tenant, to the extent caused by the act, omission, neglect or failure of Tenant or any 1 of Tenant's agents, employees, contractors or subcontractors. For purposes of this Lease, "Landlord's Work" shall mean the work described in Exhibit C-1 attached hereto, which shall be performed at no cost to Tenant using Building standard methods and materials and in accordance with Landlord's standard specifications for the Project. B. Termination Date. The termination date ("Termination Date") of this Lease is the date set forth in the Schedule. C. Early Occupancy. During the period commencing on the Effective Date and ending on the Commencement Date (the "Early Occupancy Period"), Tenant shall be permitted to enter and occupy the Premises for any purpose, provided that (i) Tenant's early entry does not materially interfere with Landlord's performance of the Tenant Improvements, and (ii) prior to Tenant's entry in the Premises, Tenant shall furnish to Landlord certificates of insurance reasonably satisfactory to Landlord evidencing Tenant's compliance with the requirements of Section 8.C below. Tenant's occupancy of the Premises during the Early Occupancy Period shall be subject to all of the terms, covenants and conditions of this Lease, except that Landlord agrees that Tenant's obligation to pay Base Rent, Operating Cost Share Rent and Tax Share Rent (as such terms are defined in Sections 2.A(1) through 2.A(3) below) during the Early Occupancy Period shall be waived. 2. RENT. A. Types of Rent. Tenant shall pay the following Rent in the form of a check to Landlord at the following address: CarrAmerica Realty Corporation Valley Business Park II P.O. Box 642922 Pittsburgh, PA 15264-2922 or by wire transfer as follows: Account Name: Carr America Realty Corporation t/a Valley Business Park II Bank Name: PNC Bank Transit Number: 043-000-096 Account Number: 1004339188 Notification: Lease Administration (CarrAmerica Realty Corporation re SCM Microsystems, Inc.) Telephone: (202) 729-3852 or in such other manner as Landlord may notify Tenant. 1. Base Rent in monthly installments in advance, the first monthly installment payable concurrently with the execution of this Lease and thereafter on or before the first day of each month of the Term in the amount set forth on the Schedule. 2 2. Operating Cost Share Rent equal to Tenant's Proportionate Share (as set forth in the Schedule) of Operating Costs for the applicable Fiscal Year (as defined in Section 2.C(5) below), paid monthly in advance in an estimated amount. The definition of Operating Costs and the method for billing and payment of Operating Cost Share Rent are set forth in Sections 2.B, 2.C and 2.D. In addition to the Operating Cost Share Rent, Tenant shall pay to Landlord management fees not to exceed one percent (1%) of Tenant's Base Rent. 3. Tax Share Rent equal to Tenant's Proportionate Share of Taxes for the applicable Fiscal Year, paid monthly in advance in an estimated amount. A definition of Taxes and the method for billing and payment of Tax Share Rent are set forth in Sections 2.B, 2.C and 2.D. As used in this Lease, the term "Rent" means Base Rent, Operating Cost Share Rent, Tax Share Rent and all other costs, expenses, liabilities, and amounts which Tenant is required to pay under this Lease ("Additional Rent"), including any interest for late payment. Tenant's agreement to pay Rent is an independent covenant, with no right of setoff, deduction or counterclaim of any kind, except as expressly set forth in this Lease. B. Payment of Operating Cost Share Rent and Tax Share Rent. 1. Payment of Estimated Operating Cost Share Rent and Tax Share Rent. (a) Before the Commencement Date and by April 1 of each succeeding Fiscal Year, or as soon as reasonably possible thereafter, Landlord shall give Tenant notice of its estimate of the payments to be made pursuant to Sections 2.A(2) and 2.A(3) above for the then applicable Fiscal Year. Landlord may revise these estimates by written notice to Tenant whenever it obtains more accurate information, such as the final real estate tax assessment or tax rate for the Project, in which event subsequent monthly payments by Tenant for such Fiscal Year shall be based upon such revised estimate. (b) Within thirty (30) days after receiving Landlord's notice regarding the original or revised estimate of the monthly payments to be made pursuant to Sections 2.A(2) and 2.A(3) above for a particular Fiscal Year, Tenant shall pay Landlord an amount equal to the product of such estimated monthly payments (as set forth in Landlord's notice), multiplied by the number of months that have elapsed in the applicable Fiscal Year to the date of such payment including the current month, minus any payments on account thereof previously made by Tenant for the months elapsed. On the first day of each month thereafter, Tenant shall pay Landlord the estimated monthly payments as set forth in Landlord's most recent notice, until a new estimate becomes applicable. 2. Correction of Operating Cost Share Rent and Tax Share Rent. Within one hundred fifty (150) days after the close of each Fiscal Year or as soon after such 150-day period as practicable, Landlord shall deliver to Tenant a statement of (a) Operating Costs and Taxes for such Fiscal Year, and (b) the payments made by Tenant under Section 2.B(1) above for such Fiscal Year (the "Annual Expense Statement"). If, on the basis of such Annual Expense Statements, Tenant owes an amount that is less than the estimated payments for 3 such Fiscal Year previously made by Tenant, Landlord, at its election, shall either promptly refund the amount of the overpayment to Tenant or, if this Lease is still in effect, credit such excess against Tenant's subsequent obligations to pay Rent. If, on the basis of such Annual Expense Statements, Tenant owes an amount that is more than the estimated payments for such Fiscal Year previously made by Tenant, Tenant shall pay the deficiency to Landlord within twenty (20) days after Landlord's delivery of such Annual Expense Statements to Tenant. C. Definitions. 1. Included Operating Costs. (a) "Operating Costs" means any expenses, costs and disbursements of any kind other than Taxes, paid or incurred by Landlord in connection with the management, maintenance, operation, insurance (including the related deductibles), repair and other related activities in connection with any part of the Project and of the personal property, fixtures, machinery, equipment, systems and apparatus used in connection therewith, including, without limitation, (i) the cost of providing those services required to be furnished by Landlord under this Lease, and (ii) the cost of all electricity, water, gas, sewers, oil and other utilities (collectively, "Utilities"), including any surcharges imposed, serving the Project or any part thereof (but excluding the cost of electricity directly billed to Tenant or other tenants in the Project), and any amounts, taxes, charges, surcharges, assessments or impositions levied, assessed or imposed upon the Project or any part thereof, or upon Tenant's use and occupancy thereof, as a result of any rationing of Utilities services or restriction on the use of Utilities affecting the Project or any part thereof. Operating Costs shall also include the costs of any capital improvements made which are intended to reduce Operating Costs or improve safety, and those made to keep the Project in compliance with Governmental Requirements (as defined in Section 5.A(3)(c) below) applicable from time to time or to repair or replace existing capital improvements, facilities and equipment within the Project, such as the roof membrane and resurfacing of the parking areas (collectively, "Included Capital Items"); provided, that the costs of any Included Capital Item shall be amortized by Landlord, together with an amount equal to interest at ten percent (10%) per annum, over the estimated useful life of such item and such amortized costs are only included in Operating Costs for that portion of the useful life of the Included Capital Item which falls within the Term, unless the cost of the Included Capital Item is less than Ten Thousand Dollars ($10,000) in which case it shall be expensed in the year in which it was incurred. (b) If the Project contains more than one building, then Operating Costs shall include (i) all Operating Costs fairly allocable to the Building, and (ii) a proportionate share (based on the gross rentable area of the Building (i.e., 27,488 RSF) as a percentage of the gross rentable area of all of the buildings in the Project (i.e., 166,928 RSF) of all Operating Costs which relate to the Project in general and are not fairly allocable to any one building in the Project. (c) If the Project is not fully occupied during any portion of any Fiscal Year, Landlord may adjust (an "Equitable Adjustment") Operating Costs to equal what would have been incurred by Landlord had the Project been fully occupied. This Equitable Adjustment shall apply only to Operating Costs which are variable and therefore increase as 4 occupancy of the Project increases. Landlord may incorporate the Equitable Adjustment in its estimates of Operating Costs. (d) If any tenant of the Project contracts directly with Landlord or a third party for any services, including Utilities, for which Tenant pays Landlord pursuant to Section 2.A(2) above, the total costs of such services for the Project shall be "grossed up" to reflect what those costs would have been had such tenant(s) not directly contracted for such services. 2. Excluded Operating Costs. Operating Costs shall not include: (a) costs of installing leasehold improvements for tenants or occupants or prospective tenants or occupants of the Project; (b) costs of capital improvements other than Included Capital Items; (c) interest and principal payments on mortgages or any other debt costs (except as provided in Section 2.C(1) above with regard to Included Capital Items), or rental payments on any ground lease of the Project; (d) real estate brokers' leasing commissions; (e) legal fees, space planner fees and advertising expenses incurred with regard to leasing the Project or portions thereof; (f) any cost or expenditure for which Landlord is reimbursed, by insurance proceeds or otherwise, except by Operating Cost Share Rent; (g) the cost of any service furnished to any office tenant of the Project which Landlord does not make available to Tenant; (h) depreciation (except on any Included Capital Items); (i) franchise or income taxes imposed upon Landlord, except to the extent imposed in lieu of all or any part of Taxes; (j) legal and auditing fees incurred for the benefit of Landlord such as collecting delinquent rents, preparing tax returns and other financial statements, and audits other than those incurred in connection with the preparation of reports required pursuant to Section 2.B above; 5 (k) the wages of any employee for services not related directly to the management, maintenance, operation and repair of the Project; (l) fines, penalties and interest incurred by Landlord for late payment by Landlord or violations of law; (m) the cost of repairs or other work occasioned by any fire or other casualty (as described in Section 9 below), to the extent that Landlord shall receive proceeds of such insurance, or to the extent that Landlord would have received such proceeds if Landlord had maintained the insurance required by this Lease (provided that costs of repairing an insured casualty to the extent of the deductible amount under the applicable insurance policy shall constitute an Operating Cost); (n) the cost of decorating, improving for tenant occupancy, painting or redecorating portions of the Building to be demised to tenants, including permit, license and inspection costs; (o) costs incurred solely as a result of Landlord's violation of any terms and conditions of this Lease or any other lease relating to the Project; (p) the cost related to the presence of Hazardous Substances in violation of Governmental Requirements in, on, or about the Project; provided, however, that the costs of routine monitoring of and testing for Hazardous Substances in, on, or about the Project shall be an Operating Cost; (q) costs to repair, replace or restore the structural portions of the Building (including the roof structure, foundation, floor slab, exterior walls and interior structural supports) or the structural portions of the parking facilities serving the Building; and (r) costs of and arising from correcting defects in construction of the Project (as opposed to the cost of normal repair, maintenance and replacement expected with the construction materials and equipment installed in the Project in light of their specifications) or to comply with any law applicable to the Project on the Commencement Date; and (s) expense reserves. 6 3. Taxes. (a) "Taxes" means any and all taxes, assessments and charges of any kind, general or special, ordinary or extraordinary, levied against the Project, which Landlord shall pay or become obligated to pay in connection with the ownership, leasing, renting, management, use, occupancy, control or operation of the Project or of the personal property, fixtures, machinery, equipment, systems and apparatus used in connection therewith. Taxes shall include real estate taxes, personal property taxes, sewer rents, water rents, special or general assessments, transit taxes, ad valorem taxes, and any tax levied on the rents hereunder or the interest of Landlord under this Lease (the "Rent Tax"). Taxes shall also include all fees and other costs and expenses paid by Landlord in reviewing any tax and in seeking a refund or reduction of any Taxes, whether or not the Landlord is ultimately successful. Taxes shall also include any assessments or fees paid to any business park owners association, or similar entity, which are imposed against the Project pursuant to any Covenants, Conditions and Restrictions ("CC&R's") recorded against the Project and any installments of principal and interest required to pay any existing or future general or special assessments for public improvements, services or benefits, and any increases resulting from reassessments imposed in connection with any change in ownership or new construction. Notwithstanding anything to the contrary herein, the term "Taxes" shall not include any charges, levies, or fees levied on Landlord's rental income, unless such tax or assessment is imposed in lieu of real property taxes. (b) If the Project contains more than one building, then Taxes shall include (i) all Taxes fairly allocable to the Building, and (ii) a proportionate share (based on the gross rentable area of the Building as a percentage of the gross rentable area of all of the buildings in the Project) of all Taxes which relate to the Project in general and are not fairly allocable to any one building in the Project. (c) For any year, the amount to be included in Taxes (i) from taxes or assessments payable in installments, shall be the amount of the installments (with any interest) due and payable during such year, and (ii) from all other Taxes, shall at Landlord's election be the amount accrued, assessed, or otherwise imposed for such year or the amount due and payable in such year. Any refund or other adjustment to any Taxes by the taxing authority, shall apply during the year in which the adjustment is made. Taxes shall not include (i) any net income (except Rent Tax), capital, stock, succession, transfer, franchise, gift, estate or inheritance tax, or (ii) any tax, levy, assessment, charge or surcharge imposed as a direct result of contamination of the Project by any Hazardous Substances, as opposed to the imposition of such a charge on a more general basis. 4. Lease Year. "Lease Year" means each consecutive twelve month period beginning with the Commencement Date, except that if the Commencement Date is not the first day of a calendar month, then the first Lease Year shall be the period from the Commencement Date through the final day of the calendar month during which the first anniversary of the Commencement Date occurs, and subsequent Lease Years shall be each succeeding twelve month period during the Term following the first Lease Year. 7 5. Fiscal Year. "Fiscal Year" means each calendar year during which any portion of the Term occurs (e.g., the first Fiscal Year shall be the calendar year during which the Commencement Date occurs). D. Computation of Base Rent and Rent Adjustments. 1. Prorations. If (a) the Commencement Date is a date other than January 1, (b) the Termination Date is a date other than December 31, (c) this Lease terminates early, or (d) the size of the Premises increases or decreases, then in each such event, the Base Rent, the Operating Cost Share Rent and Tax Share Rent shall be equitably adjusted to reflect such event on a basis determined by Landlord to be consistent with the principles underlying the provisions of this Section 2. 2. Interest Rate. Any sum due from Tenant to Landlord not paid when due shall bear interest from the date due until paid at the lesser of twelve percent (12%) per annum or the maximum rate permitted by law (the "Interest Rate"). 3. Rent Adjustments. The square footage of the Premises and the Building set forth in the Schedule are conclusively deemed to be the actual square footage thereof, without regard to any subsequent remeasurement thereof. If any Operating Cost paid in one Fiscal Year relates to more than one Fiscal Year, Landlord may proportionately allocate such Operating Cost among the related Fiscal Years. 4. Books and Records. Landlord shall maintain books and records reflecting the Operating Costs and Taxes in accordance with sound accounting and management practices. Tenant and a certified public accountant employed by a certified public accounting firm and working on a non-contingency fee basis shall have the right to inspect Landlord's records at Landlord's applicable local office or other location designated by Landlord upon at least seventy-two (72) hours' prior notice during normal business hours during the ninety (90) days following Landlord's delivery of the Annual Expense Statement to Tenant. The results of any such inspection shall be kept strictly confidential by Tenant and its agents, and Tenant and its certified public accountant must agree, in their contract for such services, to such confidentiality restrictions and shall specifically agree that the results shall not be made available to any other tenant of the Project (and in connection with the foregoing, prior to exercising its rights hereunder, Tenant and its agents shall sign a confidentiality agreement acceptable to Landlord). Unless Tenant sends to Landlord any written exception to an Annual Expense Statement within said ninety (90) day period, such Annual Expense Statement shall be deemed final and accepted by Tenant and Tenant waives any other rights pursuant to applicable law to inspect Landlord's books and records and/or to contest the amount Operating Costs and/or Taxes due hereunder. Tenant shall pay the amount shown on any Annual Expense Statement in the manner prescribed in this Lease, whether or not Tenant takes any such written exception, without any prejudice to such exception. If Tenant makes a timely exception, Landlord shall cause an independent certified public accountant to issue a final and conclusive resolution of Tenant's exception. If, according to such accountant, Landlord's original determination of annual Operating Costs and Taxes overstated the amounts thereof, in the aggregate, by three percent (3%) or less or understated the amounts thereof, then Tenant shall pay the reasonable cost of the certification, and, in the case of an understatement, shall pay to Landlord the deficiency in 8 Tenant's payment of Operating Costs and Taxes within twenty (20) days following Tenant's receipt of such certification. If, according to such certification, Landlord's original determination of annual Operating Costs and Taxes overstated the amounts thereof, in the aggregate, by more than three percent (3%), then Landlord shall pay the cost of the certification and shall, at its election, either promptly refund the amount of Tenant's overpayment of Operating Costs and Taxes or, if this Lease is still in effect, credit such overpayment against Tenant's subsequent obligations to pay Operating Costs and Taxes. 5. Miscellaneous. So long as Tenant is in monetary default of any obligation under this Lease, Tenant shall not be entitled to any refund of any amount from Landlord. If this Lease is terminated for any reason prior to the annual determination of Operating Cost Share Rent or Tax Share Rent, either party shall pay the full amount due to the other within fifteen (15) days after Landlord's notice to Tenant of the amount when it is determined. Landlord may commingle any payments made with respect to Operating Cost Share Rent and Tax Share Rent, without payment of interest. E. Additional Rent Upon Default by Tenant. Landlord and Tenant acknowledge that to induce Tenant to enter into this Lease, and in consideration of Tenant's agreement to perform all of the terms, covenants and conditions to be performed by Tenant under this Lease, as and when performance is due during the Term, Landlord has incurred (or will incur) significant costs, including, without limitation, the following: (i) expenditures incurred in connection with the performance of Landlord's Work (as defined in the Tenant Improvement Agreement attached hereto as Exhibit C), (ii) payment of the Alterations Allowance (as defined in Section 5.E below), (iii) commissions to Landlord's and/or Tenant's real estate broker, (iv) attorneys' fees and related costs incurred and/or paid by Landlord in connection with the negotiation and preparation of this Lease, and/or (v) the rent abatement granted to Tenant during the Early Occupancy Period described above (collectively, the "Inducements"). Landlord and Tenant further acknowledge that Landlord would not have granted the Inducements to Tenant but for Tenant's agreement to perform all of the terms, covenants, conditions and agreements to be performed by it under this Lease for the entire Term, and that Landlord's agreement to incur such expenditures and grant such concessions is, and shall remain, conditioned upon Tenant's faithful performance of all of the terms, covenants, conditions and agreements to be performed by Tenant under this Lease for the entire Term. Accordingly, if a default by Tenant shall occur hereunder, following any applicable notice and opportunity to cure, Landlord shall be relieved of any unfulfilled obligation to grant Inducements hereunder, or to incur further expenses in connection therewith, and Tenant shall pay, as liquidated damages for Landlord's granting the Inducements and not as a penalty, within ten (10) days after the occurrence of the default following any applicable notice and opportunity to cure, as Additional Rent, the unamortized amount of those Inducements incurred or granted prior to the date of the default (the "Pre-Default Inducements"). Landlord may or, at Tenant's request, shall, after the occurrence of a default following any applicable notice and opportunity to cure, forward a statement to Tenant setting forth the amount of the Pre-Default Inducements, but the failure to deliver such a statement shall not be or be deemed to be a waiver of the right to collect the Pre-Default Inducements or to extend the date upon which such amount shall be due and payable. For purposes of this Section 2.E, the unamortized amount of the Pre-Default Inducements shall equal the remaining principal component, measured on the date of the default, of a level-payment amortization over the initial Term of this Lease of a principal amount equal to the Pre-Default 9 Inducements, including interest at the Interest Rate. Notwithstanding the foregoing, Landlord agrees that it will seek to enforce its right to recover Pre-Default Inducements only in connection with a bankruptcy of Tenant where this Lease is rejected or deemed rejected under Section 362 of the Code. 3. PREPARATION AND CONDITION OF PREMISES; TENANT'S POSSESSION; REPAIRS AND MAINTENANCE. A. Condition of Premises. Except as otherwise set forth herein, Landlord is leasing the Premises to Tenant "as is", without any obligation to alter, remodel, improve, repair or decorate any part of the Premises and without any express or implied representations or warranties of any kind, except for (i) "Landlord's Work" and (ii) Landlord's representation that, as of the date set forth in parts (a) and (b) of Section 11 of the Schedule, the roof of the Building will be in good condition, the Premises will be in good and clean operating condition and repair, the Building Systems will be in good operating condition and repair, and there will be no leases of the Premises other than this Lease. Landlord shall, as Tenant's sole and exclusive remedy for any non-compliance with the foregoing representation, promptly after receipt of notice from Tenant remedy any non-compliance with such representation at Landlord's sole cost and expense. B. Tenant's Possession. Tenant's taking possession of any portion of the Premises shall be conclusive evidence that the Premises was in good order, repair and condition subject to (i) any Punch-List Items and (ii) latent defects of which Tenant gives Landlord written notice within one (1) year after the Substantial Completion Date. C. Repairs and Maintenance. 1. Tenant's Obligations. Except to the extent of Landlord's obligations under Section 3.C(2) below, Tenant shall, throughout the Term at its expense, make all repairs necessary to keep the Premises, Tenant's fixtures and personal property, in good order, condition and repair and in compliance with all applicable Governmental Requirements. Tenant's repair, maintenance and replacement obligations shall be performed under the supervision and subject to the prior approval of Landlord, and within any reasonable period of time specified by Landlord, and shall include, without limitation, all plumbing and sewage facilities within the Premises, fixtures, interior walls and ceiling, floors, windows (including the repairing, resealing, cleaning and replacing of both interior and exterior windows), doors, entrances, plate glass, showcases, all electrical facilities and equipment, including lighting fixtures, lamps, fans and any exhaust equipment and systems, electrical motors and all other appliances and equipment of every kind and nature located in, upon or about the Premises. Tenant shall also be responsible for all pest control within the Premises, and for all trash removal and disposal from the Premises. Tenant shall obtain HVAC systems preventive maintenance contracts with bimonthly or monthly service in accordance with manufacturer recommendations, which shall be subject to the reasonable prior written approval of Landlord and paid for by Tenant, and which shall provide for and include replacement of filters, oiling and lubricating of machinery, parts replacement, adjustment of drive belts, oil changes and other preventive maintenance, including annual maintenance of duct work, interior unit drains and caulking at sheet metal, and recaulking of jacks and vents on an annual basis. Tenant shall have the benefit of all warranties available to Landlord regarding 10 the equipment in such HVAC systems. Alternatively, Landlord may elect to perform all or some of the foregoing repairs and maintenance itself, at Tenant's expense, to the Building Systems (as defined in Section 5.B(2) below). Landlord may also perform any maintenance or repairs itself, at Tenant's expense, to the extent Tenant fails to perform such maintenance or repairs as required herein within applicable notice and cure periods. At the expiration or earlier termination of this Lease, or Tenant's right to possession, Tenant shall return the Premises to Landlord in the condition required under Section 14 below. 2. Landlord's Obligations. Except as otherwise provided in Section 9 below, Landlord agrees to make all necessary repairs to (a) the structural parts of the Building, which structural parts include only the foundation and subflooring of the Building and the structural condition of the roof and the exterior walls of the Building (but excluding the interior surfaces of exterior walls and exterior and interior of all windows, doors, ceiling and plate glass, which shall be maintained and repaired by Tenant), (b) the roof membrane and (c) the common areas of the Project, and to maintain the same in reasonably good order and condition, subject to inclusion of the costs thereof in Operating Costs; provided, however, that subject to the provisions of Section 8.F below, any damage arising from the acts of Tenant or any Tenant Parties (as defined in Section 8.B(1) below) shall be repaired by Landlord at Tenant's sole expense, and Tenant shall pay Landlord, on demand, the reasonable cost of any such repair. Landlord may also, but shall not be required to, enter the Premises at all reasonable times upon one (1) business day prior written notice (except in the case of an emergency) to make such repairs, alterations, improvements or additions to the Premises or to the Project or to any equipment located in the Project as Landlord shall deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree. The cost of any repairs made by Landlord on account of Tenant's default, or on account of the willful misconduct or neglect by Tenant or any Tenant Parties anywhere in the Project, shall become Additional Rent payable by Tenant on demand. As a condition precedent to all of Landlord's repair and maintenance obligations under this Lease, Tenant must have notified Landlord of the need of such repairs or maintenance (other than routine maintenance). Tenant hereby waives any and all rights under and benefits of subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and any similar or successor law, statute or ordinance now or hereafter in effect regarding Tenant's right to make repairs and deduct the cost of such repairs from the Rent due under this Lease. 4. SERVICES AND UTILITIES. Tenant shall promptly pay, as the same become due, all charges for water, gas, electricity, telephone, sewer service, waste pick-up and any other utilities, materials and services furnished directly to or used by Tenant on or about the Premises during the Term, including, without limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fees, and (ii) penalties for discontinued interrupted service. Any interruption or cessation of utilities resulting from any causes, including any entry for repairs pursuant to this Lease, and any renovation, redecoration or rehabilitation of any area of the Project, shall not render Landlord liable for damages to either person or property or for interruption or loss to Tenant's business, nor be construed as an eviction of Tenant, nor work an abatement of any portion of Rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof; provided, however, that if (i) an interruption of the Project services prevents Tenant from occupying all or a material portion of the Premises for the Permitted Use for a period of at least seven (7) consecutive days and (ii) such interruption was caused by the gross negligence or 11 willful misconduct of Landlord, its agents or employees, then monthly Rent shall thereafter be proportionately abated during the period of such interruption. Nothing in this Section 4 shall limit the parties' rights and obligations under Section 9 hereof, in the event of a casualty affecting the Building or Premises. Landlord shall make commercially reasonable efforts to give Tenant at least forty-eight (48) hours prior written notice of any scheduled interruption in Project services to the Premises. 5. ALTERATIONS AND REPAIRS. A. Landlord's Consent and Conditions. 1. 1. Except for Minor Alterations (as defined below), Tenant shall not make any improvements or alterations to the Premises (the "Work") without in each instance submitting plans and specifications for the Work to Landlord and obtaining Landlord's prior written consent. Tenant shall pay Landlord's actual costs incurred for review of all of the plans and all other items submitted by Tenant. Landlord will be deemed to be acting reasonably in withholding its consent for any Work which (a) impacts the base structural components or the Building Systems, (b) impacts any other tenant's premises, (c) is visible from outside the Premises, or (d) would utilize building materials or equipment which are inconsistent with Landlord's standard building materials and equipment for the Building. Subject to Landlord's review and approval of plans and specifications therefor, Landlord hereby approves the Work described in Exhibit H attached hereto and agrees that Tenant may surrender such Work upon the termination of the Lease. 2. Landlord's approval shall not be required for Work on the interior of the Premises costing less than Ten Thousand Dollars ($10,000.00) per project ("Minor Alterations"), provided that (a) Landlord would not have the right to reasonably withhold consent to the Work pursuant to clauses (1)(a) through (1)(d) of Section 5.A(1) above; and (b) Tenant provides Landlord with written notice of such Minor Alteration, which shall include a copy of any governmental permits required to complete such Minor Alteration, prior to commencing construction of such Minor Alteration. 3. Tenant shall pay for the cost of all Work, including the cost of any and all approvals, permits, fees and other charges which may be required as a condition of performing such Work. 4. The following requirements shall apply to all Work: (a) Prior to commencement, Tenant shall furnish to Landlord building permits, certificates of insurance satisfactory to Landlord, and, at Landlord's request, security for payment of all costs. However, Landlord shall not have the right to require that Tenant provide any payment or performance bonds for any Alterations unless the cost of any such project exceeds Fifty Thousand Dollars ($50,000). (b) Tenant shall perform all Work so as to maintain peace and harmony among other contractors serving the Project and shall avoid interference with other work to be performed or services to be rendered in the Project. 12 (c) The Work shall be performed in a good and workmanlike manner, meeting the standard for construction and quality of materials in the Building, and shall comply with all insurance requirements and all applicable governmental laws, ordinances, regulations or requirements of the United States of America, the State of California, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Project, including, without limitation, any such laws, ordinances, regulations or requirements relating to hazardous materials or substances, as those terms are defined by applicable laws now or hereafter in effect (collectively, "Governmental Requirements"). (d) Tenant shall perform all Work so as to minimize or prevent disruption to other tenants, and Tenant shall comply with all reasonable requests of Landlord in response to complaints from other tenants. (e) Tenant shall perform all Work in compliance with any "Policies, Rules and Procedures for Construction Projects" which may be in effect at the time the Work is performed, including, without limitation, the Tenant Improvement Guidelines attached hereto as Exhibit F. (f) All Work shall be performed only by contractors or mechanics approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed; provided, however, that (i) Landlord may, in its reasonable discretion, specify engineers, general contractors, subcontractors, and architects to perform work affecting the Building Systems; and (ii) if Landlord consents to any Work that requires work to be performed outside the Premises, Landlord may elect to perform such work at Tenant's expense. (g) Tenant shall permit Landlord to supervise all Work, including, without limitation, the right (but not an obligation) to inspect the construction work during the progress thereof, and to require corrections of faulty construction or any material deviation from the plans for such Work as approved by Landlord; provided, however, that no such inspection shall be deemed to create any liability on the part of Landlord, or constitute a representation by Landlord or any person hired to perform such inspection that the work so inspected conforms with such plans or complies with any Governmental Requirements, and no such inspection shall give rise to a waiver of, or estoppel with respect to, Landlord's continuing right at any time or from time to time to require the correction of any faulty work or any material deviation from such plans. (h) Landlord may charge a supervisory fee not to exceed three percent (3%) of labor, material, and all other costs of the Work to compensate Landlord for management and supervision of the progress for any Work which Tenant requests that Landlord act as the construction manager or supervisor for such Work (but in no event shall any fee be charged in connection with the Work described on Exhibit H). (i) Upon completion, Tenant shall furnish Landlord with contractor's affidavits and full and final statutory waivers of liens, as-built plans and specifications, and receipted bills covering all labor and materials, and all other close-out 13 documentation related to the Work, including any other information required under any "Policies, Rules and Procedures for Construction Projects" which may be in effect at the time. B. Repairs. If any part of the mechanical, electrical or other systems in the Premises (e.g., HVAC, life safety or automatic fire extinguisher/sprinkler system) (collectively, the "Building Systems") shall be damaged during the performance of the Work, Tenant shall promptly notify Landlord, and Landlord may elect to repair such damage at Tenant's expense. Alternatively, Landlord may require Tenant to repair such damage at Tenant's sole expense using contractors approved by Landlord. C. No Liens. Tenant has no authority to cause or permit any lien or encumbrance of any kind to affect Landlord's interest in the Project; any such lien or encumbrance shall attach to Tenant's interest only. If any mechanic's lien shall be filed or claim of lien made for work or materials furnished to Tenant, then Tenant shall at its expense within ten (10) days thereafter either discharge, bond over or contest the lien or claim. If Tenant contests the lien or claim, then Tenant shall (i) within such ten (10) day period, provide Landlord adequate security for the lien or claim, (ii) contest the lien or claim in good faith by appropriate proceedings that operate to stay its enforcement, and (iii) pay promptly any final adverse judgment entered in any such proceeding. If Tenant does not comply with these requirements, Landlord may discharge the lien or claim, and the amount paid, as well as attorney's fees and other expenses incurred by Landlord, shall become Additional Rent payable by Tenant on demand. D. Ownership of Improvements. All Work as defined in this Section 5, partitions, hardware, equipment, machinery and all other improvements and all fixtures, (except trade fixtures, any satellite and other telecommunications equipment and personal property installed in the Premises at Tenant's expense ("Tenant's Property")), constructed in the Premises by either Landlord or Tenant, (i) shall become Landlord's property upon installation without compensation to Tenant, unless Landlord consents otherwise in writing, and (ii) shall, at Landlord's option, either (a) be surrendered to Landlord with the Premises at the termination of the Lease or of Tenant's right to possession, or (b) be removed in accordance with Section 14 below (provided Landlord at the time it gives its consent to the performance of such construction expressly notifies Tenant in writing that it will require such removal). Notwithstanding anything to the contrary herein, Tenant's Property shall at all times remain Tenant's property and Tenant shall be entitled to all depreciation, amortization and other tax benefits with respect thereto. Except for utility installations or alterations which cannot be removed without structural injury to the Premises, at any time Tenant may remove Tenant's Property from the Premises, provided Tenant repairs all damage caused by such removal. Tenant shall be entitled to all insurance proceeds and condemnation awards and settlements payable with respect to Tenant's Property. E. Alterations Allowance. 1. Subject to the provisions of Section 5.E(3) below, Landlord agrees to contribute to the costs of any Work that Tenant performs in the Premises pursuant to this Section 5, including, without limitation, the installation of furniture, fixtures, equipment and cabling, the amount of Seventy-Four Thousand Two Hundred Seventeen Dollars ($74,217.00) 14 (the "Alterations Allowance"). Upon notice to Landlord, Tenant may credit any unused portion of the Alterations Allowance against payment of Rent next becoming due. 2. Provided that this Lease is then in full force and effect, Landlord shall pay the Alterations Allowance to Tenant within thirty (30) days after satisfaction of each of the following conditions: (a) Tenant's delivery to Landlord of invoices and other satisfactory evidence of the cost of the Work, along with such other supporting information as Landlord may reasonably request; (b) with respect to any portion of the Work requiring a building permit, Tenant's delivery to Landlord of a certificate issued by Tenant's architect certifying, for the benefit of Landlord, that such Work has been completed in accordance with plans and specifications approved by Landlord and in compliance with all applicable Governmental Requirements; (c) the lien period for the Work shall have expired and no lien shall have been filed and remain outstanding in connection therewith, or, if said lien period has not expired, Tenant shall furnish to Landlord lien waivers and certifications in a form reasonably acceptable to Landlord, verifying that all bills relating to the Work have been paid in full; and (d) Tenant's delivery to Landlord of as-built plans and specifications for the Work, if appropriate (provided that, in all cases, Tenant shall deliver to Landlord reasonably detailed plans and specifications for its cabling) (the documentation required to be submitted by Tenant pursuant to clauses (a) through (d) above is herein referred to as the "Required Allowance Documentation"). Tenant shall pay for all costs of the Work performed hereunder in excess of the Alterations Allowance. 3. Notwithstanding the foregoing provisions of this Section 5.E to the contrary, if Tenant fails to deliver to Landlord a request for disbursement of the Alterations Allowance, together with the Required Allowance Documentation, within ninety (90) days following the Commencement Date, Landlord shall disburse the Alterations Allowance to Tenant within thirty (30) days of the expiration of such period. 6. USE OF PREMISES. A. Limitation on Use. Tenant shall use the Premises only for the Permitted Use stated in the Schedule and Tenant shall not use or permit the Premises or the Project to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which may be withheld in Landlord's sole discretion.. Tenant shall not allow any use of the Premises which will negatively affect the cost of coverage of Landlord's insurance on the Project. Tenant shall not allow any inflammable or explosive liquids or materials to be kept on the Premises, except those disclosed by Tenant in the completed Environmental Questionnaire provided to Landlord pursuant to Section 27.E below. Tenant shall not allow any use of the Premises which would cause the value or utility of any part of the Premises to diminish or would interfere with any other tenant or with the operation of the Project by Landlord. Tenant shall not permit any nuisance or waste to occur in, on, or about the Project, or allow any offensive noise or odor in or around the Project. At the end of each business day, or more frequently if necessary, Tenant shall deposit all garbage and other trash (excluding any inflammable, explosive and/or hazardous materials) in trash bins or containers approved by Landlord in locations designated by Landlord from time to time. If any governmental authority shall deem the Premises to be a "place of public accommodation" under the Americans with Disabilities Act ("ADA") or any other comparable law as a result of Tenant's use, Tenant shall either modify its use to cause such 15 authority to rescind its designation or be responsible for any alterations, structural or otherwise, required to be made to the Building or the Premises under such laws. B. Signs. Tenant shall not place on any portion of the Premises any sign, placard, lettering, banner, displays, graphic, decor or other advertising or communicative material which is visible from the exterior of the Premises without Landlord's prior written approval. Any approved signs shall strictly conform to all Governmental Requirements, any CC&R's recorded against the Project, and Landlord's signage standards in effect at the time, and shall be installed and removed at Tenant's expense. Tenant, at its sole expense, shall maintain such signs in good condition and repair during the Term. Prior to the expiration or earlier termination of this Lease, Tenant at its sole cost shall remove all of its exterior signage and repair any and all damage caused to the Building and/or Project (including and fading or discoloration) by such signs and/or the removal of such signs from the Building and/or Project. Landlord hereby approves of Tenant's installation of signage as described on Exhibit H hereto. C. Parking. Tenant, at no additional cost, shall have the non-exclusive right to park in the Project's parking facilities in common with other tenants of the Project upon terms and conditions, as may from time to time be established by Landlord. Tenant agrees not to overburden the parking facilities (i.e., use more than the number of unassigned parking stalls or Reserved Spaces indicated on the Schedule) and agrees to cooperate with Landlord and other tenants in the Project in the use of the parking facilities. Landlord reserves the right in its reasonable discretion to determine whether the parking facilities are becoming crowded and to allocate and assign parking passes among Tenant and the other tenants in the Project. Landlord shall have the right to charge Tenant the portion that Landlord reasonably deems allocable to Tenant of any charges (e.g., fees or taxes) imposed by the Regional Air Quality Control Board or other governmental or quasi-governmental agency in connection with the parking facilities (e.g., in connection with operation or use of the parking facilities). Landlord shall not be liable to Tenant, nor shall this Lease be affected, if any parking is impaired by (or if any parking charges are imposed as a result of) any moratorium, initiative, referendum, law, ordinance, regulation or order passed, issued or made by any governmental or quasi-governmental body. Tenant's continued right to use the parking spaces is conditioned upon Tenant abiding by all reasonable and non-discriminatory rules and regulations which are prescribed from time to time for the orderly operation and use of the parking facility where the parking passes are located, including any sticker or other identification system established by Landlord, Tenant's cooperation in seeing that Tenant's employees and visitors also comply with such rules and regulations under this Lease. Landlord specifically reserves the right to change the size, configuration, design, layout and all other aspects of the Project parking facility at any time and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, close-off or restrict access to the Project parking facility for a reasonable period of time for purposes of permitting or facilitating any such construction, alteration or improvements; provided, however, that Landlord shall locate and secure alternate parking arrangements for Tenant within walking distance of the Building or provide reasonable shuttle service. Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord. The parking passes rented by Tenant pursuant to this Section 6.C are provided to Tenant solely for use by Tenant's own personnel and such passes may not be transferred, assigned, subleased or otherwise alienated by Tenant (other than pursuant to a 16 permitted assignment of the Lease or permitted sublease of any of the Premises) without Landlord's prior approval, which shall not be unreasonably withheld or delayed. Landlord shall not oversubscribe parking. D. Prohibition Against Use of Roof and Structure of Building. Tenant shall be prohibited from using all or any portion of the roof of the Building or any portion of the structure of the Building during the Term of this Lease (or any extensions thereof) for any purposes (including without limitation for the installation, maintenance and repair of a satellite dish and/or other telecommunications equipment), without Landlord's prior written consent, which Landlord may withhold in its reasonable discretion. Notwithstanding the foregoing, Landlord shall grant Tenant with reasonable access to the roof of the Building as may be reasonably necessary to allow Tenant to perform its HVAC and other maintenance obligations hereunder, provided that such access shall be subject to any reasonable rules and restrictions that Landlord may impose from time to time; provided, however, that Tenant may, subject to Landlord's reasonable prior written consent, use the roof for the installation and maintenance of a non-revenue producing satellite dish to service Tenant's business in the Premises. Landlord has made no representations or promise as to the suitability or effectiveness of any part of the roof for Tenant's proposed use, or as to any Governmental Requirements applicable to Tenant's proposed use. 1. Tenant shall submit to Landlord, with any request for consent of any rooftop equipment, plans and specifications therefor, which must include, without limitation, the design, size and features of the rooftop equipment and mounting structure, floor and power load requirements, cabling installations, the means of affixing or mounting the rooftop equipment, and the means of connecting the rooftop equipment to the Building's electrical system and to the Premises. Tenant acknowledges and agrees that, if Landlord consents to Tenant's use of any portion of the roof of the Building, such use shall be non-exclusive and subject to Landlord's approval of location, plans and installation pursuant to Section 5 of this Lease and such rules and regulations as Landlord may prescribe, including, without limitation, with regard to (a) the location, size, type and methods of installation of the proposed rooftop equipment, (b) requirements to prevent electrical, electromagnetic, radio frequency or other interference with other telecommunication equipment on or about the Building, (c) rooftop space availability, (d) restrictions on penetration of the roof surface, (e) rooftop access rights, and (f) removal requirements upon the expiration or earlier termination of this Lease. 2. Nothing herein shall limit or restrict Landlord's rights under Section 11.N, or require Landlord to obtain Tenant's consent prior to exercising such rights. 7. GOVERNMENTAL REQUIREMENTS AND BUILDING RULES. A. Compliance in Premises. Tenant shall, at its sole cost and expense, (1) comply with all Governmental Requirements; with any occupancy certificate issued for the Premises; and with the provisions of all recorded documents affecting the Premises, insofar as any thereof relates to or affects the condition, use or occupancy of the Premises; and (2) take all proper and necessary action to cause the Premises, including any repairs, replacements, alterations and improvements thereto, to be maintained, constructed, used and occupied in compliance with applicable Governmental Requirements, including any applicable code and 17 ADA requirements, whether or not such requirements are based on Tenant's use of the Premises, and further to assume all responsibility to ensure the Premises' continued compliance with all Governmental Requirements, including applicable code and ADA requirements, throughout the Term. Tenant shall be responsible, at its sole cost and expense, to make all alterations to the Premises as are required to comply with the governmental rules, regulations, requirements or standards described in this Section 7.A. The judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant; provided, however, that, unless necessitated by Tenant's particular use of the Premises or any improvements to or alterations of the Premises made by or on behalf of Tenant, Tenant shall have no obligation to make structural repairs or alterations to the Premises to comply with Governmental Requirements. B. Compliance in Common Areas. Subject to reimbursement as an Operating Cost as provided in Section 2 above, Landlord shall perform any work required under any applicable Governmental Requirements, including the ADA, to be performed in the common areas of the Project, except that Tenant shall be solely responsible for all such compliance work which is required as a result of Tenant's particular use or activities or which relate to Tenant's proposed alterations or repairs. With respect to any code compliance work required outside the Premises for which Tenant is responsible hereunder, Landlord shall have the right to perform such work, or require that Tenant perform such work with contractors, subcontractors, engineers and architects approved by Landlord; and if Landlord elects to perform such work outside the Premises, Tenant shall reimburse Landlord for the cost of such work within ten (10) days following receipt of invoices therefor. Landlord makes no representations or warranties regarding the Project's or the Premises' compliance with applicable Governmental Requirements as of the date of this Lease; provided, however, that Landlord represents to Tenant that, as of the date of this Lease, Landlord has not received any written notice from any governmental authority that the Building is in violation of any Governmental Requirements, which violation remains uncured. If it is determined that the foregoing representation was untrue when made, Landlord shall, as Tenant's sole and exclusive remedy, perform such work as may be required by such Governmental Requirements, but only to the extent that failure to do so would result in an obligation or liability accruing to Tenant or result in an imminent and material adverse impact on Tenant's occupancy of or access to the Premises. C. Rules and Regulations. Tenant shall also comply with all reasonable rules for the Project which may be established and amended from time to time by Landlord; provided, however, Tenant shall not be responsible for compliance with any rule promulgated after the date of this Lease until Landlord has made a reasonable effort to notify Tenant of such rule. The present rules and regulations are contained in Exhibit B. Provided that Landlord acts reasonably and in good faith in enforcing them, Landlord shall not be responsible for the failure by another tenant to comply with the rules and such failure shall not relieve Tenant of its obligation to comply with the rules. Provided that Landlord acts reasonably and in good faith in enforcing them, Landlord shall not be responsible for the failure by another tenant to comply with the rules and such failure shall not relieve Tenant of its obligation to comply with the rules. Landlord shall use reasonable efforts to apply the rules and regulations uniformly with respect to Tenant and any other tenants in the Project under leases containing rules and regulations similar to this Lease. If Tenant performs alterations or repairs, Tenant shall comply with the provisions of 18 Section 5 of this Lease and also any applicable reasonable policies, rules and regulations for construction projects which may be established and in effect at the time. 8. WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE. A. Waiver of Claims. Neither Landlord nor the other Indemnitees (as defined below) shall be liable to Tenant or to any Tenant Parties (as defined below), and Tenant waives all claims against Landlord and such other Indemnitees, for any injury to or death of any person or for loss of use of or damage to or destruction of property in or about the Premises or Project by or from any cause whatsoever, including without limitation, earthquake or earth movement, gas, fire, oil, electricity or leakage from the roof, walls, basement or other portion of the Premises or Project, except only, with respect to any Indemnitee, to the extent such injury, death or damage is caused by the gross negligence or willful misconduct of such Indemnitee or except to the extent such limitation on liability is prohibited by law. The provisions of this Section 8.A shall survive the expiration or earlier termination of this Lease until all claims within the scope of this Section 8.A are fully, finally, and absolutely barred by the applicable statutes of limitations. B. Indemnification. 1. Tenant shall indemnify, protect, defend (by counsel reasonably satisfactory to Landlord) and hold harmless Landlord and its officers, directors, employees and agents (each, an "Indemnitee" and collectively, the "Indemnitees"), and each of them, against any and all obligations, losses, claims, actions (including remedial or enforcement actions of any kind and administrative or judicial proceedings, suits, orders or judgments), causes of action, liabilities, penalties, damages (including consequential and punitive damages), costs and expenses (including reasonable attorneys' and consultants' fees and expenses) (collectively, "Claims") arising from any of the following, including, but not limited to, Claims brought by or on behalf of employees of Tenant, with respect to which Tenant waives, for the benefit of the Indemnitees, any immunity to which Tenant may be entitled under any worker's compensation laws: (a) any cause in, on or about the Premises, (b) any negligence or willful misconduct of Tenant or any person or entity claiming by or through Tenant (including any assignee or subtenant), or any of their respective members, partners, employees, contractors, agents, customers, visitors, licensees or other persons in or about the Project by reason of Tenant's occupancy of the Premises (each a "Tenant Party" and, collectively, "Tenant Parties"), or (c) Tenant's breach of its obligations under this Lease, either prior to, during, or after the expiration of the Lease Term; provided, however, that, with respect to any Indemnitee, Tenant's obligations under this Section shall be inapplicable to the extent such Claims arise solely from the gross negligence or willful misconduct of such Indemnitee or to the extent such obligations are prohibited by applicable law. 2. Tenant's duty to defend Landlord and the other Indemnitees under this Section 8.B is separate and independent of Tenant's duty to indemnify the Indemnitees. The duty to defend includes claims for which the Indemnitees may be liable without fault or strictly liable. The duty to defend applies regardless of whether the issues of negligence, liability, fault, default, or other obligation on the part of Tenant Parties have been determined. The duty to defend applies immediately, regardless of whether any Indemnitees have paid any sums or 19 incurred any detriment arising out of or relating (directly or indirectly) to any Claims. The parties expressly intend that Indemnitees shall be entitled to obtain summary adjudication or summary judgment regarding Tenant's duty to defend the Indemnitees at any stage of any claim or suit within the scope of this Section. 3. Tenant's obligations under this Section shall survive the expiration or earlier termination of this Lease until all Claims within the scope of this Section 8.B are fully, finally, and absolutely barred by the applicable statutes of limitations. C. Tenant's Insurance. Tenant shall maintain insurance as follows, with such other terms, coverages and insurers, as Landlord shall reasonably require from time to time: 1. Commercial General Liability Insurance, with (a) Contractual Liability including the indemnification provisions contained in this Lease, (b) a severability of interest endorsement, (c) limits of not less than Two Million Dollars ($2,000,000) combined single limit per occurrence and not less than Two Million Dollars ($2,000,000) in the aggregate for bodily injury, sickness or death, and property damage, and umbrella coverage of not less than Five Million Dollars ($5,000,000). 2. Property Insurance against "All Risks" of physical loss covering the replacement cost of all Tenant's fixtures and personal property and business interruption. 3. Workers' compensation or similar insurance in form and amounts required by law, and Employer's Liability with not less than the following limits: Each Accident: $500,000 Disease--Policy Limit: $500,000 Disease--Each Employee: $500,000 Tenant's insurance shall be primary and not contributory to that carried by Landlord, its agents, or mortgagee. Landlord, and if any, Landlord's building manager or agent, mortgagee and ground lessor shall be named as additional insureds under the insurance required of the Tenant in Section 8.C(1). The company or companies writing any insurance which Tenant is required to maintain under this Lease, as well as the form of such insurance, shall at all times be subject to Landlord's approval, and any such company shall be licensed to do business in the state in which the Building is located. Such insurance companies shall have a A.M. Best rating of A VI or better. 4. Tenant shall cause any contractor of Tenant performing work on the Premises to maintain insurance as follows, with such other terms, coverages and insurers, as Landlord shall reasonably require from time to time: (a) Commercial General Liability Insurance, including contractor's liability coverage, contractual liability coverage, completed operations coverage, broad form property damage endorsement, and contractor's protective liability coverage, to afford protection with limits, for each occurrence, of not less than One Million Dollars ($1,000,000) with respect to personal injury, death or property damage. 20 (b) Workers' compensation or similar insurance in form and amounts required by law, and Employer's Liability with not less than the following limits: Each Accident: $500,000 Disease--Policy Limit: $500,000 Disease--Each Employee: $500,000 Such insurance shall contain a waiver of subrogation provision in favor of Landlord and its agents. Tenant's contractor's insurance shall be primary and not contributory to that carried by Tenant, Landlord, their agents or mortgagees. Tenant and Landlord, and if any, Landlord's building manager or agent, mortgagee or ground lessor shall be named as additional insured on Tenant's contractor's insurance policies. D. Insurance Certificates. Tenant shall deliver to Landlord certificates evidencing all required insurance no later than five (5) days prior to the Commencement Date and each renewal date. Each certificate will provide for thirty (30) days prior written notice of cancellation to Landlord and Tenant. E. Landlord's Insurance. Subject to reimbursement as an Operating Cost in accordance with the provisions of Section 2 hereof, Landlord shall procure and maintain in effect throughout the Term of this Lease commercial general liability insurance, property insurance and/or such other types of insurance as are normally carried by reasonably prudent owners of commercial properties substantially similar to the Project. Such coverages shall be in such amounts, from such companies and on such other terms and conditions as Landlord may from time to time reasonably determine, and Landlord shall have the right, but not the obligation, to change, cancel, decrease or increase any insurance coverages in respect of the Building, add additional forms of insurance as Landlord shall deem reasonably necessary, and/or obtain umbrella or other policies covering both the Building and other assets owned by or associated with Landlord or its affiliates, in which event the cost thereof shall be equitably allocated. F. Waiver of Subrogation. Notwithstanding anything to the contrary herein, Landlord and Tenant hereby waive and release any and all rights of recovery against the other party, including officers, employees, agents and authorized representatives (whether in contract or tort) of such other party, that arise or result from any and all loss of or damage to any property of the waiving party located within or constituting part of the Building, including the Premises from a risk which is actually insured against, which is required to be insured against under the Lease, or which would normally be covered by "all risk" property insurance, without regard to the negligence of the person or entity so released, whether or not the party suffering the loss or damage actually carries any insurance, recovers under any insurance or self insures the loss or damage. Each party shall have their property insurance policies issued in such form as to waive any right of subrogation as might otherwise exist. This mutual waiver is in addition to any other waiver or release contained in this Lease. All of Landlord's and Tenant's repair and indemnity obligations under the Lease shall be subject to the waiver and release contained in this paragraph. 21 9. FIRE AND OTHER CASUALTY. A. Termination. If a fire or other casualty causes damage to the Building or the Premises, and sufficient insurance proceeds will be available to Landlord to cover the cost of any restoration to the Building and Premises, Landlord shall engage a registered architect to estimate, within one (1) month of the casualty, to both Landlord and Tenant the amount of time needed to restore the Building and the Premises to tenantability, using standard working methods without the payment of overtime and other premiums. If the time needed exceeds nine (9) months from the beginning of the restoration, or two (2) months therefrom if the restoration would begin during the last twelve (12) months of the Lease, then in the case of the Premises, either Landlord or Tenant may terminate this Lease, and in the case of the Building, Landlord may terminate this Lease, by notice to the other party within ten (10) days after the notifying party's receipt of the architect's estimate. If sufficient insurance proceeds will not be available to Landlord to cover the cost of any restoration to the Building or the Premises, Landlord may terminate this Lease by written notice to Tenant. Any termination pursuant to this Section 9.A shall be effective thirty (30) days from the date of such termination notice and Rent shall be paid by Tenant to that date, with an abatement for any portion of the Premises which has been untenantable after the casualty. Notwithstanding the foregoing, Landlord shall not have the right to terminate the Lease if the damage is relatively minor (e.g. repair or restoration would cost less than ten percent (10%) of the replacement cost of the Building) and is due to a risk required to be insured against by Landlord under this Lease. B. Restoration. If a casualty causes damage to the Building or the Premises but this Lease is not terminated for any reason, then subject to the rights of any mortgagees or ground lessors, Landlord shall obtain the applicable insurance proceeds and diligently restore the Building and the Premises subject to current Governmental Requirements. Landlord's obligation, should it elect or be obligated to repair or rebuild, shall be limited to the basic Premises, building-standard tenant improvements, or the basic Building, as the case may be, and Tenant shall, at Tenant's expense, replace or fully repair damaged improvements made pursuant to Section 5 hereof, any tenant improvements in excess of the building standard, personal property and fixtures. Rent shall be abated on a per diem basis during the restoration for any portion of the Premises which is untenantable, except to the extent that: (i) the casualty was caused by the gross negligence or intentional misconduct of Tenant, its agents, employees, contractors, subtenants or assignees, or (ii) Landlord does not receive insurance proceeds sufficient to cover the rent interruption during such period provided that Landlord carries the insurance required by this Lease. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the Premises, damage to Tenant's personal property and trade fixtures or any inconvenience occasioned by such damage, repair or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code, and the provisions of any similar law hereinafter enacted. 10. EMINENT DOMAIN. If a part of the Project is taken by eminent domain or deed in lieu thereof which is so substantial that the Premises cannot reasonably be used by Tenant for the operation of its business, then either party may terminate this Lease effective as of the date of the taking. If any substantial portion of the Project is taken without affecting the Premises, then Landlord may terminate this Lease as of the date of such taking. Rent shall abate from the date of the taking in proportion to any part of the Premises taken. The entire award for a taking of 22 any kind shall be paid to Landlord, and Tenant shall have no right to share in the award. All obligations accrued to the date of the taking shall be performed by the party liable to perform said obligations, as set forth herein. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of The California Code of Civil Procedure. 11. RIGHTS RESERVED TO LANDLORD. Landlord may exercise at any time any of the following rights respecting the operation of the Project without liability to Tenant of any kind: A. Name. To change the name of all or any of the Buildings or the Project, or the street address of the Buildings or the suite number(s) of the Premises(provided Landlord gives Tenant at least ninety (90) days prior written notice thereof and pays all of Tenant's actual reasonable costs as a result thereof). B. Signs. To install, modify and/or maintain any signs on the exterior and in the interior of the Buildings or on the Project, and to approve at its reasonable discretion, prior to installation, any of Tenant's signs in the Premises visible from the common areas or the exterior of the Building. C. Window Treatments. To approve, at its reasonable discretion, prior to installation, any shades, blinds, ventilators or window treatments of any kind, as well as any lighting within the Premises that may be visible from the exterior of the Building or any interior common area. D. Keys. To retain and use at any time passkeys to enter the Premises or any door within the Premises (other than to areas Tenant designates as secure), subject to the terms of this Lease. Tenant shall not alter or add any lock or bolt without Landlord's prior consent, which shall not be unreasonably withheld or delayed. Any entry under this Lease (other than in the case of an emergency) shall be subject to Tenant's reasonable security measures and shall not unreasonably interfere with Tenant's use of the Premises. E. Access. To have access to the Premises with twenty-four hours' prior notice (except in the case of an emergency, in which case Landlord shall have the right to immediate access) to inspect the Premises, to post notices of non-responsibility in connection with any Work, to make repairs, alterations, additions or improvements to the Premises or Building, and to perform any other obligations of Landlord hereunder, all without abatement of Rent. F. Preparation for Reoccupancy. Intentionally Deleted. G. Heavy Articles. To approve the weight, size, placement and time and manner of movement within the Building of any safe, central filing system or other heavy article of Tenant's property. Tenant shall move its property entirely at its own risk. H. Show Premises. To show the Premises to prospective purchasers, tenants, brokers, lenders, mortgagees, investors, rating agencies or others at any reasonable time, provided that Landlord gives prior notice to Tenant and does not materially interfere with 23 Tenant's use of the Premises. Notwithstanding the foregoing, Landlord shall not show the Premises to tenants or brokers except during the last six (6) months of the Term. I. Relocation of Tenant. Intentionally Deleted. J. Use of Lockbox. To designate a lockbox collection agent for collections of amounts due Landlord. In that case, the date of payment of Rent or other sums shall be the date of the agent's receipt of such payment or the date of actual collection if payment is made in the form of a negotiable instrument thereafter dishonored upon presentment. However, Landlord may reject any payment for all purposes as of the date of receipt or actual collection by mailing to Tenant within a reasonable time after such receipt or collection a check equal to the amount sent by Tenant. K. Repairs and Alterations. To make repairs or alterations to the Project and in doing so transport any required material through the Premises, to close entrances, doors, corridors, elevators and other facilities in the Project, to open any ceiling in the Premises, or to temporarily suspend services or use of common areas in the Building; provided that, subject to the next succeeding sentence, Landlord shall, in connection with the foregoing work, use commercially reasonable efforts to minimize interference with Tenant's business in the Premises and shall in all events provide Tenant with reasonable access to the Premises. Landlord may perform any such repairs or alterations during ordinary business hours, except that Tenant may require any work in the Premises to be done after business hours if Tenant pays Landlord for overtime and any other expenses incurred. Landlord may do or permit any work on any nearby building, land, street, alley or way. L. Building Services. To install, use and maintain through the Premises, pipes, conduits, wires and ducts serving the Building, provided that such installation, use and maintenance does not unreasonably interfere with Tenant's use of the Premises. M. Use of Roof. To permit Landlord (or any entity selected by Landlord) to install, operate, maintain and repair any satellite dish, antennae, equipment, or other facility on the roof of the Building or to use the roof of the Building in any other manner, provided that such installation, operation, maintenance, repair or use does not unreasonably interfere with Tenant's satellite or other telecommunications equipment or Tenant's use of the Premises. N. Other Actions. To take any other action which Landlord deems reasonable in connection with the operation, maintenance or preservation of the Building and the Project. 12. DEFAULTS. A. Tenant's Default. Any of the following shall constitute a default by Tenant: 1. Rent Default. Tenant fails to pay any Rent and such failure continues for five (5) days or more following Landlord's notice of such failure; 24 2. Subordination/Estoppel or Hazardous Substances Default. Tenant defaults in its obligations (beyond any applicable notice and cure periods) under Section 16 (Subordination), Section 19 (Estoppel Certificate) or Section 28 (Hazardous Substances); 3. Other Performance Default. Tenant fails to perform any other obligation to Landlord under this Lease, and this failure continues for twenty (20) days after written notice from Landlord or Landlord's agent, except that if Tenant begins to cure its failure within the twenty (20) day period but cannot reasonably complete its cure within such period, then, so long as Tenant continues to diligently attempt to cure its failure, the twenty (20) day period shall be extended to sixty (60) days, or such lesser period as is reasonably necessary to complete the cure; 4. Credit Default. One of the following credit defaults occurs: (a) Tenant (or any guarantor of Tenant's obligations hereunder) commences any proceeding under any law relating to bankruptcy, insolvency, reorganization or relief of debts, or seeks appointment of a receiver, trustee, custodian or other similar official for the Tenant (or the guarantor) or for any substantial part of its property, or any such proceeding is commenced against Tenant (or the guarantor) and either remains undismissed for a period of sixty (60) days or results in the entry of an order for relief against Tenant (or the guarantor) which is not fully stayed within thirty (30) days after entry; (b) Tenant (or any guarantor of Tenant's obligations hereunder) becomes insolvent or bankrupt, does not generally pay its debts as they become due, or admits in writing its inability to pay its debts, or makes a general assignment for the benefit of creditors; (c) Any third party obtains a levy or attachment under process of law against Tenant's leasehold interest. 5. Abandonment Default. Tenant abandons the Premises. Tenant acknowledges and agrees that, notwithstanding the foregoing provisions of this Section 12, Tenant shall be in default for purposes of Section 1161 of the California Code of Civil Procedure immediately following Tenant's failure to perform or comply with any covenants, agreements, terms or conditions of this Agreement to be performed or observed by Tenant, including, without limitation, Tenant's failure to pay Rent when due, and that any notices required to be given by Landlord under this Section 12 shall, in each case, be in lieu of, and not in addition to, any notice required under Section 1161 of the California Code of Civil Procedure, and shall be deemed to satisfy the requirement, if any, that notice be given pursuant to such section. B. Landlord Defaults. Landlord shall be in default hereunder if Landlord has not begun and is pursuing with reasonable diligence the cure of any failure of Landlord to meet its obligations hereunder within thirty (30) days after the receipt by Landlord of written notice from Tenant of the alleged failure to perform. In no event shall Tenant have the right to terminate or rescind this Lease as a result of Landlord's default as to any covenant or agreement contained in this Lease. Tenant hereby waives such remedies of termination and rescission and hereby agrees that Tenant's remedies for default hereunder and for breach of any promise or 25 inducement shall be limited to a suit for damages and/or injunction. In addition, Tenant hereby covenants that, prior to the exercise of any such remedies, Tenant will give notice and a reasonable time to cure any default by Landlord to any holder of a mortgage or deed of trust encumbering Landlord's interest in the Property of which Tenant has been given notice. Notwithstanding anything contained herein to the contrary, Landlord shall not be in default under this Lease to the extent Landlord is unable to perform any of its obligations on account of any prevention, delay, stoppage due to strikes, lockouts, inclement weather, labor disputes, inability to obtain labor, materials, fuels, energy or reasonable substitutes therefor, governmental restrictions, regulations, controls, actions or inaction, civil commotion, fire or other acts of god, national emergency, acts of war or terrorism or any other cause of any kind beyond the reasonable control of Landlord (except financial inability). 13. LANDLORD REMEDIES. UPON A DEFAULT BEYOND ALL APPLICABLE NOTICE AND CURE PERIODS, LANDLORD SHALL HAVE THE FOLLOWING REMEDIES, IN ADDITION TO ALL OTHER RIGHTS AND REMEDIES PROVIDED BY LAW OR OTHERWISE PROVIDED IN THIS LEASE, TO WHICH LANDLORD MAY RESORT CUMULATIVELY OR IN THE ALTERNATIVE: A. Termination of Lease. Landlord may elect by notice to Tenant to terminate this Lease, in which event, Tenant shall immediately vacate the Premises and deliver possession to Landlord. B. Civil Code Section 1951.4 Remedy. Even though Tenant has breached this Lease, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord shall have all of its rights and remedies, including the right, pursuant to California Civil Code Section 1951.4, to recover all rent as it becomes due under this Lease, if Tenant has the right to sublet or assign, subject only to reasonable limitations. Acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession unless written notice of termination is given by Landlord to Tenant. C. Lease Termination Damages. If Landlord elects to terminate this Lease, then this Lease shall terminate on the date for termination set forth in such notice. Tenant shall immediately vacate the Premises and deliver possession to Landlord, and Landlord may repossess the Premises and may, at Tenant's sole cost, remove any of Tenant's signs and any of its other property, without relinquishing its right to receive Rent or any other right against Tenant. On termination, Landlord has the right to recover from Tenant as damages: 1. The worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the time of termination; plus 2. The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; plus 26 3. The worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; plus 4. Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering or rehabilitating the Premises or any portion thereof, including such acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus 5. At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. The "worth at the time of award" of the amounts referred to in Sections 13.C(1) and 13.C(2) is computed by allowing interest at the Interest Rate on the unpaid rent and other sums due and payable from the termination date through the date of award. The "worth at the time of award" of the amount referred to in Section 13.C(3) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other present or future law, if Tenant is evicted or Landlord takes possession of the Premises by reason of any default of Tenant hereunder. D. Landlord's Remedies Cumulative. All of Landlord's remedies under this Lease shall be in addition to all other remedies Landlord may have at law or in equity, including, without limitation, the remedy described in California Civil Code Section 1951.4 (pursuant to which Landlord may continue the Lease in effect after Tenant's breach and abandonment and recover as rent as it becomes due if Tenant has the right to sublet or assign the Lease, subject to reasonable limitations). Waiver by Landlord of any breach of any obligation by Tenant shall be effective only if it is in writing, and shall not be deemed a waiver of any other breach, or any subsequent breach of the same obligation. The possession of Tenant's funds, negotiation of Tenant's negotiable instruments, or acceptance of Tenant's payment by Landlord or its agents shall not constitute a waiver of any breach by Tenant, and if such possession, negotiation or acceptance occurs after Landlord's notice to Tenant, or termination of the Lease or of Tenant's right to possession, such possession, negotiation or acceptance shall not affect such notice or termination. Acceptance of payment by Landlord after commencement of a legal proceeding or final judgment shall not affect such proceeding or judgment. Landlord may advance such monies and take such other actions for Tenant's account as reasonably may be required to cure or mitigate any default by Tenant. Tenant shall immediately reimburse Landlord for any such advance, and such sums shall bear interest at the Interest Rate until paid. E. WAIVER OF TRIAL BY JURY. EACH PARTY WAIVES TRIAL BY JURY IF ANY LEGAL PROCEEDING IS BROUGHT BY THE OTHER IN CONNECTION WITH THIS LEASE. EACH PARTY SHALL BRING ANY ACTION 27 AGAINST THE OTHER IN CONNECTION WITH THIS LEASE IN A FEDERAL OR STATE COURT LOCATED IN CALIFORNIA, CONSENTS TO THE JURISDICTION OF SUCH COURTS, AND WAIVES ANY RIGHT TO HAVE ANY PROCEEDING TRANSFERRED FROM SUCH COURTS ON THE GROUND OF IMPROPER VENUE OR INCONVENIENT FORUM. THE PROVISIONS OF THIS SECTION 13.E SHALL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS LEASE. 14. SURRENDER. Upon the expiration or earlier termination of this Lease for any reason, Tenant shall surrender the Premises to Landlord in its condition existing as of the date Landlord delivers possession of the Premises to Tenant, normal wear and tear and damage by fire or other casualty, alterations or improvements Tenant is not required to remove and Hazardous Substances which Tenant has no indemnity obligations pursuant to Section 28 excepted, with all interior walls repaired and repainted if marked or damaged, all carpets shampooed and cleaned, all broken, marred or nonconforming acoustical ceiling tiles replaced, all windows washed, the plumbing and electrical systems and lighting in good order and repair, including replacement of any burned out or broken light bulb or ballasts, the HVAC equipment serviced and repaired by a reputable and licensed service firm acceptable to Landlord, and all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove from the Premises and the Project all of Tenant's trade fixtures, furniture, moveable equipment and other personal property, and any Work which Landlord elects to be removed pursuant to Section 5.D, and shall restore the Premises to its condition prior to their installation, including, without limitation, repairing all damage caused by the installation or removal of any of the foregoing items. If Tenant does not timely remove such property, then Tenant shall be conclusively presumed to have, at Landlord's election: (a) conveyed such property to Landlord without compensation or (b) abandoned such property, and Landlord may dispose of or store any part thereof in any manner at Tenant's sole cost, without waiving Landlord's right to claim from Tenant all expenses arising out of Tenant's failure to remove the property, and without liability to Tenant or any other person. Landlord shall have no duty to be a bailee of any such personal property. If Landlord elects to consider such property abandoned, Tenant shall be liable to Landlord for the costs of: (i) removal of any such Work or personal property, (ii) storage, transportation, and disposition of the same, and (iii) repair and restoration the Premises, together with interest thereon at the Interest Rate from the date of expenditure by Landlord. In addition, if the Premises are not so surrendered at the termination of this Lease, Tenant shall indemnify Landlord against all loss or liability, including reasonable attorneys' fees and costs, resulting from delay by Tenant in so surrendering the Premises. 15. HOLDOVER. Tenant shall have no right to holdover possession of the Premises after the expiration or termination of this Lease without Landlord's prior written consent which Landlord may withhold in its sole and absolute discretion. If, however, Tenant retains possession of any part of the Premises after the Term, Tenant shall become a tenant at sufferance only, for the entire Premises upon all of the terms of this Lease as might be applicable to such tenancy, except that Tenant shall pay (a) for the first thirty (30) days of such holding over, an amount equal to one hundred fifty percent (150%) of the Base Rent, Operating Cost, Tax and Utility Cost Share Rent payable by Tenant immediately prior to such holding over; and (b) thereafter, an amount equal to two hundred percent (200%) of the Base Rent, Operating Cost, Tax and Utility Cost Share Rent payable by Tenant immediately prior to such holding over, computed on a monthly basis for each full or partial month Tenant remains in possession. 28 Tenant shall also protect, defend, indemnify and hold Landlord harmless from all Claims resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender and any lost profits to Landlord resulting therefrom. No acceptance of Rent or other payments by Landlord under these holdover provisions shall operate as a waiver of Landlord's right to regain possession or any other of Landlord's remedies. 16. SUBORDINATION TO GROUND LEASES AND MORTGAGES. A. Subordination. This Lease shall be subordinate to any present or future ground lease or mortgage respecting the Project, and any amendments to such ground lease or mortgage, at the election of the ground lessor or mortgagee as the case may be, effected by notice to Tenant in the manner provided in this Lease. The subordination shall be effective upon such notice, but at the request of Landlord or ground lessor or mortgagee, Tenant shall within ten (10) days of the request, execute and deliver to the requesting party any reasonable documents provided to evidence the subordination. Any mortgagee has the right, at its sole option, to subordinate its mortgage to the terms of this Lease, without notice to, nor the consent of, Tenant. With respect to any Superior Interest to which this Lease is now or shall hereafter become subordinate, Landlord shall use commercially reasonable efforts to obtain from the Holder of such Superior Interest, for the benefit of Tenant, a non-disturbance agreement, in the customary form of such Holder, providing generally that as long as Tenant is not in default (beyond any applicable notice and cure periods) under this Lease, this Lease will not be terminated if such Holder acquires title to the Building or Project by reason of foreclosure proceedings, acceptance of a deed in lieu of foreclosure, or termination of the leasehold interest of Landlord, provided that Tenant attorns to such Holder in accordance with its requirements. Except for making such commercially reasonable efforts, Landlord will be under no duty or obligation hereunder with respect to any Superior Interest, nor will the failure or refusal of the Holder of any Superior Interest to grant a non-disturbance agreement render Landlord liable to Tenant, or affect this Lease, in any manner. Tenant will bear all costs and expenses (including attorneys' fees) of the Holder of such Superior Interest in connection with Landlord's reasonable efforts to obtain a non-disturbance agreement. B. Termination of Ground Lease or Foreclosure of Mortgage. If any ground lease is terminated or mortgage foreclosed or deed in lieu of foreclosure given and the ground lessor, mortgagee, or purchaser at a foreclosure sale shall thereby become the owner of the Project, Tenant shall attorn to such ground lessor or mortgagee or purchaser without any deduction or setoff by Tenant, and this Lease shall continue in effect as a direct lease between Tenant and such ground lessor, mortgagee or purchaser. The ground lessor or mortgagee or purchaser shall be liable as Landlord only during the time such ground lessor or mortgagee or purchaser is the owner of the Project. At the request of Landlord, ground lessor or mortgagee, Tenant shall execute and deliver within ten (10) days of the request any document furnished by the requesting party to evidence Tenant's agreement to attorn. C. Security Deposit. Any ground lessor or mortgagee shall be responsible for the return of any security deposit by Tenant only to the extent the security deposit, if any, is received by such ground lessor or mortgagee. 29 D. Notice and Right to Cure. Tenant agrees to send by registered or certified mail to any ground lessor or mortgagee, identified in any notice from Landlord to Tenant, a copy of any notice of default sent by Tenant to Landlord. If Landlord fails to cure such default within the required time period under this Lease, but ground lessor or mortgagee begins to cure within ten (10) days after such period and proceeds diligently to complete such cure, then ground lessor or mortgagee shall have such additional time as is necessary to complete such cure, including any time necessary to obtain possession if possession is necessary to cure, and Tenant shall not begin to enforce its remedies so long as the cure is being diligently pursued. E. Definitions. As used in this Section 16, "mortgage" shall include "trust deed" and "deed of trust"; "mortgagee" shall include "trustee", "beneficiary" and the mortgagee of any ground lessee; and "ground lessor", "mortgagee", and "purchaser at a foreclosure sale" shall include, in each case, all of its successors and assigns, however remote. F. No Existing Lenders. Landlord represents and warrants that as of the Effective Date of this Lease that the Building is not currently mortgaged. 17. ASSIGNMENT AND SUBLEASE. A. In General. Except as otherwise set forth herein, Tenant shall not, without Landlord's prior written consent (not to be unreasonably withheld or delayed), in each case: (i) make or allow any assignment or transfer, by operation of law or otherwise, of any part of Tenant's interest in this Lease, (ii) sublet any part of the Premises, or (iii) permit anyone other than Tenant and its employees to occupy any part of the Premises (all of the foregoing are hereinafter sometimes referred to individually as a "Transfer", and collectively as "Transfers", and any person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "Transferee", and any person by whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "Transferor"). Tenant shall remain primarily liable for all of its obligations under this Lease, notwithstanding any Transfer. No consent granted by Landlord shall be deemed to be a consent to any subsequent Transfer. Tenant shall pay all of Landlord's attorneys' fees and other expenses (not to exceed $2,500, unless a dispute arises, in which event the provisions of Section 25.Z below shall apply) incurred in connection with any consent requested by Tenant or in considering any proposed Transfer. Any Transfer without Landlord's prior written consent shall be void. If Tenant shall assign this Lease or sublet or otherwise Transfer the entire Premises (except with respect to the Permitted Transfers described below) any rights of Tenant to renew this Lease, to extend the Term or to lease additional space in the Project shall be extinguished thereby and will not be transferred to the Transferee, all such rights being personal to the Tenant named herein. In addition, Tenant shall not, without Landlord's prior written consent, which Landlord may withhold in its sole discretion, mortgage, pledge or encumber this Lease, the term or estate hereby granted or any interest hereunder. B. Landlord's Consent. Landlord will not unreasonably withhold its consent to any proposed Transfer. It shall be reasonable for Landlord to withhold its consent to any Transfer if (i) Tenant is in default under this Lease (beyond any applicable notice and cure periods), (ii) the financial responsibility, nature of business, and character of the proposed Transferee are not all reasonably satisfactory to Landlord, (iii) in the reasonable judgment of 30 Landlord the purpose for which the Transferee intends to use the Premises (or a portion thereof) is not in keeping with Landlord's standards for the Building or are in violation of the terms of this Lease or any other leases in the Project, or (iv) the proposed Transferee is a government entity. The foregoing shall not exclude any other reasonable basis for Landlord to withhold its consent. C. Procedure. Tenant shall notify Landlord of any proposed Transfer at least thirty (30) days prior to its proposed effective date. The notice shall include the name and address of the proposed Transferee, its corporate affiliates in the case of a corporation and its partners in the case of a partnership, a description of the portion of the Premises that is subject to the Transfer (the "Transfer Premises"), a calculation of the Transfer Premium (as defined in Section 17.E below) payable in connection with the Transfer, an executed copy of the proposed Transfer agreement, and sufficient information to permit Landlord to determine the financial responsibility and character of the proposed Transferee (including, without limitation, the most recent financial statements for the proposed Transferee). Landlord shall notify Tenant whether it will approve the Transfer, disapprove the Transfer, or recapture the Premises in accordance with the terms of Section 13.G hereof, within thirty (30) days after the receipt of the foregoing information. As a condition to the effectiveness of any assignment of this Lease, the assignee shall execute and deliver to Landlord, at least fifteen (15) days prior to the effective date of the assignment, a reasonable form of Consent to Assignment, providing for, among other things, an assumption of all of the obligations of Tenant under this Lease. As a condition to the effectiveness of any other Transfer, Transferee shall execute and deliver to Landlord, at least fifteen (15) days prior to the effective date of such Transfer, a reasonable consent form, providing, among other things, (1) the Transferee's obligation to indemnify Landlord and the other Indemnitees consistent with Tenant's indemnification obligations in Section 8.B above, and (2) the Transferee's agreement that any such Transfer shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any such Transfer, Landlord shall have the right to: (a) treat such Transfer as cancelled and repossess the Transfer Premises by any lawful means, or (b) require that the Transferee attorn to and recognize Landlord as its landlord under any such Transfer. If Tenant shall default and fail to cure within the time permitted for cure under Section 12 above, Landlord is hereby irrevocably authorized to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease) until such default is cured. D. Change of Management or Ownership. Any transfer of the direct or indirect power to affect the management or policies of Tenant or direct or indirect change in 50% or more of the ownership interest in Tenant shall constitute an assignment of this Lease, provided that the foregoing shall not apply so long as Tenant's stock is publicly held and traded through a national stock exchange. E. Permitted Transfers. Notwithstanding anything to the contrary in this Section 17, if Tenant is not then in default of this Lease (beyond any applicable notice and cure periods), Tenant may assign this Lease or sublet any portion of the Premises (hereinafter collectively referred to as a "Permitted Transfer") without any payment of a Transfer Premium to Landlord or any loss of its rights under this Lease to (i) a parent or subsidiary of Tenant, or an entity under common control with Tenant, (ii) any successor entity to Tenant by way of merger, 31 consolidation or other non-bankruptcy corporate reorganization, (iii) an entity which acquires all or substantially all of Tenant's assets or stock, or (iv) Dazzle Holdings, Inc. (collectively, "Permitted Transferees", and, individually, a "Permitted Transferee"); provided that (1) at least ten (10) business days prior to the Transfer, Tenant notifies Landlord of such Transfer, and supplies Landlord with any documents or information reasonably requested by Landlord regarding such Transfer or Permitted Transferee, including, but not limited to, copies of the sublease or instrument of assignment and copies of documents establishing to the reasonable satisfaction of Landlord that the transaction in question is one permitted under this Section 17.E, (2) at least ten (10) business days prior to the Transfer, Tenant furnishes Landlord with a written document executed by the proposed Permitted Transferee in which such entity assumes all of Tenant's obligations under this Lease with respect to the Transfer Premises, (3) in the case of a Transfer pursuant to clause (ii) above, either (x) the successor entity must have a tangible net worth at the time of the Transfer (i.e., not including intangible assets in the calculation, such as goodwill, patents, copyrights, and trademarks) computed in accordance with generally accepted accounting principles ("Net Worth") that is at least equal to the Net Worth on the date of this Lease of the original named Tenant, or (y) the original Tenant under this Lease shall guaranty this Lease, and (4) any such proposed Transfer is made for a good faith operating business purpose and not, whether in a single transaction or in a series of transactions, be entered into as a subterfuge to evade the obligations and restrictions relating to Transfers set forth in this Section 17. F. Transfer Premium. 1. If Landlord consents to a Transfer, as a condition thereto which the parties hereby agree is reasonable, Landlord shall be entitled to receive, as Additional Rent hereunder, fifty percent (50%) of any Transfer Premium derived from such Transfer. As used herein, the term "Transfer Premium" means (a) in the case of an assignment, any consideration (including, without limitation, payment for leasehold improvements) paid by the assignee on account of such assignment, and (b) in the case of any other Transfer, all rent, additional rent or other consideration paid by the Transferee to the Transferor pursuant to such Transfer in excess of the base rent and additional rent payable by such Transferor during the term of the Transfer on a per rentable square foot basis, in the case of (a) or (b), after deducting, any brokerage commissions (not to exceed commissions typically paid in the market at the time of such subletting or assignment), and reasonable attorneys' fees, and reasonable costs of any tenant improvements paid by Tenant in connection with the Transfer ("Recoverable Expenses"). Payment of the portion of the Transfer Premium due Landlord hereunder shall be a joint and several obligation of Tenant and the Transferee, and shall be made to Landlord as follows: (i) in the case of an assignment, the Transferor shall pay fifty percent (50%) the Transfer Premium to Landlord within ten (10) days after the Transferor receives the Transfer Premium; and (ii) in the case of any other Transfer, on the first day of each month during the term of the Transfer, the Transferee shall pay directly to Landlord fifty percent (50%) the amount by which the rent, additional rent or other consideration paid by the Transferee for such month exceeds the base rent and additional rent payable by the applicable Transferor for said month which is allocable to the Transfer Premises, after first deducting the full amount of Recoverable Expenses allocated to such month. 32 2. Upon Landlord's request, Tenant shall provide Landlord with reasonable documentation of payment of the Recoverable Expenses and Tenant's calculation of the Transfer Premium. Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found to be understated, Tenant shall within ten (10) days after demand pay the deficiency, and if understated by more than two percent (2%), Tenant shall pay Landlord's costs of such audit. G. Recapture. Except with respect to the Permitted Transfers, in the case of a proposed assignment, sublease or other Transfer of the entirety of the Premises for the balance of the Lease Term, Landlord may terminate this Lease as to the Transfer Premises by giving Tenant written notice (the "Recapture Notice") within thirty (30) days after Landlord's receipt of Tenant's notice of such proposed Transfer pursuant to the terms of Section 17.C. Such termination shall be effective as of the termination date set forth in Landlord's Recapture Notice, and all obligations of Landlord and Tenant under this Lease as to such terminated space shall expire as of such termination date, except those that expressly survive any termination of this Lease. H. Tenant Remedies. Notwithstanding anything to the contrary in this Lease, if Tenant claims that Landlord has unreasonably withheld or delayed its consent under this Section 17 or otherwise has breached or acted unreasonably under this Section 17, Tenant's sole remedy shall be declaratory judgment and an injunction for the relief sought without any monetary damages, and Tenant hereby waives all other remedies, including, without limitation, any right provided under California Civil Code Section 1995.310 or other applicable laws to terminate this Lease. Tenant shall indemnify, defend and hold harmless Landlord from any and all Claims involving any third party or parties (including without limitation Tenant's broker or proposed transferee) who claim they were damaged by Landlord's withholding or conditioning of Landlord's consent, unless it is determined by a court of competent jurisdiction that Landlord has withheld or conditioned its consent to Tenant's proposed Transfer in bad faith.. 18. CONVEYANCE BY LANDLORD. If Landlord shall at any time transfer its interest in the Project or this Lease, Landlord shall be released of any obligations occurring after such transfer and such transferee's assumption of all of Landlord's obligations under the terms of this Lease, except the obligation to return to Tenant any security deposit not delivered to its transferee, and Tenant shall look solely to Landlord's successors for performance of such obligations. This Lease shall not be affected by any such transfer. 19. ESTOPPEL CERTIFICATE. Each party shall, within ten (10) days of receiving a request from the other party, execute, acknowledge in recordable form, and deliver to the other party or its designee a certificate stating, subject to a specific statement of any applicable exceptions, that the Lease as amended to date is in full force and effect, that the Tenant is paying Rent and other charges on a current basis, and that to the best of the knowledge of the certifying party, the other party has committed no uncured defaults and has no offsets or claims. The certifying party may also be required to state the date of commencement of payment of Rent, the Commencement Date, the Termination Date, the Base Rent, the current Operating Cost Share Rent and Tax Share Rent estimates, the status of any improvements required to be completed by 33 Landlord, the amount of any security deposit, and such other matters as may be reasonably requested. Tenant's failure to execute or deliver an estoppel certificate in the required time period shall constitute an acknowledgment by Tenant that the statements included in the estoppel certificate are true and correct, without exception. Tenant's failure to execute or deliver an estoppel certificate or other document or instrument required under this Article 19 in a timely manner shall be a material breach of this Lease. 20. LEASE DEPOSIT. A. Tenant shall deposit with Landlord on the date Tenant executes and delivers this Lease the cash sums set forth in the Schedule for both Prepaid Rent and Security Deposit (collectively, the "Lease Deposit"). The Prepaid Rent shall be applied by Landlord against the first full monthly installment of Base Rent payable hereunder. The Security Deposit shall be held by Landlord as security for the faithful performance by Tenant of all its obligations under this Lease. Tenant agrees that, if Tenant fails to pay any Rent, or otherwise defaults (beyond any applicable notice and cure periods) with respect to any provision of this Lease, Landlord may(but shall not be obligated to), and without prejudice to any other remedy available to Landlord, use, apply or retain all or any portion of the Security Deposit for the payment of any Rent in default (beyond any applicable notice and cure periods) or for the payment of any other sum to which Landlord may become obligated by reason of Tenant's default (beyond any applicable notice and cure periods), or to compensate Landlord for any loss or damage which Landlord may suffer thereby, including, without limitation, prospective damages and damages recoverable pursuant to California Civil Code Section 1951.2. Tenant waives the provisions of California Civil Code Section 1950.7, and all other provisions of law now in force or that become in force after the date of execution of this Lease, that restrict the use or application of the Security Deposit by Landlord. If Landlord uses or applies all or any portion of the Security Deposit as provided above, Tenant shall, within three (3) days after demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full amount thereof, and Tenant's failure to do so shall, at Landlord's option, be a default under this Lease with no opportunity to cure. The Security Deposit, or so much thereof as has not theretofore been applied by Landlord, shall be returned to Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's interest hereunder) within thirty (30) days following the expiration of the Term or earlier termination of the Lease and after Tenant has vacated the Premises; provided, however, that if this Lease is terminated by Landlord pursuant to Article 13 above, or by Tenant in a bankruptcy proceeding pursuant to 11 U.S.C. Section 365, Landlord may retain the Security Deposit and apply the same against its damages recoverable pursuant to California Civil Code Section 1951.2. Landlord shall not be deemed to hold the Security Deposit in trust nor be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to any interest on the Security Deposit. The Security Deposit shall not be construed as an advance payment of Rent nor liquidated damages, and if Landlord's claims hereunder exceed the Security Deposit, Tenant shall remain liable for the balance of such claims. B. If Landlord transfers its interest in the Project or this Lease, Landlord may transfer the Security Deposit to its transferee. Upon such transfer, Landlord shall have no further obligation to return the Security Deposit to Tenant, and Tenant's right to the return of the Security Deposit shall apply solely against Landlord's transferee. 34 21. TENANT'S PERSONAL PROPERTY AND FIXTURES. Intentionally Deleted. 22. NOTICES. All notices, consents, approvals and similar communications to be given by one party to the other under this Lease, shall be given in writing, mailed or personally delivered as follows: A. Landlord. To Landlord as follows: CarrAmerica Realty Corporation 1810 Gateway Drive, Suite 150 San Mateo, CA 94404 Attn: Market Officer with a copy to: CarrAmerica Realty Corporation 1850 K Street, N.W., Suite 500 Washington, D.C. 20006 Attn: Lease Administration or to such other person at such other address as Landlord may designate by notice to Tenant. B. Tenant. To Tenant as follows: Prior to the Commencement Date: SCM Microsystems, Inc. 47211 Bayside Parkway Fremont, CA 94538 Attn: Chief Financial Officer And to: After the Commencement Date: At the Premises Attn: Chief Financial Officer or to such other person at such other address as Tenant may designate by notice to Landlord. Mailed notices shall be sent by United States certified or registered mail, or by a reputable national overnight courier service, postage prepaid. Mailed notices shall be deemed to have been given on the earlier of actual delivery or three (3) business days after posting in the United States mail in the case of registered or certified mail, and one (1) business day in the case of overnight courier. Tenant hereby appoints as its agent to receive the service of process in any action, or any notice required by law to be given prior to the commencement of any action, for recovery of possession of the Premises or any part thereof, and to receive service of all notices 35 hereunder (including dispossessory or distraint proceedings and notices thereunder), the person in charge of or occupying the Premises at the time, and, if no person shall be in charge of or occupying the same, then such service may be made by attaching the same on the main entrance of the Premises. 23. QUIET POSSESSION. So long as Tenant shall perform all of its obligations under this Lease, Tenant shall enjoy peaceful and quiet possession of the Premises against any party claiming through the Landlord, subject to all of the terms of this Lease. 24. REAL ESTATE BROKERS. Tenant represents to Landlord that Tenant has not dealt with any real estate broker with respect to this Lease except for any broker(s) listed in the Schedule, and no other broker is in any way entitled to any broker's fee or other payment in connection with this Lease by reason of Tenant's dealing with such broker. Tenant shall indemnify and defend Landlord against any Claims by any other broker or third party for any payment of any kind in connection with this Lease by reason of Tenant's dealing with such broker. 25. MISCELLANEOUS. A. Successors and Assigns. Subject to the limits on Tenant's assignment contained in Section 17, the provisions of this Lease shall be binding upon and inure to the benefit of all successors and assigns of Landlord and Tenant. B. Date Payments Are Due. Except for payments to be made by Tenant under this Lease which are due upon demand or are due in advance (such as Base Rent), Tenant shall pay to Landlord any amount for which Landlord renders a statement of account within ten (10) days of Tenant's receipt of Landlord's statement. C. Meaning of "Landlord", "Re-Entry", "including" and "Affiliate". The term "Landlord" means only the owner of the Project and the lessor's interest in this Lease from time to time. The words "re-entry" and "re-enter" are not restricted to their technical legal meaning. The words "including" and similar words shall mean "without limitation." The word "affiliate" shall mean a person or entity controlling, controlled by or under common control with the applicable entity. "Control" shall mean the power directly or indirectly, by contract or otherwise, to direct the management and policies of the applicable entity. D. Time of the Essence. Time is of the essence of each provision of this Lease. E. No Option. The submission of this Lease to Tenant for review or execution does not create an option or constitute an offer to Tenant to lease the Premises on the terms and conditions contained herein, and this Lease shall not become effective unless and until it has been executed and delivered by both Landlord and Tenant. F. Severability. If any provision of this Lease is determined to be invalid, illegal or unenforceable, then such provision will be enforced to the maximum extent possible and the other provisions will remain fully effective and enforceable. 36 G. Governing Law. This Lease shall be governed in all respects by the laws of the state in which the Project is located, without regard to the principles of conflicts of laws. H. Lease Modification. Tenant agrees to modify this Lease in any way requested by a mortgagee which does not cause increased expense to Tenant or otherwise materially adversely affect Tenant's interests under this Lease. I. No Oral Modification. No modification of this Lease shall be effective unless it is a written modification signed by both parties. J. Landlord's Right to Cure. Landlord may cure any default by Tenant after the expiration of any applicable notice and cure periods and any expenses incurred shall become Additional Rent due from Tenant on demand by Landlord. K. Captions. The captions used in this Lease shall have no effect on the construction of this Lease. L. Authority. Landlord and Tenant each represents to the other that it has full power and authority to execute and perform this Lease. M. Landlord's Enforcement of Remedies. Landlord may enforce any of its remedies under this Lease either in its own name or through an agent. N. Entire Agreement. This Lease, together with all Appendices, constitutes the entire agreement between the parties. No representations or agreements of any kind have been made by either party which are not contained in this Lease. O. Landlord's Title. Landlord's title shall always be paramount to the interest of the Tenant, and nothing in this Lease shall empower Tenant to do anything which might in any way impair Landlord's title. P. Light and Air Rights. Landlord does not grant in this Lease any rights to light and air in connection with Project. Landlord reserves to itself, the Project, the Building below the improved floor of each floor of the Premises, the Building above the ceiling of each floor of the Premises, the exterior of the Premises and the areas on the same floor outside the Premises, along with the areas within the Premises required for the installation and repair of utility lines and other items required to serve other tenants of the Building. Q. Singular and Plural. Wherever appropriate in this Lease, a singular term shall be construed to mean the plural where necessary, and a plural term the singular. For example, if at any time two parties shall constitute Landlord or Tenant, then the relevant term shall refer to both parties together. R. No Recording by Tenant. Tenant shall not record in any public records any memorandum or any portion of this Lease. S. Exclusivity. Landlord does not grant to Tenant in this Lease any exclusive right except the right to occupy its Premises. 37 T. No Construction Against Drafting Party. The rule of construction that ambiguities are resolved against the drafting party shall not apply to this Lease. U. Survival. The waivers of claims or rights, the releases and the obligations of Tenant under this Lease to indemnify, protect, defend and hold harmless Landlord and other Indemnitees shall survive the expiration or earlier termination of this Lease, and so shall all other obligations or agreements of Landlord or Tenant hereunder which by their terms survive the expiration or earlier termination of this Lease. V. Rent Not Based on Income. No Rent or other payment in respect of the Premises shall be based in any way upon net income or profits from the Premises. Tenant may not enter into or permit any sublease or license or other agreement in connection with the Premises which provides for a rental or other payment based on net income or profit. W. Building Manager and Service Providers. Landlord may perform any of its obligations under this Lease through its employees or third parties hired by the Landlord. X. Late Charge and Interest on Late Payments. Without limiting the provisions of Section 12.A, if Tenant fails to pay any installment of Rent or other charge to be paid by Tenant pursuant to this Lease within ten (10) days after the same becomes due and payable, then Tenant shall pay a late charge equal to the greater of five percent (5%) of the amount of such payment or $250. In addition, interest shall be paid by Tenant to Landlord on any late payments of Rent from the date due until paid at the rate provided in Section 2.D(2). Such late charge and interest shall constitute Additional Rent due and payable by Tenant to Landlord upon the date of payment of the delinquent payment referenced above. Notwithstanding the provisions of this Section 25.K to the contrary, no late charge shall be assessed the first time during the Lease Term that Rent is not paid within five (5) business days after the date on which it is due and payable, so long as Tenant shall pay any such delinquent amount within three (3) days after notice of such delinquency from Landlord. Y. Tenant's Financial Statements. Within ten (10) days after Landlord's written request therefor (which may be made only in connection with a default by Tenant or a bona fide sale, financing or other similar transaction involving the Project), Tenant shall deliver to Landlord the current certified (or audited, if available) audited annual and quarterly financial statements of Tenant, and annual certified (or audited, if available) audited financial statements of the two (2) years prior to the current year's financial statements, each with an opinion of a certified public accountant, including a balance sheet and profit and loss statement for the most recent prior year, all prepared in accordance with generally accepted accounting principles consistently applied; provided, however, that as long as Tenant's financial statements are readily available over the Internet or otherwise publicly available, Tenant shall not be obligated to deliver them to Landlord hereunder. Landlord shall exercise commercially reasonable efforts to keep all such financial statements confidential, provided that Landlord may disclose the same to existing or prospective lenders, investors, partners, purchasers or other persons reasonably having a need to review such financial statements Z. Attorneys' Fees. In any arbitration, quasi-judicial or administrative proceedings or any action in any court of competent jurisdiction, brought by either party to 38 enforce any covenant or any of such party's rights or remedies under this Lease, including any action for declaratory relief, or any action to collect any payments required under this Lease or to quiet title against the other party, the prevailing party shall be entitled to reasonable attorneys' fees and all costs, expenses and disbursements in connection with such action, including the costs of reasonable investigation, preparation and professional or expert consultation, which sums may be included in any judgment or decree entered in such action in favor of the prevailing party. AA. Other Improvements. If portions of the Project or property adjacent to the Project (collectively, the "Other Improvements") are owned by an entity other than Landlord, Landlord, at its option, may enter into an agreement with the owner or owners of any of the Other Improvements to provide (i) for reciprocal rights of access, use and/or enjoyment of the Project and the Other Improvements, (ii) for the common management, operation, maintenance, improvement and/or repair of all or any portion of the Project and all or any portion of the Other Improvements, (iii) for the allocation of a portion of Operating Costs and Taxes to the Other Improvements and the allocation of a portion of the operating expenses and taxes for the Other Improvements to the Project, (iv) for the use or improvement of the Other Improvements and/or the Project in connection with the improvement, construction, and/or excavation of the Other Improvements and/or the Project, and (v) for any other matter which Landlord deems necessary. Nothing contained herein shall be deemed or construed to limit or otherwise affect Landlord's right to sell all or any portion of the Project or any other of Landlord's rights described in this Lease. BB. Approvals. Except as otherwise expressly set forth in this Lease, whenever the Lease requires an approval, consent, designation, determination, selection or judgment by either Landlord or Tenant, such approval, consent, designation, determination, selection or judgment and any conditions imposed thereby shall be reasonable and shall not be unreasonably withheld or delayed. 26. UNRELATED BUSINESS INCOME. If Landlord is advised by its counsel at any time that any part of the payments by Tenant to Landlord under this Lease may be characterized as unrelated business income under the United States Internal Revenue Code and its regulations, then Tenant shall enter into any amendment proposed by Landlord to avoid such income, so long as the amendment does not require Tenant to make more payments or accept fewer services from Landlord, than this Lease provides, or materially increase Tenant's obligations, or otherwise materially impair Tenant's rights under the Lease. 27. BUILDING RENOVATIONS. It is specifically understood and agreed that Landlord has made no representation or warranty to Tenant and has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, Building, or any part thereof and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant except as specifically set forth herein or in the Tenant Improvement Agreement. However, Tenant hereby acknowledges that Landlord may during the Lease Term renovate, improve, alter, or modify (collectively, the "Renovations") the Project, the Building and/or the Premises including without limitation the parking structure, common areas, systems and equipment, roof, and structural portions of the same, which Renovations may include, without limitation, (i) installing sprinklers in the Building common 39 areas and tenant spaces, (ii) modifying the common areas and tenant spaces to comply with applicable laws and regulations, including regulations relating to the physically disabled, seismic conditions, and building safety and security, and (iii) installing new floor covering, lighting, and wall coverings in the Building common areas, and in connection with any Renovations, Landlord may, among other things, erect scaffolding or other necessary structures in the Building, limit or eliminate access to portions of the Project, including portions of the common areas, or perform work in the Building, which work may create noise, dust or leave debris in the Building. Tenant hereby agrees that such Renovations and Landlord's actions in connection with such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Except to the extent of Landlord's gross negligence, Landlord shall have no responsibility or for any reason be liable to Tenant for any direct or indirect injury to or interference with Tenant's business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or of Tenant's personal property or improvements resulting from the Renovations or Landlord's actions in connection with such Renovations, or for any inconvenience or annoyance occasioned by such Renovations or Landlord's actions. 28. HAZARDOUS SUBSTANCES. A. Prohibition Against Hazardous Substances. Tenant shall not cause or permit any Hazardous Substances to be brought upon, produced, stored, used, discharged or disposed of in or near the Project by Tenant, its agents, employees, contractors or invitees, without Landlord's prior written consent, which Landlord may give or withhold in its sole discretion. Any handling, transportation, storage, treatment, disposal or use of any Hazardous Substances in or about the Project by Tenant, its agents, employees, contractors or invitees shall strictly comply with all applicable Governmental Requirements. Tenant shall be solely responsible for obtaining and complying with all permits necessary for the maintenance and operation of its business, including, without limitation, all permits governing the use, handling, storage, treatment, transport, discharge and disposal of Hazardous Substances. Tenant shall indemnify, defend and hold Landlord harmless from and against any Claims (including, without limitation, diminution in value of the Premises or the Project, damages for the loss or restriction on use of leasable space or of any amenity of the Premises or the Project, damages arising from any adverse impact on marketing of space in the Project, Remedial Work, and sums paid in settlement of claims) which result from or arise out of the use, storage, treatment, transportation, release, or disposal of any Hazardous Substances on or about the Project by Tenant or any Tenant Parties. If any lender or governmental agency shall require testing for Hazardous Substances in the Premises, Tenant shall pay for such testing. Tenant's obligations under this Section shall survive the expiration or earlier termination of this Lease until all Claims within the scope of this Section 27.A are fully, finally, and absolutely barred by the applicable statutes of limitations. B. Landlord Notification. Tenant shall promptly provide Landlord with complete copies of all documents, correspondence and other written materials directed to or from, or relating to, Tenant concerning environmental issues at the Premises or the Project, including, without limitation, documents relating to the release, potential release, investigation, compliance, cleanup and abatement of Hazardous Substances, and any claims, causes of action or other legal documents related to same. Within twenty-four (24) hours of any unauthorized 40 release, spill or discharge of Hazardous Substances, in, on, or about the Premises or Project by Tenant, Tenant shall provide written notice to Landlord fully describing the event. Tenant shall also provide Landlord with a copy of any document or correspondence submitted by or on behalf of Tenant to any regulatory agency as a result of or in connection with the unauthorized release, spill or discharge. Within twenty-four (24) hours of receipt by Tenant of any warning, notice of violation, permit suspension or similar disciplinary measure relating to Tenant's actual or alleged failure to comply with any environmental law, rule, regulation, ordinance or permit, Tenant shall provide written notice to Landlord. C. Remedial Work. If any investigation or monitoring of site conditions or any clean-up, containment, restoration, removal or remediation of Hazardous Substances (collectively, "Remedial Work") is required under any Governmental Requirements due to Tenant's use of Hazardous Substances, then Tenant shall perform or cause to be performed the Remedial Work in compliance with Governmental Requirements or, at Landlord's option, Landlord may cause such Remedial Work to be performed and Tenant shall reimburse Landlord for the reasonable costs thereof within thirty (30) days after demand therefor. All Remedial Work performed by Tenant shall be performed by one or more contractors, selected by Tenant and approved in advance in writing by Landlord, and under the supervision of a consulting engineer selected by Tenant and approved in advance in writing by Landlord. All costs and expenses of such Remedial Work shall be paid by Tenant, including, without limitation, the charges of such contractor(s), the consulting engineer and Landlord's reasonable attorneys' and experts' fees and costs incurred in connection with monitoring or review of such Remedial Work. D. Environmental Questionnaire. Prior to execution of this Lease, Tenant shall complete, execute and deliver to Landlord an Environmental Questionnaire and Disclosure Statement. The completed Environmental Questionnaire shall be deemed incorporated into this Lease for all purposes, and Landlord shall be entitled to rely fully on the information contained therein. Tenant shall immediately update and resubmit to Landlord the Environmental Questionnaire if changes occur in the nature, content, handling, storage, use, treatment, transport, discharge, or disposal of the Hazardous Substances described therein. Attached hereto as Exhibit E is a form of Environmental Questionnaire to be executed in accordance with the foregoing provision. E. Definition of "Hazardous Substances". "Hazardous Substances" means any hazardous or toxic substances, materials or waste which are or become regulated by any local government authority, the state in which the Project is located or the United States government, including those substances described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., any other applicable federal, state or local law, and the regulations adopted under these laws. 29. EXCULPATION. Landlord shall have no personal liability under this Lease; its liability shall be limited solely and exclusively to an amount which is equal to the lesser of (a) the interest of Landlord in the Project or (b) the equity interest Landlord would have in the Project if the Project were encumbered by third-party debt in an amount equal to eighty percent (80%) of the value of the Project (as such value is determined by Landlord). In no event shall Landlord's liability extend to any other property or assets of Landlord, nor shall any officer, 41 director, employee, agent, shareholder, partner, member or beneficiary of Landlord be personally liable for any of Landlord's obligations hereunder. Further, in no event shall Landlord be liable under any circumstances for any consequential damages or for injury or damage to, or interference with, Tenant's business, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill, or loss of use, however occurring. 30. COMMUNICATIONS AND COMPUTER LINES. Tenant may install, maintain, replace, remove or use any communications or computer wires and cables (collectively, the "Lines") at the Project in or serving the Premises, provided that (i) Tenant shall obtain Landlord's prior written consent, use an experienced and qualified contractor approved in writing by Landlord, and comply with all of the other provisions of this Lease, (ii) an acceptable number of spare Lines and space for additional Lines shall be maintained for existing and future occupants of the Project, as determined in Landlord's reasonable opinion, (iii) the Lines therefor (including riser cables) shall be appropriately insulated to prevent excessive electromagnetic fields or radiation, and shall be surrounded by a protective conduit reasonably acceptable to Landlord, (iv) any new or existing Lines servicing the Premises shall comply with all applicable governmental laws and regulations, (v) as a condition to permitting the installation of new Lines, Landlord may require that Tenant remove existing Lines located in or serving the Premises and repair any damage in connection with such removal, and (vi) Tenant shall pay all costs in connection therewith. Landlord reserves the right to require that Tenant remove any Lines located in or serving the Premises which are installed in violation of these provisions, or which are at any time in violation of any laws or represent a dangerous or potentially dangerous condition. 31. OPTION TO EXTEND. A. Subject to the terms and conditions set forth below, Tenant may at its option ("Renewal Option") extend the Term of this Lease for one (1) additional three (3) year period (the "Renewal Term"). If Tenant exercises the Renewal Option hereunder, all of the terms, covenants and conditions of this Lease shall continue in full force and effect during the Renewal Term, including provisions regarding payment of Additional Rent, which shall remain payable on the terms herein set forth, except that (i) the Base Rent payable by Tenant during the Renewal Term shall be as calculated in accordance with Section 31.C below, (ii) Tenant shall continue to possess and occupy the Premises in their existing condition, "as is" as of the commencement of the Renewal Term, and Landlord shall have no obligation to repair (except for normal repairs that are landlord's responsibility during the Term), remodel, improve or alter the Premises, to perform any other construction or other work of improvement upon the Premises, or to provide Tenant with any construction or refurbishing allowance whatsoever, and (iii) Tenant shall have no further rights to extend the Term of this Lease after the expiration of the Renewal Term. B. To exercise the Renewal Option, Tenant must deliver an unconditional binding notice to Landlord via certified mail or hand delivery not sooner than three hundred sixty-five (365) days nor later than one hundred eighty (180) days prior to the expiration of the initial Term of this Lease. Thereafter, the Market Rate for the Renewal Term shall be calculated pursuant to Subsection C below.. Such calculations shall be final and shall not be recalculated at the actual commencement of such Renewal Term. If Tenant fails to timely give its notice of exercise, Tenant will be deemed to have waived its Renewal Option. 42 C. The Base Rent during the Renewal Term shall be ninety-five percent (95%) of the prevailing market rental rate for the Premises, determined by evaluating Comparable Space (as defined below) for a term commencing on or about the commencement date of the Renewal Term (the "Market Rate"). For this purpose, "Comparable Space" shall mean commercial space comparable to the Premises that is (i) not subleased; (ii) not subject to another tenant's expansion rights; (iii) not leased to a tenant that holds an ownership interest in the landlord; (iv) comparable in size, location, and quality to the Premises; (v) leased for a term comparable to the Renewal Term; and (vi) located in the Building or other comparable industrial projects in the vicinity of the Building. In determining the Market Rate, the parties shall include all escalations and take into consideration (a) free rent and other rental abatement concessions, if any, being granted to tenants in connection with the Comparable Space; and (b) tenant improvements or allowances provided or to be provided for the Comparable Space, and the value of the existing improvements in the Premises to Tenant, based on age, quality, and layout of the improvements. D. The Base Rent shall be determined as follows: 1. If Tenant provides Landlord with its unconditional binding notice of exercise pursuant to Subsection B above, then, prior to the commencement of the Renewal Term, Landlord shall deliver to Tenant a good faith written proposal of the Market Rate. Within twenty-one (21) days after receipt of Landlord's proposal, Tenant shall notify Landlord in writing (a) that Tenant accepts Landlord's proposal or (b) that Tenant elects to submit the determination of Market Rate to arbitration in accordance with Subsections 31.D(2) through 31.D(4) below. If Tenant does not give Landlord a timely notice in response to Landlord's proposal, Landlord's proposal of Market Rate shall be binding upon Tenant. 2. If Tenant timely elects to submit the determination of Market Rate to arbitration, Landlord and Tenant shall first negotiate in good faith in an attempt to determine the Market Rate. If Landlord and Tenant are able to agree within thirty (30) days following the delivery of Tenant's notice to Landlord electing arbitration (or if Tenant accepts Landlord's initial proposal), then such agreement shall constitute a determination of Market Rate for purposes of this Section, and the parties shall immediately execute an amendment to this Lease stating the Base Rent for the Renewal Term. If Landlord and Tenant are unable to agree on the Market Rate within such negotiating period, then within fifteen (15) days after the expiration of such negotiating period, the parties shall meet and concurrently deliver to each other in envelopes their respective good faith estimates of the Market Rate (set forth on a net effective rentable square foot per annum basis). If the higher of such estimates is not more than one hundred five percent (105%) of the lower, then the Market Rate shall be the average of the two. Otherwise, the dispute shall be resolved by arbitration in accordance with Subsections (3) and (4) below. 3. Within seven (7) days after the exchange of estimates, the parties shall select as an arbitrator an independent real estate broker with at least five (5) years of experience in leasing industrial space in the metropolitan area in which the Project is located (a "Qualified Appraiser"). If the parties cannot agree on a Qualified Appraiser, then within a second period of seven (7) days, each shall select a Qualified Appraiser and within ten (10) days thereafter the two appointed Qualified Appraisers shall select an independent Qualified Appraiser and the independent Qualified Appraiser shall be the sole arbitrator. If one party shall 43 fail to select a Qualified Appraiser within the second seven (7) day period, then the Qualified Appraiser chosen by the other party shall be the sole arbitrator. 4. Within twenty-one (21) days after submission of the matter to the arbitrator, the arbitrator shall determine the Market Rate by choosing whichever of the estimates submitted by Landlord and Tenant the arbitrator judges to be more accurate. The arbitrator shall notify Landlord and Tenant of its decision, which shall be final and binding. If the arbitrator believes that expert advice would materially assist him, the arbitrator may retain one or more qualified persons to provide expert advice. The fees of the arbitrator and the expenses of the arbitration proceeding, including the fees of any expert witnesses retained by the arbitrator, shall be paid by the party whose estimate is not selected. Each party shall pay the fees of its respective counsel and the fees of any witness called by that party. 5. Until the matter is resolved by agreement between the parties or a decision is rendered in any arbitration commenced pursuant to this Section 31, Tenant's monthly payments of Base Rent during the Renewal Term shall be in an amount equal to Landlord's determination of the Market Rate. Within ten (10) business days following the resolution of such dispute by the parties or the decision of the arbitrator, as applicable, Tenant shall pay to Landlord, or Landlord shall pay to Tenant, the amount of any deficiency or excess, as the case may be, in the Base Rent theretofore paid. E. Except with respect to a Permitted Transfers, Tenant's right to exercise the Renewal Option is personal to, and may be exercised only by, the original named Tenant under this Lease or a Permitted Transferee. If Tenant shall assign this Lease or sublet all of the Premises under a sublease which is effective at any time during the final twelve (12) months of the initial Term, then immediately upon such assignment or subletting, Tenant's right to exercise the Renewal Option shall simultaneously terminate and be of no further force or effect. No assignee or subtenant other than the Permitted Transferees shall have any right to exercise the Renewal Option granted herein. In addition, if Tenant is in default under this Lease (after any applicable notice and cure period) at the time it exercises the Renewal Option or at any time thereafter until the commencement of the Renewal Term or if Tenant has been in default under this Lease (after any applicable notice and cure period) at any time prior to its exercise of the Renewal Option, Landlord shall have, in addition to all of its other rights and remedies under this Lease, the right (but not the obligation) to terminate the Renewal Option and to unilaterally revoke Tenant's exercise of the Renewal Option, in which case this Lease shall expire on the Termination Date, unless earlier terminated pursuant to the terms hereof, and Tenant shall have no further rights under this Lease to renew or extend the Term. 32. PERSONAL PROPERTY. On the Effective Date Landlord shall convey to Tenant all of its right title and interest in and to use all of the furniture, workstations and other personal property located in the Premises as of the date of this Lease (collectively, the "Existing Personal Property") more particularly described in the Bill of Sale attached hereto as Exhibit I. Tenant acknowledges, however, that Landlord makes, and has made, no representations or promises to Tenant as to the quality or condition of the furniture or its suitability for Tenant's purposes. Upon the expiration or earlier termination of this Lease, Tenant, at its sole cost, shall remove all of the Existing Personal Property from the Premises and, without limiting any other 44 of Tenant's obligations under this Lease, repair any and all damage caused to the Building and/or Project resulting from such removal. 33. NO EXISTING TENANT. Landlord represents and warrants that (a) the existing tenant at the Premises has vacated the Premises, (b) the term if the existing lease at the Premises expires on February 28, 2003, and (c) Landlord holds title to the Existing Personal Property. IN WITNESS WHEREOF, the parties hereto have executed this Lease. LANDLORD: CARRAMERICA REALTY CORPORATION, a Maryland corporation By:___________________________________________________________ Christopher S. Peatross Managing Director Date of Execution:____________________________________________ TENANT: SCM MICROSYSTEMS, INC., a Delaware corporation By:___________________________________________________________ Name:_________________________________________________________ Title:________________________________________________________ [chairman, president or vice-president] By:___________________________________________________________ Name:_________________________________________________________ Title:________________________________________________________ [secretary, assistant secretary, chief financial officer or assistant treasurer] Date of Execution:____________________________________________ 45 EXHIBIT A OUTLINE OF PREMISES See Attached EXHIBIT B RULES AND REGULATIONS 1. Tenant shall not place anything, or allow anything to be placed near the glass of any window, door, partition or wall which may, in Landlord's reasonable judgment, appear unsightly from outside of the Project. 2. The sidewalks, exits and entrances located in the common areas of the Project shall not be obstructed by Tenant or used by Tenant for any purposes other than for ingress to and egress from the Premises. Tenant shall lend its full cooperation to keep such areas free from all obstruction and in a clean and sightly condition and shall move all supplies, furniture and equipment as soon as received directly to the Premises and move all such items and waste being taken from the Premises (other than waste customarily removed by employees of the Building) directly to the shipping platform at or about the time arranged for removal therefrom. 3. Tenant shall not bring upon, use or keep in the Premises or the Project any kerosene, gasoline or inflammable or combustible fluid or material, or any other articles deemed hazardous to persons or property, except those disclosed by Tenant in the completed Environmental Questionnaire provided to Landlord pursuant to Section 27.E of the Lease. 4. Landlord shall have sole power to direct electricians as to where and how telephone and other wires are to be introduced. No boring or cutting for wires is to be allowed without Landlord's prior written consent (not to be unreasonably withheld or delayed). The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to Landlord's prior approval (not to be unreasonably withheld or delayed). 5. No additional locks shall be placed upon any doors, windows or transoms in or to the Premises without Landlord's prior written consent (not to be unreasonably withheld or delayed). Tenant shall not change existing locks or the mechanism thereof without Landlord's prior written consent (not to be unreasonably withheld or delayed). Upon termination of the Lease, Tenant shall deliver to Landlord all keys and passes for offices, rooms, parking lot and toilet rooms which shall have been furnished Tenant. If the keys so furnished are lost, Tenant shall pay Landlord therefor. Tenant shall not make, or cause to be made, any such keys and shall order all such keys solely from Landlord and shall pay Landlord for any keys in addition to the two sets of keys originally furnished by Landlord for each lock. 6. Tenant shall not install linoleum, tile, carpet or other floor covering so that the same shall be affixed to the floor of the Premises in any manner except as reasonably approved by Landlord. 7. No furniture, packages, supplies, equipment or merchandise will be received in the Project, except between such hours as shall be reasonably designated by Landlord. 8. Without Landlord's prior written consent (not to be unreasonably withheld or delayed), Tenant shall not use the name of the Project or any picture of the Project in connection 1 with, or in promoting or advertising the business of, Tenant, except Tenant may use the address of the Project as the address of its business. 9. Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage, which may arise from a cause other than Landlord's negligence or willful misconduct, which includes keeping doors locked and other means of entry to the Premises closed and secured. 10. Peddlers, solicitors and beggars shall be reported to the office of the Project or as Landlord otherwise requests. 11. Tenant shall not advertise the business, profession or activities of Tenant conducted in the Project in any manner which violates the letter or spirit of any code of ethics adopted by any recognized association or organization pertaining to such business, profession or activities. 12. Tenant shall not make or permit any noise, vibration or odor to emanate from the Premises, or do anything therein tending to create, or maintain, a nuisance. 13. Tenant acknowledges that Building security problems may occur which may require the employment of extreme security measures in the day-to-day operation of the Project. Accordingly: (a) Landlord may, at any time, or from time to time, or for regularly scheduled time periods, as deemed advisable by Landlord and/or its agents, in their sole discretion, require that persons entering or leaving the Building or the Project identify themselves to watchmen or other employees designated by Landlord, by registration, identification or otherwise. (b) Tenant agrees that it and its employees will cooperate fully with Project employees in the implementation of any and all security procedures. (c) Such security measures shall be the sole responsibility of Landlord, and Tenant shall have no liability for any action taken by Landlord in connection therewith, it being understood that Landlord is not required to provide any security procedures and shall have no liability for such security procedures or the lack thereof. 14. Tenant shall not disturb the quiet enjoyment of any other tenant. 15. Landlord may retain a pass key to the Premises and, subject to the terms of the Lease, be allowed admittance thereto at all times to enable its representatives to examine the Premises from time to time and to exhibit the same and Landlord may place and keep on the windows and doors of the Premises at any time during the last six (6) months of the Term, signs advertising the Premises for Rent. 16. No equipment, mechanical ventilators, awnings, special shades or other forms of window covering shall be permitted either inside or outside the windows of the Premises without 2 Landlord's prior written consent (not to be unreasonably withheld or delayed), and then only at the expense and risk of Tenant, and they shall be of such shape, color, material, quality, design and make as may be reasonably approved by Landlord. 17. Tenant shall not during the term of this Lease canvas or solicit other tenants of the Building for any purpose. 18. Tenant shall not install or operate any phonograph, musical or sound- producing instrument or device, radio receiver or transmitter, TV receiver or transmitter, or similar device in the Building, nor install or operate any antenna, aerial, wires or other equipment inside or outside the Building, nor operate any electrical device from which may emanate electrical waves which may interfere with or impair radio or television broadcasting or reception from or in the Building or elsewhere, without in each instance Landlord's prior written approval (not to be unreasonably withheld or delayed). The use thereof, if permitted, shall be subject to control by Landlord to the end that others shall not be disturbed. 19. Tenant shall promptly remove all rubbish and waste from the Premises. 20. Tenant shall not exhibit, sell or offer for sale, rent or exchange in the Premises or at the Project any article, thing or service, except those ordinarily embraced within the use of the Premises specified in Section 6 of this Lease, without Landlord's prior written consent. 21. Tenant shall not overload any floors in the Premises or any public corridors or elevators in the Building. 22. Tenant shall not do any painting in the Premises, or mark, paint, cut or drill into, drive nails or screws into, or in any way deface any part of the Premises or the Building, outside or inside, without Landlord's prior written consent (not to be unreasonably withheld or delayed). 23. Whenever Landlord's consent, approval or satisfaction is required under these Rules, then unless otherwise stated, any such consent, approval or satisfaction must be obtained in advance, such consent or approval may be granted or withheld in Landlord's reasonable discretion, and Landlord's satisfaction shall be determined in its reasonable judgment. 24. Tenant and its employees shall cooperate in all fire drills conducted by Landlord in the Building. 3 EXHIBIT C TENANT IMPROVEMENT AGREEMENT This Tenant Improvement Agreement ("Agreement") is an integral part of the Lease dated March 3, 2003 ("Lease") relating to certain Premises described therein, and except where clearly inconsistent or inapplicable, the provisions of the Lease are incorporated into this Agreement. Capitalized terms used in this Agreement not otherwise defined herein shall have the meaning given such terms in the Lease. Landlord and Tenant agree as follows with respect to the Tenant Improvements, if any, to be installed in the Premises: 1. INITIAL TENANT IMPROVEMENTS. (a) Landlord shall cause to be performed as soon as reasonably practicable the initial alterations, additions and improvements (the "Tenant Improvements") to the Premises identified on the Space Plan and related Notes attached to the Lease as Exhibit C-1 (collectively, the "Approved Space Plan"), subject to and in accordance with Landlord's standard specifications for the Building ("Building Standard Specifications") including, but not limited to, the standard building materials which are currently being used by Landlord for the Building. Landlord will provide Tenant with a copy of the Building Standard Specifications upon Tenant's request. The work of constructing the Tenant Improvements is referred to as "Landlord's Work". (b) Following execution of the Lease, Landlord shall cause to be prepared, at its sole cost and expense, and delivered to Tenant, for Tenant's review and approval, final working drawings for Landlord's Work (the "Final Plans"). Tenant shall have deemed to approved the Final Plans if it fails to notify Landlord of its disapproval within three (3) business days after delivery of the Final Plans. Tenant may only disapprove the Final Plans if the Final Plans differ from the Approved Space Plan or the Building Standard Specifications. The Tenant Improvements shown on the Final Plans shall be substantially consistent with those initially identified on the Approved Space Plan, and Landlord shall cause Landlord's Work to be performed substantially as shown on the Final Plans, excepting only minor variations (i.e., variations which are not inconsistent with the intent of the Final Plans) as Landlord may deem advisable, and any Change Orders approved by Landlord. 2. CHANGE ORDERS. If, prior to the Substantial Completion Date, Tenant shall request improvements or changes to the Premises in addition to, revision of or substitution for the Tenant Improvements identified on the Approved Space Plan, including, without limitation, any request for above-Building standard finishes or other detailed specifications (individually or collectively, "Change Order Requests"), Tenant shall deliver to Landlord for its approval, which approval shall not be unreasonably withheld or delayed, plans and specifications for such Change Order Requests. If Landlord does not approve of the plans for such Change Order Requests, Landlord shall advise Tenant of the revisions required. Tenant shall revise and redeliver the plans and specifications to Landlord within five (5) days of Landlord's advice or Tenant shall be deemed to have abandoned its request for such Change Order Requests. Tenant shall pay for the preparation and revision of plans and specifications relating to Change Order Requests, and any increase in the cost of construction of the Tenant Improvements resulting from Change Order Requests. 1 3. TENANT IMPROVEMENT COSTS. Landlord shall bear the cost of construction of the Tenant Improvements, except for the following, which shall be Tenant's responsibility: (a) any increase in the cost of construction of the Tenant Improvements resulting from Change Order Requests, and (b) any costs and expenses incurred by Landlord in connection with, or as a consequence of, any Tenant Delay (as defined in Section 4 below). If Landlord and Tenant agree on any Change Order Requests as provided in Section 2 above, Landlord shall furnish Tenant with an invoice specifying the estimated increase in the cost of the Tenant Improvements resulting therefrom, and Tenant shall pay such estimated increase to Landlord within three (3) days thereafter. Tenant acknowledges and agrees that any such invoice shall be based solely on an estimate of the increase in the cost of the Tenant Improvements, and shall not be binding on Landlord or Landlord's contractor, nor shall Tenant's payment on account of such estimate limit Tenant's obligation hereunder to pay the amount specified in clauses (a) and (b) above. 4. SUBSTANTIAL COMPLETION. The "Substantial Completion Date" shall be the date that Landlord, its architect, engineer or construction manager determines that Landlord's Work has been completed, except for (A) finishing details, minor omissions, mechanical adjustments, and similar items of the type customarily found on an architectural punch-list (the "Punch-List Items"), the correction or completion of which will not substantially interfere with Tenant's occupancy and use of the Premises; and (B) trade fixtures, workstations, telecommunications or computer cabling or built-in furniture or equipment to be installed by Tenant ("Substantial Completion"); provided, however, that if Landlord is delayed in completing Landlord's Work or in delivering possession of the Premises to Tenant as a result of any Tenant Delay (as defined below), the Substantial Completion Date shall be deemed to have occurred on the date the Substantial Completion Date would have occurred in the absence of such Tenant Delay, as reasonably determined by Landlord or Landlord's architect. Tenant shall be responsible for and shall pay any costs and expenses incurred by Landlord in connection with, or as a consequence of, any Tenant Delay. As used in this Lease, the term "Tenant Delay" means a delay in the completion of Landlord's Work or the delivery of possession of the Premises to Tenant, to the extent caused by the act, omission, neglect or failure of Tenant or any of Tenant's agents, employees, contractors or subcontractors, including, without limitation, any Change Order Requests. Tenant shall have the right to submit (a) a list of Punch-List Items to Landlord within thirty (30) days of Substantial Completion and (b) a list of latent defects within one (1) year following the Substantial Completion Date, setting forth any defective item of construction, and provided that Tenant has submitted such lists within the foregoing periods, Landlord shall promptly cause such items to be corrected. 5. CONDITION OF TENANT IMPROVEMENTS. Effective upon delivery of the Premises to Tenant, Landlord warrants that (a) construction of the Tenant Improvements was performed in accordance with all Laws and the Final Plan and in a good and workmanlike manner, and (b) all material and equipment installed in the Premises conformed to the Final Plan and was new and otherwise of good quality. 6. MISCELLANEOUS. Terms used in this Exhibit C shall have the meanings assigned to them in the Lease. The terms of this Exhibit C are subject to the terms of the Lease. 2 EXHIBIT C-1 LANDLORD'S WORK As provided in Section 3.A of the Lease to which this Exhibit is attached, Landlord is leasing the Premises to Tenant "as is", without any obligation to alter, remodel, improve, repair or decorate any part of the Premises and without any express or implied representations or warranties of any kind, except for the following Landlord's Work: 1. Carpets to be cleaned. The exception being the lobby carpet which shall be replaced. 2. New paint throughout the Premises. 3. All windows (inside and out) shall be cleaned and washed. 4. All interior blinds to be cleaned. 5. All tile floors shall be stripped and waxed. 6. An additional 10' counter in the kitchen area shall be installed (without a sink). 7. VCT flooring shall be installed in warehouse area. 8. Replace all broken, discolored or odd variety ceiling tiles. 9. Replace all burned out or discolored fluorescent bulbs. 10. Install drop ceiling, HVAC and lighting in warehouse area to create a lab environment, including painting the walls and installing insulation, a ceiling and carpet to conform to the remainder of the Premises 11. Replace grade door with a glass version grade door. 12. Remove blinds and screens in lobby. 13. Convert the janitor closet in the training room to a unisex shower (shall be completed by Landlord at Tenant's sole cost). 3 APPROVED SPACE PLAN See Attached 4 EXHIBIT D COMMENCEMENT DATE CONFIRMATION THIS CONFIRMATION AGREEMENT is entered into as of _______________ __, 20__ by and between CARRAMERICA REALTY CORPORATION, a Maryland corporation ("Landlord"), and SCM MICROSYSTEMS, INC., a Delaware corporation ("Tenant"), with respect to that certain Lease dated as of March 3, 2003 (the "Lease") respecting certain premises (the "Premises") located in the building known as 225-231 Charcot Avenue, San Jose, California. Pursuant to Section 1.A of the Lease, Landlord and Tenant hereby confirm and agree that the Commencement Date (as defined in the Lease) is ________________ __, 20___ and that the Termination Date (as defined in the Lease) is _______________ __, 20__. This Confirmation Agreement supplements, and shall be a part of, the Lease. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Confirmation Agreement as of the day and year first above written. LANDLORD: CARRAMERICA REALTY CORPORATION, a Maryland corporation By:___________________________________________________________ Christopher S. Peatross Managing Director Date of Execution:____________________________________________ TENANT: SCM MICROSYSTEMS, INC. a Delaware corporation By:___________________________________________________________ Name:_________________________________________________________ Title:________________________________________________________ Date of Execution:____________________________________________ 1 EXHIBIT E ENVIRONMENTAL QUESTIONNAIRE As a new tenant of the Project, answer based upon: (1) any existing or previous operations of the same kind which Tenant has conducted elsewhere, and (2) Tenant's plans for the new space. For each answer, specify which operation(s) you are describing. 1. SOLID WASTE. a. Does the facility have an EPA Hazardous Waste generator number? b. Does the facility produce Hazardous Waste? Other chemical waste? c. Describe each type of waste generated (whether or not hazardous). d. If the facility produces hazardous waste, is it classified as a large quantity generator, small quantity generator or conditionally exempt small quantity generator? e. Are hazardous waste manifests maintained for three years on site? f. Please identify the waste disposal contractor. 2. WASTEWATER. a. Does the facility produce any "process wastewater," meaning any wastewater that has come in contact with chemicals or other materials in process (essentially, any discharge of water other than from sinks and toilets)? b. If so, please describe each type of process wastewater produced. c. Is any water discharged down the floor drains? d. Does the facility have a permit for its wastewater discharges? 3. AIR EMISSIONS. a. Does the facility emit any chemicals or wastes into the air? b. Does the facility have an air permit? c. Does the facility treat any of its air emissions to remove air pollutants? d. Describe the ventilation system for the facility. 4. GENERAL. a. Has the facility ever been charged with any violation of, or found in violation of any environmental requirements? If yes, please describe. b. Are you aware of any testing of soil or groundwater to determine whether any contamination exists in or around the facility? If so, please provide results. c. Please describe any hazardous materials present on site, their respective quantities and the containment measures for those materials. EXHIBIT H INITIAL ALTERATIONS NO INITIAL ALTERATIONS APPROVED PRIOR TO EXECUTION EXHIBIT I BILL OF SALE FOR VALUABLE CONSIDERATION, receipt and adequacy of which is hereby acknowledged, the undersigned, Carramerica Realty Corporation, a Maryland corporation ("Landlord"), hereby sells, transfers, assigns and conveys to SCM Microsystems, Inc., a Delaware corporation ("Tenant"), all of Landlord's right, title and interest, if any, in and to the furniture, workstations and other personal property (collectively, the "Personal Property") described on Schedule 1 attached hereto and made a part hereof. This Bill of Sale is given pursuant to that certain Lease Agreement ("Lease") dated as of March 3, 2003 by and between Landlord and Tenant, pertaining to certain premises located at 225 Charcot Avenue, San Jose, California, as more particularly described in the Lease (the Premises"). Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Lease. Tenant acknowledges that the Personal Property is being conveyed by Landlord and accepted by Tenant "AS IS, WHERE IS", AND WITHOUT ANY WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, IT BEING THE INTENTION OF LANDLORD AND TENANT EXPRESSLY TO NEGATE AND EXCLUDE ALL WARRANTIES, INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE, WARRANTIES CREATED BY ANY AFFIRMATION OF FACT OR PROMISE OR BY ANY DESCRIPTION OF THE PROPERTY CONVEYED HEREUNDER, AND ALL OTHER WARRANTIES WHATSOEVER CONTAINED IN OR CREATED BY THE CALIFORNIA COMMERCIAL CODE. This Bill of Sale may be executed in one or more counterparts, each of which so executed and delivered shall be deemed an original, but all of which taken together shall constitute but one and the same instrument. [SIGNATURES FOLLOW ON NEXT PAGE] IN WITNESS WHEREOF, Landlord and Tenant have executed this Bill of Sale as of March ___, 2003. LANDLORD: CARRAMERICA REALTY CORPORATION, a Maryland corporation By:___________________________________________________________ Christopher S. Peatross Managing Director TENANT: SCM MICROSYSTEMS, INC., a Delaware corporation By:___________________________________________________________ Name:_________________________________________________________ Title:________________________________________________________ SCHEDULE 1 1. All Westinghouse cubicles including chairs in the Premises. 2. All office furniture including chairs in the Premises. 3. All tables and chairs in the training room in the Premises. 4. All conference room furniture in the Premises. EX-99.1 5 f89710exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert Schneider, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of SCM Microsystems, Inc. on Form 10-Q for the quarter ended March 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of SCM Microsystems, Inc. By: /s/ ROBERT SCHNEIDER -------------------------------- Name: Robert Schneider Title: Chief Executive Officer I, Andrew Warner, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of SCM Microsystems, Inc. on Form 10-Q for the quarter ended March 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of SCM Microsystems, Inc. By: /s/ ANDREW WARNER -------------------------------- Name: Andrew Warner Title: Vice President, Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.21

                                                                   EXHIBIT 10.21

                                                            10/31/01 CALWESTMTIN
                                                            CALIFORNIA FORM 1/03

                                      LEASE

                        CALWEST INDUSTRIAL HOLDINGS, LLC,
                      A DELAWARE LIMITED LIABILITY COMPANY
                                    Landlord

                                       and

                             SCM MICROSYSTEMS, INC.,
                             A DELAWARE CORPORATION
                                     Tenant



                                TABLE OF CONTENTS



                                                                                                                           PAGE
                                                                                                                        
1.       USE AND RESTRICTIONS ON USE....................................................................................     1

2.       TERM...........................................................................................................     2

3.       RENT...........................................................................................................     3

4.       RENT ADJUSTMENTS...............................................................................................     4

5.       SECURITY DEPOSIT...............................................................................................     7

6.       ALTERATIONS....................................................................................................     7

7.       REPAIR.........................................................................................................     9

8.       LIENS..........................................................................................................    10

9.       ASSIGNMENT AND SUBLETTING......................................................................................    10

10.      INDEMNIFICATION................................................................................................    13

11.      INSURANCE......................................................................................................    13

12.      WAIVER OF SUBROGATION..........................................................................................    14

13.      SERVICES AND UTILITIES.........................................................................................    14

14.      HOLDING OVER...................................................................................................    14

15.      SUBORDINATION..................................................................................................    14

16.      RULES AND REGULATIONS..........................................................................................    15

17.      REENTRY BY LANDLORD............................................................................................    15

18.      DEFAULT........................................................................................................    16

19.      REMEDIES.......................................................................................................    17

20.      TENANT'S BANKRUPTCY OR INSOLVENCY..............................................................................    18

21.      QUIET ENJOYMENT................................................................................................    19

22.      CASUALTY.......................................................................................................    19

23.      EMINENT DOMAIN.................................................................................................    20

24.      SALE BY LANDLORD...............................................................................................    20

25.      ESTOPPEL CERTIFICATES..........................................................................................    20

26.      SURRENDER OF PREMISES..........................................................................................    21

27.      NOTICES........................................................................................................    21

28.      TAXES PAYABLE BY TENANT........................................................................................    22

29.      INTENTIONALLY OMITTED..........................................................................................    22

30.      DEFINED TERMS AND HEADINGS.....................................................................................    22

31.      TENANT'S AUTHORITY.............................................................................................    22

32.      FINANCIAL STATEMENTS AND CREDIT REPORTS........................................................................    22

33.      COMMISSIONS....................................................................................................    23

34.      TIME AND APPLICABLE LAW........................................................................................    23

35.      SUCCESSORS AND ASSIGNS.........................................................................................    23

36.      ENTIRE AGREEMENT...............................................................................................    23

37.      EXAMINATION NOT OPTION.........................................................................................    23


                                        i




                                                                                                                        
38.      RECORDATION....................................................................................................    23

39.      LIMITATION OF LANDLORD'S LIABILITY.............................................................................    23

40.      RENEWAL OPTION.................................................................................................    23

41.      SIGNAGE........................................................................................................    23

42.      INTENTIONALLY OMITTED..........................................................................................    23

43.      ROOF RIGHTS FOR DEVICE.........................................................................................    23



EXHIBIT A - FLOOR PLAN DEPICTING THE PREMISES

EXHIBIT A-1 - SITE PLAN DEPICTING THE PREMISES

EXHIBIT B - INITIAL ALTERATIONS

EXHIBIT C - COMMENCEMENT DATE MEMORANDUM

EXHIBIT D - RULES AND REGULATIONS

EXHIBIT E - SIGN SPECIFICATIONS

EXHIBIT F- FORM OF SUBORDINATION, NONDISTRUBANCE AND ATTORNMENT AGREEMENT

                                       ii



                        MULTI-TENANT INDUSTRIAL NET LEASE

                                 REFERENCE PAGES

BUILDING:                            Scott Creek Business Park

LANDLORD:                            CALWEST INDUSTRIAL HOLDINGS, LLC,
                                     A DELAWARE LIMITED LIABILITY
                                     COMPANY

LANDLORD'S ADDRESS:                  5934 Gibraltar Drive, Suite 102
                                     Pleasanton, CA 94588

WIRE INSTRUCTIONS AND/OR ADDRESS     CalWest Industrial Holdings, LLC
FOR RENT PAYMENT:                    File #30077
                                     P.O. Box 60000
                                     San Francisco, CA 94160-0001

LEASE REFERENCE DATE:
                                     March 18, 2003
TENANT:                              SCM MICROSYSTEMS, INC.,
                                     A DELAWARE CORPORATION

TENANT'S NOTICE ADDRESS:

       (a) As of beginning of Term:  466 Kato Terrace
                                     Fremont, CA 94539
                                     Attention: Chief Financial Officer

       (b) Prior to beginning of     47211 Bayside Parkway
           Term (if different):      Fremont, CA 94538
                                     Attention: Chief Financial Officer

PREMISES ADDRESS:                    466 Kato Terrace, Fremont, California

PREMISES RENTABLE AREA:              approximately 18,322 sq. ft. (for outline
                                     of Premises see Exhibit A)

USE:                                 General office use, video software
                                     design, software engineering,
                                     laboratory, warehouse, engineering, sales
                                     and related uses in conformity with the
                                     municipal zoning requirements of the
                                     City of Fremont.

SCHEDULED COMMENCEMENT DATE:         April 15, 2003

TERM OF LEASE:                       Approximately thirty-six (36) months and
                                     sixteen (16) days beginning on the
                                     Commencement Date and ending on the
                                     Termination Date.

TERMINATION DATE:                    April 30, 2006

                                     -iii-



ANNUAL RENT and MONTHLY INSTALLMENT OF RENT(Article 3)



- -------------------------------------------------------------------------------------------------------
        PERIOD             RENTABLE SQUARE       ANNUAL RENT                        MONTHLY INSTALLMENT
   FROM       THROUGH         FOOTAGE          PER SQUARE FOOT      ANNUAL RENT          OF RENT
- -------------------------------------------------------------------------------------------------------
                                                                     
4/15/2003    4/30/2004         18,322              $8.40            $153,904.80          $12,825.40
- -------------------------------------------------------------------------------------------------------
 5/1/2004    4/30/2005         18,322              $8.64            $158,302.08          $13,191.84
- -------------------------------------------------------------------------------------------------------
 5/1/2005    4/30/2006         18,322              $8.88            $162,699.36          $13,558.28
- -------------------------------------------------------------------------------------------------------


INITIAL ESTIMATED MONTHLY INSTALLMENT   $  6,229.00
OF RENT ADJUSTMENTS (Article 4)

TENANT'S PROPORTIONATE SHARE:                  46.8%

SECURITY DEPOSIT:                       $ 20,000.00

ASSIGNMENT/SUBLETTING FEE               $  1,000.00

REAL ESTATE BROKER DUE COMMISSION:      Colliers International
                                        Cornish and Carey Commercial

TENANT'S SIC CODE:                             7372

The Reference Pages information is incorporated into and made a part of the
Lease. In the event of any conflict between any Reference Pages information and
the Lease, the Lease shall control. This Lease includes Exhibits A through F,
all of which are made a part of this Lease.

LANDLORD:                                            TENANT:

CALWEST INDUSTRIAL HOLDINGS, LLC,                    SCM MICROSYSTEMS, INC.,
A DELAWARE LIMITED LIABILITY COMPANY                 A DELAWARE CORPORATION

By:  RREEF Management Company,
     a Delaware corporation, its Property Manager

By: ______________________________                By: _________________________

Name: Timothy DeGoosh                             Name: _______________________

Title: District Manager                           Title: ______________________

Dated: _______________________, 2003              Dated: _________________, 2003

                                       iv




                                      LEASE

         By this Lease Landlord leases to Tenant and Tenant leases from Landlord
the Premises in the Building as set forth and described on the Reference Pages.
The Premises are depicted on the floor plan attached hereto as Exhibit A, and
the Building is depicted on the site plan attached hereto as Exhibit A-1. The
Reference Pages, including all terms defined thereon, are incorporated as part
of this Lease.

1.   USE AND RESTRICTIONS ON USE.

         1.1      The Premises are to be used solely for the purposes set forth
                  on the Reference Pages and for no other uses without
                  Landlord's prior written consent which may be withheld in
                  Landlord's sole discretion. Tenant shall not do or permit
                  anything to be done in or about the Premises which will in any
                  way obstruct or interfere with the rights of other tenants or
                  occupants of the Building or injure, annoy, or disturb them,
                  or allow the Premises to be used for any improper, immoral,
                  unlawful, or objectionable purpose, or commit any waste.
                  Tenant shall not do, permit or suffer in, on, or about the
                  Premises the sale of any alcoholic liquor without the written
                  consent of Landlord first obtained. Tenant shall comply with
                  all governmental laws, ordinances and regulations applicable
                  to the use of the Premises and its occupancy and shall
                  promptly comply with all governmental orders and directions
                  for the correction, prevention and abatement of any violations
                  in the Building or appurtenant land, caused or permitted by,
                  or resulting from the specific use by, Tenant, or in or upon,
                  or in connection with, the Premises, all at Tenant's sole
                  expense. Tenant shall not do or permit anything to be done on
                  or about the Premises or bring or keep anything into the
                  Premises which will in any way increase the rate of,
                  invalidate or prevent the procuring of any insurance
                  protecting against loss or damage to the Building or any of
                  its contents by fire or other casualty or against liability
                  for damage to property or injury to persons in or about the
                  Building or any part thereof. Landlord will, at Landlord's
                  expense, perform all acts required to comply with laws, rules
                  or regulations in effect as of the date of this Lease and as
                  interpreted and enforced in the county in which the Premises
                  is located, with respect to the foregoing as the same affect
                  the Premises and the Building. Landlord will perform all acts
                  required to comply with laws, rules or regulations in effect
                  after the date of this Lease with respect to the foregoing as
                  the same affect the Building and the common areas and such
                  costs shall be a part of Expenses as provided in Article 4 of
                  this Lease. Landlord will perform all acts required to comply
                  with laws, rules or regulations in effect after the date of
                  this Lease with respect to the foregoing as the same affect
                  the Premises and such costs shall be the sole responsibility
                  of Tenant. To the extent the foregoing is a cost that is the
                  responsibility of Tenant as provided herein, Tenant shall pay
                  to Landlord, within 10 days following Landlord's written
                  demand therefor, which demand shall be accompanied by
                  documented evidence reasonably acceptable to Tenant reflecting
                  all such costs, the costs and expenses related to such
                  compliance work, plus any and all third-party costs actually
                  incurred by Landlord in connection with such work.
                  Notwithstanding the foregoing, Landlord shall have the right
                  to contest any alleged violation of any laws, rule or
                  regulation in good faith, including, without limitation, the
                  right to apply for and obtain a waiver or deferment of
                  compliance, the right to assert any and all defenses allowed
                  by law and the right to appeal any decisions, judgments or
                  rulings to the fullest extent permitted by law. Landlord,
                  after the exhaustion of any and all rights to appeal or
                  contest, will make all repairs, additions, alterations or
                  improvements necessary to comply with the terms of any final
                  order or judgment, provided that if Landlord elects not to
                  contest any alleged violation, Landlord will promptly make
                  necessary all repairs, additions, alterations or improvements.
                  Notwithstanding anything to the contrary contained herein,
                  Tenant, not Landlord, shall be responsible for the correction
                  of any violations that arise out of or in connection with the
                  specific nature of Tenant's business in the Premises (other
                  than general office use), the acts or omissions of Tenant, its
                  agents, employees or contractors, Tenant's arrangement of any
                  furniture, equipment or other property in the Premises, any
                  repairs, alterations, additions or improvements performed by
                  or on behalf of Tenant and any design or configuration of the
                  Premises.

         1.2      Tenant shall not, and shall not direct, suffer or permit any
                  of its agents, contractors, employees, licensees or invitees
                  (collectively, the "Tenant Entities") to at any time handle,
                  use, manufacture, store or dispose of in or about the Premises
                  or the Building any (collectively "Hazardous Materials")
                  flammables, explosives, radioactive materials, hazardous
                  wastes or materials, toxic wastes or materials, or other
                  similar substances, petroleum products or derivatives or any
                  substance subject to regulation by or under any federal, state
                  and local laws and ordinances relating to the protection of
                  the environment or the keeping, use or disposition of
                  environmentally hazardous materials, substances, or wastes,
                  presently in effect or hereafter adopted, all amendments to
                  any of them, and all rules and regulations issued pursuant to
                  any of such laws or ordinances



                  (collectively "Environmental Laws"), nor shall Tenant suffer
                  or permit any Hazardous Materials to be used in any manner not
                  fully in compliance with all Environmental Laws, in the
                  Premises or the Building and, if the same may affect or impact
                  the Building and/or the parcel of land upon which the Building
                  is located, or any portions of land benefiting the foregoing
                  by easement, license or other similar rights, any appurtenant
                  land, or allow the environment to become contaminated with any
                  Hazardous Materials if the same may affect or impact the
                  Building and/or the parcel of land upon which the Building is
                  located, or any portions of land benefiting the foregoing by
                  easement, license or other similar rights. Notwithstanding the
                  foregoing, Tenant may handle, store, use or dispose of
                  products containing small quantities of Hazardous Materials
                  (such as aerosol cans containing insecticides, toner for
                  copiers, paints, paint remover and the like) to the extent
                  customary and necessary for the use of the Premises for
                  general office purposes; provided that Tenant shall always
                  handle, store, use, and dispose of any such Hazardous
                  Materials in a safe and lawful manner and never allow such
                  Hazardous Materials to contaminate the Premises, Building and
                  appurtenant land or the environment. Tenant shall protect,
                  defend, indemnify and hold each and all of the Landlord
                  Entities (as defined in Article 30) harmless from and against
                  any and all loss, claims, liability or costs (including court
                  costs and attorney's fees) incurred by reason of any actual or
                  asserted failure of Tenant to fully comply with all applicable
                  Environmental Laws, or the presence, handling, use or
                  disposition in or from the Premises of any Hazardous Materials
                  by Tenant or any Tenant Entity (even though permissible under
                  all applicable Environmental Laws or the provisions of this
                  Lease), or by reason of any actual or asserted failure of
                  Tenant to keep, observe, or perform any provision of this
                  Section 1.2. As of the date hereof, Landlord has not received
                  notice from any governmental agencies that the Building is in
                  violation of any Environmental Laws. Further, to Landlord's
                  actual knowledge, there are no Hazardous Materials at the
                  Building other than small quantities of Hazardous Materials
                  (such as aerosol cans containing insecticides, toner for
                  copiers, paints, paint remover and the like) to the extent
                  customary and necessary for the use of the Premises for
                  general office purposes. For purposes of this Section,
                  "Landlord's actual knowledge" shall be deemed to mean and
                  limited to the current actual knowledge of Nicole Aamoth,
                  Property Manager for the Building, at the time of execution of
                  the Lease and not any implied, imputed, or constructive
                  knowledge of said individual or of Landlord or any parties
                  related to or comprising Landlord and without any independent
                  investigation or inquiry having been made or any implied duty
                  to investigate or make any inquiries; it being understood and
                  agreed that such individual shall have no personal liability
                  in any manner whatsoever hereunder or otherwise related to the
                  transactions contemplated hereby.

         1.3      Tenant and the Tenant Entities will be entitled to the
                  non-exclusive use of the common areas of the Building as they
                  exist from time to time during the Term, including the parking
                  facilities, subject to Landlord's reasonable rules and
                  regulations regarding such use. The rules and regulations
                  shall be generally applicable, and generally applied in the
                  same manner, to all tenants of the Building. However, in no
                  event will Tenant or the Tenant Entities park more vehicles in
                  the parking facilities than Tenant's Proportionate Share of
                  the total parking spaces available for common use. Landlord
                  hereby grants to Tenant and persons designated by Tenant a
                  license to use up to 73 non-reserved parking spaces in the
                  surface parking facility servicing the Building on a
                  nonexclusive basis. The foregoing shall not be deemed to
                  provide Tenant with an exclusive right to any parking spaces
                  or any guaranty of the availability of any particular parking
                  spaces or any specific number of parking spaces.

2.   TERM.

         2.1      The Term of this Lease shall begin on the date ("Commencement
                  Date") which shall be the later of the Scheduled Commencement
                  Date as shown on the Reference Pages and the date that
                  Landlord shall tender possession of the Premises to Tenant,
                  and shall terminate on the date as shown on the Reference
                  Pages ("Termination Date"), unless sooner terminated by the
                  provisions of this Lease. Notwithstanding the foregoing, if
                  the Termination Date, as determined herein, does not occur on
                  the last day of a calendar month, the Term shall be deemed
                  automatically extended by the number of days necessary to
                  cause the Termination Date to occur on the last day of the
                  last calendar month of the Term. Tenant shall pay the Monthly
                  Installment of Rent and Additional Rent proportionately
                  applicable to such additional days at the same rate payable
                  for the portion of the last calendar month immediately
                  preceding such extension. Landlord shall deliver possession of
                  the Premises to Tenant vacant and in broom-clean condition.
                  Except to the extent caused by Tenant, or any of Tenant's
                  related parties, agents, employees, invitees, customers or
                  contractors, as of the date Landlord delivers possession of
                  the Premises to Tenant, the base Building electrical, heating,
                  ventilation and air conditioning, mechanical and plumbing
                  systems servicing the Premises shall be in good order and
                  satisfactory condition. Tenant shall have sixty (60) days from
                  the date

                                        2



                  Landlord delivers possession of the Premises to Tenant in
                  which to discover and notify Landlord of any latent defects in
                  the Premises. Except to the extent caused or exacerbated by
                  Tenant or any of Tenant's employees, invitees, agents,
                  licensees or contractors, Landlord shall be responsible for
                  the cost and correction of any such latent defects with
                  respect to which it received timely notice from Tenant. Tenant
                  shall, at Landlord's request, execute and deliver a memorandum
                  agreement provided by Landlord in the form of Exhibit C
                  attached hereto, setting forth the actual Commencement Date,
                  Termination Date and, if necessary, a revised rent schedule.
                  Should Tenant fail to do so within thirty (30) days after
                  Landlord's request, the information set forth in such
                  memorandum provided by Landlord shall be conclusively presumed
                  to be agreed and correct. Notwithstanding the foregoing, the
                  Commencement Date shall be extended beyond the Scheduled
                  Commencement Date only as a result of any actual delay in
                  Substantial Completion (as defined in Exhibit B to this Lease)
                  of the Improvements beyond the Scheduled Commencement Date
                  which delay results directly from an act or omission by
                  Landlord; provided, however, that Tenant shall provide to
                  Landlord prior written notice of such delay at the time it
                  occurs (but in no event later than two (2) business days
                  thereafter) and Landlord shall have one (1) business day after
                  its receipt of Tenant's notice to cure such delay prior to the
                  extension of the Commencement Date beyond the Scheduled
                  Commencement Date.

         2.2      Tenant agrees that in the event of the inability of Landlord
                  to deliver possession of the Premises on the Scheduled
                  Commencement Date for any reason, Landlord shall not be liable
                  for any damage resulting from such inability, but Tenant shall
                  not be liable for any rent until the time when Landlord can,
                  after notice to Tenant, deliver possession of the Premises to
                  Tenant. No such failure to give possession on the Scheduled
                  Commencement Date shall affect the other obligations of Tenant
                  under this Lease, except that if Landlord is unable to deliver
                  possession of the Premises within one hundred twenty (120)
                  days after the Scheduled Commencement Date (other than as a
                  result of strikes, shortages of materials, holdover tenancies
                  or similar matters beyond the reasonable control of Landlord
                  and Tenant is notified by Landlord in writing as to such
                  delay), Tenant shall have the option to terminate this Lease
                  unless said delay is as a result of: (a) Tenant's failure to
                  agree to plans and specifications and/or construction cost
                  estimates or bids; (b) Tenant's request for materials,
                  finishes or installations other than Landlord's standard
                  except those, if any, that Landlord shall have expressly
                  agreed to furnish without extension of time agreed by
                  Landlord; (c) Tenant's change in any plans or specifications;
                  or, (d) performance or completion by a party employed by
                  Tenant (each of the foregoing, a "Tenant Delay"). If any delay
                  is the result of a Tenant Delay, the Commencement Date and the
                  payment of rent under this Lease shall be accelerated by the
                  number of days of such Tenant Delay. In the event Tenant
                  terminates this Lease in accordance with the foregoing, any
                  monies previously paid by Tenant to Landlord shall be
                  reimbursed to Tenant.

         2.3      In the event Landlord permits Tenant, or any agent, employee
                  or contractor of Tenant, to enter, use or occupy the Premises
                  prior to the Commencement Date, such entry, use or occupancy
                  shall be subject to all the provisions of this Lease other
                  than the payment of the Monthly Installment of Rent,
                  including, without limitation, Tenant's compliance with the
                  insurance requirements of Article 11. Said early possession
                  shall not advance the Termination Date. Tenant shall pay
                  Tenant's Proportionate Share of Expenses and Taxes during any
                  early entry upon the Premises prior to the Commencement Date.
                  Landlord hereby grants Tenant the right to enter the Premises,
                  at Tenant's sole risk, following execution of this Lease
                  solely for the purpose of construction of Tenant's
                  Improvements (as defined in Exhibit B).

3.   RENT.

         3.1      Tenant agrees to pay to Landlord the Annual Rent in effect
                  from time to time by paying the Monthly Installment of Rent
                  then in effect on or before the first day of each full
                  calendar month during the Term, except that the first Monthly
                  Installment of Rent and the Security Deposit shall be paid
                  upon the execution of this Lease. The Monthly Installment of
                  Rent in effect at any time shall be one-twelfth (1/12) of the
                  Annual Rent in effect at such time. Rent for any period during
                  the Term which is less than a full month shall be a prorated
                  portion of the Monthly Installment of Rent based upon the
                  number of days in such month. Said rent shall be paid to
                  Landlord, without deduction or offset and without notice or
                  demand, at the Rent Payment Address, as set forth on the
                  Reference Pages, or to such other person or at such other
                  place as Landlord may from time to time designate in writing.
                  If an Event of Default occurs three (3) times or more in any
                  twelve (12) month period during the Term, Landlord may require
                  that Tenant submit Base Rent and Tenant's Proportionate Share
                  of Expenses and Taxes to Landlord on a quarterly basis (due on
                  or before the first day of each calendar quarter) for the
                  following 12 month period. Unless specified in this

                                        3



                  Lease to the contrary, all amounts and sums payable by Tenant
                  to Landlord pursuant to this Lease shall be deemed additional
                  rent.

         3.2      Tenant recognizes that late payment of any rent or other sum
                  due under this Lease will result in administrative expense to
                  Landlord, the extent of which additional expense is extremely
                  difficult and economically impractical to ascertain. Tenant
                  therefore agrees that if rent or any other sum is not paid
                  when due and payable pursuant to this Lease, a late charge
                  shall be imposed in an amount equal to the greater of: (a)
                  Fifty Dollars ($50.00), or (b) five percent (5%) of the unpaid
                  rent or other payment; provided that Tenant shall be entitled
                  to a grace period of 5 days for the first 1late payment of
                  rent or other sum due in a given calendar year. The amount of
                  the late charge to be paid by Tenant shall be reassessed and
                  added to Tenant's obligation for each successive month until
                  paid. The provisions of this Section 3.2 in no way relieve
                  Tenant of the obligation to pay rent or other payments on or
                  before the date on which they are due, nor do the terms of
                  this Section 3.2 in any way affect Landlord's remedies
                  pursuant to Article 19 of this Lease in the event said rent or
                  other payment is unpaid after date due.

4.   RENT ADJUSTMENTS.

         4.1      For the purpose of this Article 4, the following terms are
                  defined as follows:

                  4.1.1    LEASE YEAR: Each fiscal year (as determined by
                           Landlord from time to time) falling partly or wholly
                           within the Term.

                  4.1.2    EXPENSES: All costs of operation, maintenance,
                           repair, replacement and management of the Building,
                           as determined in accordance with generally accepted
                           accounting principles, including the following costs
                           by way of illustration, but not limitation: water and
                           sewer charges; insurance charges of or relating to
                           all insurance policies and endorsements deemed by
                           Landlord to be reasonably necessary or desirable and
                           relating in any manner to the protection,
                           preservation, or operation of the Building or any
                           part thereof; utility costs, including, but not
                           limited to, the cost of heat, light, power, steam,
                           gas; waste disposal; the cost of janitorial services;
                           the cost of security and alarm services (including
                           any central station signaling system); costs of
                           cleaning, repairing, replacing and maintaining the
                           common areas, including parking and landscaping,
                           window cleaning costs; labor costs; costs and
                           expenses of managing the Building including
                           management and/or administrative fees (subject to the
                           limitations expressly set forth below); air
                           conditioning maintenance costs; elevator maintenance
                           fees and supplies; material costs; equipment costs
                           including the cost of maintenance, repair and service
                           agreements and rental and leasing costs; purchase
                           costs of equipment; current rental and leasing costs
                           of items which would be capital items if purchased;
                           tool costs; licenses, permits and inspection fees;
                           wages and salaries for personnel below the level of
                           vice president (provided that if any employee
                           performs services in connection with the Building and
                           other buildings, costs associated with such employee
                           may be proportionately included in Expenses based on
                           the percentage of time such employee spends in
                           connection with the operation, maintenance and
                           management of the Building); employee benefits and
                           payroll taxes; accounting and legal fees; any sales,
                           use or service taxes incurred in connection
                           therewith. In addition, Landlord shall be entitled to
                           recover, as additional rent (which, along with any
                           other capital expenditures constituting Expenses,
                           Landlord may either include in Expenses or cause to
                           be billed to Tenant along with Expenses and Taxes but
                           as a separate item), Tenant's Proportionate Share of:
                           (i) an allocable portion of the cost of capital
                           improvement items which are reasonably calculated to
                           reduce operating expenses; (ii) the cost of fire
                           sprinklers and suppression systems and other life
                           safety systems (provided that to the extent the
                           foregoing is a capital improvement, the cost thereof
                           shall be amortized over the reasonable life of such
                           expenditures as provided in the following clause
                           (iii)); and (iii) other capital expenses which are
                           required under any governmental laws, regulations or
                           ordinances which were not applicable to the Building
                           as of the date of this Lease; but the costs described
                           in this sentence shall be amortized over the
                           reasonable life of such expenditures in accordance
                           with such reasonable life and amortization schedules
                           as shall be determined by Landlord in accordance with
                           generally accepted accounting principles, with
                           interest on the unamortized amount at one percent
                           (1%) in excess of the Wall Street Journal prime
                           lending rate announced from time to time. Expenses
                           shall not include depreciation or amortization of the
                           Building or equipment in the Building except as
                           provided herein, loan principal payments, costs of
                           alterations of tenants' premises, leasing
                           commissions,

                                        4



                           interest expenses on long-term borrowings,
                           advertising costs including the cost of brochures and
                           marketing supplies, legal fees in negotiating and
                           preparing lease documents, and construction,
                           improvement and decorating costs in preparing space
                           for initial occupancy by a specific tenant.

         The following items are also excluded from Expenses and in no event
         shall Tenant have any obligation to perform, pay directly or reimburse
         Landlord for any of the following except to the extent expressly
         provided herein:

                           (a)      Sums paid to subsidiaries or other
                                    affiliates of Landlord for services on or to
                                    the Building and/or Premises, but only to
                                    the extent that the costs of such services
                                    exceed the competitive cost for such
                                    services rendered by persons or entities of
                                    similar skill, competence and experience.

                           (b)      Any fines, penalties or interest resulting
                                    from the negligence or willful misconduct of
                                    the Landlord or its agents, contractors, or
                                    employees.

                           (c)      Fines, costs or penalties incurred as a
                                    result and to the extent of a violation by
                                    Landlord or other tenants of the project of
                                    which Building is a part of any applicable
                                    laws.

                           (d)      Landlord's charitable and political
                                    contributions.

                           (e)      Ground lease rental.

                           (f)      Attorney's fees and other expenses incurred
                                    in connection with negotiations or disputes
                                    with prospective tenants or tenants or other
                                    occupants of the Building.

                           (g)      The cost or expense of any services or
                                    benefits provided generally to other tenants
                                    in the Building and not provided or
                                    available to Tenant.

                           (h)      All costs of purchasing or leasing major
                                    sculptures, paintings or other major works
                                    or objects of art (as opposed to decorations
                                    purchased or leased by Landlord for display
                                    in the common areas of the Building).

                           (i)      Any expenses for which Landlord has received
                                    actual reimbursement (other than through
                                    Expenses).

                           (j)      Costs incurred by Landlord in connection
                                    with the correction of defects in design and
                                    original construction of the Building.

                           (k)      Any cost or expense related to removal,
                                    cleaning, abatement or remediation of
                                    Hazardous Materials in or about the Building
                                    or the common areas, including, without
                                    limitation, hazardous substances in the
                                    ground water or soil, except to the extent
                                    such removal, cleaning, abatement or
                                    remediation is related to the general repair
                                    and maintenance of the Building and the
                                    common areas.

                           (l)      Costs incurred by Landlord in connection
                                    with the correction of defects in design and
                                    original construction of the Building.

                           (m)      Any costs, fines or penalties incurred due
                                    to violations by Landlord of any law, order,
                                    rule or regulations of any governmental
                                    authority which was in effect (and as
                                    interpreted and enforced) as of the date of
                                    this Lease.

                           (n)      Penalties, interest and other costs incurred
                                    by Landlord in connection with Landlord's
                                    failure to comply with conditions, covenants
                                    and restrictions applicable to the Building.

                           (o)      The cost of repairs and maintenance
                                    equitably allocated by Landlord to buildings
                                    other than the Building.

                           (p)      Principal payments of mortgage debt of
                                    Landlord.

                                        5



                           (q)      Interest (except as provided in this Lease
                                    for the amortization of capital
                                    improvements).

                           (r)      Costs of capital improvements except to the
                                    extent expressly set forth in this Lease.

                           (s)      Expense reserves.

                  4.1.3    TAXES: Real estate taxes and any other taxes, charges
                           and assessments which are levied with respect to the
                           Building or the land appurtenant to the Building, or
                           with respect to any improvements, fixtures and
                           equipment or other property of Landlord, real or
                           personal, located in the Building and used in
                           connection with the operation of the Building and
                           said land, any payments to any ground lessor in
                           reimbursement of tax payments made by such lessor;
                           and all fees, expenses and costs incurred by Landlord
                           in investigating, protesting, contesting or in any
                           way seeking to reduce or avoid increase in any
                           assessments, levies or the tax rate pertaining to any
                           Taxes to be paid by Landlord in any Lease Year. Taxes
                           shall not include any corporate franchise, capital
                           levy, capital stock, gift, estate, inheritance or net
                           income tax, or tax imposed upon any transfer by
                           Landlord of its interest in this Lease or the
                           Building, any property taxes allocated to buildings
                           other than the Building and any taxes to be paid by
                           Tenant pursuant to Article 28. In the event that
                           Landlord may elect to pay a special assessment in one
                           payment or over a period of time, regardless of
                           Landlord's election, any such assessment shall be
                           included in Taxes only to the extent it would have
                           been due over time.

         4.2      Tenant shall pay as additional rent for each Lease Year
                  Tenant's Proportionate Share of Expenses and Taxes incurred
                  for such Lease Year. As of the date of this Lease, Landlord's
                  current estimate of Tenant's Proportionate Share of Expenses
                  and Taxes for the Building is $0.34 per rentable square foot
                  of the Premises.

         4.3      The annual determination of Expenses shall be made by Landlord
                  and shall be binding upon Landlord and Tenant, subject to the
                  provisions of this Section 4.3. During the Term, Tenant may
                  review, at Tenant's sole cost and expense, the books and
                  records supporting such determination in an office of
                  Landlord, or Landlord's agent, during normal business hours,
                  upon giving Landlord five (5) days advance written notice
                  within ninety (90) days after receipt of such determination,
                  but in no event more often than once in any one (1) year
                  period, subject to execution of a confidentiality agreement
                  acceptable to Landlord, and provided that if Tenant utilizes
                  an independent accountant to perform such review it shall be
                  one of national standing which is reasonably acceptable to
                  Landlord, is not compensated on a contingency basis and is
                  also subject to such confidentiality agreement. Tenant shall
                  be solely responsible for all costs, expenses and fees
                  incurred for such review. However, notwithstanding the
                  foregoing, if Landlord and Tenant determine that Expenses for
                  the Building for the year in question were less than stated by
                  more than 5%, Landlord, within 30 days after its receipt of
                  paid invoices therefor from Tenant, shall reimburse Tenant for
                  the reasonable amounts paid by Tenant to third parties in
                  connection with such review by Tenant. If Tenant fails to
                  object to Landlord's determination of Expenses within ninety
                  (90) days after receipt, or if any such objection fails to
                  state with specificity the reason for the objection, Tenant
                  shall be deemed to have approved such determination and shall
                  have no further right to object to or contest such
                  determination. In the event that during all or any portion of
                  any Lease Year or Base Year, the Building is not fully rented
                  and occupied Landlord shall make an appropriate adjustment in
                  occupancy-related Expenses for such year for the purpose of
                  avoiding distortion of the amount of such Expenses to be
                  attributed to Tenant by reason of variation in total occupancy
                  of the Building, by employing consistent and sound accounting
                  and management principles to determine Expenses that would
                  have been paid or incurred by Landlord had the Building been
                  at least ninety-five percent (95%) rented and occupied, and
                  the amount so determined shall be deemed to have been Expenses
                  for such Lease Year.

         4.4      Prior to the actual determination thereof for a Lease Year,
                  Landlord may from time to time estimate Tenant's liability for
                  Expenses and/or Taxes under Section 4.2, Article 6 and Article
                  28 for the Lease Year or portion thereof. Landlord will give
                  Tenant written notification of the amount of such estimate and
                  Tenant agrees that it will pay, by increase of its Monthly
                  Installments of Rent due in such Lease Year, additional rent
                  in the amount of such estimate. Any such increased rate of
                  Monthly Installments of Rent pursuant to this Section 4.4
                  shall remain in effect until further written notification to
                  Tenant pursuant hereto.

                                        6



         4.5      When the above mentioned actual determination of Tenant's
                  liability for Expenses and/or Taxes is made for any Lease Year
                  and when Tenant is so notified in writing, then:

                  4.5.1    If the total additional rent Tenant actually paid
                           pursuant to Section 4.3 on account of Expenses and/or
                           Taxes for the Lease Year is less than Tenant's
                           liability for Expenses and/or Taxes, then Tenant
                           shall pay such deficiency to Landlord as additional
                           rent in one lump sum within thirty (30) days of
                           receipt of Landlord's bill therefor; and

                  4.5.2    If the total additional rent Tenant actually paid
                           pursuant to Section 4.3 on account of Expenses and/or
                           Taxes for the Lease Year is more than Tenant's
                           liability for Expenses and/or Taxes, then Landlord
                           shall credit the difference against the then next due
                           payments to be made by Tenant under this Article 4,
                           or, if the Lease has terminated, refund the
                           difference in cash.

         4.6      If the Commencement Date is other than January 1 or if the
                  Termination Date is other than December 31, Tenant's liability
                  for Expenses and Taxes for the Lease Year in which said Date
                  occurs shall be prorated based upon a three hundred sixty-five
                  (365) day year.

5.       SECURITY DEPOSIT. Tenant shall deposit the Security Deposit with
         Landlord upon the execution of this Lease. Landlord may commingle the
         Security Deposit with other funds and shall in no event be required to
         pay interest or any other charges or fees to Tenant with respect to the
         Security Deposit. Said sum shall be held by Landlord as security for
         the faithful performance by Tenant of all the terms, covenants and
         conditions of this Lease to be kept and performed by Tenant and not as
         an advance rental deposit or as a measure of Landlord's damage in case
         of Tenant's default. If Tenant defaults with respect to any provision
         of this Lease beyond the expiration of any applicable notice and cure
         periods, Landlord may use any part of the Security Deposit for the
         payment of any rent or any other sum in default, or for the payment of
         any amount which Landlord may spend or become obligated to spend by
         reason of Tenant's default, or to compensate Landlord for any other
         loss or damage which Landlord may suffer by reason of Tenant's default.
         If any portion is so used, Tenant shall within five (5) days after
         written demand therefor, deposit with Landlord an amount sufficient to
         restore the Security Deposit to its original amount and Tenant's
         failure to do so shall be a material breach of this Lease. Except to
         such extent, if any, as shall be required by law, Landlord shall not be
         required to keep the Security Deposit separate from its general funds,
         and Tenant shall not be entitled to interest on such deposit. If Tenant
         shall fully and faithfully perform every provision of this Lease to be
         performed by it, the Security Deposit or any balance thereof shall be
         returned to Tenant at such time after termination of this Lease when
         Landlord shall have determined that all of Tenant's obligations under
         this Lease have been fulfilled. If Tenant is not in default at the
         termination of this Lease, Landlord shall return any unapplied balance
         of the Security Deposit to Tenant within 30 days after Tenant
         surrenders the Premises to Landlord in accordance with this Lease. In
         addition to any other deductions Landlord is entitled to make pursuant
         to the terms hereof, Landlord shall have the right to make a good faith
         estimate of any unreconciled Expenses and/or Taxes as of the
         Termination Date and to deduct any anticipated shortfall from the
         Security Deposit. Such estimate shall be final and binding upon Tenant.
         Tenant hereby waives the provisions of Section 1950.7 of the California
         Civil Code, or any similar or successor Regulations or other laws now
         or hereinafter in effect to the extent the same conflicts with any of
         the terms and conditions of this Lease.

6.   ALTERATIONS.

         6.1      Except for those, if any, specifically provided for in Exhibit
                  B to this Lease, Tenant shall not make or suffer to be made
                  any alterations, additions, or improvements, including, but
                  not limited to, the attachment of any fixtures or equipment
                  in, on, or to the Premises or any part thereof or the making
                  of any improvements as required by Article 7, without the
                  prior written consent of Landlord. So long as the same do not
                  affect the structure of the Building or any of the Building
                  systems, Tenant may install non-attached trade fixtures in the
                  Premises without Landlord's prior consent but otherwise in
                  accordance with the terms of this Article 6. When applying for
                  such consent, Tenant shall, if requested by Landlord, furnish
                  complete plans and specifications for such alterations,
                  additions and improvements. Landlord's consent shall not be
                  unreasonably withheld with respect to alterations which (i)
                  are not structural in nature, (ii) are not visible from the
                  exterior of the Building, (iii) do not affect or require
                  modification of the Building's electrical, mechanical,
                  plumbing, HVAC or other systems, and (iv) in aggregate do not
                  cost more than $5.00 per rentable square foot of that portion
                  of the Premises affected by the alterations in question.
                  Notwithstanding the foregoing, Landlord's consent shall not be
                  required for any alteration that satisfies all of the
                  following criteria (a "Permitted Alteration"): (1) is not
                  reasonably visible from the exterior of the Premises or

                                        7



                  Building; (2) will not affect the systems or structure of the
                  Building; (3) does not require work to be performed inside the
                  walls or above the ceiling of the Premises; and (4) all such
                  alterations cost less than $30,000.00 in the aggregate in any
                  12 month period during the Term. However, even though consent
                  is not required, the performance of Permitted Alterations
                  shall be subject to all the other provisions of this Article
                  6.

         6.2      In the event Landlord consents to the making of any such
                  alteration, addition or improvement by Tenant, the same shall
                  be made by using either Landlord's contractor or a contractor
                  reasonably approved by Landlord, in either event at Tenant's
                  sole cost and expense. If Tenant shall employ any contractor
                  other than Landlord's contractor and such other contractor or
                  any subcontractor of such other contractor shall employ any
                  non-union labor or supplier, Tenant shall be responsible for
                  and hold Landlord harmless from any and all delays, damages
                  and extra costs suffered by Landlord as a result of any
                  dispute with any labor unions concerning the wage, hours,
                  terms or conditions of the employment of any such labor. In
                  any event, with respect to alterations other than Permitted
                  Alterations only, Landlord may charge Tenant a construction
                  management fee not to exceed five percent (5%) of the cost of
                  such work to cover its overhead as it relates to such proposed
                  work, plus third-party costs actually incurred by Landlord in
                  connection with the proposed work and the design thereof, with
                  all such amounts being due five (5) days after Landlord's
                  demand.

         6.3      All alterations, additions or improvements proposed by Tenant
                  shall be constructed in accordance with all government laws,
                  ordinances, rules and regulations, using Building standard
                  materials where applicable, and Tenant shall, prior to
                  construction, provide the additional insurance required under
                  Article 11 in such case, and also all such assurances to
                  Landlord as Landlord shall reasonably require to assure
                  payment of the costs thereof, including but not limited to,
                  notices of non-responsibility, waivers of lien and surety
                  company performance bonds and to protect Landlord and the
                  Building and appurtenant land against any loss from any
                  mechanic's, materialmen's or other liens. Tenant shall pay in
                  addition to any sums due pursuant to Article 4, any increase
                  in real estate taxes attributable to any such alteration,
                  addition or improvement for so long, during the Term, as such
                  increase is ascertainable; at Landlord's election said sums
                  shall be paid in the same way as sums due under Article 4.

         6.4      Notwithstanding anything to the contrary contained herein, so
                  long as Tenant's written request for consent for a proposed
                  alteration or improvements contains the following statement in
                  large, bold and capped font "PURSUANT TO SECTION 6 OF THE
                  LEASE, IF LANDLORD CONSENTS TO THE SUBJECT ALTERATION,
                  LANDLORD SHALL NOTIFY TENANT IN WRITING (1) WHETHER OR NOT
                  LANDLORD WILL REQUIRE SUCH ALTERATION TO BE REMOVED AT THE
                  EXPIRATION OR EARLIER TERMINATION OF THE LEASE AND, (2) IF
                  SUCH REMOVAL IS REQUIRED, WHETHER OR NOT TENANT SHALL BE
                  REQUIRED TO DEPOSIT WITH LANDLORD THE AMOUNT REASONABLY
                  ESTIMATED BY LANDLORD AS SUFFICIENT TO COVER THE COST OF
                  REMOVING SUCH ALTERATIONS OR IMPROVEMENTS AND RESTORING THE
                  PREMISES AND, IF SO, SUCH ESTIMATED AMOUNT.", at the time
                  Landlord gives its consent for any alterations or
                  improvements, if it so does, Tenant shall also be notified (i)
                  whether or not Landlord will require that such alterations or
                  improvements be removed upon the expiration or earlier
                  termination of this Lease and, (ii) to the extent that such
                  removal is required, whether Landlord shall require Tenant to
                  deposit with Landlord the amount reasonably estimated by
                  Landlord as sufficient to cover the cost of removing such
                  alterations or improvements and restoring the Premises, to the
                  extent required under Section 26.2, and the estimated amount
                  thereof. Notwithstanding anything to the contrary contained in
                  this Lease, at the expiration or earlier termination of this
                  Lease and otherwise in accordance with Article 26 hereof,
                  Tenant shall be required to remove all alterations or
                  improvements made to the Premises except for any such
                  alterations or improvements which Landlord expressly indicates
                  or is deemed to have indicated shall not be required to be
                  removed from the Premises by Tenant. If Tenant's written
                  notice strictly complies with the foregoing and if Landlord
                  fails to so notify Tenant whether Tenant shall be required to
                  remove the subject alterations or improvements at the
                  expiration or earlier termination of this lease, Tenant is
                  entitled to deliver to Landlord a second written notice (the
                  "Second Notice") in compliance with the foregoing requirements
                  but also stating in large, bold and capped font the following:
                  "THIS IS TENANT'S SECOND NOTICE TO LANDLORD. LANDLORD FAILED
                  TO RESPOND TO TENANT'S FIRST NOTICE IN ACCORDANCE WITH THE
                  TERMS OF ARTICLE 6 OF THE LEASE. IF LANDLORD FAILS TO RESPOND
                  TO THIS NOTICE IN FIVE BUSINESS DAYS WITH RESPECT TO THE
                  DEPOSIT OF REMOVAL AND RESTORATION FUNDS, TENANT SHALL

                                        8



                  HAVE NO OBLIGATION TO DEPOSIT WITH LANDLORD THE AMOUNT
                  REASONABLY ESTIMATED BY LANDLORD AS SUFFICIENT TO COVER THE
                  COST OF REMOVING SUCH ALTERATIONS OR IMPROVEMENTS AND
                  RESTORING THE PREMISES. IF LANLDORD FAILS TO REPSOND TO THIS
                  NOTICE IN FIVE BUSINESS DAYS WITH RESPECT TO TENANT'S
                  OBLIGATION TO REMOVE THE SUBJECT ALTERATION, TENANT SHALL HAVE
                  NO OBLIGATION TO REMOVE THE SUBJECT ALTERATION AT THE
                  EXPIRATION OR EARLIER TERMINATION OF ITS LEASE". If Landlord
                  fails to respond to the Second Notice within five business
                  days of Landlord's receipt thereof, it shall be assumed that,
                  with respect to Tenant's obligation to remove the subject
                  alterations or improvements, Landlord shall not require the
                  removal of the subject alterations or improvements. If
                  Landlord fails to respond to the Second Notice within five
                  business days of Landlord's receipt thereof, it shall be
                  assumed that, with respect to Tenant's obligation to deposit
                  sufficient funds with Landlord for the removal of the subject
                  alterations or improvements, Landlord shall not require any
                  such deposit from Tenant with respect thereto.

7.   REPAIR.

         7.1      Landlord shall have no obligation to alter, remodel, improve,
                  repair, decorate or paint the Premises except that Landlord
                  shall repair and maintain the following, the cost of which may
                  be included in Expenses as provided in Article 4 of this
                  Lease: the structural portions of the roof, the roof membrane,
                  the common areas, foundation and walls of the Building and the
                  Building mechanical, sprinkler/life safety systems, electrical
                  and plumbing systems servicing the project in general (not
                  specifically servicing the Premises, the repair and
                  maintenance of which shall be Tenant's responsibility
                  hereunder); provided, however, that, subject to the terms
                  hereof, Tenant, not Landlord shall repair and maintain the
                  heating, ventilating and air conditioning unit(s) servicing
                  the Premises. Notwithstanding the foregoing, Landlord's repair
                  and maintenance obligations with respect to the following
                  shall be at Landlord's sole cost and expense: the foundation
                  and the exterior walls of the Building. By taking possession
                  of the Premises, Tenant accepts them as being in good order,
                  condition and repair and in the condition in which Landlord is
                  obligated to deliver them except as otherwise expressly stated
                  in this Lease. It is hereby understood and agreed that no
                  representations respecting the condition of the Premises or
                  the Building have been made by Landlord to Tenant, except as
                  specifically set forth in this Lease. Landlord shall not be
                  liable for any failure to make any repairs or to perform any
                  maintenance unless such failure shall persist for an
                  unreasonable time after written notice of the need of such
                  repairs or maintenance is given to Landlord by Tenant.
                  Notwithstanding the foregoing, Landlord shall perform and
                  construct, and Tenant shall have no responsibility to perform
                  or construct, any repair, maintenance or improvements (a)
                  necessitated by the negligence or willful misconduct of
                  Landlord, and (b) which Landlord shall determine to be capital
                  improvement (the cost thereof may be an Expense pursuant to
                  Section 4.1.2 of this Lease).

         7.2      To the extent the same is not an express obligation of
                  Landlord pursuant to Section 7.1 above, Tenant shall at its
                  own cost and expense keep and maintain all parts of the
                  Premises and such portion of the Building and improvements as
                  are within the exclusive control of Tenant (including, without
                  limitation, electrical and plumbing systems servicing the
                  Premises) in good condition, promptly making all necessary
                  repairs and replacements, whether ordinary or extraordinary,
                  with materials and workmanship of the same character, kind and
                  quality as the original (including, but not limited to, repair
                  and replacement of all fixtures installed by Tenant, water
                  heaters serving the Premises, windows, glass and plate glass,
                  doors, exterior stairs, skylights, if any, any special office
                  entries, interior walls and finish work, floors and floor
                  coverings, heating and air conditioning systems serving the
                  Premises, electrical systems and fixtures, sprinkler systems,
                  dock boards, truck doors, dock bumpers, plumbing work and
                  fixtures, and performance of regular removal of trash and
                  debris). Tenant as part of its obligations hereunder shall
                  keep the Premises in a clean and sanitary condition. Tenant
                  will, as far as possible keep all such parts of the Premises
                  from falling temporarily out of repair, and upon termination
                  of this Lease in any way Tenant will yield up the Premises to
                  Landlord in good condition and repair, loss by fire or other
                  casualty excepted (but not excepting any damage to glass).
                  Subject to the waiver of subrogation provided in Section 12,
                  Tenant shall, at its own cost and expense, repair any damage
                  to the Premises or the Building resulting from and/or caused
                  in whole or in part by the negligence or misconduct of Tenant,
                  its agents, employees, contractors, invitees, or any other
                  person entering upon the Premises as a result of Tenant's
                  business activities or caused by Tenant's default hereunder

         7.3      Except as provided in Article 22, there shall be no abatement
                  of rent and no liability of Landlord by reason of any injury
                  to or interference with Tenant's business arising from the
                  making of any repairs, alterations or

                                        9



                  improvements in or to any portion of the Building or the
                  Premises or to fixtures, appurtenances and equipment in the
                  Building. Tenant hereby waives any and all rights under and
                  benefits of subsection 1 of Section 1932 and Sections 1941 and
                  1942 of the California Civil Code, or any similar or successor
                  Regulations or other laws now or hereinafter in effect. Except
                  in emergency situations as determined by Landlord, Landlord
                  shall exercise reasonable efforts not to unreasonably
                  interfere with the conduct of the business of Tenant in the
                  Premises.

         7.4      Tenant shall, at its own cost and expense, enter into a
                  regularly scheduled preventive maintenance/service contract
                  with a maintenance contractor approved by Landlord for
                  servicing all heating and air conditioning systems and
                  equipment serving the Premises (and a copy thereof shall be
                  furnished to Landlord). The service contract must include all
                  services suggested by the equipment manufacturer in the
                  operation/maintenance manual and must become effective within
                  thirty (30) days of the date Tenant takes possession of the
                  Premises. At Landlord's election, Landlord may, upon notice to
                  Tenant, enter into such a maintenance/ service contract on
                  behalf of Tenant or perform the work and in either case,
                  charge Tenant the cost thereof along with a reasonable amount
                  for Landlord's overhead.

         7.5      If applicable, Landlord shall coordinate any repairs and other
                  maintenance of any railroad tracks serving the Building and,
                  if Tenant uses such rail tracks, Tenant shall reimburse
                  Landlord or the railroad company from time to time upon
                  demand, as additional rent, for its share of the costs of such
                  repair and maintenance and for any other sums specified in any
                  agreement to which Landlord or Tenant is a party respecting
                  such tracks, such costs to be borne proportionately by all
                  tenants in the Building using such rail tracks, based upon the
                  actual number of rail cars shipped and received by such tenant
                  during each calendar year during the Term.

8.       LIENS. Tenant shall keep the Premises, the Building and appurtenant
         land and Tenant's leasehold interest in the Premises free from any
         liens arising out of any services, work or materials performed,
         furnished, or contracted for by Tenant, or obligations incurred by
         Tenant. In the event that Tenant fails, within ten (10) days following
         the imposition of any such lien, to either cause the same to be
         released of record or provide Landlord with insurance against the same
         issued by a major title insurance company or such other protection
         against the same as Landlord shall accept (such failure to constitute
         an Event of Default), Landlord shall have the right to cause the same
         to be released by such means as it shall deem proper, including payment
         of the claim giving rise to such lien. All such sums paid by Landlord
         and all expenses incurred by it in connection therewith shall be
         payable to it by Tenant within five (5) days after Landlord's demand.

9.   ASSIGNMENT AND SUBLETTING.

         9.1      Tenant shall not have the right to assign or pledge this Lease
                  or to sublet the whole or any part of the Premises whether
                  voluntarily or by operation of law, or permit the use or
                  occupancy of the Premises by anyone other than Tenant, and
                  shall not make, suffer or permit such assignment, subleasing
                  or occupancy without the prior written consent of Landlord,
                  such consent not to be unreasonably withheld, and said
                  restrictions shall be binding upon any and all assignees of
                  the Lease and subtenants of the Premises. In the event Tenant
                  desires to sublet, or permit such occupancy of, the Premises,
                  or any portion thereof, or assign this Lease, Tenant shall
                  give written notice thereof to Landlord at least thirty (30)
                  days prior to the proposed commencement date of such
                  subletting or assignment, which notice shall set forth the
                  name of the proposed subtenant or assignee, the relevant terms
                  of any sublease or assignment and copies of financial reports
                  and other relevant financial information of the proposed
                  subtenant or assignee. To the extent reasonably necessary,
                  upon written request by Tenant, Landlord shall enter into a
                  commercially reasonable confidentiality agreement covering any
                  confidential information that is disclosed by Tenant with
                  respect to the financial reports and other relevant financial
                  information of the proposed subtenant or assignee.

         9.2      Notwithstanding any assignment or subletting, permitted or
                  otherwise, Tenant shall at all times remain directly,
                  primarily and fully responsible and liable for the payment of
                  the rent specified in this Lease and for compliance with all
                  of its other obligations under the terms, provisions and
                  covenants of this Lease. Upon the occurrence of an Event of
                  Default, if the Premises or any part of them are then assigned
                  or sublet, Landlord, in addition to any other remedies
                  provided in this Lease or provided by law, may, at its option,
                  collect directly from such assignee or subtenant all rents due
                  and becoming due to Tenant under such assignment or sublease
                  and apply such rent against any sums due to Landlord from
                  Tenant under this

                                       10



                  Lease, and no such collection shall be construed to constitute
                  a novation or release of Tenant from the further performance
                  of Tenant's obligations under this Lease.

         9.3      In addition to Landlord's right to approve of any subtenant or
                  assignee, Landlord shall have the option, in its sole
                  discretion, in the event of any proposed assignment of this
                  Lease, or with respect to a subletting, (i) for a term which
                  is for more than 50% of the then remaining Term of this Lease
                  (as the same may have been extended) or (ii) of 30% or more of
                  the Premises, to terminate this Lease, or in the case of a
                  proposed subletting of less than the entire Premises, to
                  recapture the portion of the Premises to be sublet, as of the
                  date the subletting or assignment is to be effective. The
                  foregoing shall not apply to Permitted Transfers, Affiliated
                  Parties, and any Corporate Successors (as each such term is
                  defined in Paragraph 9.8 below). The option shall be
                  exercised, if at all, by Landlord giving Tenant written notice
                  given by Landlord to Tenant within twenty (20) days following
                  Landlord's receipt of Tenant's written notice as required
                  above. However, if Tenant notifies Landlord, within five (5)
                  days after receipt of Landlord's termination notice, that
                  Tenant is rescinding its proposed assignment or sublease, the
                  termination notice shall be void and the Lease shall continue
                  in full force and effect. If this Lease shall be terminated
                  with respect to the entire Premises pursuant to this Section,
                  the Term of this Lease shall end on the date stated in
                  Tenant's notice as the effective date of the sublease or
                  assignment as if that date had been originally fixed in this
                  Lease for the expiration of the Term. If Landlord recaptures
                  under this Section only a portion of the Premises, the rent to
                  be paid from time to time during the unexpired Term shall
                  abate proportionately based on the proportion by which the
                  approximate square footage of the remaining portion of the
                  Premises shall be less than that of the Premises as of the
                  date immediately prior to such recapture. Tenant shall, at
                  Tenant's own cost and expense, discharge in full any
                  outstanding commission obligation which may be due and owing
                  as a result of any proposed assignment or subletting, whether
                  or not the Premises are recaptured pursuant to this Section
                  9.3 and rented by Landlord to the proposed tenant or any other
                  tenant.

         9.4      In the event that Tenant sells, sublets, assigns or transfers
                  this Lease, Tenant shall pay to Landlord as additional rent an
                  amount equal to seventy-five percent (75%) of any Increased
                  Rent (as defined below), less the Costs Component (as defined
                  below), when and as such Increased Rent is received by Tenant.
                  As used in this Section, "Increased Rent" shall mean the
                  excess of (i) all rent and other consideration which Tenant is
                  entitled to receive by reason of any sale, sublease,
                  assignment or other transfer of this Lease, over (ii) the rent
                  otherwise payable by Tenant under this Lease at such time. For
                  purposes of the foregoing, any consideration received by
                  Tenant in form other than cash shall be valued at its fair
                  market value as determined by Landlord in good faith. The
                  "Costs Component" is that amount which, if paid monthly, would
                  fully amortize on a straight-line basis, over the entire
                  period for which Tenant is to receive Increased Rent, the
                  reasonable costs incurred by Tenant for legal fees, leasing
                  commissions and tenant improvements constructed by or on
                  behalf of Tenant and performed solely to bring about such
                  sublease, assignment or other transfer.

         9.5      Notwithstanding any other provision hereof, it shall be
                  considered reasonable for Landlord to withhold its consent to
                  any assignment of this Lease or sublease of any portion of the
                  Premises if at the time of either Tenant's notice of the
                  proposed assignment or sublease or the proposed commencement
                  date thereof, there shall exist any uncured event of Default
                  of Tenant or matter which will become an Event of Default of
                  Tenant with passage of time unless cured, or if the proposed
                  assignee or sublessee is an entity: (a) with which Landlord is
                  already in negotiation; (b) is already an occupant of the
                  Building unless Landlord is unable to provide the amount of
                  space required by such occupant; (c) is a governmental agency;
                  (d) is incompatible with the character of occupancy of the
                  Building; (e) with which the payment for the sublease or
                  assignment is determined in whole or in part based upon its
                  net income or profits; or (f) would subject the Premises to a
                  use which would: (i) involve increased wear upon the Building;
                  (ii) violate any exclusive right granted to another tenant of
                  the Building; (iii) require any addition to or modification of
                  the Premises or the Building in order to comply with building
                  code or other governmental requirements; or, (iv) involve a
                  violation of Section 1.2. Tenant expressly agrees that for the
                  purposes of any statutory or other requirement of
                  reasonableness on the part of Landlord, Landlord's refusal to
                  consent to any assignment or sublease for any of the reasons
                  described in this Section 9.5, shall be conclusively deemed to
                  be reasonable.

         9.6      Upon any request to assign or sublet, Tenant will pay to
                  Landlord the Assignment/Subletting Fee plus, on demand, a sum
                  equal to all of Landlord's costs, including reasonable
                  attorney's fees, incurred in investigating, considering
                  reviewing and documenting any proposed or purported assignment
                  or pledge of this Lease or sublease of any of the Premises
                  (the "Review Reimbursement" and together with the

                                       11



                  Assignment/Subletting Fee, collectively, the "Total
                  Reimbursement"), regardless of whether Landlord shall consent
                  to, refuse consent, or determine that Landlord's consent is
                  not required for, such assignment, pledge or sublease. Except
                  as otherwise expressly provided herein, the Total
                  Reimbursement shall not exceed $1,000.00 (the "Cap"). Any
                  purported sale, assignment, mortgage, transfer of this Lease
                  or subletting which does not comply with the provisions of
                  this Article 9 shall be void. Landlord shall notify Tenant if
                  Landlord reasonably estimates that the Total Reimbursement
                  shall exceed the Cap and shall inform Tenant of the amount of
                  Landlord's reasonable estimate of the Total Reimbursement (the
                  "Estimated Fees"). If the Estimated Fees exceed the Cap, then
                  the Cap shall not apply and Tenant shall pay to Landlord the
                  amount of the Total Reimbursement up to an amount not to
                  exceed 120% of the amount of the Estimated Fees.

         9.7      If Tenant is a corporation, limited liability company,
                  partnership or trust, any transfer or transfers of or change
                  or changes within any twelve (12) month period in the number
                  of the outstanding voting shares of the corporation or limited
                  liability company, the general partnership interests in the
                  partnership or the identity of the persons or entities
                  controlling the activities of such partnership or trust
                  resulting in the persons or entities owning or controlling a
                  majority of such shares, partnership interests or activities
                  of such partnership or trust at the beginning of such period
                  no longer having such ownership or control shall be regarded
                  as equivalent to an assignment of this Lease to the persons or
                  entities acquiring such ownership or control and shall be
                  subject to all the provisions of this Article 9 to the same
                  extent and for all intents and purposes as though such an
                  assignment; provided, however, to the extent Tenant is a
                  corporation, the foregoing shall not apply to a single
                  transfer (or series of related transfers that are part of the
                  same general transaction and which proximately occur) of all
                  or substantially all of the capital stock of Tenant to one
                  recipient (whether an individual or an entity) so long as
                  there is no diminution of the Tenant's tangible net worth as a
                  result thereof.

         9.8      So long as Tenant is not entering into the Permitted Transfer
                  (as defined herein) for the purpose of avoiding or otherwise
                  circumventing the remaining terms of this Article 9, Tenant
                  may assign its entire interest under this Lease, without the
                  consent of Landlord, to (i) an affiliate, subsidiary, or
                  parent of Tenant, or a corporation, partnership or other legal
                  entity wholly owned by Tenant (collectively, an "Affiliated
                  Party"), or (ii) a successor to Tenant by purchase, merger,
                  consolidation or reorganization (a "Corporate Successor"),
                  provided that all of the following conditions are satisfied
                  (each such transfer a "Permitted Transfer"): (1) Tenant is not
                  in default under this Lease; (2) the Permitted Use does not
                  allow the Premises to be used for retail purposes; (3) Tenant
                  shall give Landlord written notice at least 15 days prior to
                  the effective date of the proposed Permitted Transfer;
                  provided, however, that to the extent that Tenant is
                  prohibited by any applicable law, rule, regulation, ordinance
                  of code from providing the foregoing notice, Tenant shall
                  provide notice to Landlord as soon as is reasonably possible
                  but in no event later than two (2) business days following the
                  effective date of any such Permitted Transfer; (4) with
                  respect to a proposed Permitted Transfer to an Affiliated
                  Party, the proposed transferee has a tangible net worth,
                  financial standing and financial resources, as evidenced by
                  current financial statements satisfactory to Landlord and
                  certified by an independent certified public accountant,
                  prepared in accordance with generally accepted accounting
                  principles that are consistently applied, reasonably
                  sufficient, taking into account all expected obligations of
                  the transferee with respect to the proposed transfer and all
                  of its other contingent and noncontingent obligations, to
                  service when due the obligations of the transferee with
                  respect to the proposed Permitted Transfer; and (5) with
                  respect to a purchase, merger, consolidation or reorganization
                  or any Permitted Transfer which results in Tenant ceasing to
                  exist as a separate legal entity, (a) Tenant's successor shall
                  own all or substantially all of the assets of Tenant, and (b)
                  Tenant's successor shall have a tangible net worth which is at
                  least equal to Ten Million Dollars ($10,000,000.00) as
                  evidenced by current financial statements satisfactory to
                  Landlord and certified by an independent certified public
                  accountant, prepared in accordance with generally accepted
                  accounting principles that are consistently applied. Tenant's
                  notice to Landlord shall include information and documentation
                  showing that each of the above conditions has been satisfied.
                  If requested by Landlord, Tenant's successor shall sign a
                  commercially reasonable form of assumption agreement. As used
                  herein, (A) "parent" shall mean a company which owns a
                  majority of Tenant's voting equity; (B) "subsidiary" shall
                  mean an entity wholly owned by Tenant or at least 51% of whose
                  voting equity is owned by Tenant; and (C) "affiliate" shall
                  mean an entity controlled, controlling or under common control
                  with Tenant. Notwithstanding the foregoing, if any parent,
                  affiliate or subsidiary to which this Lease has been assigned
                  or transferred subsequently sells or transfers its voting
                  equity or its interest under this Lease other than to another
                  parent, subsidiary or affiliate

                                       12



                  of the original Tenant named hereunder, such sale or transfer
                  shall be deemed to be a transfer requiring the consent of
                  Landlord hereunder.

10.      INDEMNIFICATION. None of the Landlord Entities shall be liable and
         Tenant hereby waives all claims against them for any damage to any
         property or any injury to any person in or about the Premises or the
         Building by or from any cause whatsoever (including without limiting
         the foregoing, rain or water leakage of any character from the roof,
         windows, walls, basement, pipes, plumbing works or appliances, the
         Building not being in good condition or repair, gas, fire, oil,
         electricity or theft), except to the extent caused by or arising from
         the active negligence or willful misconduct of Landlord or its agents,
         employees or contractors, or a breach of this lease by Landlord. Tenant
         shall protect, indemnify and hold the Landlord Entities harmless from
         and against any and all loss, claims, liability or costs (including
         court costs and attorney's fees) incurred by reason of (a) any damage
         to any property (including but not limited to property of any Landlord
         Entity) or any injury (including but not limited to death) to any
         person occurring in, on or about the Premises or the Building to the
         extent that such injury or damage shall be caused by or arise from any
         actual or alleged act, neglect, fault, or omission by or of Tenant or
         any Tenant Entity to meet any standards imposed by any duty with
         respect to the injury or damage; (b) the conduct or management of any
         work or thing whatsoever done by the Tenant in or about the Premises or
         from transactions of the Tenant concerning the Premises; (c) Tenant's
         failure to comply with any and all governmental laws, ordinances and
         regulations applicable to the condition or use of the Premises or its
         occupancy; or (d) any breach or default on the part of Tenant in the
         performance of any covenant or agreement on the part of the Tenant to
         be performed pursuant to this Lease. The provisions of this Article
         shall survive the termination of this Lease with respect to any claims
         or liability accruing prior to such termination.

11.  INSURANCE.

         11.1     Tenant shall keep in force throughout the Term: (a) a
                  Commercial General Liability insurance policy or policies to
                  protect the Landlord Entities against any liability to the
                  public or to any invitee of Tenant or a Landlord Entity
                  incidental to the use of or resulting from any accident
                  occurring in or upon the Premises with a limit of not less
                  than $1,000,000 per occurrence and not less than $2,000,000 in
                  the annual aggregate, or such larger amount as Landlord may
                  prudently require from time to time so long as such larger
                  amounts are typically carried by similar commercial tenants in
                  similar buildings and in the same geographic area in which the
                  Building is located, covering bodily injury and property
                  damage liability and $1,000,000 products/completed operations
                  aggregate; (b) Business Auto Liability covering owned,
                  non-owned and hired vehicles with a limit of not less than
                  $1,000,000 per accident; (c) insurance protecting against
                  liability under Worker's Compensation Laws with limits at
                  least as required by statute; (d) Employers Liability with
                  limits of $1,000,000 each accident, $1,000,000 disease policy
                  limit, $1,000,000 disease--each employee; (e) All Risk or
                  Special Form coverage protecting Tenant against loss of or
                  damage to Tenant's alterations, additions, improvements
                  (including the Improvements), carpeting, floor coverings,
                  panelings, decorations, fixtures, inventory and other business
                  personal property situated in or about the Premises to the
                  full replacement value of the property so insured, (f)
                  Business Interruption Insurance for 100% of the 12 months
                  actual loss sustained, and (g) Excess Liability in the amount
                  of $5,000,000.

         11.2     The aforesaid policies shall (a) be provided at Tenant's
                  expense; (b) name the Landlord Entities as additional insureds
                  (General Liability) and loss payee (Property--Special Form);
                  (c) be issued by an insurance company with a minimum Best's
                  rating of "A:VII" during the Term; and (d) provide that said
                  insurance shall not be canceled unless thirty (30) days prior
                  written notice (ten days for non-payment of premium) shall
                  have been given to Landlord; a certificate of Liability
                  insurance on ACORD Form 25 and a certificate of Property
                  insurance on ACORD Form 27 shall be delivered to Landlord by
                  Tenant upon the Commencement Date and at least twenty (20)
                  days prior to each renewal of said insurance.

         11.3     Whenever Tenant shall undertake any alterations, additions or
                  improvements in, to or about the Premises ("Work") the
                  aforesaid insurance protection must extend to and include
                  injuries to persons and damage to property arising in
                  connection with such Work, without limitation including
                  liability under any applicable structural work act, and such
                  other insurance as Landlord shall require; and the policies of
                  or certificates evidencing such insurance must be delivered to
                  Landlord prior to the commencement of any such Work.

         11.4     Landlord shall keep in force throughout the Term Commercial
                  General Liability Insurance and All Risk or Special Form
                  coverage insuring the Landlord and the Building, in such
                  amounts and with such deductibles

                                       13



                  as Landlord determines from time to time in accordance with
                  sound and reasonable risk management principles. The cost of
                  all such insurance is included in Expenses.

12.      WAIVER OF SUBROGATION. Notwithstanding anything in this Lease to the
         contrary, Landlord and Tenant hereby waive, and shall cause their
         respective insurance carriers to waive, any and all rights of recovery,
         claim, action or causes of action against the other and their
         respective trustees, principals, beneficiaries, partners, officers,
         directors, agents, and employees, by subrogation, to the extent the
         same is insured against (or is required to be insured against under the
         terms hereof) for any loss or damage that may occur to Landlord or
         Tenant or any party claiming by, through or under Landlord or Tenant,
         as the case may be, with respect to Tenant's personal property, the
         Premises, the Building, the project of which the Building is a part,
         any additions or improvements to the Premises, the Building or the
         project of which the Building is a part, or any contents thereof,
         including all rights of recovery, claims, actions or causes of action
         arising out of the negligence of Landlord or any parties related to or
         comprising Landlord or the negligence of Tenant or parties related to
         or comprising Tenant, which loss or damage is (or would have been, had
         the insurance required by this Lease been carried and as if the All
         Risk or Special Form coverage insuring the Landlord and the Building
         and required to be carried by Landlord pursuant to Paragraph 12 above
         is carried at full replacement value) covered by property damage
         insurance.

13.      SERVICES AND UTILITIES. Tenant shall pay for all water, gas, heat,
         light, power, telephone, sewer, sprinkler system charges and other
         utilities and services used on or from the Premises, together with any
         taxes, penalties, and surcharges or the like pertaining thereto and any
         maintenance charges for utilities. Tenant shall furnish all electric
         light bulbs, tubes and ballasts, battery packs for emergency lighting
         and fire extinguishers. Landlord hereby represents to Tenant that the
         Premises as initially configured in this Lease is separately metered.
         Tenant will not, without the written consent of Landlord, contract with
         a utility provider to service the Premises with any utility, including,
         but not limited to, telecommunications, electricity, water, sewer or
         gas, which is not previously providing such service to other tenants in
         the Building. Landlord shall in no event be liable for any interruption
         or failure of utility services on or to the Premises.

         Notwithstanding the foregoing, if Tenant is prevented from using, and
         does not use, all or part of the Premises (the "Affected Area") as a
         result of a Essential Services Interruption Event as defined below, and
         the remaining portions of the Premises are not reasonably sufficient to
         allow Tenant to conduct its business in the Premises and if this
         Essential Services Interruption Event continues for three (3)
         consecutive business days after Landlord's receipt of notice from
         Tenant of the Essential Services Interruption Event (the "Eligibility
         Period"), the Rent payable under this Lease shall be abated after the
         expiration of the Eligibility Period for such time that Tenant
         continues to be prevented from using, and does not use, the Affected
         Area in the proportion that the rentable area of the Affected Area
         bears to the total rentable area of the Premises. If, however, Tenant
         reoccupies any portion of the Premises during this period, the Rent
         allocable to this reoccupied portion (based on the proportion that the
         rentable area of the reoccupied portion of the Premises bears to the
         total rentable area of the Premises) shall be payable by Tenant from
         the date on which Tenant reoccupies this portion of the Premises. An
         "Essential Services Interruption Event" shall mean the failure of or
         interruption in essential services required to be supplied by Landlord
         to the Premises during ordinary business hours of generally recognized
         business days which occurs solely as a result of Landlord's active
         negligence or willful misconduct. In the event of a stoppage or
         interruption of services, Landlord shall diligently attempt to resume
         such services as promptly as practicable.

14.      HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains
         possession of the Premises or part of them after termination of this
         Lease by lapse of time or otherwise at the rate ("Holdover Rate") which
         shall be One Hundred Fifty Percent (150%) of the greater of (a) the
         amount of the Annual Rent for the last period prior to the date of such
         termination plus all Rent Adjustments under Article 4; and (b) the then
         market rental value of the Premises as determined by Landlord assuming
         a new lease of the Premises of the then usual duration and other terms,
         in either case, prorated on a daily basis, and also pay all damages
         sustained by Landlord by reason of such retention. If Landlord gives
         notice to Tenant of Landlord's election to such effect, such holding
         over shall constitute renewal of this Lease for a period from month to
         month or one (1) year, whichever shall be specified in such notice, in
         either case at the Holdover Rate, but if the Landlord does not so
         elect, no such renewal shall result notwithstanding acceptance by
         Landlord of any sums due hereunder after such termination; and instead,
         a tenancy at sufferance at the Holdover Rate shall be deemed to have
         been created. In any event, no provision of this Article 14 shall be
         deemed to waive Landlord's right of reentry or any other right under
         this Lease or at law.

15.      SUBORDINATION. Without the necessity of any additional document being
         executed by Tenant for the purpose of effecting a subordination, this
         Lease shall be subject and subordinate at all times to ground or
         underlying leases and to the lien of any mortgages or deeds of trust
         now or hereafter placed on, against or affecting the Building,

                                       14



         Landlord's interest or estate in the Building, or any ground or
         underlying lease; provided, however, that if the lessor, mortgagee,
         trustee, or holder of any such mortgage or deed of trust elects to have
         Tenant's interest in this Lease be superior to any such instrument,
         then, by notice to Tenant, this Lease shall be deemed superior, whether
         this Lease was executed before or after said instrument.
         Notwithstanding the foregoing, Tenant covenants and agrees to execute
         and deliver within ten (10) days of Landlord's request such further
         instruments evidencing such subordination or superiority of this Lease
         as may be required by Landlord. As of the date hereof, a lien encumbers
         Landlord's interest in the Building in favor of LaSalle Bank N. A., as
         Trustee for the holders of Calwest Industrial Trust Commercial Mortgage
         Pass-Through Certificates Series 2002-CALW. At Tenant's cost, Landlord
         shall provide Tenant with a non-disturbance, subordination, and
         attornment agreement in favor of Tenant in the form attached hereto as
         Exhibit F (the "SNDA") within 45 days following Tenant's execution and
         delivery thereof to Landlord.

16.      RULES AND REGULATIONS. Tenant shall faithfully observe and comply with
         all the rules and regulations as set forth in Exhibit D to this Lease
         and all reasonable and non-discriminatory modifications of and
         additions to them from time to time put into effect by Landlord,
         provided that any such modification and/or additions shall not
         materially increase Tenant's obligations or decrease Tenant's rights or
         parking ratio as provided in this Lease. Landlord shall not be
         responsible to Tenant for the non-performance by any other tenant or
         occupant of the Building of any such rules and regulations. If there is
         a conflict between this Lease and any rules and regulations enacted
         after the date of this Lease, the terms of this Lease shall control.
         The rules and regulations shall be generally applicable, and generally
         applied in the same manner, to all tenants of the Building.

17.  REENTRY BY LANDLORD.

         17.1     Landlord reserves and shall at all times have the right to
                  re-enter the Premises to inspect the same, to show said
                  Premises to prospective purchasers or mortgagees, and to
                  alter, improve or repair the Premises and any portion of the
                  Building, and, during the last 9 months of the Term, to show
                  said Premises to prospective tenants, without abatement of
                  rent, and may for that purpose erect, use and maintain
                  scaffolding, pipes, conduits and other necessary structures
                  and open any wall, ceiling or floor in and through the
                  Building and Premises where reasonably required by the
                  character of the work to be performed, provided entrance to
                  the Premises shall not be blocked thereby, and further
                  provided that the business of Tenant shall not be interfered
                  with unreasonably. Except in emergencies, Landlord shall
                  provide Tenant with reasonable prior notice of entry into the
                  Premises, which may be given orally. During any entry by
                  Landlord to the Premises as provided herein, Landlord shall
                  comply with all reasonable security measures pertaining to the
                  Premises and of which Tenant has provided reasonable advance
                  written notice to Landlord. Landlord shall have the right at
                  any time to change the arrangement and/or locations of
                  entrances, or passageways, doors and doorways, and corridors,
                  windows, elevators, stairs, toilets or other public parts of
                  the Building and to change the name, number or designation by
                  which the Building is commonly known. Landlord shall use
                  reasonable efforts to give Tenant at least 60 days prior
                  notice with respect to a change in the Building's street
                  address that will prohibit Tenant from receiving mail at its
                  current address, and if Landlord fails to provide Tenant with
                  such prior notice, Landlord shall reimburse Tenant for the
                  cost of replacing all business stationery and business cards
                  on hand (not to exceed a 2 month supply) at the effective date
                  of such change. Landlord shall provide to Tenant at least 30
                  days prior notice before any change is made to the name,
                  number or designation by which the Building is commonly known.
                  In the event that Landlord damages any portion of any wall or
                  wall covering, ceiling, or floor or floor covering within the
                  Premises, Landlord shall repair or replace the damaged portion
                  to match the original as nearly as commercially reasonable but
                  shall not be required to repair or replace more than the
                  portion actually damaged. Tenant hereby waives any claim for
                  damages for any injury or inconvenience to or interference
                  with Tenant's business, any loss of occupancy or quiet
                  enjoyment of the Premises, and any other loss occasioned by
                  any action of Landlord authorized by this Article 17;
                  provided, however, that Tenant shall not be entitled to
                  receive any consequential, special or indirect damages based
                  upon a claim that Landlord violated the terms and conditions
                  of this Section 17.1. Instead, any such claim of Tenant shall
                  be limited to the foreseeable, direct and actual damages
                  incurred by Tenant.

         17.2     For each of the aforesaid purposes, Landlord shall at all
                  times have and retain a key with which to unlock all of the
                  doors in the Premises, excluding Tenant's vaults and safes or
                  special security areas (designated in advance), and Landlord
                  shall have the right to use any and all means which Landlord
                  may deem proper to open said doors in an emergency to obtain
                  entry to any portion of the Premises. As to any portion to
                  which access cannot be had by means of a key or keys in
                  Landlord's possession, Landlord is authorized to gain

                                       15



                  access by such means as Landlord shall elect and the cost of
                  repairing any damage occurring in doing so shall be borne by
                  Tenant and paid to Landlord within five (5) days of Landlord's
                  written demand.

18.  DEFAULT.

         18.1     Except as otherwise provided in Article 20, the following
                  events shall be deemed to be Events of Default under this
                  Lease:

                  18.1.1   Tenant shall fail to pay when due any sum of money
                           becoming due to be paid to Landlord under this Lease,
                           whether such sum be any installment of the rent
                           reserved by this Lease, any other amount treated as
                           additional rent under this Lease, or any other
                           payment or reimbursement to Landlord required by this
                           Lease, whether or not treated as additional rent
                           under this Lease, and such failure shall continue for
                           a period of five (5) days after written notice that
                           such payment was not made when due, but if any such
                           notice shall be given, more than two (2) times in
                           such twelve (12) month period commencing with the
                           date of such notice, the failure to pay within five
                           (5) days after due any additional sum of money
                           becoming due to be paid to Landlord under this Lease
                           the third (3rd) time during such period shall be an
                           Event of Default, without notice. So long as a notice
                           delivered to Tenant pursuant to this Section 18.1.1
                           is in compliance with California Code of Civil
                           Procedure Section 1161 or any successor statute, such
                           notice shall concurrently satisfy the statutory
                           requirement as well as the notice requirement of this
                           Lease described in this Section 18.1.1.

                  18.1.2   Tenant shall fail to comply with any term, provision
                           or covenant of this Lease which is not provided for
                           in another Section of this Article and shall not cure
                           such failure within thirty (30) days (forthwith, if
                           the failure involves a hazardous condition) after
                           written notice of such failure to Tenant provided,
                           however, that such failure shall not be an event of
                           default if such failure could not reasonably be cured
                           during such thirty (30) day period, Tenant has
                           commenced the cure within such thirty (30) day period
                           and thereafter is diligently pursuing such cure to
                           completion, but the total aggregate cure period shall
                           not exceed ninety (90) days.

                  18.1.3   Tenant shall fail to vacate the Premises immediately
                           upon termination of this Lease, by lapse of time or
                           otherwise, or upon termination of Tenant's right to
                           possession only.

                  18.1.4   Tenant shall become insolvent, admit in writing its
                           inability to pay its debts generally as they become
                           due, file a petition in bankruptcy or a petition to
                           take advantage of any insolvency statute, make an
                           assignment for the benefit of creditors, make a
                           transfer in fraud of creditors, apply for or consent
                           to the appointment of a receiver of itself or of the
                           whole or any substantial part of its property, or
                           file a petition or answer seeking reorganization or
                           arrangement under the federal bankruptcy laws, as now
                           in effect or hereafter amended, or any other
                           applicable law or statute of the United States or any
                           state thereof.

                  18.1.5   A court of competent jurisdiction shall enter an
                           order, judgment or decree adjudicating Tenant
                           bankrupt, or appointing a receiver of Tenant, or of
                           the whole or any substantial part of its property,
                           without the consent of Tenant, or approving a
                           petition filed against Tenant seeking reorganization
                           or arrangement of Tenant under the bankruptcy laws of
                           the United States, as now in effect or hereafter
                           amended, or any state thereof, and such order,
                           judgment or decree shall not be vacated or set aside
                           or stayed within sixty (60) days from the date of
                           entry thereof.

                                       16



19.  REMEDIES.

         19.1     Upon the occurrence of any Event or Events of Default under
                  this Lease, whether enumerated in Article 18 or not, Landlord
                  shall have the option to pursue any one or more of the
                  following remedies without any notice (except as expressly
                  prescribed herein) or demand whatsoever (and without limiting
                  the generality of the foregoing, Tenant hereby specifically
                  waives notice and demand for payment of rent (except to the
                  extent required herein) or other obligations and waives any
                  and all other notices or demand requirements imposed by
                  applicable law):

                  19.1.1   Terminate this Lease and Tenant's right to possession
                           of the Premises and recover from Tenant an award of
                           damages equal to the sum of the following:

                           19.1.1.1 The Worth at the Time of Award of the unpaid
                                    rent which had been earned at the time of
                                    termination;

                           19.1.1.2 The Worth at the Time of Award of the amount
                                    by which the unpaid rent which would have
                                    been earned after termination until the time
                                    of award exceeds the amount of such rent
                                    loss that Tenant affirmatively proves could
                                    have been reasonably avoided;

                           19.1.1.3 The Worth at the Time of Award of the amount
                                    by which the unpaid rent for the balance of
                                    the Term after the time of award exceeds the
                                    amount of such rent loss that Tenant
                                    affirmatively proves could be reasonably
                                    avoided;

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

                           19.1.1.5 All such other amounts in addition to or in
                                    lieu of the foregoing as may be permitted
                                    from time to time under applicable law.

                  The "Worth at the Time of Award" of the amounts referred to in
                  parts 19.1.1.1 and 19.1.1.2 above, shall be computed by
                  allowing interest at the lesser of a per annum rate equal to:
                  (i) the greatest per annum rate of interest permitted from
                  time to time under applicable law, or (ii) the Prime Rate plus
                  5%. For purposes hereof, the "Prime Rate" shall be the per
                  annum interest rate publicly announced as its prime or base
                  rate by a federally insured bank selected by Landlord in the
                  State of California. The "Worth at the Time of Award" of the
                  amount referred to in part 19.1.1.3, above, shall be computed
                  by discounting such amount at the discount rate of the Federal
                  Reserve Bank of San Francisco at the time of award plus 1%;

                  19.1.2   Employ the remedy described in California Civil Code
                           Section 1951.4 (Landlord may continue this Lease in
                           effect after Tenant's breach and abandonment and
                           recover rent as it becomes due, if Tenant has the
                           right to sublet or assign, subject only to reasonable
                           limitations); or

                  19.1.3   Notwithstanding Landlord's exercise of the remedy
                           described in California Civil Code Section 1951.4 in
                           respect of an Event or Events of Default, at such
                           time thereafter as Landlord may elect in writing, to
                           terminate this Lease and Tenant's right to possession
                           of the Premises and recover an award of damages as
                           provided above in Section 19.1.1.

         19.2     The subsequent acceptance of rent hereunder by Landlord shall
                  not be deemed to be a waiver of any preceding breach by Tenant
                  of any term, covenant or condition of this Lease, other than
                  the failure of Tenant to pay the particular rent so accepted,
                  regardless of Landlord's knowledge of such preceding breach at
                  the time of acceptance of such rent. No waiver by Landlord of
                  any breach hereof shall be effective unless such waiver is in
                  writing and signed by Landlord.

         19.3     TENANT HEREBY WAIVES ANY AND ALL RIGHTS CONFERRED BY SECTION
                  3275 OF THE CIVIL CODE OF CALIFORNIA AND BY SECTIONS 1174 (c)
                  AND 1179 OF THE CODE OF CIVIL PROCEDURE OF CALIFORNIA AND ANY
                  AND ALL OTHER REGULATIONS AND RULES OF LAW FROM TIME TO TIME
                  IN EFFECT DURING THE TERM PROVIDING THAT TENANT SHALL HAVE ANY
                  RIGHT TO REDEEM, REINSTATE OR RESTORE THIS LEASE FOLLOWING ITS
                  TERMINATION BY REASON OF TENANT'S BREACH. TENANT ALSO

                                       17



                  HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE
                  RIGHT TO TRIAL BY JURY IN ANY LITIGATION ARISING OUT OF OR
                  RELATING TO THIS LEASE.

         19.4     No right or remedy herein conferred upon or reserved to
                  Landlord is intended to be exclusive of any other right or
                  remedy, and each and every right and remedy shall be
                  cumulative and in addition to any other right or remedy given
                  hereunder or now or hereafter existing by agreement,
                  applicable law or in equity. In addition to other remedies
                  provided in this Lease, Landlord shall be entitled, to the
                  extent permitted by applicable law, to injunctive relief, or
                  to a decree compelling performance of any of the covenants,
                  agreements, conditions or provisions of this Lease, or to any
                  other remedy allowed to Landlord at law or in equity.
                  Forbearance by Landlord to enforce one or more of the remedies
                  herein provided upon an Event of Default shall not be deemed
                  or construed to constitute a waiver of such Default.

         19.5     This Article 19 shall be enforceable to the maximum extent
                  such enforcement is not prohibited by applicable law, and the
                  unenforceability of any portion thereof shall not thereby
                  render unenforceable any other portion..

         19.6     If more than one (1) Event of Default occurs during the Term
                  or any renewal thereof, Tenant's renewal options, expansion
                  options, purchase options and rights of first offer and/or
                  refusal, if any are provided for in this Lease, shall be null
                  and void.

         19.7     Service of any statutory notices required in connection with
                  any rights of the parties hereto shall be completed in a
                  manner mandated by the applicable law, including California
                  Code of Civil Procedure Section 1162 or any similar or
                  successor statute.

20.  TENANT'S BANKRUPTCY OR INSOLVENCY.

         20.1     If at any time and for so long as Tenant shall be subjected to
                  the provisions of the United States Bankruptcy Code or other
                  law of the United States or any state thereof for the
                  protection of debtors as in effect at such time (each a
                  "Debtor's Law"):

                  20.1.1   Tenant, Tenant as debtor-in-possession, and any
                           trustee or receiver of Tenant's assets (each a
                           "Tenant's Representative") shall have no greater
                           right to assume or assign this Lease or any interest
                           in this Lease, or to sublease any of the Premises
                           than accorded to Tenant in Article 9, except to the
                           extent Landlord shall be required to permit such
                           assumption, assignment or sublease by the provisions
                           of such Debtor's Law. Without limitation of the
                           generality of the foregoing, any right of any
                           Tenant's Representative to assume or assign this
                           Lease or to sublease any of the Premises shall be
                           subject to the conditions that:

                           20.1.1.1 Such Debtor's Law shall provide to Tenant's
                                    Representative a right of assumption of this
                                    Lease which Tenant's Representative shall
                                    have timely exercised and Tenant's
                                    Representative shall have fully cured any
                                    default of Tenant under this Lease.

                           20.1.1.2 Tenant's Representative or the proposed
                                    assignee, as the case shall be, shall have
                                    deposited with Landlord as security for the
                                    timely payment of rent an amount equal to
                                    the larger of: (a) three (3) months' rent
                                    and other monetary charges accruing under
                                    this Lease; and (b) any sum specified in
                                    Article 5; and shall have provided Landlord
                                    with adequate other assurance of the future
                                    performance of the obligations of the Tenant
                                    under this Lease. Without limitation, such
                                    assurances shall include, at least, in the
                                    case of assumption of this Lease,
                                    demonstration to the satisfaction of the
                                    Landlord that Tenant's Representative has
                                    and will continue to have sufficient
                                    unencumbered assets after the payment of all
                                    secured obligations and administrative
                                    expenses to assure Landlord that Tenant's
                                    Representative will have sufficient funds to
                                    fulfill the obligations of Tenant under this
                                    Lease; and, in the case of assignment,
                                    submission of current financial statements
                                    of the proposed assignee, audited by an
                                    independent certified public accountant
                                    reasonably acceptable to Landlord and
                                    showing a net worth and working capital in
                                    amounts determined by Landlord to be
                                    sufficient to assure the future performance
                                    by such assignee of all of the Tenant's
                                    obligations under this Lease.

                                       18



                           20.1.1.3 The assumption or any contemplated
                                    assignment of this Lease or subleasing any
                                    part of the Premises, as shall be the case,
                                    will not breach any provision in any other
                                    lease, mortgage, financing agreement or
                                    other agreement by which Landlord is bound.

                           20.1.1.4 Landlord shall have, or would have had
                                    absent the Debtor's Law, no right under
                                    Article 9 to refuse consent to the proposed
                                    assignment or sublease by reason of the
                                    identity or nature of the proposed assignee
                                    or sublessee or the proposed use of the
                                    Premises concerned.

21.      QUIET ENJOYMENT. Landlord represents and warrants that it has full
         right and authority to enter into this Lease and that Tenant, while
         paying the rental and performing its other covenants and agreements
         contained in this Lease within applicable notice and cure periods,
         shall peaceably and quietly have, hold and enjoy the Premises for the
         Term without hindrance or molestation from Landlord subject to the
         terms and provisions of this Lease. Landlord shall not be liable for
         any interference or disturbance by other tenants or third persons, nor
         shall Tenant be released from any of the obligations of this Lease
         because of such interference or disturbance.

22.  CASUALTY

         22.1     In the event the Premises or the Building are damaged by fire
                  or other cause and in Landlord's reasonable estimation such
                  damage can be materially restored within one hundred eighty
                  (180) days, Landlord shall forthwith repair the same and this
                  Lease shall remain in full force and effect, except that
                  Tenant shall be entitled to a proportionate abatement in rent
                  from the date of such damage. Such abatement of rent shall be
                  made in proportion to the extent to which the damage and the
                  making of such repairs shall interfere with the Permitted Use
                  and occupancy by Tenant of the Premises from time to time.
                  Within forty-five (45) days from the date of such damage,
                  Landlord shall notify Tenant, in writing, of Landlord's
                  reasonable estimation of the length of time within which
                  material restoration can be made, and Landlord's determination
                  shall be binding on Tenant. For purposes of this Lease, the
                  Building or Premises shall be deemed "materially restored" if
                  they are in a substantially similar condition as of the date
                  of this Lease, reasonable wear and tear excepted, and provided
                  that Landlord shall have no obligation to restore and/or
                  replace the Improvements or any alterations or other
                  improvements made to the Premises.

         22.2     If such repairs cannot, in Landlord's reasonable estimation,
                  be made within one hundred eighty (180) days days, Landlord
                  and Tenant shall each have the option of giving the other, at
                  any time within ninety (90) days after such damage, notice
                  terminating this Lease as of the date of such damage. In the
                  event of the giving of such notice, this Lease shall expire
                  and all interest of the Tenant in the Premises shall terminate
                  as of the date of such damage as if such date had been
                  originally fixed in this Lease for the expiration of the Term.
                  In the event that neither Landlord nor Tenant exercises its
                  option to terminate this Lease, then Landlord shall repair or
                  restore such damage, this Lease continuing in full force and
                  effect, and the rent hereunder shall be proportionately abated
                  as provided in Section 22.1. Landlord shall not in bad faith
                  terminate this Lease pursuant to the terms of this Section
                  22.2 solely for the purpose of replacing Tenant with a
                  successor tenant.

         22.3     Landlord shall not be required to repair or replace any damage
                  or loss by or from fire or other cause to any panelings,
                  decorations, partitions, additions, railings, ceilings, floor
                  coverings, office fixtures or any other property or
                  improvements installed on the Premises by, or belonging to,
                  Tenant. Any insurance which may be carried by Landlord or
                  Tenant against loss or damage to the Building or Premises
                  shall be for the sole benefit of the party carrying such
                  insurance and under its sole control.

         22.4     In the event that Landlord should fail to complete such
                  repairs and material restoration within ninety (90) days after
                  the date estimated by Landlord therefor as extended by this
                  Section 22.4, Tenant may at its option and as its sole remedy
                  terminate this Lease by delivering written notice to Landlord,
                  within fifteen (15) days after the expiration of said period
                  of time, whereupon the Lease shall end on the date of such
                  notice or such later date fixed in such notice as if the date
                  of such notice was the date originally fixed in this Lease for
                  the expiration of the Term; provided, however, that if
                  construction is delayed because of changes, deletions or
                  additions in construction requested by Tenant, strikes,
                  lockouts, casualties, Acts of God, war, material or labor
                  shortages, government regulation or control or other causes
                  beyond the reasonable control of Landlord, the period for
                  restoration, repair or rebuilding shall be extended for the
                  amount of time Landlord is so delayed.

                                       19



         22.5     Notwithstanding anything to the contrary contained in this
                  Article: (a) Landlord shall not have any obligation whatsoever
                  to repair, reconstruct, or restore the Premises when the
                  damages resulting from any casualty covered by the provisions
                  of this Article 22 occur during the last twelve (12) months of
                  the Term or any extension thereof, but if Landlord determines
                  not to repair such damages Landlord shall notify Tenant and if
                  such damages shall render any material portion of the Premises
                  untenantable Tenant shall have the right to terminate this
                  Lease by notice to Landlord within fifteen (15) days after
                  receipt of Landlord's notice; and (b) in the event the holder
                  of any indebtedness secured by a mortgage or deed of trust
                  covering the Premises or Building requires that any insurance
                  proceeds be applied to such indebtedness, then Landlord shall
                  have the right to terminate this Lease by delivering written
                  notice of termination to Tenant within fifteen (15) days after
                  such requirement is made by any such holder, whereupon this
                  Lease shall end on the date of such damage as if the date of
                  such damage were the date originally fixed in this Lease for
                  the expiration of the Term.

         22.6     In the event of any damage or destruction to the Building or
                  Premises by any peril covered by the provisions of this
                  Article 22, it shall be Tenant's responsibility to properly
                  secure the Premises and upon notice from Landlord to remove
                  forthwith, at its sole cost and expense, such portion of all
                  of the property belonging to Tenant or its licensees from such
                  portion or all of the Building or Premises as Landlord shall
                  request.

         22.7     Tenant hereby waives any and all rights under and benefits of
                  Sections 1932(2) and 1933(4) of the California Code of Civil
                  Procedure, or any similar or successor Regulations or other
                  laws now or hereinafter in effect.

23.      EMINENT DOMAIN. If all or any substantial part of the Premises shall be
         taken or appropriated by any public or quasi-public authority under the
         power of eminent domain, or conveyance in lieu of such appropriation,
         either party to this Lease shall have the right, at its option, of
         giving the other, at any time within thirty (30) days after such
         taking, notice terminating this Lease, except that Tenant may only
         terminate this Lease by reason of taking or appropriation, if such
         taking or appropriation shall be so substantial as to materially
         interfere with Tenant's use and occupancy of the Premises. If neither
         party to this Lease shall so elect to terminate this Lease, the rental
         thereafter to be paid shall be adjusted on a fair and equitable basis
         under the circumstances and based upon the proportion of the Premises
         so taken. In addition to the rights of Landlord above, if any
         substantial part of the Building shall be taken or appropriated by any
         public or quasi-public authority under the power of eminent domain or
         conveyance in lieu thereof, and regardless of whether the Premises or
         any part thereof are so taken or appropriated, Landlord shall have the
         right, at its sole option, to terminate this Lease. Landlord shall be
         entitled to any and all income, rent, award, or any interest whatsoever
         in or upon any such sum, which may be paid or made in connection with
         any such public or quasi-public use or purpose, and Tenant hereby
         assigns to Landlord any interest it may have in or claim to all or any
         part of such sums, other than any separate award which may be made with
         respect to Tenant's trade fixtures, moving expenses and the value of
         leasehold improvements to the extent paid for solely by Tenant (except
         for those alterations approved by Landlord and which will become the
         property of Landlord upon the expiration or termination of this Lease);
         Tenant shall make no claim for the value of any unexpired Term. Tenant
         hereby waives any and all rights under and benefits of Section 1265.130
         of the California Code of Civil Procedure, or any similar or successor
         Regulations or other laws now or hereinafter in effect.

24.      SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the
         Building, the same shall operate to release Landlord from any future
         liability upon any of the covenants or conditions, expressed or
         implied, contained in this Lease in favor of Tenant and in such event
         Tenant agrees to look solely to the responsibility of the successor in
         interest of Landlord in and to this Lease. In the event of a sale, such
         successor-in-interest shall assume in writing Landlord's obligations
         under this Lease. Except as set forth in this Article 24, this Lease
         shall not be affected by any such sale and Tenant agrees to attorn to
         the purchaser or assignee. If any security has been given by Tenant to
         secure the faithful performance of any of the covenants of this Lease,
         Landlord shall transfer or deliver said security, as such, to
         Landlord's successor in interest and thereupon Landlord shall be
         discharged from any further liability with regard to said security.

25.      ESTOPPEL CERTIFICATES. Within ten (10) days following any written
         request which Landlord may make from time to time, Tenant shall execute
         and deliver to Landlord or mortgagee or prospective mortgagee a sworn
         statement certifying: (a) the date of commencement of this Lease; (b)
         the fact that this Lease is unmodified and in full force and effect
         (or, if there have been modifications to this Lease, that this lease is
         in full force and effect, as modified, and stating the date and nature
         of such modifications); (c) the date to which the rent and other sums

                                       20



         payable under this Lease have been paid; (d) the fact that there are no
         current defaults under this Lease by either Tenant or, to Tenant's
         actual knowledge, Landlord, except as specified in Tenant's statement;
         and (e) such other matters as may be reasonably requested by Landlord.
         Landlord and Tenant intend that any statement delivered pursuant to
         this Article 25 may be relied upon by any mortgagee, beneficiary or
         purchaser, and Tenant shall be liable for all loss, cost or expense
         resulting from the failure of any sale or funding of any loan caused by
         any material misstatement contained in such estoppel certificate.
         Tenant irrevocably agrees that if Tenant fails to execute and deliver
         such certificate within such ten (10) day period, such certificate as
         prepared by Landlord shall be deemed executed by Tenant and accordingly
         shall be fully binding on Tenant. The parties agree that Tenant's
         obligation to furnish such estoppel certificates in a timely fashion is
         a material inducement for Landlord's execution of this Lease, and shall
         be an Event of Default (without any cure period that might be provided
         under this Lease) if Tenant fails to fully comply or makes any material
         misstatement in any such certificate.

26.  SURRENDER OF PREMISES.

         26.1     Landlord shall arrange to meet Tenant for two (2) joint
                  inspections of the Premises, the first to occur at least ten
                  (10) days (but no more than sixty (60) days) before the last
                  day of the Term, and the second to occur not later than five
                  (5) days after Tenant has vacated the Premises. In the event
                  of Landlord's failure to arrange such joint inspections or
                  Tenant's failure to participate in either such inspection,
                  Landlord's inspection at or after Tenant's vacating the
                  Premises shall be conclusively deemed correct for purposes of
                  determining Tenant's responsibility for repairs and
                  restoration.

         26.2     All alterations, additions, and improvements in, on, or to the
                  Premises made or installed by or for Tenant, including
                  carpeting (collectively, "Alterations"), shall be and remain
                  the property of Tenant during the Term. Upon the expiration or
                  sooner termination of the Term, all Alterations shall become a
                  part of the realty and shall belong to Landlord without
                  compensation, and title shall pass to Landlord under this
                  Lease as by a bill of sale. At the end of the Term or any
                  renewal of the Term or other sooner termination of this Lease,
                  Tenant will peaceably deliver up to Landlord possession of the
                  Premises, together with all Alterations by whomsoever made, in
                  the same conditions received or first installed, broom clean
                  and free of all debris, excepting only ordinary wear and tear
                  and damage by fire or other casualty. Notwithstanding the
                  foregoing, and subject to the terms of Article 6 of this
                  Lease, if Landlord elects by notice given to Tenant at least
                  ten (10) days prior to expiration of the Term, Tenant shall,
                  at Tenant's sole cost, remove any Alterations, including
                  carpeting, so designated by Landlord's notice, and repair any
                  damage caused by such removal. Further, nothing contained in
                  this Section 26.2 shall increase Tenant's obligation to
                  remediate or remove Hazardous Materials as the same is
                  expressly provided in this Lease. Tenant must, at Tenant's
                  sole cost, remove upon termination of this Lease, any and all
                  of Tenant's furniture, furnishings, movable partitions of less
                  than full height from floor to ceiling and other trade
                  fixtures and personal property (collectively, "Personalty").
                  The Personalty shall be and remain the property of Tenant
                  during the Term. Personalty not so removed shall be deemed
                  abandoned by the Tenant and title to the same shall thereupon
                  pass to Landlord under this Lease as by a bill of sale, but
                  Tenant shall remain responsible for the cost of removal and
                  disposal of such Personalty, as well as any damage caused by
                  such removal. If Tenant fails to remove such alterations or
                  Tenant's trade fixtures or furniture or the Personalty,
                  Landlord may keep and use them or remove any of them and cause
                  them to be stored or sold in accordance with applicable law,
                  at Tenant's sole expense.

         26.3     All obligations of Tenant under this Lease not fully performed
                  as of the expiration or earlier termination of the Term shall
                  survive the expiration or earlier termination of the Term To
                  the extent Tenant has failed to do the same, upon the
                  expiration or earlier termination of the Term, Tenant shall
                  pay to Landlord the amount, as reasonably estimated by
                  Landlord, necessary to repair and restore the Premises as
                  provided in this Lease and/or to discharge Tenant's obligation
                  for unpaid amounts due or to become due to Landlord. All such
                  amounts shall be used and held by Landlord for payment of such
                  obligations of Tenant, with Tenant being liable for any
                  additional costs upon demand by Landlord, or with any excess
                  to be promptly returned to Tenant after all such obligations
                  have been determined and satisfied. Any otherwise unused
                  Security Deposit shall be credited against the amount payable
                  by Tenant under this Lease.

27.      NOTICES. Any notice or document required or permitted to be delivered
         under this Lease shall be addressed to the intended recipient, by fully
         prepaid registered or certified United States Mail return receipt
         requested, or by reputable independent contract delivery service
         furnishing a written record of attempted or actual delivery, and shall
         be deemed to be delivered when tendered for delivery to the addressee
         at its address set forth on the Reference

                                       21



         Pages, or at such other address as it has then last specified by
         written notice delivered in accordance with this Article 27, or if to
         Tenant at either its aforesaid address or its last known registered
         office or home of a general partner or individual owner, whether or not
         actually accepted or received by the addressee. Any such notice or
         document may also be personally delivered if a receipt is signed by and
         received from, the individual, if any, named in Tenant's Notice
         Address.

28.      TAXES PAYABLE BY TENANT. In addition to rent and other charges to be
         paid by Tenant under this Lease, Tenant shall reimburse to Landlord,
         upon demand, any and all taxes payable by Landlord (other than net
         income taxes) whether or not now customary or within the contemplation
         of the parties to this Lease: (a) upon or measured by the Tenant's
         gross receipts or payroll or the value of Tenant's equipment,
         furniture, fixtures and other personal property of Tenant or leasehold
         improvements, alterations or additions located in the Premises; or (b)
         upon this transaction or any document to which Tenant is a party
         creating or transferring any interest of Tenant in this Lease or the
         Premises. If due to a future change in the method of taxation, any
         franchise, income or profit or other tax shall be levied in
         substitution in whole or in part or in lieu of any tax which would
         otherwise constitute a part of Taxes under this Lease, such franchise,
         income, profit or other tax shall be deemed to be a part of Taxes for
         the purposes of this Lease. In addition to the foregoing, Tenant agrees
         to pay, before delinquency, any and all taxes levied or assessed
         against Tenant and which become payable during the term hereof upon
         Tenant's equipment, furniture, fixtures and other personal property of
         Tenant located in the Premises. In addition to and wholly apart from
         Tenant's obligation to pay Tenant's Proportionate Share of Expenses and
         Taxes, Tenant shall be responsible for and shall pay prior to
         delinquency any taxes or governmental service fees, possessory interest
         taxes, fees or charges in lieu of any such taxes, capital levies, or
         other charges imposed upon, levied with respect to or assessed against
         its fixtures or Personalty, on the value of any alterations or other
         improvements within the Premises, and on Tenant's interest pursuant to
         this Lease, or any increase in any of the foregoing based on such
         alterations and/or improvements.

29.      INTENTIONALLY OMITTED.

30.      DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease
         are for convenience of reference and shall in no way define, increase,
         limit or describe the scope or intent of any provision of this Lease.
         Any indemnification or insurance of Landlord shall apply to and inure
         to the benefit of all the following "Landlord Entities", being
         Landlord, Landlord's investment advisors, and the trustees, boards of
         directors, officers, general partners, beneficiaries, stockholders,
         employees and agents of each of them. Any option granted to Landlord
         shall also include or be exercisable by Landlord's trustee,
         beneficiary, agents and employees, as the case may be. In any case
         where this Lease is signed by more than one person, the obligations
         under this Lease shall be joint and several. The terms "Tenant" and
         "Landlord" or any pronoun used in place thereof shall indicate and
         include the masculine or feminine, the singular or plural number,
         individuals, firms or corporations, and their and each of their
         respective successors, executors, administrators and permitted assigns,
         according to the context hereof. The term "rentable area" shall mean
         the rentable area of the Premises or the Building as calculated by the
         Landlord on the basis of the plans and specifications of the Building
         including a proportionate share of any common areas. Tenant hereby
         accepts and agrees to be bound by the figures for the rentable square
         footage of the Premises and Tenant's Proportionate Share shown on the
         Reference Pages; however, Landlord may adjust either or both figures if
         there is manifest error, addition or subtraction to the Building or any
         business park or complex of which the Building is a part, remeasurement
         or other circumstance reasonably justifying adjustment. The term
         "Building" refers to the structure in which the Premises are located
         and the common areas (parking lots, sidewalks, landscaping, etc.)
         appurtenant thereto. If the Building is part of a larger complex of
         structures, the term "Building" may include the entire complex, where
         appropriate (such as shared Expenses or Taxes) and subject to
         Landlord's reasonable discretion.

31.      TENANT'S AUTHORITY. If Tenant signs as a corporation, partnership,
         trust or other legal entity, Tenant represents and warrants that each
         of the persons executing this Lease on behalf of Tenant has been and is
         qualified to do business in the state in which the Building is located,
         that the entity has full right and authority to enter into this Lease,
         and that all persons signing on behalf of the entity were authorized to
         do so by appropriate actions.

32.      FINANCIAL STATEMENTS AND CREDIT REPORTS. At Landlord's request, Tenant
         shall deliver to Landlord a copy, certified by an officer of Tenant as
         being a true and correct copy, of Tenant's most recent audited
         financial statement, or, if unaudited, certified by Tenant's chief
         financial officer as being true, complete and correct in all material
         respects. Tenant hereby authorizes Landlord to obtain one or more
         credit reports on Tenant at any time, and shall execute such further
         authorizations as Landlord may reasonably require in order to obtain a
         credit

                                       22



         report. The foregoing shall not apply to the extent Tenant is a
         publicly traded entity on the "over-the-counter" market or any
         recognized national or international securities exchange and,
         accordingly, Tenant's audited financial statements are available to the
         public.

33.      COMMISSIONS. Each of the parties represents and warrants to the other
         that it has not dealt with any broker or finder in connection with this
         Lease, except as described on the Reference Pages. Tenant shall
         indemnify and hold Landlord and its employees and affiliates harmless
         from all claims of any other brokers claiming to have represented
         Tenant in connection with this Lease. Landlord agrees to indemnify and
         hold Tenant and its employees and affiliates harmless from all claims
         of any brokers claiming to have represented Landlord in connection with
         this Lease.

34.      TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all
         of its provisions. This Lease shall in all respects be governed by the
         laws of the state in which the Building is located.

35.      SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the
         terms, covenants and conditions contained in this Lease shall be
         binding upon and inure to the benefit of the heirs, successors,
         executors, administrators and assigns of the parties to this Lease.

36.      ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all
         agreements of the parties to this Lease and supersedes any previous
         negotiations. There have been no representations made by the Landlord
         or any of its representatives or understandings made between the
         parties other than those set forth in this Lease and its exhibits. This
         Lease may not be modified except by a written instrument duly executed
         by the parties to this Lease.

37.      EXAMINATION NOT OPTION. Submission of this Lease shall not be deemed to
         be a reservation of the Premises. Landlord shall not be bound by this
         Lease until it has received a copy of this Lease duly executed by
         Tenant and has delivered to Tenant a copy of this Lease duly executed
         by Landlord, and until such delivery Landlord reserves the right to
         exhibit and lease the Premises to other prospective tenants.
         Notwithstanding anything contained in this Lease to the contrary,
         Landlord may withhold delivery of possession of the Premises from
         Tenant until such time as Tenant has paid to Landlord any security
         deposit required by Article 5, the first month's rent as set forth in
         Article 3 and any sum owed pursuant to this Lease.

38.      RECORDATION. Tenant shall not record or register this Lease or a short
         form memorandum hereof without the prior written consent of Landlord,
         and then shall pay all charges and taxes incident such recording or
         registration.

39.      LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against
         Landlord under this Lease shall be limited to and enforceable only
         against and to the extent of Landlord's interest in the Building. The
         obligations of Landlord under this Lease are not intended to be and
         shall not be personally binding on, nor shall any resort be had to the
         private properties of, any of its or its investment manager's trustees,
         directors, officers, partners, beneficiaries, members, stockholders,
         employees, or agents, and in no case shall Landlord be liable to Tenant
         hereunder for any lost profits, damage to business, or any form of
         special, indirect or consequential damages.

40.      RENEWAL OPTION. Tenant shall, provided the Lease is in full force and
         effect and Tenant is not in default under any of the other terms and
         conditions of the Lease at the time of notification or commencement,
         have one (1) option to renew this Lease for a term of three (3) years,
         for the portion of the Premises being leased by Tenant as of the date
         the renewal term is to commence, on the same terms and conditions set
         forth in the Lease, except as modified by the terms, covenants and
         conditions as set forth below:

         40.1     If Tenant elects to exercise said option, then Tenant shall
                  provide Landlord with written notice no earlier than the date
                  which is 365 days prior to the expiration of the then current
                  term of the Lease but no later than the date which is 180 days
                  prior to the expiration of the then current term of this
                  Lease. If Tenant fails to provide such notice, Tenant shall
                  have no further or additional right to extend or renew the
                  term of the Lease.

         40.2     The Annual Rent and Monthly Installment in effect at the
                  expiration of the then current term of the Lease shall be
                  increased to reflect the current fair market rental for
                  comparable space in the Building and in other similar
                  buildings in the same rental market as of the date the renewal
                  term is to commence, taking into account the specific
                  provisions of the Lease which will remain constant and, unless
                  it is not the case, taking into account that there will be no
                  free rent and no tenant improvement allowances or other
                  concessions.

                                       23



                  Landlord shall advise Tenant of the new Annual Rent and
                  Monthly Installment for the Premises no later than thirty (30)
                  days after receipt of Tenant's written request therefor. Said
                  request shall be made no earlier than thirty (30) days prior
                  to the first date on which Tenant may exercise its option
                  under this Paragraph. Said notification of the new Annual Rent
                  may include a provision for its escalation to provide for a
                  change in fair market rental between the time of notification
                  and the commencement of the renewal term. If Tenant and
                  Landlord are unable to agree on a mutually acceptable rental
                  rate not later than one hundred eighty (180) days prior to the
                  expiration of the then current term, then either (i) Tenant
                  may, by providing written notice to Landlord on or before the
                  date which is one hundred seventy (170) days prior to the
                  expiration of the then current term, rescind its notice of
                  exercise of the renewal option, or (ii) Landlord and Tenant
                  shall each appoint a qualified MAI appraiser doing business in
                  the area, in turn those two independent MAI appraisers shall
                  appoint a third MAI appraiser and the majority shall decide
                  upon the fair market rental for the Premises as of the
                  expiration of the then current term. Landlord and Tenant shall
                  equally share in the expense of this appraisal except that in
                  the event the Annual Rent and Monthly Installment is found to
                  be within fifteen percent (15%) of the original rate quoted by
                  Landlord, then Tenant shall bear the full cost of all the
                  appraisal process. In no event shall the Annual Rent and
                  Monthly Installment for any option period be less than the
                  Annual Rent and Monthly Installment in the preceding period.

         40.3     Except with respect to Permitted Transfers and transfers to
                  Affiliated Parties and Corporate Successors which are approved
                  by Landlord at the time of such transfer in accordance with
                  Article 9 of this Lease, this option is not transferable; the
                  parties hereto acknowledge and agree that they intend that the
                  aforesaid option to renew this Lease shall be "personal" to
                  Tenant as set forth above and that in no event will any
                  assignee or sublessee have any rights to exercise the
                  aforesaid option to renew.

         40.4     As each renewal option provided for above is exercised, the
                  number of renewal options remaining to be exercised is reduced
                  by one and upon exercise of the last remaining renewal option
                  Tenant shall have no further right to extend the term of the
                  Lease.

41.      SIGNAGE. Tenant shall not place, install, affix, paint or maintain any
         signs, notices, graphics or banners whatsoever or any window decor
         which is visible in or from public view or corridors, the common areas
         or the exterior of the Premises or the Building, in or on any exterior
         window or window fronting upon any common areas or service area or upon
         any truck doors or man doors without Landlord's prior written approval
         which Landlord shall have the right to withhold in its absolute and
         sole discretion; provided that Tenant's name shall be included in any
         Building-standard door and directory signage, if any, in accordance
         with Landlord's Building signage program, including without limitation,
         payment by Tenant of any fee charged by Landlord for maintaining such
         signage, which fee shall constitute additional rent hereunder. Any
         installation of signs, notices, graphics or banners on or about the
         Premises approved by Landlord shall be subject to any applicable laws,
         codes, ordinances, rules, the Sign Specifications attached to this
         Lease as Exhibit E and to any other reasonable requirements imposed by
         Landlord. Tenant shall remove all such signs or graphics by the
         expiration or any earlier termination of this Lease. Such installations
         and removals shall be made in such manner as to avoid injury to or
         defacement of the Premises and the Building and any other improvements
         contained therein, and Tenant shall repair any injury or defacement
         including without limitation discoloration caused by such installation
         or removal.

42.      INTENTIONALLY OMITTED.

43.      ROOF RIGHTS FOR DEVICE.

         43.1     Tenant shall have the right, in consideration for payments of
                  $0 per month (the "Device Payments") for the initial Term of
                  this Lease, to lease space on the roof of the Building for the
                  purpose of installing (in accordance with the alterations
                  provision of the Lease), operating and maintaining one 18 inch
                  dish/antenna or other communication device approved by the
                  Landlord (the "Device"). Following the initial Term of this
                  Lease, Landlord shall have the right to charge and Tenant
                  shall pay Landlord the prevailing monthly charges established
                  from time to time for the leasing of space on the roof on the
                  Building, payable in advance, with Tenant's payment of the
                  Monthly Installment of Rent. The Device Payments, if any,
                  shall constitute Additional Rent under the terms of the Lease
                  and Tenant shall be required to make these payments in strict
                  compliance with the terms of the Lease. The exact location of
                  the space on the roof to be leased by Tenant shall be
                  designated by Landlord and shall not exceed 9 square feet (the
                  "Roof Space"). Landlord reserves the right to relocate the
                  Roof Space as reasonably necessary during the Term. Landlord's
                  designation shall take into account Tenant's use of the
                  Device. Notwithstanding the foregoing, Tenant's right to
                  install the Device shall be subject to the approval rights of
                  Landlord and Landlord's architect and/or engineer with

                                       24



                  respect to the plans and specifications of the Device, the
                  manner in which the Device is attached to the roof of the
                  Building and the manner in which any cables are run to and
                  from the Device. The precise specifications and a general
                  description of the Device along with all documents Landlord
                  reasonably requires to review the installation of the Device
                  (the "Plans and Specifications") shall be submitted to
                  Landlord for Landlord's written approval no later than 20 days
                  before Tenant commences to install the Device. Tenant shall be
                  solely responsible for obtaining all necessary governmental
                  and regulatory approvals and for the cost of installing,
                  operating, maintaining and removing the Device. Tenant shall
                  notify Landlord upon completion of the installation of the
                  Device. If Landlord determines that the Device equipment does
                  not comply with the approved Plans and Specifications, that
                  the Building has been damaged during installation of the
                  Device or that the installation was defective, Landlord shall
                  notify Tenant of any noncompliance or detected problems and
                  Tenant immediately shall cure the defects. If the Tenant fails
                  to immediately cure the defects, Tenant shall pay to Landlord
                  upon demand the cost, as reasonably determined by Landlord, of
                  correcting any defects and repairing any damage to the
                  Building caused by such installation. If at any time Landlord,
                  in its reasonable discretion, deems it necessary, Tenant shall
                  provide and install, at Tenant's sole cost and expense,
                  appropriate aesthetic screening, reasonably satisfactory to
                  Landlord, for the Device (the "Screening").

         43.2     Landlord agrees that Tenant, upon reasonable prior written
                  notice to Landlord, shall have access to the roof of the
                  Building and the Roof Space for the purpose of installing,
                  maintaining, repairing and removing the Device, the
                  appurtenances and the Screening, if any, all of which shall be
                  performed by Tenant or Tenant's authorized representatives,
                  engineers or contractors, and authorized FCC (as defined
                  below) inspectors which shall be approved by Landlord, at
                  Tenant's sole cost and risk. Tenant further agrees to keep to
                  a minimum the number of people having access to the roof of
                  the Building and the Roof Space and the frequency of their
                  visits.

         43.3     It is further understood and agreed that the installation,
                  maintenance, operation and removal of the Device, the
                  appurtenances and the Screening, if any, is not permitted to
                  damage the Building or the roof thereof, or interfere with the
                  use of the Building and roof by Landlord. Tenant agrees to be
                  responsible for any damage caused to the roof or any other
                  part of the Building, which may be caused by Tenant or any of
                  its agents or representatives.

         43.4     Tenant agrees to install only equipment of types and
                  frequencies which will not cause unreasonable interference to
                  Landlord or existing tenants of the Building. In the event
                  Tenant's equipment causes such interference, Tenant will
                  change the frequency on which it transmits and/or receives and
                  take any other steps necessary to eliminate the interference.
                  If said interference cannot be eliminated within a reasonable
                  period of time, in the reasonable judgment of Landlord, then
                  Tenant agrees to remove the Device from the Roof Space.

         43.5     Tenant shall, at its sole cost and expense, and at its sole
                  risk, install, operate and maintain the Device in a good and
                  workmanlike manner, and in compliance with all Building,
                  electric, communication, and safety codes, ordinances,
                  standards, regulations and requirements, now in effect or
                  hereafter promulgated, of the Federal Government, including,
                  without limitation, the Federal Communications Commission (the
                  "FCC"), the Federal Aviation Administration ("FAA") or any
                  successor agency of either the FCC or FAA having jurisdiction
                  over radio or telecommunications, and of the state, city and
                  county in which the Building is located. Under this Lease, the
                  Landlord and its agents assume no responsibility for the
                  licensing, operation and/or maintenance of Tenant's equipment.
                  Tenant has the responsibility of carrying out the terms of its
                  FCC license in all respects. Neither Landlord nor its agents
                  shall be liable to Tenant for any stoppages or shortages of
                  electrical power furnished to the Device or the Roof Space
                  because of any act, omission or requirement of the public
                  utility serving the Building, or the act or omission of any
                  other tenant, invitee or licensee or their respective agents,
                  employees or contractors, or for any other cause beyond the
                  reasonable control of Landlord, and Tenant shall not be
                  entitled to any rental abatement for any such stoppage or
                  shortage of electrical power. Neither Landlord nor its agents
                  shall have any responsibility or liability for the conduct or
                  safety of any of Tenant's representatives, repair, maintenance
                  and engineering personnel while in or on any part of the
                  Building or the Roof Space.

         43.6     The Device, the appurtenances and the Screening, if any, shall
                  remain the personal property of Tenant, and shall be removed
                  by Tenant at its own expense at the expiration or earlier
                  termination of this Lease or Tenant's right to possession
                  hereunder. Tenant agrees that at all times during the Term, it
                  will keep the

                                       25



                  roof of the Building and the Roof Space free of all trash or
                  waste materials produced by Tenant or Tenant's agents,
                  employees or contractors.

         43.7     Tenant must provide Landlord with prior written notice of any
                  such installation, removal or repair and coordinate such work
                  with Landlord in order to avoid voiding or otherwise adversely
                  affecting any warranties granted to Landlord with respect to
                  the roof. In the event the Landlord contemplates roof repairs
                  that could affect Tenant's Device, or which may result in an
                  interruption of the Tenant's telecommunication service,
                  Landlord shall formally notify Tenant at least 30 days in
                  advance (except in cases of an emergency) prior to the
                  commencement of such contemplated work in order to allow
                  Tenant to make other arrangements for such service.

         43.8     Tenant shall not use the Roof Space and/or Device to provide
                  communication services to an unaffiliated tenant, occupant or
                  licensee of another building, or to facilitate the provision
                  of communication services on behalf of another communication
                  services provider to an unaffiliated tenant, occupant or
                  licensee of the Building or any other building. Tenant
                  specifically acknowledges and agrees that the terms and
                  conditions of the Lease respecting Tenant's indemnity
                  obligation of Landlord and the waiver of subrogation shall
                  apply with full force and effect to the Roof Space and any
                  other portions of the roof accessed or utilized by Tenant, its
                  representatives, agents, employees or contractors.

         43.9     If Tenant defaults under any of the terms and conditions of
                  this Section or the Lease, and Tenant fails to cure said
                  default within the time allowed by the terms and conditions of
                  the Lease, Landlord shall be permitted to exercise all
                  remedies provided under the terms of the Lease, including
                  removing at tenant's sole cost and expense the Device, the
                  appurtenances and the Screening, if any, and, at tenant's sole
                  cost and expense, restoring the Building and the Roof Space to
                  the condition that existed prior to the installation of the
                  Device, the appurtenances and the Screening, if any.

IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day
and the year stated below.

LANDLORD:                                            TENANT:

CALWEST INDUSTRIAL HOLDINGS, LLC,                    SCM MICROSYSTEMS, INC.,
A DELAWARE LIMITED LIABILITY COMPANY                 A DELAWARE CORPORATION

By: RREEF Management Company,
    A Delaware corporation, its Property Manager

By: _______________________________                  By: _______________________

Name: Timothy DeGoosh                                Name: _____________________

Title: District Manager                              Title: ____________________

Dated: _______________________, 2003                 Dated: ______________, 2003

                                       26



                  EXHIBIT A - FLOOR PLAN DEPICTING THE PREMISES

        ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE
       DATE OF MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A
            DELAWARE LIMITED LIABILITY COMPANY, AS LANDLORD, AND SCM
              MICROSYSTEMS, INC., A DELAWARE CORPORATION, AS TENANT

Exhibit A is intended only to show the general layout of the Premises as of the
beginning of the Term of this Lease. It does not in any way supersede any of
Landlord's rights set forth in Article 17 with respect to arrangements and/or
locations of public parts of the Building and changes in such arrangements
and/or locations. It is not to be scaled; any measurements or distances shown
should be taken as approximate.

                   466 Kato Terrace, Fremont, California 94539
                        Approximately 18,322 square feet

                                                                       Initials

                                       A-1



                             EXHIBIT A-1 - SITE PLAN

    ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF
  MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED
     LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE
                             CORPORATION, AS TENANT

Exhibit A-1 is intended only to show the general layout of the Premises as of
the beginning of the Term of this Lease. It does not in any way supersede any of
Landlord's rights set forth in Article 17 with respect to arrangements and/or
locations of public parts of the Building and changes in such arrangements
and/or locations. It is not to be scaled; any measurements or distances shown
should be taken as approximate.

[SITE PLAN]

                   466 Kato Terrace, Fremont, California 94539
                        Approximately 18,322 square feet

                                                                       Initials

                                       A-2



                            EXHIBIT B -- IMPROVEMENTS

    ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF
  MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED
     LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE
                             CORPORATION, AS TENANT

a.       Landlord shall provide a leasehold improvement allowance for
improvement of the Premises in an amount not to exceed $45,000.00 (the
"Leasehold Improvement Allowance"). The Leasehold Improvement Allowance shall be
used for Tenant's costs incurred in the design and construction of the
Improvements (as hereinafter defined) in the Premises, including, without
limitation, (i) payment of the fees of any architect or engineers employed by
Tenant, (ii) the cost of construction of such Improvements, and (iii) the cost
to construct any permanent fixtures. Notwithstanding anything herein to the
contrary, Landlord shall not be obligated to disburse any portion of the
Leasehold Improvement Allowance during the continuance of an uncured default by
Tenant under the Lease, and Landlord's obligation to disburse shall only resume
when and if such default is cured.

b.       Tenant shall have no right to credit or otherwise offset any unused
portion of the Leasehold Improvement Allowance against any monthly installment
of Annual Rent, Additional Rent, or any other amounts payable by Tenant to
Landlord under this Lease. In no event shall the Leasehold Improvement Allowance
be used for the purchase of equipment, furniture or other items of personal
property of Tenant. If Tenant does not submit a request for payment of the
entire Allowance to Landlord in accordance with the provisions contained in this
Improvement Agreement by June 30, 2003, any unused amount shall accrue to the
sole benefit of Landlord, it being understood that Tenant shall not be entitled
to any credit, abatement or other concession in connection therewith. Tenant
shall be responsible for all applicable state sales or use taxes, if any,
payable in connection with the Improvements and/or Allowance.

c.       Tenant has inspected the Premises and, subject to the terms and
conditions of the Lease, agrees (i) to accept possession of the Premises in the
condition existing as of the Commencement Date of this Lease, "as is", (ii) that
neither Landlord nor Landlord's agents have made any representations or
warranties with respect to the Premises or the Building except as expressly set
forth herein, and (iii) except for the Leasehold Improvement Allowance, Landlord
has no obligation to perform any work, supply any materials, incur any expense
or make any alterations or improvements to the Premises for Tenant's occupancy.
This Section c. shall be subject to the provisions of Section h. below.

d.       All Improvements shall be constructed by a general contractor selected
by Tenant and approved by Landlord in Landlord's reasonable discretion (the
"General Contractor"). Landlord hereby approves Qualogy Construction, Inc. as
the General Contractor. Additionally, Landlord shall approve all subcontractors
employed by Tenant and/or its general contractor, which consent (except as to
any Major Subcontractor (as hereinafter defined)), shall not be unreasonably
withheld or delayed. Landlord's approval of any Major Subcontractor may be
withheld or conditioned in Landlord's sole and absolute discretion. "Major
Subcontractor" shall mean any subcontractor responsible for mechanical,
electrical, structural, sprinkler, fire, life and safety, or ACM, as designated
by Landlord.

e.       Tenant shall perform improvements to the Premises in accordance with
the plans prepared by Interior Architects, dated February 19, 2003 as Job Number
123103.00 (the "Final Plans"). The improvements to be performed by Tenant in
accordance with the Final Plans are hereinafter referred to as the
"Improvements." Tenant shall not be required to remove the Improvements at the
expiration or earlier termination of the Lease. All Final Plans shall comply
with all applicable statutes, ordinances, regulations, laws, and codes and with
the requirements of Landlord's fire insurance underwriters. Neither review nor
approval by Landlord of the Final Plans shall constitute a representation or
warranty by Landlord that such plans either (i) are complete or suitable for
their intended purpose, or (ii) comply with applicable laws, ordinances, codes,
regulations, or any insurance requirements. Tenant shall not make any changes in
the Final Plans without Landlord's prior written approval, which shall be either
reasonably approved or disapproved, in writing, within five (5) business days
following submission by Tenant.

f.       In the event Tenant desires to change the Final Plans, Tenant shall
deliver notice (the "Final Plans Change Notice") of the same to Landlord,
setting forth in detail the changes (the "Tenant Change") Tenant desires to make
to the Final Plans. Landlord shall, within five (5) business days of receipt of
the Final Plans Change Notice, either (i) approve the Tenant Change, or (ii)
disapprove the Tenant Change and deliver a notice to Tenant specifying in detail
the reasons for Landlord's disapproval' provided, however, that Landlord may
only disapprove of the Tenant Change if the Tenant Change contains a

                                                                       Initials



Design Problem (as hereinafter defined). Any additional costs which arise in
connection with such Tenant Change in excess of the Leasehold Improvement
Allowance shall be paid by Tenant. For the purposes of this Section e., a
"Design Problem" shall mean a change in the Final Plans which has an adverse
affect on the exterior appearance of the Building, serves to create an
unreasonable burden upon one or more of the various Building systems, creates
excessive structural loads, or threatens the integrity of the roof.

g.       Tenant, at its sole cost and expense, shall file the Final Plans with
the governmental agencies having jurisdiction over the Improvements. Tenant
shall not commence the Improvements until the required governmental
authorizations for such work are obtained.

h.       All work performed by Tenant shall be performed with a minimum of
interference with other tenants and occupants of the Property and shall conform
to the Building rules and regulations attached to the Lease and those
reasonable, nondiscriminatory rules and regulations governing construction in
the Building as Landlord may impose. Tenant will take all reasonable and
customary precautionary steps to protect its facilities and the facilities of
others affected by the Improvements and to properly police same and Landlord
shall have no responsibility for any loss by theft or otherwise. Construction
equipment and materials are to be located in confined areas and delivery and
loading of equipment and materials shall be done at such reasonable locations
and at such time as Landlord shall direct so as not to burden the operation of
the Building or the Property. Landlord shall advise Tenant in advance of any
special delivery and loading dock requirements. Tenant shall at all times keep
the Premises and adjacent areas free from accumulations of waste materials or
rubbish caused by its suppliers, contractors or workmen. At the completion of
the Improvements, Tenant's contractors shall forthwith remove all rubbish and
all tools, equipment and surplus materials from and about the Premises and
Building. Any damage caused by Tenant's contractors to any portion of the
Building or to any property of Landlord or other tenants shall be repaired
forthwith after written notice from Landlord to its condition prior to such
damage by Tenant at Tenant's expense.

i.       The General Contractor shall assume responsibility for the prevention
of accidents to its agents and employees and shall take all reasonable safety
precautions with respect to the work to be performed and shall comply with all
reasonable safety measures initiated by the Landlord and with all applicable
laws, ordinances, rules, regulations and orders of any public authority for the
safety of persons or property. Tenant shall advise the Tenant's contractors to
report to Landlord any injury to any of its agents or employees and shall
furnish Landlord a copy of the accident report filed with its insurance carrier
within three (3) days of its occurrence. Tenant shall cause the General
Contractor to secure, pay for, and maintain during the performance of the
construction of the Improvements, insurance in the following minimum coverages
and limits of liability:

         (i)      Workers' Compensation and Employer's Liability Insurance as
                  required by law.

         (ii)     Comprehensive General Liability Insurance (including Owner's
and Contractors' Protective Liability) in an amount not less than One Million
Dollars ($1,000,000) per occurrence, whether involving bodily injury liability
(or death resulting therefrom) or property damage liability or a combination
thereof with a minimum aggregate limit of Two Million Dollars ($2,000,000), and
with umbrella coverage with limits not less than Five Million Dollars
($5,000,000). Such insurance shall provide for explosion and collapse, completed
operations coverage with a two-year extension after completion of the work, and
broad form blanket contractual liability coverage and shall insure Tenant's
contractors against any and all claims for bodily injury, including death
resulting therefrom and damage to the property of others and arising from its
operations under the contracts whether such operations are performed by Tenant's
contractors, or by anyone directly or indirectly employed by any of them.

         (iii)    Comprehensive Automobile Liability Insurance, including the
ownership, maintenance, and operation of any automotive equipment, owned, hired,
or non-owned in an amount not less than One Million Dollars ($1,000,000) for
each person in one accident, and One Million Dollars ($1,000,000) for injuries
sustained by two or more persons in any one accident and property damage
liability in an amount not less than One Million Dollars ($1,000,000) for each
accident. Such insurance shall insure Tenant's contractors against any and all
claims for bodily injury, including death resulting therefrom, and damage to the
property of others arising from its operations under the contracts, whether such
operations are performed by Tenant's contractors, or by anyone directly or
indirectly employed by any of them.

The Improvements shall be constructed in a first-class manner using only
first-class grades of material and in compliance with the Final Plans, all
insurance requirements, applicable laws and ordinances and rules and regulations
of governmental departments or agencies and the rules and regulations adopted by
Landlord for the Building. The Improvements shall be deemed to be "Substantially
Complete" on the date that the Improvements have been performed, other than any
details of

                                                                       Initials

                                       B-2



construction, mechanical adjustment or any other similar matter, the
noncompletion of which does not materially interfere with Tenant's use of the
Premises.

j.       The Allowance may only be used for hard costs in connection with the
Improvements. The Allowance shall be paid to Tenant or, at Landlord's option, to
the order of the general contractor that performed the Improvements, within 30
days following receipt by Landlord of (1) receipted bills covering all labor and
materials expended and used in the Improvements; (2) a sworn contractor's
affidavit from the general contractor and a request to disburse from Tenant
containing an approval by Tenant of the work done; (3) full and final releases
and waivers of lien, in form and content satisfactory to Landlord, from all
persons and entities providing work or materials covered by such statement; (4)
as-built plans of the Improvements; and (5) the certification of Tenant and its
architect that the Improvements have been installed in a good and workmanlike
manner in accordance with the approved plans, and in accordance with applicable
laws, codes and ordinances and that the same are substantially complete. The
Leasehold Improvement Allowance shall be disbursed in the amount reflected on
the receipted bills meeting the requirements above. Landlord's obligation to
disburse the Leasehold Improvement Allowance shall be subject to verification
that the work described in the disbursement request has been completed in
accordance with the requirements of the Lease, as determined by Landlord's
construction manager; provided, however, that such verification shall not
constitute an acceptance of the work by Landlord or a waiver by Landlord of any
right against Tenant in the event the work has not been completed as required by
the terms of the Lease.

k.       Following Substantial Completion of the Improvements, Tenant shall
comply with the following: (i) Tenant shall obtain and deliver to Landlord a
copy of the certificate of occupancy for the Improvements from the governmental
agency having jurisdiction thereof; (ii) Tenant shall promptly cause a notice of
completion to be validly recorded for the Improvements; (iii) Tenant shall
furnish Landlord with unconditional waivers of lien in statutory form from all
parties performing labor and/or supplying equipment and/or materials in
connection with the Improvements, including Tenant's architect(s); (iv) Tenant
shall deliver to Landlord a certificate of Tenant's architect(s) certifying
completion of the Improvements in substantial accordance with the Final Plans;
(v) Tenant shall deliver to Landlord a certificate of Tenant's contractor(s)
certifying completion of the Improvements in substantial accordance with the
construction contract(s) approved by Landlord; (vi) Tenant shall deliver to
Landlord a full set of reproducible as-built drawings (signed and dated by the
General Contractor and each responsible subcontractor) for the Improvements; and
(vii) Tenant shall deliver to Landlord copies of all written construction and
equipment warranties related to the Improvements.

l.       Should Landlord fail to pay within sixty (60) days of Tenant's written
demand and Tenant's compliance with its obligations under the Lease and this
Improvement Agreement any portion of the Leasehold Improvement Allowance, Tenant
shall have the right, on ten (10) business days' notice, to deduct any and all
sums owing to Tenant (any portion of the Leasehold Improvement Allowance in
dispute not being a sum owing to Tenant) from the next due Monthly Installment
of Rent and each subsequent installment of Monthly Installment of Rent until
Tenant is fully reimbursed. This exercise of set-off shall not constitute an
election of remedies except any amounts so recovered shall not be subsequently
recovered from Landlord.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                                                       Initials

                                       B-3



                    EXHIBIT C - COMMENCEMENT DATE MEMORANDUM

      ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE
 OF MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED
     LIABILITY COMPANY, AS LANDLORD, AND SCM MICROSYSTEMS, INC., A DELAWARE
              CORPORATION, AS TENANT COMMENCEMENT DATE MEMORANDUM

         THIS MEMORANDUM, made as of _____, 2003 by and between CalWest
Industrial Holdings, LLC, a Delaware limited liability company ("Landlord") and
SCM Microsystems, Inc., a Delaware Corporation ("Tenant").

                                    Recitals:

         A.       Landlord and Tenant are parties to that certain Lease, dated
                  for reference March 18, 2003 (the "Lease") for certain
                  premises (the "Premises") consisting of approximately 18,322
                  square feet at the building commonly known as 466 Kato
                  Terrace, Fremont, California.

         B.       Tenant is in possession of the Premises and the Term of the
                  Lease has commenced.

         C.       Landlord and Tenant desire to enter into this Memorandum
                  confirming the Commencement Date, the Termination Date and
                  other matters under the Lease.

         NOW, THEREFORE, Landlord and Tenant agree as follows:

         1.       The actual Commencement Date is ___________, 20__.

         2.       The actual Termination Date is __________, 20__.

         3.       The schedule of the Annual Rent and the Monthly Installment of
Rent set forth on the Reference Pages is deleted in its entirety, and the
following is substituted therefor:

                             [INSERT RENT SCHEDULE]

         4.       Capitalized terms not defined herein shall have the same
meaning as set forth in the Lease.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                                                       Initials

                                       C-1



         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first above written.

LANDLORD:                                          TENANT:

CALWEST INDUSTRIAL HOLDINGS, LLC,                  SCM MICROSYSTEMS, INC.,
A DELAWARE LIMITED LIABILITY COMPANY               A DELAWARE CORPORATION

By: RREEF Management Company,
    a Delaware corporation, its Property Manager

By: ______________________________                 By: _________________________

Name: Timothy DeGoosh                              Name: _______________________

Title: District Manager                            Title: ______________________

Dated: _______________________, 2003               Dated: ________________, 2003


                                                                       Initials



                        EXHIBIT D - RULES AND REGULATIONS

    ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF
  MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED
     LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE
                             CORPORATION, AS TENANT

1.       No sign, placard, picture, advertisement, name or notice (collectively
referred to as "Signs") shall be installed or displayed on any part of the
outside of the Building without the prior written consent of the Landlord which
consent shall be in Landlord's sole discretion. All approved Signs shall be
printed, painted, affixed or inscribed at Tenant's expense by a person or vendor
approved by Landlord and shall be removed by Tenant at Tenant's expense upon
vacating the Premises. Landlord shall have the right to remove any Sign
installed or displayed in violation of this rule at Tenant's expense and without
notice.

2.       If Landlord objects in writing to any curtains, blinds, shades or
screens attached to or hung in or used in connection with any window or door of
the Premises or Building, Tenant shall immediately discontinue such use. No
awning shall be permitted on any part of the Premises. Tenant shall not place
anything or allow anything to be placed against or near any glass partitions or
doors or windows which may appear unsightly, in the opinion of Landlord, from
outside the Premises.

3.       Tenant shall not alter any lock or other access device or install a new
or additional lock or access device or bolt on any door of its Premises without
the prior written consent of Landlord. Tenant, upon the termination of its
tenancy, shall deliver to Landlord the keys or other means of access to all
doors.

4.       If Tenant requires telephone, data, burglar alarm or similar service,
the cost of purchasing, installing and maintaining such service shall be borne
solely by Tenant. No boring or cutting for wires will be allowed without the
prior written consent of Landlord. Landlord shall direct electricians as to
where and how telephone, data, and electrical wires are to be introduced or
installed. The location of burglar alarms, telephones, call boxes or other
office equipment affixed to the Premises shall be subject to the prior written
approval of Landlord.

5.       Tenant shall not place a load upon any floor of its Premises, including
mezzanine area, if any, which exceeds the load per square foot that such floor
was designed to carry and that is allowed by law. Heavy objects shall stand on
such platforms as determined by Landlord to be necessary to properly distribute
the weight. Landlord will not be responsible for loss of or damage to any such
equipment or other property from any cause, and all damage done to the Building
by maintaining or moving such equipment or other property shall be repaired at
the expense of Tenant.

6.       Tenant shall not install any radio or television antenna, satellite
dish, loudspeaker or other device on the roof or exterior walls of the Building
without Landlord's prior written consent which consent shall be in Landlord's
sole discretion.

7.       Tenant shall not mark, drive nails, screw or drill into the partitions,
woodwork, plaster or drywall (except for pictures and general office uses) or in
any way deface the Premises or any part thereof. Tenant shall not affix any
floor covering to the floor of the Premises or paint or seal any floors in any
manner except as approved by Landlord. Tenant shall repair any damage resulting
from noncompliance with this rule.

8.       No cooking shall be done or permitted on the Premises, except that
Underwriters' Laboratory approved microwave ovens or equipment for brewing
coffee, tea, hot chocolate and similar beverages shall be permitted, provided
that such equipment and use is in accordance with all applicable federal, state
and city laws, codes, ordinances, rules and regulations.

9.       Tenant shall not use any hand trucks except those equipped with the
rubber tires and side guards, and may use such other material-handling equipment
as Landlord may approve. Tenant shall not bring any other vehicles of any kind
into the Building. Forklifts which operate on asphalt areas shall only use tires
that do not damage the asphalt.

10.      Tenant shall not use the name of the Building or any photograph or
other likeness of the Building in connection with or in promoting or advertising
Tenant's business except that Tenant may include the Building name in Tenant's
address. Landlord shall have the right, exercisable without notice and without
liability to any tenant, to change the name and address of the Building.

                                                                       Initials

                                       D-1



11.      All trash and refuse shall be contained in suitable receptacles at
locations approved by Landlord. Tenant shall not place in the trash receptacles
any personal trash or material that cannot be disposed of in the ordinary and
customary manner of removing such trash without violation of any law or
ordinance governing such disposal.

12.      Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governing authority.

13.      Tenant assumes all responsibility for securing and protecting its
Premises and its contents including keeping doors locked and other means of
entry to the Premises closed.

14.      Tenant shall not use any method of heating or air conditioning other
than that supplied by Landlord without Landlord's prior written consent.

15.      No person shall go on the roof without Landlord's permission.

16.      Tenant shall not permit any animals, other than seeing-eye dogs, to be
brought or kept in or about the Premises or any common area of the property.

17.      Tenant shall not permit any motor vehicles to be washed or mechanical
work or maintenance of motor vehicles to be performed on any portion of the
Premises or parking lot.

18.      These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of any premises in the
Building. Landlord may waive any one or more of these Rules and Regulations for
the benefit of any tenant or tenants, and any such waiver by Landlord shall not
be construed as a waiver of such Rules and Regulations for any or all tenants.

19.      Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for safety and
security, for care and cleanliness of the Building and for the preservation of
good order in and about the Building. Tenant agrees to abide by all such rules
and regulations herein stated and any additional rules and regulations which are
adopted. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invitees and guests.

20.      Any toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown into
them. The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose employees or
invitees, shall have caused it.

21.      Tenant shall not permit smoking or carrying of lighted cigarettes or
cigars in areas reasonably designated by Landlord or any applicable governmental
agencies as non-smoking areas.

22.      Any directory of the Building or project of which the Building is a
part ("Project Area"), if provided, will be exclusively for the display of the
name and location of tenants only and Landlord reserves the right to charge for
the use thereof and to exclude any other names.

23.      Canvassing, soliciting, distribution of handbills or any other written
material in the Building or Project Area is prohibited and each tenant shall
cooperate to prevent the same. No tenant shall solicit business from other
tenants or permit the sale of any goods or merchandise in the Building or
Project Area without the written consent of Landlord.

24.      Any equipment belonging to Tenant which causes noise or vibration that
may be transmitted to the structure of the Building or to any space therein to
such a degree as to be objectionable to Landlord or to any tenants in the
Building shall be placed and maintained by Tenant, at Tenant's expense, on
vibration eliminators or other devices sufficient to eliminate the noise or
vibration.

25.      Driveways, sidewalks, halls, passages, exits, entrances and stairways
("Access Areas") shall not be obstructed by tenants or used by tenants for any
purpose other than for ingress to and egress from their respective premises.
Access areas are not for the use of the general public and Landlord shall in all
cases retain the right to control and prevent access thereto by

                                                                       Initials

                                       D-2



all persons whose presence, in the judgment of Landlord, shall be prejudicial to
the safety, character, reputation and interests of the Building or its tenants.

26.      Landlord reserves the right to designate the use of parking areas and
spaces. Tenant shall not park in visitor, reserved, or unauthorized parking
areas. Tenant and Tenant's guests shall park between designated parking lines
only and shall not park motor vehicles in those areas designated by Landlord for
loading and unloading. Vehicles in violation of the above shall be subject to
being towed at the vehicle owner's expense. Vehicles parked overnight without
prior written consent of the Landlord shall be deemed abandoned and shall be
subject to being towed at vehicle owner's expense. Tenant will from time to
time, upon the request of Landlord, supply Landlord with a list of license plate
numbers of vehicles owned or operated by its employees or agents.

27.      No trucks, tractors or similar vehicles can be parked anywhere other
than in Tenant's own truck dock area. Tractor-trailers which must be unhooked or
parked with dolly wheels beyond the concrete loading areas must use steel plates
or wood blocks under the dolly wheels to prevent damage to the asphalt paving
surfaces. No parking or storing of such trailers will be permitted in the
parking areas or on streets adjacent thereto.

28.      During periods of loading and unloading, Tenant shall not unreasonably
interfere with traffic flow and loading and unloading areas of other tenants.
All products, materials or goods must be stored within the Tenant's Premises and
not in any exterior areas, including, but not limited to, exterior dock
platforms, against the exterior of the Building, parking areas and driveway
areas. Tenant agrees to keep the exterior of the Premises clean and free of
nails, wood, pallets, packing materials, barrels and any other debris produced
from their operation.

              [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                                                       Initials

                                       D-3



                         EXHIBIT E - SIGN SPECIFICATIONS

    ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF
  MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED
     LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE
                             CORPORATION, AS TENANT

Scott Creek Business Park shares the City of Fremont's concern that all signage
be harmonious with a building's architecture and done in a tasteful manner.
These guidelines address Primary Signs and Secondary Signs. All signage
installation must be approved by Landlord, as well as by the City of Fremont.

PRIMARY SIGN GUIDELINES

- -    These signs shall be reserved for offering corporate identity to Scott
     Creek Business Park's major tenants, to be determined by Landlord.

- -    These signs shall be located on the parapet wall at the top elevation of
     the building. No more than one (1) Primary Sign shall be allowed per
     building.

- -    Sign shall be a maximum of 60 square feet, with maximum letter height shall
     be 18 inches. These sizes are maximums. The owner and the City of Fremont
     will ensure that each application is compatible with the architectural
     features and proportions of the building. These maximums may vary with each
     building.

- -    The sign color will be the building standard black or dark grey / green (to
     match Benjamin Moore #1491).

- -    These signs will be 1/2" thick solid routed acrylic letters, painted with
     acrylic polyurethane and will be flush-mounted to building face using VHB
     tape and silicone adhesive.

- -    Tenant's corporate identity marks (logo mark or signature) shall be
     approved on a case-by-case basis by Landlord.

- -    The above is presented as guidelines for signage. All signage plans must be
     submitted to the Landlord for approval prior to installation.

SECONDARY SIGN GUIDELINES

- -    These signs are reserved for tenants only and are limited to one (1) per
     Lease.

- -    These signs shall be located on the free standing wall in front of tenant
     entrances in the 2' high by 9' wide entry area painted Egret (white).

- -    Letter font of the signage shall be Highway Gothic "D" (caps only).
     Exceptions may be approved by the Landlord, on a case-by-case basis, to use
     Highway Gothic "C" (lower and upper case letters).

- -    These signs shall be a maximum of approximately 18 square feet, which will
     fit within the specified area. This is approximately 22 letters. If a sign
     has more than 22 letters, the overall sign size shall be reduced
     accordingly to fit within the specified area.

- -    These signs will be 1/2" thick solid routed acrylic letters with a maximum
     size of 10" each, painted with acrylic polyurethane and will be
     flush-mounted to building face using VHB tape and silicone adhesive.

- -    The sign color will be the building standard dark grey / green color (to
     match Benjamin Moore #1491).

- -    Tenant's corporate identity marks (logo mark or signature) shall be
     approved on a case-by-case basis by Landlord.

- -    The above is presented as guidelines for signage. All signage plans must be
     submitted to the Landlord for approval prior to installation.

                                                                       Initials

                                       E-1



                                    EXHIBIT F

         FORM OF SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT

    ATTACHED TO AND MADE A PART OF LEASE BEARING THE LEASE REFERENCE DATE OF
  MARCH 18, 2003, BETWEEN CALWEST INDUSTRIAL HOLDINGS, LLC, A DELAWARE LIMITED
     LIABILITY COMPANY, AS LANDLORD AND SCM MICROSYSTEMS, INC., A DELAWARE
                             CORPORATION, AS TENANT

                     FORM OF SUBORDINATION, NON-DISTURBANCE
                            AND ATTORNMENT AGREEMENT

         THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this
"Agreement") made as of the [___] day of [______], 2003, by and among LASALLE
BANK NATIONAL ASSOCIATION, as Trustee for Calwest Industrial Trust Commercial
Pass-Through Certificates Series 2002-CALW, whose Servicer is Midland Loan
Services, Inc., whose mailing address is 10851 Mastin, Suite 300, Overland Park,
KS 66210 (together with its successors and assigns, the "Lender"), SCM
MICROSYSTEMS, INC., a Delaware corporation ("Tenant") and CALWEST INDUSTRIAL
HOLDINGS, LLC, a Delaware limited liability company ("Landlord").

                                   WITNESSETH:

         WHEREAS, Lender, as successor-in-interest to Secore Financial
Corporation ("Secore"), is the mortgagee or beneficiary under a mortgage or deed
of trust (the "Mortgage") of even date herewith made by Landlord to Lender
covering the land (the "Land") described on Exhibit A attached hereto and all
improvements (the "Improvements") now or hereafter located on the land (the Land
and the Improvements hereinafter collectively referred to as the "Property"),
which Mortgage secures all amounts payable by Landlord to Lender under that
certain Loan Agreement of even date herewith between Lender's
predecessor-in-interest, Secore, Landlord and CALWEST INDUSTRIAL HOLDINGS, LLC
(the "Loan Agreement"); and

         WHEREAS, by a lease dated as of March 18, 2003 (which lease, as the
same may have been amended and supplemented, is hereinafter called the "Lease"),
Landlord or Landlord's predecessor-in-interest leased to Tenant certain space
located in the Improvements (the "Premises"); and

         WHEREAS, the parties hereto desire to make the Lease subject and
subordinate to the Mortgage and the Loan Agreement;

         NOW, THEREFORE, the parties hereto, in consideration of the covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, hereby agree as follows:

         1.       The Lease, as the same may hereafter be modified, amended or
extended, and all of Tenant's right, title and interest in and to the Premises
and all rights, remedies and options of Tenant under the Lease, are and shall be
unconditionally subject and subordinate to the Mortgage and the lien thereof, to
all the terms, conditions and provisions of the Mortgage and the Loan Agreement,
to each and every advance made or hereafter made under the Loan Agreement, and
to all renewals, modifications, consolidations, replacements, substitutions and
extensions of the Mortgage and/or the Loan Agreement, so that at all times the
Mortgage shall be and remain a lien on the Property prior and superior to the
Lease for all purposes; provided, however, and Lender agrees, that so long as
(A) no event has occurred and no condition exists, which would entitle Landlord
to terminate the Lease or would cause, without further action of Landlord, the
termination of the Lease or would entitle Landlord to dispossess Tenant from the
Premises, (B) Tenant shall duly confirm its attornment to Lender or its
successor or assign by written instrument reasonably acceptable to Lender and
Tenant as set forth in Paragraph 3 hereof, and (C) then Tenant's leasehold
estate under the Lease shall not be terminated, Tenant's possession of the
Premises shall not be disturbed by Lender and Lender will accept the attornment
of Tenant.

                                                                       Initials



         2.       Notwithstanding anything to the contrary contained in the
Lease, Tenant hereby agrees that in the even of any act, omission or default by
Landlord or Landlord's agents, employees, contractors, licensees or invitees
which would give Tenant the rights, either immediately or after the lapse of a
period of time, to terminate the Lease, Tenant will not exercise any such right
(i) until it has given written notice of such act, omission or default to Lender
by delivering notice of such act, omission or default, in accordance with
Paragraph 8 hereof, and (ii) until a period of not less than thirty (30) days
for remedying such act, omission or default shall have elapsed following the
giving of such notice. Notwithstanding the foregoing, in the case of any default
of Landlord which cannot be cured within such thirty (30) day period, if Lender
shall within such period proceed promptly to cure the same (including such time
as may be necessary to acquire possession of the Premises if possession is
necessary to effect such cure) and thereafter shall prosecute the curing of such
default with diligence, then the time within which such default may be cured by
Lender shall be extended for such period as may be necessary to complete the
curing of the same with diligence (but in no event shall such period extend
beyond sixty (60) days following the giving of such notice). Lender's cure of
Landlord's default shall not be considered an assumption by Lender of Landlord's
other obligations under the Lease. If Lender or any successor or assign becomes
obligated to perform as Landlord under the Lease, such person or entity will be
released from those obligations when such person or entity assigns, sells or
otherwise transfers its interest in the Premises or the Property with respect to
obligations accruing after the date of such assignment, sale or other transfer.

         3.       In the event that Lender succeeds to the interest of Landlord
or any successor to Landlord, then subject to the provisions of this Agreement
including, without limitation, Paragraph 1 above, the Lease shall nevertheless
continue in full force and effect, Tenant's possession of the Premises shall not
be disturbed by Lender and Tenant shall and does hereby agree to attorn to and
accept Lender and to recognize Lender as its Landlord under the Lease for the
then remaining balance of the term thereof, and upon request of Lender, Tenant
shall execute and deliver to Lender an agreement of attornment reasonably
satisfactory to Lender and Tenant.

         4.       If Lender succeeds to the interest of Landlord or any
successor to Landlord, in no event shall Lender have any liability for any act
or omission of any prior landlord under the Lease which occurs prior to the date
Lender succeeds to the rights of Landlord under the Lease. In no event shall
Lender have any personal liability as successor to Landlord and Tenant shall
look only to the estate and property of Lender in the Land and the Improvements
for the satisfaction of Tenant's remedies for the collection of a judgment (or
other judicial process) requiring the payment of money in the event of any
default by Lender as Landlord under the Lease, and no other property or assets
of Lender shall be subject to levy, execution or other enforcement procedure for
the satisfaction of Tenant's remedies under or with respect to the Lease.

         5.       Tenant agrees that no prepayment of rent or additional rent
due under the Lease of more than one month in advance, and no amendment,
modification, voluntary surrender or voluntary cancellation of the Lease, and no
waiver or consent by Landlord under the terms of the Lease, shall be binding
upon or as against Lender, as holder of the Mortgage, and as Landlord under the
Lease if it succeeds to that position, unless consented to in writing by Lender
(which consent shall not be unreasonably withheld or delayed with respect to any
amendment or modification of the Lease). Tenant further agrees with Lender that
Tenant will not voluntarily subordinate the Lease to any lien or encumbrance
without Lender's prior written consent.

         6.       This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute and be construed as one and the same instrument.

         7.       All remedies which Lender may have against Landlord provided
herein, if any, are cumulative and shall be in addition to any and all other
rights and remedies provided by law and by other agreements between Lender and
Landlord or others. If any party consists of multiple individuals or entities,
each of same shall be jointly and severally liable for the obligations of such
party hereunder.

         8.       All notices to be given under this Agreement shall be in
writing and shall be deemed served upon receipt by the addressee if served
personally or, if mailed, upon the first to occur of receipt or the refusal of
delivery as shown on a return receipt, after deposit in the United States Postal
Service certified mail,

                                                                       Initials



postage prepaid, addressed to the address of Landlord, Tenant or Lender
appearing below, or, if sent by telegram, when delivered by or refused upon
attempted delivery by the telegraph office. Such addresses may be changed by
notice given in the same manner. If any party consists of multiple individuals
or entities, then notice to any one of the same shall be deemed notice to such
party.

         Lender's Address:

         Midland Loan Services, Inc.
         Asset Management Department
         10851 Mastin
         Suite 300
         Overland Park, KS 66210

         Landlord's Address:

         Calwest Industrial Holdings, LLC
         c/o Global Securitization Services
         103 Foulk Road
         Suite 205-11
         Wilmington, Delaware 19803
         Attention: Andrew L. Stidd
         Telecopier: (302) 652-8667

         With a copy to:

         RREEF Management Company
         6759 Sierra Court, Suite E
         Dublin, California 94568
         Attention: Eric Russell
         Telecopier: (925) 556-5590

         Tenant's Address:

         Name: _____________________________________________

         Address: __________________________________________

                  __________________________________________

                  __________________________________________

         Attention: ________________________________________

         9.       This Agreement shall be interpreted and construed in
accordance with and governed by the laws of the state in which the Property is
located.

         10.      This Agreement shall apply to, bind and inure to the benefit
of the parties hereto and their respective successors and assigns. As used
herein "Lender" shall include any subsequent holder of the Mortgage.

         11.      Tenant acknowledges that Landlord has assigned to Lender its
right, title and interest in the Lease and to the rents, issues and profits of
the Property and the Property pursuant to the Mortgage, and that Landlord has
been granted the license to collect such rents provided no Event of Default has
occurred under, and as defined in, the Mortgage. Tenant agrees to pay all rents
and other amounts due under the Lease directly to Lender

                                                                       Initials



upon receipt of written demand by Lender, and Landlord hereby consents thereto.
The assignment of the Lease to Lender, or the collection of rents by Lender
pursuant to such assignment, shall not obligate Lender to perform Landlord's
obligations under the Lease unless Lender succeeds to the interest of Landlord
under the Lease.

         IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.

                              Lender:

                              LaSalle Bank N. A., as Trustee for the holders of
                              Calwest Industrial Trust Commercial Mortgage
                              Pass-Through Certificates Series 2002-CALW, by and
                              through its Master Servicer and Attorney-in-fact,
                              Midland Loan Services, Inc., a Delaware
                              corporation

                              By:_______________________________________________
                                          Authorized Signatory

                              Landlord:

                              Calwest Industrial Holdings, LLC,
                              a Delaware limited liability company

                              By:_______________________________________________

                              Name:_____________________________________________

                              Its:______________________________________________

                              Tenant:

                              Tenant Name:______________________________________

                              By:_______________________________________________
                                          Authorized Signatory

                                                                       Initials

EX-10.22

                                                                   EXHIBIT 10.22

                     * * * * * * * * * * * * * * * * * * * *

                                      LEASE

                             VALLEY BUSINESS PARK II

                     * * * * * * * * * * * * * * * * * * * *

                                     BETWEEN

                             SCM MICROSYSTEMS, INC.
                                    (TENANT)

                                       AND

                         CARRAMERICA REALTY CORPORATION
                                   (LANDLORD)



                                TABLE OF CONTENTS



                                                                                                          Page
                                                                                                          ----
                                                                                                       
1.       LEASE AGREEMENT.............................................................................       1
2.       RENT........................................................................................       2
3.       PREPARATION AND CONDITION OF PREMISES; TENANT'S POSSESSION; REPAIRS AND MAINTENANCE.........      10
4.       SERVICES AND UTILITIES......................................................................      11
5.       ALTERATIONS AND REPAIRS.....................................................................      12
6.       USE OF PREMISES.............................................................................      15
7.       GOVERNMENTAL REQUIREMENTS AND BUILDING RULES................................................      17
8.       WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE................................................      19
9.       FIRE AND OTHER CASUALTY.....................................................................      22
10.      EMINENT DOMAIN..............................................................................      22
11.      RIGHTS RESERVED TO LANDLORD.................................................................      23
12.      DEFAULTS....................................................................................      24
13.      LANDLORD REMEDIES...........................................................................      26
14.      SURRENDER...................................................................................      28
15.      HOLDOVER....................................................................................      28
16.      SUBORDINATION TO GROUND LEASES AND MORTGAGES................................................      29
17.      ASSIGNMENT AND SUBLEASE.....................................................................      30
18.      CONVEYANCE BY LANDLORD......................................................................      33
19.      ESTOPPEL CERTIFICATE........................................................................      33
20.      LEASE DEPOSIT...............................................................................      34
21.      TENANT'S PERSONAL PROPERTY AND FIXTURES.....................................................      35
22.      NOTICES.....................................................................................      35
23.      QUIET POSSESSION............................................................................      36
24.      REAL ESTATE BROKERS.........................................................................      36
25.      MISCELLANEOUS...............................................................................      36
26.      UNRELATED BUSINESS INCOME...................................................................      39
27.      BUILDING RENOVATIONS........................................................................      39
28.      HAZARDOUS SUBSTANCES........................................................................      40
29.      EXCULPATION.................................................................................      41
30.      COMMUNICATIONS AND COMPUTER LINES...........................................................      42
31.      OPTION TO EXTEND............................................................................      42
32.      PERSONAL PROPERTY...........................................................................      44
32.      EXISTING TENANT.............................................................................      44


                                       i



                                      LEASE

         THIS LEASE (the "Lease") is dated as of March 3, 2003 (for reference
purposes only) between CARRAMERICA REALTY CORPORATION, a Maryland corporation
("Landlord") and the Tenant as named in the Schedule below. The term "Project"
means the six (6) buildings, the land appurtenant thereto ("Land"), and other
improvements located thereon commonly known as "Valley Business Park II",
located in San Jose, California. The "Premises" means that portion of the
Project leased to Tenant and described in the Schedule and outlined on Exhibit A
attached hereto. The building in which the Premises is located shall be referred
to herein as the "Building". The following schedule (the "Schedule") is an
integral part of this Lease. Terms defined in this Schedule shall have the same
meaning throughout the Lease.

                                    SCHEDULE

         1.       TENANT: SCM Microsystems, Inc., a Delaware corporation

         2.       PREMISES: 225 Charcot Avenue, San Jose, California

         3.       BUILDING: 225-231 Charcot Avenue, San Jose, California

         4.       RENTABLE SQUARE FOOTAGE OF THE PREMISES: Approximately 13,494
                  rentable square feet

         5.       TENANT'S PROPORTIONATE SHARE: 49.1% (based upon a total of
                  27,488 rentable square feet in the Building)

         6.       LEASE DEPOSIT: Prepaid Rent equal to $12,144.60 and Security
                  Deposit equal to $13,494.00, totaling $25,638.60

         7.       PERMITTED USE: General office, software and hardware design,
                  engineering, sales, warehouse, light assembly and
                  manufacturing, research and development

         8.       TENANT'S REAL ESTATE BROKER FOR THIS LEASE: Cornish and Carey
                  Commercial

         9.       LANDLORD'S REAL ESTATE BROKER FOR THIS LEASE: None

         10.      TENANT IMPROVEMENTS: See Section 3.A and the Tenant
                  Improvement Agreement attached hereto as Exhibit C

         11.      COMMENCEMENT DATE: The Commencement Date shall be sixty (60)
                  days following the later of (a) the "Substantial Completion
                  Date" of the "Tenant Improvements" (each as defined in Exhibit
                  C attached hereto), and (b) the date Landlord has tendered
                  possession of the Premises in the condition required under
                  this Lease and Tenant shall be able to legally occupy the
                  Premises except to the extent that any work being performed by
                  the Tenant in the Premises delays or interferes with obtaining
                  any applicable permits or approvals from the appropriate
                  governmental authorities required for the legal occupancy of
                  the Premises by Tenant.

                                       ii



         12.      TERM/TERMINATION DATE: The Term of this Lease shall be for
                  three (3) years commencing on the Commencement Date and
                  expiring on the calendar day preceding the third (3rd)
                  anniversary of the Commencement Date; provided, however, that
                  if the Commencement Date shall occur on a date other than the
                  first day of a calendar month, the Termination Date shall be
                  the last day of the calendar month in which the third (3rd)
                  anniversary of the Commencement Date occurs

         13.      PARKING STALLS: Forty-Eight (48) unassigned stalls, and four
                  (4) stalls (as reasonably designated by Landlord and Tenant
                  prior to the Commencement Date) shall be designated as
                  "Reserved Spaces", subject to applicable Governmental
                  Requirements (as defined in Section 5.1.4(c) below), including
                  any applicable transportation management program applicable to
                  the Project. Such Reserved Spaces shall be designated by signs
                  or other markings to be installed by Tenant at its expense,
                  but subject to Landlord's approval thereof in accordance with
                  the provisions of Section 6.2 below.

         14.      BASE RENT:



    Period         Monthly Base Rent       Annual Base Rent
    ------         -----------------       ----------------
                                     
1st Lease Year        $12,144.60             $145,735.20

2nd Lease Year        $12,819.30             $153,831.60

3rd Lease Year        $13,494.00             $161,928.00


         15.      RENEWAL OPTION: One (1) option to extend for a period of three
                  (3) additional years

Exhibit A - OUTLINE OF THE PREMISES
Exhibit B - RULES AND REGULATIONS
Exhibit C - TENANT IMPROVEMENT AGREEMENT
Exhibit D - COMMENCEMENT DATE CONFIRMATION (see Section 1.A)
Exhibit E - ENVIRONMENTAL QUESTIONNAIRE
Exhibit F - TENANT IMPROVEMENT GUIDELINES
Exhibit G - SIGNAGE
Exhibit H - INITIAL ALTERATIONS
Exhibit I - BILL OF SALE

                                      iii



         1.       LEASE AGREEMENT. On the terms stated in this Lease, Landlord
leases the Premises to Tenant, and Tenant leases the Premises from Landlord, for
the Term beginning on the Commencement Date and ending on the Termination Date
unless extended or sooner terminated pursuant to this Lease. This Lease shall be
effective on the date that this Lease is fully executed and delivered by
Landlord to Tenant (the "Effective Date").

                  A.       Commencement Date.

                           1.       The commencement date ("Commencement Date")
for this Lease is the date set forth in the Schedule, provided that if the
Commencement Date (as defined below) does not occur on or before the date which
is ninety (90) days following the Effective Date (the "Premises Delivery
Deadline"), Tenant, as its sole remedy, shall have the right to cancel this
Lease by giving written notice of such cancellation to Landlord at any time
after the Premises Delivery Deadline and prior to the date Landlord delivers
possession of the Premises to Tenant, in which case this Lease shall be
cancelled effective thirty (30) days after Landlord's receipt of Tenant's
cancellation notice, unless Landlord delivers possession of the Premises to
Tenant within said thirty (30) day period; provided, however, that the Premises
Delivery Deadline shall be extended by the number of days that the Substantial
Completion Date is delayed due to any Force Majeure Delay (as defined below). In
the event of such cancellation by Tenant, neither party shall have any
obligations to the other under this Lease, except for obligations arising before
such cancellation and Landlord shall return to Tenant the Security Deposit and
any other payments made by Tenant which are applicable to any period of time
following the effective date of the cancellation of this Lease. Following the
Commencement Date, Landlord shall prepare and deliver to Tenant a Commencement
Date Confirmation substantially in the form attached hereto as Exhibit D that
sets forth both the Commencement Date and Termination Date for this Lease.
Tenant shall execute the Commencement Date Confirmation and deliver the executed
original of the same to Landlord within three (3) business days of Tenant's
receipt thereof. Tenant's failure to timely execute and return the Commencement
Date Confirmation document to Landlord shall be conclusive evidence of Tenant's
agreement with the information as set forth therein. This Lease shall be a
binding contractual obligation effective upon execution and delivery hereof by
Landlord and Tenant, notwithstanding the later commencement of the Lease Term.
For purposes of this Lease, the term "Force Majeure Delay" means any delay
attributable to one or more of the following causes: strike, lockout or other
labor disturbance, civil disturbance, fire, flood, lightning, earthquake, or
other act of God or the public enemy, war, riot, sabotage, blockade, embargo,
accident, interruption of utilities or services, inability to obtain necessary
materials, supplies or labor, action or inaction on the part of any government
or regulatory body, or any other similar cause which is beyond the reasonable
control of Landlord.

                           2.       If Landlord is delayed in completing
Landlord's Work or in delivering possession of the Premises to Tenant as a
result of any Tenant Delay (as defined below), (a) the Substantial Completion
Date shall be deemed to have occurred on the date the Substantial Completion
Date would have occurred in the absence of such Tenant Delay, as reasonably
determined by Landlord or Landlord's architect, and (b) Tenant shall be
responsible for and shall pay any costs and expenses incurred by Landlord in
connection with, or as a consequence of, any Tenant Delay. For purposes of this
Lease, the term "Tenant Delay" means a delay in the substantial completion of
Landlord's Work or the delivery of possession of the Premises to Tenant, to the
extent caused by the act, omission, neglect or failure of Tenant or any

                                       1



of Tenant's agents, employees, contractors or subcontractors. For purposes of
this Lease, "Landlord's Work" shall mean the work described in Exhibit C-1
attached hereto, which shall be performed at no cost to Tenant using Building
standard methods and materials and in accordance with Landlord's standard
specifications for the Project.

                  B.       Termination Date. The termination date ("Termination
Date") of this Lease is the date set forth in the Schedule.

                  C.       Early Occupancy. During the period commencing on the
Effective Date and ending on the Commencement Date (the "Early Occupancy
Period"), Tenant shall be permitted to enter and occupy the Premises for any
purpose, provided that (i) Tenant's early entry does not materially interfere
with Landlord's performance of the Tenant Improvements, and (ii) prior to
Tenant's entry in the Premises, Tenant shall furnish to Landlord certificates of
insurance reasonably satisfactory to Landlord evidencing Tenant's compliance
with the requirements of Section 8.C below. Tenant's occupancy of the Premises
during the Early Occupancy Period shall be subject to all of the terms,
covenants and conditions of this Lease, except that Landlord agrees that
Tenant's obligation to pay Base Rent, Operating Cost Share Rent and Tax Share
Rent (as such terms are defined in Sections 2.A(1) through 2.A(3) below) during
the Early Occupancy Period shall be waived.

         2.       RENT.

                  A.       Types of Rent. Tenant shall pay the following Rent in
the form of a check to Landlord at the following address:

                               CarrAmerica Realty Corporation
                               Valley Business Park II
                               P.O. Box 642922
                               Pittsburgh, PA 15264-2922

or by wire transfer as follows:

                               Account Name:   Carr America Realty Corporation
                                               t/a Valley Business Park II
                               Bank Name:      PNC Bank
                               Transit Number: 043-000-096
                               Account Number: 1004339188
                               Notification:   Lease Administration (CarrAmerica
                                               Realty Corporation re SCM
                                               Microsystems, Inc.)
                               Telephone:      (202) 729-3852

or in such other manner as Landlord may notify Tenant.

                           1.  Base Rent in monthly installments in
advance, the first monthly installment payable concurrently with the execution
of this Lease and thereafter on or before the first day of each month of the
Term in the amount set forth on the Schedule.

                                       2



                           2.       Operating Cost Share Rent equal to Tenant's
Proportionate Share (as set forth in the Schedule) of Operating Costs for the
applicable Fiscal Year (as defined in Section 2.C(5) below), paid monthly in
advance in an estimated amount. The definition of Operating Costs and the method
for billing and payment of Operating Cost Share Rent are set forth in Sections
2.B, 2.C and 2.D. In addition to the Operating Cost Share Rent, Tenant shall pay
to Landlord management fees not to exceed one percent (1%) of Tenant's Base
Rent.

                           3.       Tax Share Rent equal to Tenant's
Proportionate Share of Taxes for the applicable Fiscal Year, paid monthly in
advance in an estimated amount. A definition of Taxes and the method for billing
and payment of Tax Share Rent are set forth in Sections 2.B, 2.C and 2.D.

         As used in this Lease, the term "Rent" means Base Rent, Operating Cost
Share Rent, Tax Share Rent and all other costs, expenses, liabilities, and
amounts which Tenant is required to pay under this Lease ("Additional Rent"),
including any interest for late payment. Tenant's agreement to pay Rent is an
independent covenant, with no right of setoff, deduction or counterclaim of any
kind, except as expressly set forth in this Lease.

                  B.       Payment of Operating Cost Share Rent and Tax Share
Rent.

                           1.       Payment of Estimated Operating Cost Share
Rent and Tax Share Rent.

                           (a)      Before the Commencement Date and by April 1
of each succeeding Fiscal Year, or as soon as reasonably possible thereafter,
Landlord shall give Tenant notice of its estimate of the payments to be made
pursuant to Sections 2.A(2) and 2.A(3) above for the then applicable Fiscal
Year. Landlord may revise these estimates by written notice to Tenant whenever
it obtains more accurate information, such as the final real estate tax
assessment or tax rate for the Project, in which event subsequent monthly
payments by Tenant for such Fiscal Year shall be based upon such revised
estimate.

                           (b)      Within thirty (30) days after receiving
Landlord's notice regarding the original or revised estimate of the monthly
payments to be made pursuant to Sections 2.A(2) and 2.A(3) above for a
particular Fiscal Year, Tenant shall pay Landlord an amount equal to the product
of such estimated monthly payments (as set forth in Landlord's notice),
multiplied by the number of months that have elapsed in the applicable Fiscal
Year to the date of such payment including the current month, minus any payments
on account thereof previously made by Tenant for the months elapsed. On the
first day of each month thereafter, Tenant shall pay Landlord the estimated
monthly payments as set forth in Landlord's most recent notice, until a new
estimate becomes applicable.

                           2.       Correction of Operating Cost Share Rent and
Tax Share Rent. Within one hundred fifty (150) days after the close of each
Fiscal Year or as soon after such 150-day period as practicable, Landlord shall
deliver to Tenant a statement of (a) Operating Costs and Taxes for such Fiscal
Year, and (b) the payments made by Tenant under Section 2.B(1) above for such
Fiscal Year (the "Annual Expense Statement"). If, on the basis of such Annual
Expense Statements, Tenant owes an amount that is less than the estimated
payments for

                                       3



such Fiscal Year previously made by Tenant, Landlord, at its election, shall
either promptly refund the amount of the overpayment to Tenant or, if this Lease
is still in effect, credit such excess against Tenant's subsequent obligations
to pay Rent. If, on the basis of such Annual Expense Statements, Tenant owes an
amount that is more than the estimated payments for such Fiscal Year previously
made by Tenant, Tenant shall pay the deficiency to Landlord within twenty (20)
days after Landlord's delivery of such Annual Expense Statements to Tenant.

         C.       Definitions.

                  1.       Included Operating Costs.

                           (a)      "Operating Costs" means any expenses, costs
and disbursements of any kind other than Taxes, paid or incurred by Landlord in
connection with the management, maintenance, operation, insurance (including the
related deductibles), repair and other related activities in connection with any
part of the Project and of the personal property, fixtures, machinery,
equipment, systems and apparatus used in connection therewith, including,
without limitation, (i) the cost of providing those services required to be
furnished by Landlord under this Lease, and (ii) the cost of all electricity,
water, gas, sewers, oil and other utilities (collectively, "Utilities"),
including any surcharges imposed, serving the Project or any part thereof (but
excluding the cost of electricity directly billed to Tenant or other tenants in
the Project), and any amounts, taxes, charges, surcharges, assessments or
impositions levied, assessed or imposed upon the Project or any part thereof, or
upon Tenant's use and occupancy thereof, as a result of any rationing of
Utilities services or restriction on the use of Utilities affecting the Project
or any part thereof. Operating Costs shall also include the costs of any capital
improvements made which are intended to reduce Operating Costs or improve
safety, and those made to keep the Project in compliance with Governmental
Requirements (as defined in Section 5.A(3)(c) below) applicable from time to
time or to repair or replace existing capital improvements, facilities and
equipment within the Project, such as the roof membrane and resurfacing of the
parking areas (collectively, "Included Capital Items"); provided, that the costs
of any Included Capital Item shall be amortized by Landlord, together with an
amount equal to interest at ten percent (10%) per annum, over the estimated
useful life of such item and such amortized costs are only included in Operating
Costs for that portion of the useful life of the Included Capital Item which
falls within the Term, unless the cost of the Included Capital Item is less than
Ten Thousand Dollars ($10,000) in which case it shall be expensed in the year in
which it was incurred.

                           (b)      If the Project contains more than one
building, then Operating Costs shall include (i) all Operating Costs fairly
allocable to the Building, and (ii) a proportionate share (based on the gross
rentable area of the Building (i.e., 27,488 RSF) as a percentage of the gross
rentable area of all of the buildings in the Project (i.e., 166,928 RSF) of all
Operating Costs which relate to the Project in general and are not fairly
allocable to any one building in the Project.

                           (c)      If the Project is not fully occupied during
any portion of any Fiscal Year, Landlord may adjust (an "Equitable Adjustment")
Operating Costs to equal what would have been incurred by Landlord had the
Project been fully occupied. This Equitable Adjustment shall apply only to
Operating Costs which are variable and therefore increase as

                                       4



occupancy of the Project increases. Landlord may incorporate the Equitable
Adjustment in its estimates of Operating Costs.

                           (d)      If any tenant of the Project contracts
directly with Landlord or a third party for any services, including Utilities,
for which Tenant pays Landlord pursuant to Section 2.A(2) above, the total costs
of such services for the Project shall be "grossed up" to reflect what those
costs would have been had such tenant(s) not directly contracted for such
services.

                  2.       Excluded Operating Costs. Operating Costs shall not
                           include:

                           (a)      costs of installing leasehold improvements
                                    for tenants or occupants or prospective
                                    tenants or occupants of the Project;

                           (b)      costs of capital improvements other than
                                    Included Capital Items;

                           (c)      interest and principal payments on mortgages
                                    or any other debt costs (except as provided
                                    in Section 2.C(1) above with regard to
                                    Included Capital Items), or rental payments
                                    on any ground lease of the Project;

                           (d)      real estate brokers' leasing commissions;

                           (e)      legal fees, space planner fees and
                                    advertising expenses incurred with regard to
                                    leasing the Project or portions thereof;

                           (f)      any cost or expenditure for which Landlord
                                    is reimbursed, by insurance proceeds or
                                    otherwise, except by Operating Cost Share
                                    Rent;

                           (g)      the cost of any service furnished to any
                                    office tenant of the Project which Landlord
                                    does not make available to Tenant;

                           (h)      depreciation (except on any Included Capital
                                    Items);

                           (i)      franchise or income taxes imposed upon
                                    Landlord, except to the extent imposed in
                                    lieu of all or any part of Taxes;

                           (j)      legal and auditing fees incurred for the
                                    benefit of Landlord such as collecting
                                    delinquent rents, preparing tax returns and
                                    other financial statements, and audits other
                                    than those incurred in connection with the
                                    preparation of reports required pursuant to
                                    Section 2.B above;

                                       5



                           (k)      the wages of any employee for services not
                                    related directly to the management,
                                    maintenance, operation and repair of the
                                    Project;

                           (l)      fines, penalties and interest incurred by
                                    Landlord for late payment by Landlord or
                                    violations of law;

                           (m)      the cost of repairs or other work occasioned
                                    by any fire or other casualty (as described
                                    in Section 9 below), to the extent that
                                    Landlord shall receive proceeds of such
                                    insurance, or to the extent that Landlord
                                    would have received such proceeds if
                                    Landlord had maintained the insurance
                                    required by this Lease (provided that costs
                                    of repairing an insured casualty to the
                                    extent of the deductible amount under the
                                    applicable insurance policy shall constitute
                                    an Operating Cost);

                           (n)      the cost of decorating, improving for tenant
                                    occupancy, painting or redecorating portions
                                    of the Building to be demised to tenants,
                                    including permit, license and inspection
                                    costs;

                           (o)      costs incurred solely as a result of
                                    Landlord's violation of any terms and
                                    conditions of this Lease or any other lease
                                    relating to the Project;

                           (p)      the cost related to the presence of
                                    Hazardous Substances in violation of
                                    Governmental Requirements in, on, or about
                                    the Project; provided, however, that the
                                    costs of routine monitoring of and testing
                                    for Hazardous Substances in, on, or about
                                    the Project shall be an Operating Cost;

                           (q)      costs to repair, replace or restore the
                                    structural portions of the Building
                                    (including the roof structure, foundation,
                                    floor slab, exterior walls and interior
                                    structural supports) or the structural
                                    portions of the parking facilities serving
                                    the Building; and

                           (r)      costs of and arising from correcting defects
                                    in construction of the Project (as opposed
                                    to the cost of normal repair, maintenance
                                    and replacement expected with the
                                    construction materials and equipment
                                    installed in the Project in light of their
                                    specifications) or to comply with any law
                                    applicable to the Project on the
                                    Commencement Date; and

                           (s)      expense reserves.

                                       6



                  3.       Taxes.

                           (a)      "Taxes" means any and all taxes, assessments
and charges of any kind, general or special, ordinary or extraordinary, levied
against the Project, which Landlord shall pay or become obligated to pay in
connection with the ownership, leasing, renting, management, use, occupancy,
control or operation of the Project or of the personal property, fixtures,
machinery, equipment, systems and apparatus used in connection therewith. Taxes
shall include real estate taxes, personal property taxes, sewer rents, water
rents, special or general assessments, transit taxes, ad valorem taxes, and any
tax levied on the rents hereunder or the interest of Landlord under this Lease
(the "Rent Tax"). Taxes shall also include all fees and other costs and expenses
paid by Landlord in reviewing any tax and in seeking a refund or reduction of
any Taxes, whether or not the Landlord is ultimately successful. Taxes shall
also include any assessments or fees paid to any business park owners
association, or similar entity, which are imposed against the Project pursuant
to any Covenants, Conditions and Restrictions ("CC&R's") recorded against the
Project and any installments of principal and interest required to pay any
existing or future general or special assessments for public improvements,
services or benefits, and any increases resulting from reassessments imposed in
connection with any change in ownership or new construction. Notwithstanding
anything to the contrary herein, the term "Taxes" shall not include any charges,
levies, or fees levied on Landlord's rental income, unless such tax or
assessment is imposed in lieu of real property taxes.

                           (b)      If the Project contains more than one
building, then Taxes shall include (i) all Taxes fairly allocable to the
Building, and (ii) a proportionate share (based on the gross rentable area of
the Building as a percentage of the gross rentable area of all of the buildings
in the Project) of all Taxes which relate to the Project in general and are not
fairly allocable to any one building in the Project.

                           (c)      For any year, the amount to be included in
Taxes (i) from taxes or assessments payable in installments, shall be the amount
of the installments (with any interest) due and payable during such year, and
(ii) from all other Taxes, shall at Landlord's election be the amount accrued,
assessed, or otherwise imposed for such year or the amount due and payable in
such year. Any refund or other adjustment to any Taxes by the taxing authority,
shall apply during the year in which the adjustment is made. Taxes shall not
include (i) any net income (except Rent Tax), capital, stock, succession,
transfer, franchise, gift, estate or inheritance tax, or (ii) any tax, levy,
assessment, charge or surcharge imposed as a direct result of contamination of
the Project by any Hazardous Substances, as opposed to the imposition of such a
charge on a more general basis.

                  4.       Lease Year. "Lease Year" means each consecutive
twelve month period beginning with the Commencement Date, except that if the
Commencement Date is not the first day of a calendar month, then the first Lease
Year shall be the period from the Commencement Date through the final day of the
calendar month during which the first anniversary of the Commencement Date
occurs, and subsequent Lease Years shall be each succeeding twelve month period
during the Term following the first Lease Year.

                                       7



                  5.       Fiscal Year. "Fiscal Year" means each calendar year
during which any portion of the Term occurs (e.g., the first Fiscal Year shall
be the calendar year during which the Commencement Date occurs).

         D.       Computation of Base Rent and Rent Adjustments.

                  1.       Prorations. If (a) the Commencement Date is a date
other than January 1, (b) the Termination Date is a date other than December 31,
(c) this Lease terminates early, or (d) the size of the Premises increases or
decreases, then in each such event, the Base Rent, the Operating Cost Share Rent
and Tax Share Rent shall be equitably adjusted to reflect such event on a basis
determined by Landlord to be consistent with the principles underlying the
provisions of this Section 2.

                  2.       Interest Rate. Any sum due from Tenant to Landlord
not paid when due shall bear interest from the date due until paid at the lesser
of twelve percent (12%) per annum or the maximum rate permitted by law (the
"Interest Rate").

                  3.       Rent Adjustments. The square footage of the Premises
and the Building set forth in the Schedule are conclusively deemed to be the
actual square footage thereof, without regard to any subsequent remeasurement
thereof. If any Operating Cost paid in one Fiscal Year relates to more than one
Fiscal Year, Landlord may proportionately allocate such Operating Cost among the
related Fiscal Years.

                  4.       Books and Records. Landlord shall maintain books and
records reflecting the Operating Costs and Taxes in accordance with sound
accounting and management practices. Tenant and a certified public accountant
employed by a certified public accounting firm and working on a non-contingency
fee basis shall have the right to inspect Landlord's records at Landlord's
applicable local office or other location designated by Landlord upon at least
seventy-two (72) hours' prior notice during normal business hours during the
ninety (90) days following Landlord's delivery of the Annual Expense Statement
to Tenant. The results of any such inspection shall be kept strictly
confidential by Tenant and its agents, and Tenant and its certified public
accountant must agree, in their contract for such services, to such
confidentiality restrictions and shall specifically agree that the results shall
not be made available to any other tenant of the Project (and in connection with
the foregoing, prior to exercising its rights hereunder, Tenant and its agents
shall sign a confidentiality agreement acceptable to Landlord). Unless Tenant
sends to Landlord any written exception to an Annual Expense Statement within
said ninety (90) day period, such Annual Expense Statement shall be deemed final
and accepted by Tenant and Tenant waives any other rights pursuant to applicable
law to inspect Landlord's books and records and/or to contest the amount
Operating Costs and/or Taxes due hereunder. Tenant shall pay the amount shown on
any Annual Expense Statement in the manner prescribed in this Lease, whether or
not Tenant takes any such written exception, without any prejudice to such
exception. If Tenant makes a timely exception, Landlord shall cause an
independent certified public accountant to issue a final and conclusive
resolution of Tenant's exception. If, according to such accountant, Landlord's
original determination of annual Operating Costs and Taxes overstated the
amounts thereof, in the aggregate, by three percent (3%) or less or understated
the amounts thereof, then Tenant shall pay the reasonable cost of the
certification, and, in the case of an understatement, shall pay to Landlord the
deficiency in

                                       8



Tenant's payment of Operating Costs and Taxes within twenty (20) days following
Tenant's receipt of such certification. If, according to such certification,
Landlord's original determination of annual Operating Costs and Taxes overstated
the amounts thereof, in the aggregate, by more than three percent (3%), then
Landlord shall pay the cost of the certification and shall, at its election,
either promptly refund the amount of Tenant's overpayment of Operating Costs and
Taxes or, if this Lease is still in effect, credit such overpayment against
Tenant's subsequent obligations to pay Operating Costs and Taxes.

                           5.       Miscellaneous. So long as Tenant is in
monetary default of any obligation under this Lease, Tenant shall not be
entitled to any refund of any amount from Landlord. If this Lease is terminated
for any reason prior to the annual determination of Operating Cost Share Rent or
Tax Share Rent, either party shall pay the full amount due to the other within
fifteen (15) days after Landlord's notice to Tenant of the amount when it is
determined. Landlord may commingle any payments made with respect to Operating
Cost Share Rent and Tax Share Rent, without payment of interest.

                  E.       Additional Rent Upon Default by Tenant. Landlord and
Tenant acknowledge that to induce Tenant to enter into this Lease, and in
consideration of Tenant's agreement to perform all of the terms, covenants and
conditions to be performed by Tenant under this Lease, as and when performance
is due during the Term, Landlord has incurred (or will incur) significant costs,
including, without limitation, the following: (i) expenditures incurred in
connection with the performance of Landlord's Work (as defined in the Tenant
Improvement Agreement attached hereto as Exhibit C), (ii) payment of the
Alterations Allowance (as defined in Section 5.E below), (iii) commissions to
Landlord's and/or Tenant's real estate broker, (iv) attorneys' fees and related
costs incurred and/or paid by Landlord in connection with the negotiation and
preparation of this Lease, and/or (v) the rent abatement granted to Tenant
during the Early Occupancy Period described above (collectively, the
"Inducements"). Landlord and Tenant further acknowledge that Landlord would not
have granted the Inducements to Tenant but for Tenant's agreement to perform all
of the terms, covenants, conditions and agreements to be performed by it under
this Lease for the entire Term, and that Landlord's agreement to incur such
expenditures and grant such concessions is, and shall remain, conditioned upon
Tenant's faithful performance of all of the terms, covenants, conditions and
agreements to be performed by Tenant under this Lease for the entire Term.
Accordingly, if a default by Tenant shall occur hereunder, following any
applicable notice and opportunity to cure, Landlord shall be relieved of any
unfulfilled obligation to grant Inducements hereunder, or to incur further
expenses in connection therewith, and Tenant shall pay, as liquidated damages
for Landlord's granting the Inducements and not as a penalty, within ten (10)
days after the occurrence of the default following any applicable notice and
opportunity to cure, as Additional Rent, the unamortized amount of those
Inducements incurred or granted prior to the date of the default (the
"Pre-Default Inducements"). Landlord may or, at Tenant's request, shall, after
the occurrence of a default following any applicable notice and opportunity to
cure, forward a statement to Tenant setting forth the amount of the Pre-Default
Inducements, but the failure to deliver such a statement shall not be or be
deemed to be a waiver of the right to collect the Pre-Default Inducements or to
extend the date upon which such amount shall be due and payable. For purposes of
this Section 2.E, the unamortized amount of the Pre-Default Inducements shall
equal the remaining principal component, measured on the date of the default, of
a level-payment amortization over the initial Term of this Lease of a principal
amount equal to the Pre-Default

                                       9



Inducements, including interest at the Interest Rate. Notwithstanding the
foregoing, Landlord agrees that it will seek to enforce its right to recover
Pre-Default Inducements only in connection with a bankruptcy of Tenant where
this Lease is rejected or deemed rejected under Section 362 of the Code.

         3.       PREPARATION AND CONDITION OF PREMISES; TENANT'S POSSESSION;
REPAIRS AND MAINTENANCE.

                  A.       Condition of Premises. Except as otherwise set forth
herein, Landlord is leasing the Premises to Tenant "as is", without any
obligation to alter, remodel, improve, repair or decorate any part of the
Premises and without any express or implied representations or warranties of any
kind, except for (i) "Landlord's Work" and (ii) Landlord's representation that,
as of the date set forth in parts (a) and (b) of Section 11 of the Schedule, the
roof of the Building will be in good condition, the Premises will be in good and
clean operating condition and repair, the Building Systems will be in good
operating condition and repair, and there will be no leases of the Premises
other than this Lease. Landlord shall, as Tenant's sole and exclusive remedy for
any non-compliance with the foregoing representation, promptly after receipt of
notice from Tenant remedy any non-compliance with such representation at
Landlord's sole cost and expense.

                  B.       Tenant's Possession. Tenant's taking possession of
any portion of the Premises shall be conclusive evidence that the Premises was
in good order, repair and condition subject to (i) any Punch-List Items and (ii)
latent defects of which Tenant gives Landlord written notice within one (1) year
after the Substantial Completion Date.

                  C.       Repairs and Maintenance.

                           1.       Tenant's Obligations. Except to the extent
of Landlord's obligations under Section 3.C(2) below, Tenant shall, throughout
the Term at its expense, make all repairs necessary to keep the Premises,
Tenant's fixtures and personal property, in good order, condition and repair and
in compliance with all applicable Governmental Requirements. Tenant's repair,
maintenance and replacement obligations shall be performed under the supervision
and subject to the prior approval of Landlord, and within any reasonable period
of time specified by Landlord, and shall include, without limitation, all
plumbing and sewage facilities within the Premises, fixtures, interior walls and
ceiling, floors, windows (including the repairing, resealing, cleaning and
replacing of both interior and exterior windows), doors, entrances, plate glass,
showcases, all electrical facilities and equipment, including lighting fixtures,
lamps, fans and any exhaust equipment and systems, electrical motors and all
other appliances and equipment of every kind and nature located in, upon or
about the Premises. Tenant shall also be responsible for all pest control within
the Premises, and for all trash removal and disposal from the Premises. Tenant
shall obtain HVAC systems preventive maintenance contracts with bimonthly or
monthly service in accordance with manufacturer recommendations, which shall be
subject to the reasonable prior written approval of Landlord and paid for by
Tenant, and which shall provide for and include replacement of filters, oiling
and lubricating of machinery, parts replacement, adjustment of drive belts, oil
changes and other preventive maintenance, including annual maintenance of duct
work, interior unit drains and caulking at sheet metal, and recaulking of jacks
and vents on an annual basis. Tenant shall have the benefit of all warranties
available to Landlord regarding

                                       10



the equipment in such HVAC systems. Alternatively, Landlord may elect to perform
all or some of the foregoing repairs and maintenance itself, at Tenant's
expense, to the Building Systems (as defined in Section 5.B(2) below). Landlord
may also perform any maintenance or repairs itself, at Tenant's expense, to the
extent Tenant fails to perform such maintenance or repairs as required herein
within applicable notice and cure periods. At the expiration or earlier
termination of this Lease, or Tenant's right to possession, Tenant shall return
the Premises to Landlord in the condition required under Section 14 below.

                           2.       Landlord's Obligations. Except as otherwise
provided in Section 9 below, Landlord agrees to make all necessary repairs to
(a) the structural parts of the Building, which structural parts include only
the foundation and subflooring of the Building and the structural condition of
the roof and the exterior walls of the Building (but excluding the interior
surfaces of exterior walls and exterior and interior of all windows, doors,
ceiling and plate glass, which shall be maintained and repaired by Tenant), (b)
the roof membrane and (c) the common areas of the Project, and to maintain the
same in reasonably good order and condition, subject to inclusion of the costs
thereof in Operating Costs; provided, however, that subject to the provisions of
Section 8.F below, any damage arising from the acts of Tenant or any Tenant
Parties (as defined in Section 8.B(1) below) shall be repaired by Landlord at
Tenant's sole expense, and Tenant shall pay Landlord, on demand, the reasonable
cost of any such repair. Landlord may also, but shall not be required to, enter
the Premises at all reasonable times upon one (1) business day prior written
notice (except in the case of an emergency) to make such repairs, alterations,
improvements or additions to the Premises or to the Project or to any equipment
located in the Project as Landlord shall deem necessary or as Landlord may be
required to do by governmental or quasi-governmental authority or court order or
decree. The cost of any repairs made by Landlord on account of Tenant's default,
or on account of the willful misconduct or neglect by Tenant or any Tenant
Parties anywhere in the Project, shall become Additional Rent payable by Tenant
on demand. As a condition precedent to all of Landlord's repair and maintenance
obligations under this Lease, Tenant must have notified Landlord of the need of
such repairs or maintenance (other than routine maintenance). Tenant hereby
waives any and all rights under and benefits of subsection 1 of Section 1932 and
Sections 1941 and 1942 of the California Civil Code and any similar or successor
law, statute or ordinance now or hereafter in effect regarding Tenant's right to
make repairs and deduct the cost of such repairs from the Rent due under this
Lease.

         4.       SERVICES AND UTILITIES. Tenant shall promptly pay, as the same
become due, all charges for water, gas, electricity, telephone, sewer service,
waste pick-up and any other utilities, materials and services furnished directly
to or used by Tenant on or about the Premises during the Term, including,
without limitation, (i) meter, use and/or connection fees, hook-up fees, or
standby fees, and (ii) penalties for discontinued interrupted service. Any
interruption or cessation of utilities resulting from any causes, including any
entry for repairs pursuant to this Lease, and any renovation, redecoration or
rehabilitation of any area of the Project, shall not render Landlord liable for
damages to either person or property or for interruption or loss to Tenant's
business, nor be construed as an eviction of Tenant, nor work an abatement of
any portion of Rent, nor relieve Tenant from fulfillment of any covenant or
agreement hereof; provided, however, that if (i) an interruption of the Project
services prevents Tenant from occupying all or a material portion of the
Premises for the Permitted Use for a period of at least seven (7) consecutive
days and (ii) such interruption was caused by the gross negligence or

                                       11



willful misconduct of Landlord, its agents or employees, then monthly Rent shall
thereafter be proportionately abated during the period of such interruption.
Nothing in this Section 4 shall limit the parties' rights and obligations under
Section 9 hereof, in the event of a casualty affecting the Building or Premises.
Landlord shall make commercially reasonable efforts to give Tenant at least
forty-eight (48) hours prior written notice of any scheduled interruption in
Project services to the Premises.

         5.       ALTERATIONS AND REPAIRS.

                  A.       Landlord's Consent and Conditions.

                           1.       1. Except for Minor Alterations (as defined
below), Tenant shall not make any improvements or alterations to the Premises
(the "Work") without in each instance submitting plans and specifications for
the Work to Landlord and obtaining Landlord's prior written consent. Tenant
shall pay Landlord's actual costs incurred for review of all of the plans and
all other items submitted by Tenant. Landlord will be deemed to be acting
reasonably in withholding its consent for any Work which (a) impacts the base
structural components or the Building Systems, (b) impacts any other tenant's
premises, (c) is visible from outside the Premises, or (d) would utilize
building materials or equipment which are inconsistent with Landlord's standard
building materials and equipment for the Building. Subject to Landlord's review
and approval of plans and specifications therefor, Landlord hereby approves the
Work described in Exhibit H attached hereto and agrees that Tenant may surrender
such Work upon the termination of the Lease.

                           2.       Landlord's approval shall not be required
for Work on the interior of the Premises costing less than Ten Thousand Dollars
($10,000.00) per project ("Minor Alterations"), provided that (a) Landlord would
not have the right to reasonably withhold consent to the Work pursuant to
clauses (1)(a) through (1)(d) of Section 5.A(1) above; and (b) Tenant provides
Landlord with written notice of such Minor Alteration, which shall include a
copy of any governmental permits required to complete such Minor Alteration,
prior to commencing construction of such Minor Alteration.

                           3.       Tenant shall pay for the cost of all Work,
including the cost of any and all approvals, permits, fees and other charges
which may be required as a condition of performing such Work.

                           4.       The following requirements shall apply to
all Work:

                                    (a)   Prior to commencement, Tenant shall
furnish to Landlord building permits, certificates of insurance satisfactory to
Landlord, and, at Landlord's request, security for payment of all costs.
However, Landlord shall not have the right to require that Tenant provide any
payment or performance bonds for any Alterations unless the cost of any such
project exceeds Fifty Thousand Dollars ($50,000).

                                    (b)   Tenant shall perform all Work so as to
maintain peace and harmony among other contractors serving the Project and shall
avoid interference with other work to be performed or services to be rendered in
the Project.

                                       12



                                    (c)   The Work shall be performed in a good
and workmanlike manner, meeting the standard for construction and quality of
materials in the Building, and shall comply with all insurance requirements and
all applicable governmental laws, ordinances, regulations or requirements of the
United States of America, the State of California, or the ordinances,
regulations or requirements of the local municipal or county governing body or
other lawful authorities having jurisdiction over the Project, including,
without limitation, any such laws, ordinances, regulations or requirements
relating to hazardous materials or substances, as those terms are defined by
applicable laws now or hereafter in effect (collectively, "Governmental
Requirements").

                                    (d)   Tenant shall perform all Work so as to
minimize or prevent disruption to other tenants, and Tenant shall comply with
all reasonable requests of Landlord in response to complaints from other
tenants.

                                    (e)   Tenant shall perform all Work in
compliance with any "Policies, Rules and Procedures for Construction Projects"
which may be in effect at the time the Work is performed, including, without
limitation, the Tenant Improvement Guidelines attached hereto as Exhibit F.

                                    (f)   All Work shall be performed only by
contractors or mechanics approved by Landlord, which approval shall not be
unreasonably withheld, conditioned or delayed; provided, however, that (i)
Landlord may, in its reasonable discretion, specify engineers, general
contractors, subcontractors, and architects to perform work affecting the
Building Systems; and (ii) if Landlord consents to any Work that requires work
to be performed outside the Premises, Landlord may elect to perform such work at
Tenant's expense.

                                    (g)   Tenant shall permit Landlord to
supervise all Work, including, without limitation, the right (but not an
obligation) to inspect the construction work during the progress thereof, and to
require corrections of faulty construction or any material deviation from the
plans for such Work as approved by Landlord; provided, however, that no such
inspection shall be deemed to create any liability on the part of Landlord, or
constitute a representation by Landlord or any person hired to perform such
inspection that the work so inspected conforms with such plans or complies with
any Governmental Requirements, and no such inspection shall give rise to a
waiver of, or estoppel with respect to, Landlord's continuing right at any time
or from time to time to require the correction of any faulty work or any
material deviation from such plans.

                                    (h)   Landlord may charge a supervisory fee
not to exceed three percent (3%) of labor, material, and all other costs of the
Work to compensate Landlord for management and supervision of the progress for
any Work which Tenant requests that Landlord act as the construction manager or
supervisor for such Work (but in no event shall any fee be charged in connection
with the Work described on Exhibit H).

                                    (i)   Upon completion, Tenant shall furnish
Landlord with contractor's affidavits and full and final statutory waivers of
liens, as-built plans and specifications, and receipted bills covering all labor
and materials, and all other close-out

                                       13



documentation related to the Work, including any other information required
under any "Policies, Rules and Procedures for Construction Projects" which may
be in effect at the time.

                  B.       Repairs. If any part of the mechanical, electrical or
other systems in the Premises (e.g., HVAC, life safety or automatic fire
extinguisher/sprinkler system) (collectively, the "Building Systems") shall be
damaged during the performance of the Work, Tenant shall promptly notify
Landlord, and Landlord may elect to repair such damage at Tenant's expense.
Alternatively, Landlord may require Tenant to repair such damage at Tenant's
sole expense using contractors approved by Landlord.

                  C.       No Liens. Tenant has no authority to cause or permit
any lien or encumbrance of any kind to affect Landlord's interest in the
Project; any such lien or encumbrance shall attach to Tenant's interest only. If
any mechanic's lien shall be filed or claim of lien made for work or materials
furnished to Tenant, then Tenant shall at its expense within ten (10) days
thereafter either discharge, bond over or contest the lien or claim. If Tenant
contests the lien or claim, then Tenant shall (i) within such ten (10) day
period, provide Landlord adequate security for the lien or claim, (ii) contest
the lien or claim in good faith by appropriate proceedings that operate to stay
its enforcement, and (iii) pay promptly any final adverse judgment entered in
any such proceeding. If Tenant does not comply with these requirements, Landlord
may discharge the lien or claim, and the amount paid, as well as attorney's fees
and other expenses incurred by Landlord, shall become Additional Rent payable by
Tenant on demand.

                  D.       Ownership of Improvements. All Work as defined in
this Section 5, partitions, hardware, equipment, machinery and all other
improvements and all fixtures, (except trade fixtures, any satellite and other
telecommunications equipment and personal property installed in the Premises at
Tenant's expense ("Tenant's Property")), constructed in the Premises by either
Landlord or Tenant, (i) shall become Landlord's property upon installation
without compensation to Tenant, unless Landlord consents otherwise in writing,
and (ii) shall, at Landlord's option, either (a) be surrendered to Landlord with
the Premises at the termination of the Lease or of Tenant's right to possession,
or (b) be removed in accordance with Section 14 below (provided Landlord at the
time it gives its consent to the performance of such construction expressly
notifies Tenant in writing that it will require such removal). Notwithstanding
anything to the contrary herein, Tenant's Property shall at all times remain
Tenant's property and Tenant shall be entitled to all depreciation, amortization
and other tax benefits with respect thereto. Except for utility installations or
alterations which cannot be removed without structural injury to the Premises,
at any time Tenant may remove Tenant's Property from the Premises, provided
Tenant repairs all damage caused by such removal. Tenant shall be entitled to
all insurance proceeds and condemnation awards and settlements payable with
respect to Tenant's Property.

                  E.       Alterations Allowance.

                           1.       Subject to the provisions of Section 5.E(3)
below, Landlord agrees to contribute to the costs of any Work that Tenant
performs in the Premises pursuant to this Section 5, including, without
limitation, the installation of furniture, fixtures, equipment and cabling, the
amount of Seventy-Four Thousand Two Hundred Seventeen Dollars ($74,217.00)

                                       14



(the "Alterations Allowance"). Upon notice to Landlord, Tenant may credit any
unused portion of the Alterations Allowance against payment of Rent next
becoming due.

                           2.       Provided that this Lease is then in full
force and effect, Landlord shall pay the Alterations Allowance to Tenant within
thirty (30) days after satisfaction of each of the following conditions: (a)
Tenant's delivery to Landlord of invoices and other satisfactory evidence of the
cost of the Work, along with such other supporting information as Landlord may
reasonably request; (b) with respect to any portion of the Work requiring a
building permit, Tenant's delivery to Landlord of a certificate issued by
Tenant's architect certifying, for the benefit of Landlord, that such Work has
been completed in accordance with plans and specifications approved by Landlord
and in compliance with all applicable Governmental Requirements; (c) the lien
period for the Work shall have expired and no lien shall have been filed and
remain outstanding in connection therewith, or, if said lien period has not
expired, Tenant shall furnish to Landlord lien waivers and certifications in a
form reasonably acceptable to Landlord, verifying that all bills relating to the
Work have been paid in full; and (d) Tenant's delivery to Landlord of as-built
plans and specifications for the Work, if appropriate (provided that, in all
cases, Tenant shall deliver to Landlord reasonably detailed plans and
specifications for its cabling) (the documentation required to be submitted by
Tenant pursuant to clauses (a) through (d) above is herein referred to as the
"Required Allowance Documentation"). Tenant shall pay for all costs of the Work
performed hereunder in excess of the Alterations Allowance.

                           3.       Notwithstanding the foregoing provisions of
this Section 5.E to the contrary, if Tenant fails to deliver to Landlord a
request for disbursement of the Alterations Allowance, together with the
Required Allowance Documentation, within ninety (90) days following the
Commencement Date, Landlord shall disburse the Alterations Allowance to Tenant
within thirty (30) days of the expiration of such period.

         6.       USE OF PREMISES.

                  A.       Limitation on Use. Tenant shall use the Premises only
for the Permitted Use stated in the Schedule and Tenant shall not use or permit
the Premises or the Project to be used for any other purpose or purposes
whatsoever without the prior written consent of Landlord, which may be withheld
in Landlord's sole discretion.. Tenant shall not allow any use of the Premises
which will negatively affect the cost of coverage of Landlord's insurance on the
Project. Tenant shall not allow any inflammable or explosive liquids or
materials to be kept on the Premises, except those disclosed by Tenant in the
completed Environmental Questionnaire provided to Landlord pursuant to Section
27.E below. Tenant shall not allow any use of the Premises which would cause the
value or utility of any part of the Premises to diminish or would interfere with
any other tenant or with the operation of the Project by Landlord. Tenant shall
not permit any nuisance or waste to occur in, on, or about the Project, or allow
any offensive noise or odor in or around the Project. At the end of each
business day, or more frequently if necessary, Tenant shall deposit all garbage
and other trash (excluding any inflammable, explosive and/or hazardous
materials) in trash bins or containers approved by Landlord in locations
designated by Landlord from time to time. If any governmental authority shall
deem the Premises to be a "place of public accommodation" under the Americans
with Disabilities Act ("ADA") or any other comparable law as a result of
Tenant's use, Tenant shall either modify its use to cause such

                                       15



authority to rescind its designation or be responsible for any alterations,
structural or otherwise, required to be made to the Building or the Premises
under such laws.

                  B.       Signs. Tenant shall not place on any portion of the
Premises any sign, placard, lettering, banner, displays, graphic, decor or other
advertising or communicative material which is visible from the exterior of the
Premises without Landlord's prior written approval. Any approved signs shall
strictly conform to all Governmental Requirements, any CC&R's recorded against
the Project, and Landlord's signage standards in effect at the time, and shall
be installed and removed at Tenant's expense. Tenant, at its sole expense, shall
maintain such signs in good condition and repair during the Term. Prior to the
expiration or earlier termination of this Lease, Tenant at its sole cost shall
remove all of its exterior signage and repair any and all damage caused to the
Building and/or Project (including and fading or discoloration) by such signs
and/or the removal of such signs from the Building and/or Project. Landlord
hereby approves of Tenant's installation of signage as described on Exhibit H
hereto.

                  C.       Parking. Tenant, at no additional cost, shall have
the non-exclusive right to park in the Project's parking facilities in common
with other tenants of the Project upon terms and conditions, as may from time to
time be established by Landlord. Tenant agrees not to overburden the parking
facilities (i.e., use more than the number of unassigned parking stalls or
Reserved Spaces indicated on the Schedule) and agrees to cooperate with Landlord
and other tenants in the Project in the use of the parking facilities. Landlord
reserves the right in its reasonable discretion to determine whether the parking
facilities are becoming crowded and to allocate and assign parking passes among
Tenant and the other tenants in the Project. Landlord shall have the right to
charge Tenant the portion that Landlord reasonably deems allocable to Tenant of
any charges (e.g., fees or taxes) imposed by the Regional Air Quality Control
Board or other governmental or quasi-governmental agency in connection with the
parking facilities (e.g., in connection with operation or use of the parking
facilities). Landlord shall not be liable to Tenant, nor shall this Lease be
affected, if any parking is impaired by (or if any parking charges are imposed
as a result of) any moratorium, initiative, referendum, law, ordinance,
regulation or order passed, issued or made by any governmental or
quasi-governmental body. Tenant's continued right to use the parking spaces is
conditioned upon Tenant abiding by all reasonable and non-discriminatory rules
and regulations which are prescribed from time to time for the orderly operation
and use of the parking facility where the parking passes are located, including
any sticker or other identification system established by Landlord, Tenant's
cooperation in seeing that Tenant's employees and visitors also comply with such
rules and regulations under this Lease. Landlord specifically reserves the right
to change the size, configuration, design, layout and all other aspects of the
Project parking facility at any time and Tenant acknowledges and agrees that
Landlord may, without incurring any liability to Tenant and without any
abatement of Rent under this Lease, from time to time, close-off or restrict
access to the Project parking facility for a reasonable period of time for
purposes of permitting or facilitating any such construction, alteration or
improvements; provided, however, that Landlord shall locate and secure alternate
parking arrangements for Tenant within walking distance of the Building or
provide reasonable shuttle service. Landlord may delegate its responsibilities
hereunder to a parking operator in which case such parking operator shall have
all the rights of control attributed hereby to the Landlord. The parking passes
rented by Tenant pursuant to this Section 6.C are provided to Tenant solely for
use by Tenant's own personnel and such passes may not be transferred, assigned,
subleased or otherwise alienated by Tenant (other than pursuant to a

                                       16



permitted assignment of the Lease or permitted sublease of any of the Premises)
without Landlord's prior approval, which shall not be unreasonably withheld or
delayed. Landlord shall not oversubscribe parking.

                  D.       Prohibition Against Use of Roof and Structure of
Building. Tenant shall be prohibited from using all or any portion of the roof
of the Building or any portion of the structure of the Building during the Term
of this Lease (or any extensions thereof) for any purposes (including without
limitation for the installation, maintenance and repair of a satellite dish
and/or other telecommunications equipment), without Landlord's prior written
consent, which Landlord may withhold in its reasonable discretion.
Notwithstanding the foregoing, Landlord shall grant Tenant with reasonable
access to the roof of the Building as may be reasonably necessary to allow
Tenant to perform its HVAC and other maintenance obligations hereunder, provided
that such access shall be subject to any reasonable rules and restrictions that
Landlord may impose from time to time; provided, however, that Tenant may,
subject to Landlord's reasonable prior written consent, use the roof for the
installation and maintenance of a non-revenue producing satellite dish to
service Tenant's business in the Premises. Landlord has made no representations
or promise as to the suitability or effectiveness of any part of the roof for
Tenant's proposed use, or as to any Governmental Requirements applicable to
Tenant's proposed use.

                           1.       Tenant shall submit to Landlord, with any
request for consent of any rooftop equipment, plans and specifications therefor,
which must include, without limitation, the design, size and features of the
rooftop equipment and mounting structure, floor and power load requirements,
cabling installations, the means of affixing or mounting the rooftop equipment,
and the means of connecting the rooftop equipment to the Building's electrical
system and to the Premises. Tenant acknowledges and agrees that, if Landlord
consents to Tenant's use of any portion of the roof of the Building, such use
shall be non-exclusive and subject to Landlord's approval of location, plans and
installation pursuant to Section 5 of this Lease and such rules and regulations
as Landlord may prescribe, including, without limitation, with regard to (a) the
location, size, type and methods of installation of the proposed rooftop
equipment, (b) requirements to prevent electrical, electromagnetic, radio
frequency or other interference with other telecommunication equipment on or
about the Building, (c) rooftop space availability, (d) restrictions on
penetration of the roof surface, (e) rooftop access rights, and (f) removal
requirements upon the expiration or earlier termination of this Lease.

                           2.       Nothing herein shall limit or restrict
Landlord's rights under Section 11.N, or require Landlord to obtain Tenant's
consent prior to exercising such rights.

         7.       GOVERNMENTAL REQUIREMENTS AND BUILDING RULES.

                  A.       Compliance in Premises. Tenant shall, at its sole
cost and expense, (1) comply with all Governmental Requirements; with any
occupancy certificate issued for the Premises; and with the provisions of all
recorded documents affecting the Premises, insofar as any thereof relates to or
affects the condition, use or occupancy of the Premises; and (2) take all proper
and necessary action to cause the Premises, including any repairs, replacements,
alterations and improvements thereto, to be maintained, constructed, used and
occupied in compliance with applicable Governmental Requirements, including any
applicable code and

                                       17



ADA requirements, whether or not such requirements are based on Tenant's use of
the Premises, and further to assume all responsibility to ensure the Premises'
continued compliance with all Governmental Requirements, including applicable
code and ADA requirements, throughout the Term. Tenant shall be responsible, at
its sole cost and expense, to make all alterations to the Premises as are
required to comply with the governmental rules, regulations, requirements or
standards described in this Section 7.A. The judgment of any court of competent
jurisdiction or the admission of Tenant in any judicial action, regardless of
whether Landlord is a party thereto, that Tenant has violated any of said
governmental measures, shall be conclusive of that fact as between Landlord and
Tenant; provided, however, that, unless necessitated by Tenant's particular use
of the Premises or any improvements to or alterations of the Premises made by
or on behalf of Tenant, Tenant shall have no obligation to make structural
repairs or alterations to the Premises to comply with Governmental Requirements.

                  B.       Compliance in Common Areas. Subject to reimbursement
as an Operating Cost as provided in Section 2 above, Landlord shall perform any
work required under any applicable Governmental Requirements, including the ADA,
to be performed in the common areas of the Project, except that Tenant shall be
solely responsible for all such compliance work which is required as a result of
Tenant's particular use or activities or which relate to Tenant's proposed
alterations or repairs. With respect to any code compliance work required
outside the Premises for which Tenant is responsible hereunder, Landlord shall
have the right to perform such work, or require that Tenant perform such work
with contractors, subcontractors, engineers and architects approved by Landlord;
and if Landlord elects to perform such work outside the Premises, Tenant shall
reimburse Landlord for the cost of such work within ten (10) days following
receipt of invoices therefor. Landlord makes no representations or warranties
regarding the Project's or the Premises' compliance with applicable Governmental
Requirements as of the date of this Lease; provided, however, that Landlord
represents to Tenant that, as of the date of this Lease, Landlord has not
received any written notice from any governmental authority that the Building is
in violation of any Governmental Requirements, which violation remains uncured.
If it is determined that the foregoing representation was untrue when made,
Landlord shall, as Tenant's sole and exclusive remedy, perform such work as may
be required by such Governmental Requirements, but only to the extent that
failure to do so would result in an obligation or liability accruing to Tenant
or result in an imminent and material adverse impact on Tenant's occupancy of or
access to the Premises.

                  C.       Rules and Regulations. Tenant shall also comply with
all reasonable rules for the Project which may be established and amended from
time to time by Landlord; provided, however, Tenant shall not be responsible for
compliance with any rule promulgated after the date of this Lease until Landlord
has made a reasonable effort to notify Tenant of such rule. The present rules
and regulations are contained in Exhibit B. Provided that Landlord acts
reasonably and in good faith in enforcing them, Landlord shall not be
responsible for the failure by another tenant to comply with the rules and such
failure shall not relieve Tenant of its obligation to comply with the rules.
Provided that Landlord acts reasonably and in good faith in enforcing them,
Landlord shall not be responsible for the failure by another tenant to comply
with the rules and such failure shall not relieve Tenant of its obligation to
comply with the rules. Landlord shall use reasonable efforts to apply the rules
and regulations uniformly with respect to Tenant and any other tenants in the
Project under leases containing rules and regulations similar to this Lease. If
Tenant performs alterations or repairs, Tenant shall comply with the provisions
of

                                       18



Section 5 of this Lease and also any applicable reasonable policies, rules and
regulations for construction projects which may be established and in effect at
the time.

         8.       WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE.

                  A.       Waiver of Claims. Neither Landlord nor the other
Indemnitees (as defined below) shall be liable to Tenant or to any Tenant
Parties (as defined below), and Tenant waives all claims against Landlord and
such other Indemnitees, for any injury to or death of any person or for loss of
use of or damage to or destruction of property in or about the Premises or
Project by or from any cause whatsoever, including without limitation,
earthquake or earth movement, gas, fire, oil, electricity or leakage from the
roof, walls, basement or other portion of the Premises or Project, except only,
with respect to any Indemnitee, to the extent such injury, death or damage is
caused by the gross negligence or willful misconduct of such Indemnitee or
except to the extent such limitation on liability is prohibited by law. The
provisions of this Section 8.A shall survive the expiration or earlier
termination of this Lease until all claims within the scope of this Section 8.A
are fully, finally, and absolutely barred by the applicable statutes of
limitations.

                  B.       Indemnification.

                           1.       Tenant shall indemnify, protect, defend (by
counsel reasonably satisfactory to Landlord) and hold harmless Landlord and its
officers, directors, employees and agents (each, an "Indemnitee" and
collectively, the "Indemnitees"), and each of them, against any and all
obligations, losses, claims, actions (including remedial or enforcement actions
of any kind and administrative or judicial proceedings, suits, orders or
judgments), causes of action, liabilities, penalties, damages (including
consequential and punitive damages), costs and expenses (including reasonable
attorneys' and consultants' fees and expenses) (collectively, "Claims") arising
from any of the following, including, but not limited to, Claims brought by or
on behalf of employees of Tenant, with respect to which Tenant waives, for the
benefit of the Indemnitees, any immunity to which Tenant may be entitled under
any worker's compensation laws: (a) any cause in, on or about the Premises, (b)
any negligence or willful misconduct of Tenant or any person or entity claiming
by or through Tenant (including any assignee or subtenant), or any of their
respective members, partners, employees, contractors, agents, customers,
visitors, licensees or other persons in or about the Project by reason of
Tenant's occupancy of the Premises (each a "Tenant Party" and, collectively,
"Tenant Parties"), or (c) Tenant's breach of its obligations under this Lease,
either prior to, during, or after the expiration of the Lease Term; provided,
however, that, with respect to any Indemnitee, Tenant's obligations under this
Section shall be inapplicable to the extent such Claims arise solely from the
gross negligence or willful misconduct of such Indemnitee or to the extent such
obligations are prohibited by applicable law.

                           2.       Tenant's duty to defend Landlord and the
other Indemnitees under this Section 8.B is separate and independent of Tenant's
duty to indemnify the Indemnitees. The duty to defend includes claims for which
the Indemnitees may be liable without fault or strictly liable. The duty to
defend applies regardless of whether the issues of negligence, liability, fault,
default, or other obligation on the part of Tenant Parties have been determined.
The duty to defend applies immediately, regardless of whether any Indemnitees
have paid any sums or

                                       19



incurred any detriment arising out of or relating (directly or indirectly) to
any Claims. The parties expressly intend that Indemnitees shall be entitled to
obtain summary adjudication or summary judgment regarding Tenant's duty to
defend the Indemnitees at any stage of any claim or suit within the scope of
this Section.

                           3.       Tenant's obligations under this Section
shall survive the expiration or earlier termination of this Lease until all
Claims within the scope of this Section 8.B are fully, finally, and absolutely
barred by the applicable statutes of limitations.

                  C.       Tenant's Insurance. Tenant shall maintain insurance
as follows, with such other terms, coverages and insurers, as Landlord shall
reasonably require from time to time:

                           1.       Commercial General Liability Insurance, with
(a) Contractual Liability including the indemnification provisions contained in
this Lease, (b) a severability of interest endorsement, (c) limits of not less
than Two Million Dollars ($2,000,000) combined single limit per occurrence and
not less than Two Million Dollars ($2,000,000) in the aggregate for bodily
injury, sickness or death, and property damage, and umbrella coverage of not
less than Five Million Dollars ($5,000,000).

                           2.       Property Insurance against "All Risks" of
physical loss covering the replacement cost of all Tenant's fixtures and
personal property and business interruption.

                           3.       Workers' compensation or similar insurance
in form and amounts required by law, and Employer's Liability with not less than
the following limits:

                       
Each Accident:            $500,000
Disease--Policy Limit:    $500,000
Disease--Each Employee:   $500,000



                  Tenant's insurance shall be primary and not contributory to
that carried by Landlord, its agents, or mortgagee. Landlord, and if any,
Landlord's building manager or agent, mortgagee and ground lessor shall be named
as additional insureds under the insurance required of the Tenant in Section
8.C(1). The company or companies writing any insurance which Tenant is required
to maintain under this Lease, as well as the form of such insurance, shall at
all times be subject to Landlord's approval, and any such company shall be
licensed to do business in the state in which the Building is located. Such
insurance companies shall have a A.M. Best rating of A VI or better.

                           4.       Tenant shall cause any contractor of Tenant
performing work on the Premises to maintain insurance as follows, with such
other terms, coverages and insurers, as Landlord shall reasonably require from
time to time:

                                    (a)   Commercial General Liability
Insurance, including contractor's liability coverage, contractual liability
coverage, completed operations coverage, broad form property damage endorsement,
and contractor's protective liability coverage, to afford protection with
limits, for each occurrence, of not less than One Million Dollars ($1,000,000)
with respect to personal injury, death or property damage.

                                       20



                                    (b)   Workers' compensation or similar
insurance in form and amounts required by law, and Employer's Liability with not
less than the following limits:

                        
Each Accident:             $500,000
Disease--Policy Limit:     $500,000
Disease--Each Employee:    $500,000



                  Such insurance shall contain a waiver of subrogation provision
in favor of Landlord and its agents. Tenant's contractor's insurance shall be
primary and not contributory to that carried by Tenant, Landlord, their agents
or mortgagees. Tenant and Landlord, and if any, Landlord's building manager or
agent, mortgagee or ground lessor shall be named as additional insured on
Tenant's contractor's insurance policies.

                  D.       Insurance Certificates. Tenant shall deliver to
Landlord certificates evidencing all required insurance no later than five (5)
days prior to the Commencement Date and each renewal date. Each certificate will
provide for thirty (30) days prior written notice of cancellation to Landlord
and Tenant.

                  E.       Landlord's Insurance. Subject to reimbursement as an
Operating Cost in accordance with the provisions of Section 2 hereof, Landlord
shall procure and maintain in effect throughout the Term of this Lease
commercial general liability insurance, property insurance and/or such other
types of insurance as are normally carried by reasonably prudent owners of
commercial properties substantially similar to the Project. Such coverages shall
be in such amounts, from such companies and on such other terms and conditions
as Landlord may from time to time reasonably determine, and Landlord shall have
the right, but not the obligation, to change, cancel, decrease or increase any
insurance coverages in respect of the Building, add additional forms of
insurance as Landlord shall deem reasonably necessary, and/or obtain umbrella or
other policies covering both the Building and other assets owned by or
associated with Landlord or its affiliates, in which event the cost thereof
shall be equitably allocated.

                  F.       Waiver of Subrogation. Notwithstanding anything to
the contrary herein, Landlord and Tenant hereby waive and release any and all
rights of recovery against the other party, including officers, employees,
agents and authorized representatives (whether in contract or tort) of such
other party, that arise or result from any and all loss of or damage to any
property of the waiving party located within or constituting part of the
Building, including the Premises from a risk which is actually insured against,
which is required to be insured against under the Lease, or which would normally
be covered by "all risk" property insurance, without regard to the negligence of
the person or entity so released, whether or not the party suffering the loss or
damage actually carries any insurance, recovers under any insurance or self
insures the loss or damage. Each party shall have their property insurance
policies issued in such form as to waive any right of subrogation as might
otherwise exist. This mutual waiver is in addition to any other waiver or
release contained in this Lease. All of Landlord's and Tenant's repair and
indemnity obligations under the Lease shall be subject to the waiver and release
contained in this paragraph.

                                       21



         9.       FIRE AND OTHER CASUALTY.

                  A.       Termination. If a fire or other casualty causes
damage to the Building or the Premises, and sufficient insurance proceeds will
be available to Landlord to cover the cost of any restoration to the Building
and Premises, Landlord shall engage a registered architect to estimate, within
one (1) month of the casualty, to both Landlord and Tenant the amount of time
needed to restore the Building and the Premises to tenantability, using standard
working methods without the payment of overtime and other premiums. If the time
needed exceeds nine (9) months from the beginning of the restoration, or two (2)
months therefrom if the restoration would begin during the last twelve (12)
months of the Lease, then in the case of the Premises, either Landlord or Tenant
may terminate this Lease, and in the case of the Building, Landlord may
terminate this Lease, by notice to the other party within ten (10) days after
the notifying party's receipt of the architect's estimate. If sufficient
insurance proceeds will not be available to Landlord to cover the cost of any
restoration to the Building or the Premises, Landlord may terminate this Lease
by written notice to Tenant. Any termination pursuant to this Section 9.A shall
be effective thirty (30) days from the date of such termination notice and Rent
shall be paid by Tenant to that date, with an abatement for any portion of the
Premises which has been untenantable after the casualty. Notwithstanding the
foregoing, Landlord shall not have the right to terminate the Lease if the
damage is relatively minor (e.g. repair or restoration would cost less than ten
percent (10%) of the replacement cost of the Building) and is due to a risk
required to be insured against by Landlord under this Lease.

                  B.       Restoration. If a casualty causes damage to the
Building or the Premises but this Lease is not terminated for any reason, then
subject to the rights of any mortgagees or ground lessors, Landlord shall obtain
the applicable insurance proceeds and diligently restore the Building and the
Premises subject to current Governmental Requirements. Landlord's obligation,
should it elect or be obligated to repair or rebuild, shall be limited to the
basic Premises, building-standard tenant improvements, or the basic Building, as
the case may be, and Tenant shall, at Tenant's expense, replace or fully repair
damaged improvements made pursuant to Section 5 hereof, any tenant improvements
in excess of the building standard, personal property and fixtures. Rent shall
be abated on a per diem basis during the restoration for any portion of the
Premises which is untenantable, except to the extent that: (i) the casualty was
caused by the gross negligence or intentional misconduct of Tenant, its agents,
employees, contractors, subtenants or assignees, or (ii) Landlord does not
receive insurance proceeds sufficient to cover the rent interruption during such
period provided that Landlord carries the insurance required by this Lease.
Tenant shall not be entitled to any compensation or damages from Landlord for
loss of the use of the Premises, damage to Tenant's personal property and trade
fixtures or any inconvenience occasioned by such damage, repair or restoration.
Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section
1933, Subdivision 4, of the California Civil Code, and the provisions of any
similar law hereinafter enacted.

         10.      EMINENT DOMAIN. If a part of the Project is taken by eminent
domain or deed in lieu thereof which is so substantial that the Premises cannot
reasonably be used by Tenant for the operation of its business, then either
party may terminate this Lease effective as of the date of the taking. If any
substantial portion of the Project is taken without affecting the Premises, then
Landlord may terminate this Lease as of the date of such taking. Rent shall
abate from the date of the taking in proportion to any part of the Premises
taken. The entire award for a taking of

                                       22



any kind shall be paid to Landlord, and Tenant shall have no right to share in
the award. All obligations accrued to the date of the taking shall be performed
by the party liable to perform said obligations, as set forth herein. Tenant
hereby waives any and all rights it might otherwise have pursuant to Section
1265.130 of The California Code of Civil Procedure.

         11.      RIGHTS RESERVED TO LANDLORD.

                  Landlord may exercise at any time any of the following rights
respecting the operation of the Project without liability to Tenant of any kind:

                  A.       Name. To change the name of all or any of the
Buildings or the Project, or the street address of the Buildings or the suite
number(s) of the Premises(provided Landlord gives Tenant at least ninety (90)
days prior written notice thereof and pays all of Tenant's actual reasonable
costs as a result thereof).

                  B.       Signs. To install, modify and/or maintain any signs
on the exterior and in the interior of the Buildings or on the Project, and to
approve at its reasonable discretion, prior to installation, any of Tenant's
signs in the Premises visible from the common areas or the exterior of the
Building.

                  C.       Window Treatments. To approve, at its reasonable
discretion, prior to installation, any shades, blinds, ventilators or window
treatments of any kind, as well as any lighting within the Premises that may be
visible from the exterior of the Building or any interior common area.

                  D.       Keys. To retain and use at any time passkeys to enter
the Premises or any door within the Premises (other than to areas Tenant
designates as secure), subject to the terms of this Lease. Tenant shall not
alter or add any lock or bolt without Landlord's prior consent, which shall not
be unreasonably withheld or delayed. Any entry under this Lease (other than in
the case of an emergency) shall be subject to Tenant's reasonable security
measures and shall not unreasonably interfere with Tenant's use of the Premises.

                  E.       Access. To have access to the Premises with
twenty-four hours' prior notice (except in the case of an emergency, in which
case Landlord shall have the right to immediate access) to inspect the Premises,
to post notices of non-responsibility in connection with any Work, to make
repairs, alterations, additions or improvements to the Premises or Building, and
to perform any other obligations of Landlord hereunder, all without abatement of
Rent.

                  F.       Preparation for Reoccupancy. Intentionally Deleted.

                  G.       Heavy Articles. To approve the weight, size,
placement and time and manner of movement within the Building of any safe,
central filing system or other heavy article of Tenant's property. Tenant shall
move its property entirely at its own risk.

                  H.       Show Premises. To show the Premises to prospective
purchasers, tenants, brokers, lenders, mortgagees, investors, rating agencies or
others at any reasonable time, provided that Landlord gives prior notice to
Tenant and does not materially interfere with

                                       23



Tenant's use of the Premises. Notwithstanding the foregoing, Landlord shall not
show the Premises to tenants or brokers except during the last six (6) months of
the Term.

                  I.       Relocation of Tenant. Intentionally Deleted.

                  J.       Use of Lockbox. To designate a lockbox collection
agent for collections of amounts due Landlord. In that case, the date of payment
of Rent or other sums shall be the date of the agent's receipt of such payment
or the date of actual collection if payment is made in the form of a negotiable
instrument thereafter dishonored upon presentment. However, Landlord may reject
any payment for all purposes as of the date of receipt or actual collection by
mailing to Tenant within a reasonable time after such receipt or collection a
check equal to the amount sent by Tenant.

                  K.       Repairs and Alterations. To make repairs or
alterations to the Project and in doing so transport any required material
through the Premises, to close entrances, doors, corridors, elevators and other
facilities in the Project, to open any ceiling in the Premises, or to
temporarily suspend services or use of common areas in the Building; provided
that, subject to the next succeeding sentence, Landlord shall, in connection
with the foregoing work, use commercially reasonable efforts to minimize
interference with Tenant's business in the Premises and shall in all events
provide Tenant with reasonable access to the Premises. Landlord may perform any
such repairs or alterations during ordinary business hours, except that Tenant
may require any work in the Premises to be done after business hours if Tenant
pays Landlord for overtime and any other expenses incurred. Landlord may do or
permit any work on any nearby building, land, street, alley or way.

                  L.       Building Services. To install, use and maintain
through the Premises, pipes, conduits, wires and ducts serving the Building,
provided that such installation, use and maintenance does not unreasonably
interfere with Tenant's use of the Premises.

                  M.       Use of Roof. To permit Landlord (or any entity
selected by Landlord) to install, operate, maintain and repair any satellite
dish, antennae, equipment, or other facility on the roof of the Building or to
use the roof of the Building in any other manner, provided that such
installation, operation, maintenance, repair or use does not unreasonably
interfere with Tenant's satellite or other telecommunications equipment or
Tenant's use of the Premises.

                  N.       Other Actions. To take any other action which
Landlord deems reasonable in connection with the operation, maintenance or
preservation of the Building and the Project.

         12.      DEFAULTS.

                  A.       Tenant's Default. Any of the following shall
constitute a default by Tenant:

                           1.       Rent Default. Tenant fails to pay any Rent
and such failure continues for five (5) days or more following Landlord's notice
of such failure;

                                       24



                           2.       Subordination/Estoppel or Hazardous
Substances Default. Tenant defaults in its obligations (beyond any applicable
notice and cure periods) under Section 16 (Subordination), Section 19 (Estoppel
Certificate) or Section 28 (Hazardous Substances);

                           3.       Other Performance Default. Tenant fails to
perform any other obligation to Landlord under this Lease, and this failure
continues for twenty (20) days after written notice from Landlord or Landlord's
agent, except that if Tenant begins to cure its failure within the twenty (20)
day period but cannot reasonably complete its cure within such period, then, so
long as Tenant continues to diligently attempt to cure its failure, the twenty
(20) day period shall be extended to sixty (60) days, or such lesser period as
is reasonably necessary to complete the cure;

                           4.       Credit Default. One of the following credit
defaults occurs:

                                    (a)   Tenant (or any guarantor of Tenant's
obligations hereunder) commences any proceeding under any law relating to
bankruptcy, insolvency, reorganization or relief of debts, or seeks appointment
of a receiver, trustee, custodian or other similar official for the Tenant (or
the guarantor) or for any substantial part of its property, or any such
proceeding is commenced against Tenant (or the guarantor) and either remains
undismissed for a period of sixty (60) days or results in the entry of an order
for relief against Tenant (or the guarantor) which is not fully stayed within
thirty (30) days after entry;

                                    (b)   Tenant (or any guarantor of Tenant's
obligations hereunder) becomes insolvent or bankrupt, does not generally pay its
debts as they become due, or admits in writing its inability to pay its debts,
or makes a general assignment for the benefit of creditors;

                                    (c)   Any third party obtains a levy or
attachment under process of law against Tenant's leasehold interest.

                           5.       Abandonment Default. Tenant abandons the
Premises.

                  Tenant acknowledges and agrees that, notwithstanding the
foregoing provisions of this Section 12, Tenant shall be in default for purposes
of Section 1161 of the California Code of Civil Procedure immediately following
Tenant's failure to perform or comply with any covenants, agreements, terms or
conditions of this Agreement to be performed or observed by Tenant, including,
without limitation, Tenant's failure to pay Rent when due, and that any notices
required to be given by Landlord under this Section 12 shall, in each case, be
in lieu of, and not in addition to, any notice required under Section 1161 of
the California Code of Civil Procedure, and shall be deemed to satisfy the
requirement, if any, that notice be given pursuant to such section.

                  B.       Landlord Defaults. Landlord shall be in default
hereunder if Landlord has not begun and is pursuing with reasonable diligence
the cure of any failure of Landlord to meet its obligations hereunder within
thirty (30) days after the receipt by Landlord of written notice from Tenant of
the alleged failure to perform. In no event shall Tenant have the right to
terminate or rescind this Lease as a result of Landlord's default as to any
covenant or agreement contained in this Lease. Tenant hereby waives such
remedies of termination and rescission and hereby agrees that Tenant's remedies
for default hereunder and for breach of any promise or

                                       25



inducement shall be limited to a suit for damages and/or injunction. In
addition, Tenant hereby covenants that, prior to the exercise of any such
remedies, Tenant will give notice and a reasonable time to cure any default by
Landlord to any holder of a mortgage or deed of trust encumbering Landlord's
interest in the Property of which Tenant has been given notice. Notwithstanding
anything contained herein to the contrary, Landlord shall not be in default
under this Lease to the extent Landlord is unable to perform any of its
obligations on account of any prevention, delay, stoppage due to strikes,
lockouts, inclement weather, labor disputes, inability to obtain labor,
materials, fuels, energy or reasonable substitutes therefor, governmental
restrictions, regulations, controls, actions or inaction, civil commotion, fire
or other acts of god, national emergency, acts of war or terrorism or any other
cause of any kind beyond the reasonable control of Landlord (except financial
inability).

         13.      LANDLORD REMEDIES. UPON A DEFAULT BEYOND ALL APPLICABLE NOTICE
AND CURE PERIODS, LANDLORD SHALL HAVE THE FOLLOWING REMEDIES, IN ADDITION TO ALL
OTHER RIGHTS AND REMEDIES PROVIDED BY LAW OR OTHERWISE PROVIDED IN THIS LEASE,
TO WHICH LANDLORD MAY RESORT CUMULATIVELY OR IN THE ALTERNATIVE:

                  A.       Termination of Lease. Landlord may elect by notice to
Tenant to terminate this Lease, in which event, Tenant shall immediately vacate
the Premises and deliver possession to Landlord.

                  B.       Civil Code Section 1951.4 Remedy. Even though Tenant
has breached this Lease, this Lease shall continue in effect for so long as
Landlord does not terminate Tenant's right to possession, and Landlord shall
have all of its rights and remedies, including the right, pursuant to California
Civil Code Section 1951.4, to recover all rent as it becomes due under this
Lease, if Tenant has the right to sublet or assign, subject only to reasonable
limitations. Acts of maintenance or preservation or efforts to relet the
Premises or the appointment of a receiver upon initiative of Landlord to protect
Landlord's interest under this Lease shall not constitute a termination of
Tenant's right to possession unless written notice of termination is given by
Landlord to Tenant.

                  C.       Lease Termination Damages. If Landlord elects to
terminate this Lease, then this Lease shall terminate on the date for
termination set forth in such notice. Tenant shall immediately vacate the
Premises and deliver possession to Landlord, and Landlord may repossess the
Premises and may, at Tenant's sole cost, remove any of Tenant's signs and any of
its other property, without relinquishing its right to receive Rent or any other
right against Tenant. On termination, Landlord has the right to recover from
Tenant as damages:

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

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

                                       26



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

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

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

                  The "worth at the time of award" of the amounts referred to in
Sections 13.C(1) and 13.C(2) is computed by allowing interest at the Interest
Rate on the unpaid rent and other sums due and payable from the termination date
through the date of award. The "worth at the time of award" of the amount
referred to in Section 13.C(3) is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent (1%). Tenant waives redemption or relief from forfeiture under
California Code of Civil Procedure Sections 1174 and 1179, or under any other
present or future law, if Tenant is evicted or Landlord takes possession of the
Premises by reason of any default of Tenant hereunder.

                  D.       Landlord's Remedies Cumulative. All of Landlord's
remedies under this Lease shall be in addition to all other remedies Landlord
may have at law or in equity, including, without limitation, the remedy
described in California Civil Code Section 1951.4 (pursuant to which Landlord
may continue the Lease in effect after Tenant's breach and abandonment and
recover as rent as it becomes due if Tenant has the right to sublet or assign
the Lease, subject to reasonable limitations). Waiver by Landlord of any breach
of any obligation by Tenant shall be effective only if it is in writing, and
shall not be deemed a waiver of any other breach, or any subsequent breach of
the same obligation. The possession of Tenant's funds, negotiation of Tenant's
negotiable instruments, or acceptance of Tenant's payment by Landlord or its
agents shall not constitute a waiver of any breach by Tenant, and if such
possession, negotiation or acceptance occurs after Landlord's notice to Tenant,
or termination of the Lease or of Tenant's right to possession, such possession,
negotiation or acceptance shall not affect such notice or termination.
Acceptance of payment by Landlord after commencement of a legal proceeding or
final judgment shall not affect such proceeding or judgment. Landlord may
advance such monies and take such other actions for Tenant's account as
reasonably may be required to cure or mitigate any default by Tenant. Tenant
shall immediately reimburse Landlord for any such advance, and such sums shall
bear interest at the Interest Rate until paid.

                  E.       WAIVER OF TRIAL BY JURY. EACH PARTY WAIVES TRIAL BY
JURY IF ANY LEGAL PROCEEDING IS BROUGHT BY THE OTHER IN CONNECTION WITH THIS
LEASE. EACH PARTY SHALL BRING ANY ACTION

                                       27



AGAINST THE OTHER IN CONNECTION WITH THIS LEASE IN A FEDERAL OR STATE COURT
LOCATED IN CALIFORNIA, CONSENTS TO THE JURISDICTION OF SUCH COURTS, AND WAIVES
ANY RIGHT TO HAVE ANY PROCEEDING TRANSFERRED FROM SUCH COURTS ON THE GROUND OF
IMPROPER VENUE OR INCONVENIENT FORUM. THE PROVISIONS OF THIS SECTION 13.E SHALL
SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS LEASE.

         14.      SURRENDER. Upon the expiration or earlier termination of this
Lease for any reason, Tenant shall surrender the Premises to Landlord in its
condition existing as of the date Landlord delivers possession of the Premises
to Tenant, normal wear and tear and damage by fire or other casualty,
alterations or improvements Tenant is not required to remove and Hazardous
Substances which Tenant has no indemnity obligations pursuant to Section 28
excepted, with all interior walls repaired and repainted if marked or damaged,
all carpets shampooed and cleaned, all broken, marred or nonconforming
acoustical ceiling tiles replaced, all windows washed, the plumbing and
electrical systems and lighting in good order and repair, including replacement
of any burned out or broken light bulb or ballasts, the HVAC equipment serviced
and repaired by a reputable and licensed service firm acceptable to Landlord,
and all floors cleaned and waxed, all to the reasonable satisfaction of
Landlord. Tenant shall remove from the Premises and the Project all of Tenant's
trade fixtures, furniture, moveable equipment and other personal property, and
any Work which Landlord elects to be removed pursuant to Section 5.D, and shall
restore the Premises to its condition prior to their installation, including,
without limitation, repairing all damage caused by the installation or removal
of any of the foregoing items. If Tenant does not timely remove such property,
then Tenant shall be conclusively presumed to have, at Landlord's election: (a)
conveyed such property to Landlord without compensation or (b) abandoned such
property, and Landlord may dispose of or store any part thereof in any manner at
Tenant's sole cost, without waiving Landlord's right to claim from Tenant all
expenses arising out of Tenant's failure to remove the property, and without
liability to Tenant or any other person. Landlord shall have no duty to be a
bailee of any such personal property. If Landlord elects to consider such
property abandoned, Tenant shall be liable to Landlord for the costs of: (i)
removal of any such Work or personal property, (ii) storage, transportation, and
disposition of the same, and (iii) repair and restoration the Premises, together
with interest thereon at the Interest Rate from the date of expenditure by
Landlord. In addition, if the Premises are not so surrendered at the termination
of this Lease, Tenant shall indemnify Landlord against all loss or liability,
including reasonable attorneys' fees and costs, resulting from delay by Tenant
in so surrendering the Premises.

         15.      HOLDOVER. Tenant shall have no right to holdover possession of
the Premises after the expiration or termination of this Lease without
Landlord's prior written consent which Landlord may withhold in its sole and
absolute discretion. If, however, Tenant retains possession of any part of the
Premises after the Term, Tenant shall become a tenant at sufferance only, for
the entire Premises upon all of the terms of this Lease as might be applicable
to such tenancy, except that Tenant shall pay (a) for the first thirty (30) days
of such holding over, an amount equal to one hundred fifty percent (150%) of the
Base Rent, Operating Cost, Tax and Utility Cost Share Rent payable by Tenant
immediately prior to such holding over; and (b) thereafter, an amount equal to
two hundred percent (200%) of the Base Rent, Operating Cost, Tax and Utility
Cost Share Rent payable by Tenant immediately prior to such holding over,
computed on a monthly basis for each full or partial month Tenant remains in
possession.

                                       28



Tenant shall also protect, defend, indemnify and hold Landlord harmless from all
Claims resulting from such failure, including, without limiting the generality
of the foregoing, any claims made by any succeeding tenant founded upon such
failure to surrender and any lost profits to Landlord resulting therefrom. No
acceptance of Rent or other payments by Landlord under these holdover provisions
shall operate as a waiver of Landlord's right to regain possession or any other
of Landlord's remedies.

         16.      SUBORDINATION TO GROUND LEASES AND MORTGAGES.

                  A.       Subordination. This Lease shall be subordinate to any
present or future ground lease or mortgage respecting the Project, and any
amendments to such ground lease or mortgage, at the election of the ground
lessor or mortgagee as the case may be, effected by notice to Tenant in the
manner provided in this Lease. The subordination shall be effective upon such
notice, but at the request of Landlord or ground lessor or mortgagee, Tenant
shall within ten (10) days of the request, execute and deliver to the requesting
party any reasonable documents provided to evidence the subordination. Any
mortgagee has the right, at its sole option, to subordinate its mortgage to the
terms of this Lease, without notice to, nor the consent of, Tenant. With respect
to any Superior Interest to which this Lease is now or shall hereafter become
subordinate, Landlord shall use commercially reasonable efforts to obtain from
the Holder of such Superior Interest, for the benefit of Tenant, a
non-disturbance agreement, in the customary form of such Holder, providing
generally that as long as Tenant is not in default (beyond any applicable notice
and cure periods) under this Lease, this Lease will not be terminated if such
Holder acquires title to the Building or Project by reason of foreclosure
proceedings, acceptance of a deed in lieu of foreclosure, or termination of the
leasehold interest of Landlord, provided that Tenant attorns to such Holder in
accordance with its requirements. Except for making such commercially reasonable
efforts, Landlord will be under no duty or obligation hereunder with respect to
any Superior Interest, nor will the failure or refusal of the Holder of any
Superior Interest to grant a non-disturbance agreement render Landlord liable to
Tenant, or affect this Lease, in any manner. Tenant will bear all costs and
expenses (including attorneys' fees) of the Holder of such Superior Interest in
connection with Landlord's reasonable efforts to obtain a non-disturbance
agreement.

                  B.       Termination of Ground Lease or Foreclosure of
Mortgage. If any ground lease is terminated or mortgage foreclosed or deed in
lieu of foreclosure given and the ground lessor, mortgagee, or purchaser at a
foreclosure sale shall thereby become the owner of the Project, Tenant shall
attorn to such ground lessor or mortgagee or purchaser without any deduction or
setoff by Tenant, and this Lease shall continue in effect as a direct lease
between Tenant and such ground lessor, mortgagee or purchaser. The ground lessor
or mortgagee or purchaser shall be liable as Landlord only during the time such
ground lessor or mortgagee or purchaser is the owner of the Project. At the
request of Landlord, ground lessor or mortgagee, Tenant shall execute and
deliver within ten (10) days of the request any document furnished by the
requesting party to evidence Tenant's agreement to attorn.

                  C.       Security Deposit. Any ground lessor or mortgagee
shall be responsible for the return of any security deposit by Tenant only to
the extent the security deposit, if any, is received by such ground lessor or
mortgagee.

                                       29



                  D.       Notice and Right to Cure. Tenant agrees to send by
registered or certified mail to any ground lessor or mortgagee, identified in
any notice from Landlord to Tenant, a copy of any notice of default sent by
Tenant to Landlord. If Landlord fails to cure such default within the required
time period under this Lease, but ground lessor or mortgagee begins to cure
within ten (10) days after such period and proceeds diligently to complete such
cure, then ground lessor or mortgagee shall have such additional time as is
necessary to complete such cure, including any time necessary to obtain
possession if possession is necessary to cure, and Tenant shall not begin to
enforce its remedies so long as the cure is being diligently pursued.

                  E.       Definitions. As used in this Section 16, "mortgage"
shall include "trust deed" and "deed of trust"; "mortgagee" shall include
"trustee", "beneficiary" and the mortgagee of any ground lessee; and "ground
lessor", "mortgagee", and "purchaser at a foreclosure sale" shall include, in
each case, all of its successors and assigns, however remote.

                  F.       No Existing Lenders. Landlord represents and warrants
that as of the Effective Date of this Lease that the Building is not currently
mortgaged.

         17.      ASSIGNMENT AND SUBLEASE.

                  A.       In General. Except as otherwise set forth herein,
Tenant shall not, without Landlord's prior written consent (not to be
unreasonably withheld or delayed), in each case: (i) make or allow any
assignment or transfer, by operation of law or otherwise, of any part of
Tenant's interest in this Lease, (ii) sublet any part of the Premises, or (iii)
permit anyone other than Tenant and its employees to occupy any part of the
Premises (all of the foregoing are hereinafter sometimes referred to
individually as a "Transfer", and collectively as "Transfers", and any person to
whom any Transfer is made or sought to be made is hereinafter sometimes referred
to as a "Transferee", and any person by whom any Transfer is made or sought to
be made is hereinafter sometimes referred to as a "Transferor"). Tenant shall
remain primarily liable for all of its obligations under this Lease,
notwithstanding any Transfer. No consent granted by Landlord shall be deemed to
be a consent to any subsequent Transfer. Tenant shall pay all of Landlord's
attorneys' fees and other expenses (not to exceed $2,500, unless a dispute
arises, in which event the provisions of Section 25.Z below shall apply)
incurred in connection with any consent requested by Tenant or in considering
any proposed Transfer. Any Transfer without Landlord's prior written consent
shall be void. If Tenant shall assign this Lease or sublet or otherwise Transfer
the entire Premises (except with respect to the Permitted Transfers described
below) any rights of Tenant to renew this Lease, to extend the Term or to lease
additional space in the Project shall be extinguished thereby and will not be
transferred to the Transferee, all such rights being personal to the Tenant
named herein. In addition, Tenant shall not, without Landlord's prior written
consent, which Landlord may withhold in its sole discretion, mortgage, pledge or
encumber this Lease, the term or estate hereby granted or any interest
hereunder.

                  B.       Landlord's Consent. Landlord will not unreasonably
withhold its consent to any proposed Transfer. It shall be reasonable for
Landlord to withhold its consent to any Transfer if (i) Tenant is in default
under this Lease (beyond any applicable notice and cure periods), (ii) the
financial responsibility, nature of business, and character of the proposed
Transferee are not all reasonably satisfactory to Landlord, (iii) in the
reasonable judgment of

                                       30



Landlord the purpose for which the Transferee intends to use the Premises (or a
portion thereof) is not in keeping with Landlord's standards for the Building or
are in violation of the terms of this Lease or any other leases in the Project,
or (iv) the proposed Transferee is a government entity. The foregoing shall not
exclude any other reasonable basis for Landlord to withhold its consent.

                  C.       Procedure. Tenant shall notify Landlord of any
proposed Transfer at least thirty (30) days prior to its proposed effective
date. The notice shall include the name and address of the proposed Transferee,
its corporate affiliates in the case of a corporation and its partners in the
case of a partnership, a description of the portion of the Premises that is
subject to the Transfer (the "Transfer Premises"), a calculation of the Transfer
Premium (as defined in Section 17.E below) payable in connection with the
Transfer, an executed copy of the proposed Transfer agreement, and sufficient
information to permit Landlord to determine the financial responsibility and
character of the proposed Transferee (including, without limitation, the most
recent financial statements for the proposed Transferee). Landlord shall notify
Tenant whether it will approve the Transfer, disapprove the Transfer, or
recapture the Premises in accordance with the terms of Section 13.G hereof,
within thirty (30) days after the receipt of the foregoing information. As a
condition to the effectiveness of any assignment of this Lease, the assignee
shall execute and deliver to Landlord, at least fifteen (15) days prior to the
effective date of the assignment, a reasonable form of Consent to Assignment,
providing for, among other things, an assumption of all of the obligations of
Tenant under this Lease. As a condition to the effectiveness of any other
Transfer, Transferee shall execute and deliver to Landlord, at least fifteen
(15) days prior to the effective date of such Transfer, a reasonable consent
form, providing, among other things, (1) the Transferee's obligation to
indemnify Landlord and the other Indemnitees consistent with Tenant's
indemnification obligations in Section 8.B above, and (2) the Transferee's
agreement that any such Transfer shall be subordinate and subject to the
provisions of this Lease, and if this Lease shall be terminated during the term
of any such Transfer, Landlord shall have the right to: (a) treat such Transfer
as cancelled and repossess the Transfer Premises by any lawful means, or (b)
require that the Transferee attorn to and recognize Landlord as its landlord
under any such Transfer. If Tenant shall default and fail to cure within the
time permitted for cure under Section 12 above, Landlord is hereby irrevocably
authorized to direct any Transferee to make all payments under or in connection
with the Transfer directly to Landlord (which Landlord shall apply towards
Tenant's obligations under this Lease) until such default is cured.

                  D.       Change of Management or Ownership. Any transfer of
the direct or indirect power to affect the management or policies of Tenant or
direct or indirect change in 50% or more of the ownership interest in Tenant
shall constitute an assignment of this Lease, provided that the foregoing shall
not apply so long as Tenant's stock is publicly held and traded through a
national stock exchange.

                  E.       Permitted Transfers. Notwithstanding anything to the
contrary in this Section 17, if Tenant is not then in default of this Lease
(beyond any applicable notice and cure periods), Tenant may assign this Lease or
sublet any portion of the Premises (hereinafter collectively referred to as a
"Permitted Transfer") without any payment of a Transfer Premium to Landlord or
any loss of its rights under this Lease to (i) a parent or subsidiary of Tenant,
or an entity under common control with Tenant, (ii) any successor entity to
Tenant by way of merger,

                                       31



consolidation or other non-bankruptcy corporate reorganization, (iii) an entity
which acquires all or substantially all of Tenant's assets or stock, or (iv)
Dazzle Holdings, Inc. (collectively, "Permitted Transferees", and, individually,
a "Permitted Transferee"); provided that (1) at least ten (10) business days
prior to the Transfer, Tenant notifies Landlord of such Transfer, and supplies
Landlord with any documents or information reasonably requested by Landlord
regarding such Transfer or Permitted Transferee, including, but not limited to,
copies of the sublease or instrument of assignment and copies of documents
establishing to the reasonable satisfaction of Landlord that the transaction in
question is one permitted under this Section 17.E, (2) at least ten (10)
business days prior to the Transfer, Tenant furnishes Landlord with a written
document executed by the proposed Permitted Transferee in which such entity
assumes all of Tenant's obligations under this Lease with respect to the
Transfer Premises, (3) in the case of a Transfer pursuant to clause (ii) above,
either (x) the successor entity must have a tangible net worth at the time of
the Transfer (i.e., not including intangible assets in the calculation, such as
goodwill, patents, copyrights, and trademarks) computed in accordance with
generally accepted accounting principles ("Net Worth") that is at least equal to
the Net Worth on the date of this Lease of the original named Tenant, or (y) the
original Tenant under this Lease shall guaranty this Lease, and (4) any such
proposed Transfer is made for a good faith operating business purpose and not,
whether in a single transaction or in a series of transactions, be entered into
as a subterfuge to evade the obligations and restrictions relating to Transfers
set forth in this Section 17.

                  F.       Transfer Premium.

                           1.       If Landlord consents to a Transfer, as a
condition thereto which the parties hereby agree is reasonable, Landlord shall
be entitled to receive, as Additional Rent hereunder, fifty percent (50%) of any
Transfer Premium derived from such Transfer. As used herein, the term "Transfer
Premium" means (a) in the case of an assignment, any consideration (including,
without limitation, payment for leasehold improvements) paid by the assignee on
account of such assignment, and (b) in the case of any other Transfer, all rent,
additional rent or other consideration paid by the Transferee to the Transferor
pursuant to such Transfer in excess of the base rent and additional rent payable
by such Transferor during the term of the Transfer on a per rentable square foot
basis, in the case of (a) or (b), after deducting, any brokerage commissions
(not to exceed commissions typically paid in the market at the time of such
subletting or assignment), and reasonable attorneys' fees, and reasonable costs
of any tenant improvements paid by Tenant in connection with the Transfer
("Recoverable Expenses"). Payment of the portion of the Transfer Premium due
Landlord hereunder shall be a joint and several obligation of Tenant and the
Transferee, and shall be made to Landlord as follows: (i) in the case of an
assignment, the Transferor shall pay fifty percent (50%) the Transfer Premium to
Landlord within ten (10) days after the Transferor receives the Transfer
Premium; and (ii) in the case of any other Transfer, on the first day of each
month during the term of the Transfer, the Transferee shall pay directly to
Landlord fifty percent (50%) the amount by which the rent, additional rent or
other consideration paid by the Transferee for such month exceeds the base rent
and additional rent payable by the applicable Transferor for said month which is
allocable to the Transfer Premises, after first deducting the full amount of
Recoverable Expenses allocated to such month.

                                       32



                           2.       Upon Landlord's request, Tenant shall
provide Landlord with reasonable documentation of payment of the Recoverable
Expenses and Tenant's calculation of the Transfer Premium. Landlord or its
authorized representatives shall have the right at all reasonable times to audit
the books, records and papers of Tenant relating to any Transfer, and shall have
the right to make copies thereof. If the Transfer Premium respecting any
Transfer shall be found to be understated, Tenant shall within ten (10) days
after demand pay the deficiency, and if understated by more than two percent
(2%), Tenant shall pay Landlord's costs of such audit.

                  G.       Recapture. Except with respect to the Permitted
Transfers, in the case of a proposed assignment, sublease or other Transfer of
the entirety of the Premises for the balance of the Lease Term, Landlord may
terminate this Lease as to the Transfer Premises by giving Tenant written notice
(the "Recapture Notice") within thirty (30) days after Landlord's receipt of
Tenant's notice of such proposed Transfer pursuant to the terms of Section 17.C.
Such termination shall be effective as of the termination date set forth in
Landlord's Recapture Notice, and all obligations of Landlord and Tenant under
this Lease as to such terminated space shall expire as of such termination date,
except those that expressly survive any termination of this Lease.

                  H.       Tenant Remedies. Notwithstanding anything to the
contrary in this Lease, if Tenant claims that Landlord has unreasonably withheld
or delayed its consent under this Section 17 or otherwise has breached or acted
unreasonably under this Section 17, Tenant's sole remedy shall be declaratory
judgment and an injunction for the relief sought without any monetary damages,
and Tenant hereby waives all other remedies, including, without limitation, any
right provided under California Civil Code Section 1995.310 or other applicable
laws to terminate this Lease. Tenant shall indemnify, defend and hold harmless
Landlord from any and all Claims involving any third party or parties (including
without limitation Tenant's broker or proposed transferee) who claim they were
damaged by Landlord's withholding or conditioning of Landlord's consent, unless
it is determined by a court of competent jurisdiction that Landlord has withheld
or conditioned its consent to Tenant's proposed Transfer in bad faith..

         18.      CONVEYANCE BY LANDLORD. If Landlord shall at any time transfer
its interest in the Project or this Lease, Landlord shall be released of any
obligations occurring after such transfer and such transferee's assumption of
all of Landlord's obligations under the terms of this Lease, except the
obligation to return to Tenant any security deposit not delivered to its
transferee, and Tenant shall look solely to Landlord's successors for
performance of such obligations. This Lease shall not be affected by any such
transfer.

         19.      ESTOPPEL CERTIFICATE. Each party shall, within ten (10) days
of receiving a request from the other party, execute, acknowledge in recordable
form, and deliver to the other party or its designee a certificate stating,
subject to a specific statement of any applicable exceptions, that the Lease as
amended to date is in full force and effect, that the Tenant is paying Rent and
other charges on a current basis, and that to the best of the knowledge of the
certifying party, the other party has committed no uncured defaults and has no
offsets or claims. The certifying party may also be required to state the date
of commencement of payment of Rent, the Commencement Date, the Termination Date,
the Base Rent, the current Operating Cost Share Rent and Tax Share Rent
estimates, the status of any improvements required to be completed by

                                       33



Landlord, the amount of any security deposit, and such other matters as may be
reasonably requested. Tenant's failure to execute or deliver an estoppel
certificate in the required time period shall constitute an acknowledgment by
Tenant that the statements included in the estoppel certificate are true and
correct, without exception. Tenant's failure to execute or deliver an estoppel
certificate or other document or instrument required under this Article 19 in a
timely manner shall be a material breach of this Lease.

         20.      LEASE DEPOSIT.

                  A.       Tenant shall deposit with Landlord on the date Tenant
executes and delivers this Lease the cash sums set forth in the Schedule for
both Prepaid Rent and Security Deposit (collectively, the "Lease Deposit"). The
Prepaid Rent shall be applied by Landlord against the first full monthly
installment of Base Rent payable hereunder. The Security Deposit shall be held
by Landlord as security for the faithful performance by Tenant of all its
obligations under this Lease. Tenant agrees that, if Tenant fails to pay any
Rent, or otherwise defaults (beyond any applicable notice and cure periods) with
respect to any provision of this Lease, Landlord may(but shall not be obligated
to), and without prejudice to any other remedy available to Landlord, use, apply
or retain all or any portion of the Security Deposit for the payment of any Rent
in default (beyond any applicable notice and cure periods) or for the payment of
any other sum to which Landlord may become obligated by reason of Tenant's
default (beyond any applicable notice and cure periods), or to compensate
Landlord for any loss or damage which Landlord may suffer thereby, including,
without limitation, prospective damages and damages recoverable pursuant to
California Civil Code Section 1951.2. Tenant waives the provisions of California
Civil Code Section 1950.7, and all other provisions of law now in force or that
become in force after the date of execution of this Lease, that restrict the use
or application of the Security Deposit by Landlord. If Landlord uses or applies
all or any portion of the Security Deposit as provided above, Tenant shall,
within three (3) days after demand therefor, deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to the full amount thereof,
and Tenant's failure to do so shall, at Landlord's option, be a default under
this Lease with no opportunity to cure. The Security Deposit, or so much thereof
as has not theretofore been applied by Landlord, shall be returned to Tenant
(or, at Landlord's option, to the last assignee, if any, of Tenant's interest
hereunder) within thirty (30) days following the expiration of the Term or
earlier termination of the Lease and after Tenant has vacated the Premises;
provided, however, that if this Lease is terminated by Landlord pursuant to
Article 13 above, or by Tenant in a bankruptcy proceeding pursuant to 11 U.S.C.
Section 365, Landlord may retain the Security Deposit and apply the same
against its damages recoverable pursuant to California Civil Code Section
1951.2. Landlord shall not be deemed to hold the Security Deposit in trust nor
be required to keep the Security Deposit separate from its general funds, and
Tenant shall not be entitled to any interest on the Security Deposit. The
Security Deposit shall not be construed as an advance payment of Rent nor
liquidated damages, and if Landlord's claims hereunder exceed the Security
Deposit, Tenant shall remain liable for the balance of such claims.

                  B.       If Landlord transfers its interest in the Project or
this Lease, Landlord may transfer the Security Deposit to its transferee. Upon
such transfer, Landlord shall have no further obligation to return the Security
Deposit to Tenant, and Tenant's right to the return of the Security Deposit
shall apply solely against Landlord's transferee.

                                       34



         21.      TENANT'S PERSONAL PROPERTY AND FIXTURES. Intentionally
Deleted.

         22.      NOTICES. All notices, consents, approvals and similar
communications to be given by one party to the other under this Lease, shall be
given in writing, mailed or personally delivered as follows:

                  A.       Landlord. To Landlord as follows:

                           CarrAmerica Realty Corporation
                           1810 Gateway Drive, Suite 150
                           San Mateo, CA 94404
                           Attn: Market Officer

                           with a copy to:

                           CarrAmerica Realty Corporation
                           1850 K Street, N.W., Suite 500
                           Washington, D.C. 20006
                           Attn: Lease Administration

         or to such other person at such other address as Landlord may designate
by notice to Tenant.

                  B.       Tenant. To Tenant as follows:

                           Prior to the Commencement Date:
                           SCM Microsystems, Inc.
                           47211 Bayside Parkway
                           Fremont, CA 94538
                           Attn: Chief Financial Officer

                           And to:

                           After the Commencement Date:
                           At the Premises
                           Attn: Chief Financial Officer

         or to such other person at such other address as Tenant may designate
by notice to Landlord.

         Mailed notices shall be sent by United States certified or registered
mail, or by a reputable national overnight courier service, postage prepaid.
Mailed notices shall be deemed to have been given on the earlier of actual
delivery or three (3) business days after posting in the United States mail in
the case of registered or certified mail, and one (1) business day in the case
of overnight courier. Tenant hereby appoints as its agent to receive the service
of process in any action, or any notice required by law to be given prior to the
commencement of any action, for recovery of possession of the Premises or any
part thereof, and to receive service of all notices

                                       35



hereunder (including dispossessory or distraint proceedings and notices
thereunder), the person in charge of or occupying the Premises at the time, and,
if no person shall be in charge of or occupying the same, then such service may
be made by attaching the same on the main entrance of the Premises.

         23.      QUIET POSSESSION. So long as Tenant shall perform all of its
obligations under this Lease, Tenant shall enjoy peaceful and quiet possession
of the Premises against any party claiming through the Landlord, subject to all
of the terms of this Lease.

         24.      REAL ESTATE BROKERS. Tenant represents to Landlord that Tenant
has not dealt with any real estate broker with respect to this Lease except for
any broker(s) listed in the Schedule, and no other broker is in any way entitled
to any broker's fee or other payment in connection with this Lease by reason of
Tenant's dealing with such broker. Tenant shall indemnify and defend Landlord
against any Claims by any other broker or third party for any payment of any
kind in connection with this Lease by reason of Tenant's dealing with such
broker.

         25.      MISCELLANEOUS.

                  A.       Successors and Assigns. Subject to the limits on
Tenant's assignment contained in Section 17, the provisions of this Lease shall
be binding upon and inure to the benefit of all successors and assigns of
Landlord and Tenant.

                  B.       Date Payments Are Due. Except for payments to be made
by Tenant under this Lease which are due upon demand or are due in advance (such
as Base Rent), Tenant shall pay to Landlord any amount for which Landlord
renders a statement of account within ten (10) days of Tenant's receipt of
Landlord's statement.

                  C.       Meaning of "Landlord", "Re-Entry", "including" and
"Affiliate". The term "Landlord" means only the owner of the Project and the
lessor's interest in this Lease from time to time. The words "re-entry" and
"re-enter" are not restricted to their technical legal meaning. The words
"including" and similar words shall mean "without limitation." The word
"affiliate" shall mean a person or entity controlling, controlled by or under
common control with the applicable entity. "Control" shall mean the power
directly or indirectly, by contract or otherwise, to direct the management and
policies of the applicable entity.

                  D.       Time of the Essence. Time is of the essence of each
provision of this Lease.

                  E.       No Option. The submission of this Lease to Tenant for
review or execution does not create an option or constitute an offer to Tenant
to lease the Premises on the terms and conditions contained herein, and this
Lease shall not become effective unless and until it has been executed and
delivered by both Landlord and Tenant.

                  F.       Severability. If any provision of this Lease is
determined to be invalid, illegal or unenforceable, then such provision will be
enforced to the maximum extent possible and the other provisions will remain
fully effective and enforceable.

                                       36



                  G.       Governing Law. This Lease shall be governed in all
respects by the laws of the state in which the Project is located, without
regard to the principles of conflicts of laws.

                  H.       Lease Modification. Tenant agrees to modify this
Lease in any way requested by a mortgagee which does not cause increased expense
to Tenant or otherwise materially adversely affect Tenant's interests under this
Lease.

                  I.       No Oral Modification. No modification of this Lease
shall be effective unless it is a written modification signed by both parties.

                  J.       Landlord's Right to Cure. Landlord may cure any
default by Tenant after the expiration of any applicable notice and cure periods
and any expenses incurred shall become Additional Rent due from Tenant on demand
by Landlord.

                  K.       Captions. The captions used in this Lease shall have
no effect on the construction of this Lease.

                  L.       Authority. Landlord and Tenant each represents to the
other that it has full power and authority to execute and perform this Lease.

                  M.       Landlord's Enforcement of Remedies. Landlord may
enforce any of its remedies under this Lease either in its own name or through
an agent.

                  N.       Entire Agreement. This Lease, together with all
Appendices, constitutes the entire agreement between the parties. No
representations or agreements of any kind have been made by either party which
are not contained in this Lease.

                  O.       Landlord's Title. Landlord's title shall always be
paramount to the interest of the Tenant, and nothing in this Lease shall empower
Tenant to do anything which might in any way impair Landlord's title.

                  P.       Light and Air Rights. Landlord does not grant in this
Lease any rights to light and air in connection with Project. Landlord reserves
to itself, the Project, the Building below the improved floor of each floor of
the Premises, the Building above the ceiling of each floor of the Premises, the
exterior of the Premises and the areas on the same floor outside the Premises,
along with the areas within the Premises required for the installation and
repair of utility lines and other items required to serve other tenants of the
Building.

                  Q.       Singular and Plural. Wherever appropriate in this
Lease, a singular term shall be construed to mean the plural where necessary,
and a plural term the singular. For example, if at any time two parties shall
constitute Landlord or Tenant, then the relevant term shall refer to both
parties together.

                  R.       No Recording by Tenant. Tenant shall not record in
any public records any memorandum or any portion of this Lease.

                  S.       Exclusivity. Landlord does not grant to Tenant in
this Lease any exclusive right except the right to occupy its Premises.

                                       37



                  T.       No Construction Against Drafting Party. The rule of
construction that ambiguities are resolved against the drafting party shall not
apply to this Lease.

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

                  V.       Rent Not Based on Income. No Rent or other payment in
respect of the Premises shall be based in any way upon net income or profits
from the Premises. Tenant may not enter into or permit any sublease or license
or other agreement in connection with the Premises which provides for a rental
or other payment based on net income or profit.

                  W.       Building Manager and Service Providers. Landlord may
perform any of its obligations under this Lease through its employees or third
parties hired by the Landlord.

                  X.       Late Charge and Interest on Late Payments. Without
limiting the provisions of Section 12.A, if Tenant fails to pay any installment
of Rent or other charge to be paid by Tenant pursuant to this Lease within ten
(10) days after the same becomes due and payable, then Tenant shall pay a late
charge equal to the greater of five percent (5%) of the amount of such payment
or $250. In addition, interest shall be paid by Tenant to Landlord on any late
payments of Rent from the date due until paid at the rate provided in Section
2.D(2). Such late charge and interest shall constitute Additional Rent due and
payable by Tenant to Landlord upon the date of payment of the delinquent payment
referenced above. Notwithstanding the provisions of this Section 25.K to the
contrary, no late charge shall be assessed the first time during the Lease Term
that Rent is not paid within five (5) business days after the date on which it
is due and payable, so long as Tenant shall pay any such delinquent amount
within three (3) days after notice of such delinquency from Landlord.

                  Y.       Tenant's Financial Statements. Within ten (10) days
after Landlord's written request therefor (which may be made only in connection
with a default by Tenant or a bona fide sale, financing or other similar
transaction involving the Project), Tenant shall deliver to Landlord the current
certified (or audited, if available) audited annual and quarterly financial
statements of Tenant, and annual certified (or audited, if available) audited
financial statements of the two (2) years prior to the current year's financial
statements, each with an opinion of a certified public accountant, including a
balance sheet and profit and loss statement for the most recent prior year, all
prepared in accordance with generally accepted accounting principles
consistently applied; provided, however, that as long as Tenant's financial
statements are readily available over the Internet or otherwise publicly
available, Tenant shall not be obligated to deliver them to Landlord hereunder.
Landlord shall exercise commercially reasonable efforts to keep all such
financial statements confidential, provided that Landlord may disclose the same
to existing or prospective lenders, investors, partners, purchasers or other
persons reasonably having a need to review such financial statements

                  Z.       Attorneys' Fees. In any arbitration, quasi-judicial
or administrative proceedings or any action in any court of competent
jurisdiction, brought by either party to

                                       38



enforce any covenant or any of such party's rights or remedies under this Lease,
including any action for declaratory relief, or any action to collect any
payments required under this Lease or to quiet title against the other party,
the prevailing party shall be entitled to reasonable attorneys' fees and all
costs, expenses and disbursements in connection with such action, including the
costs of reasonable investigation, preparation and professional or expert
consultation, which sums may be included in any judgment or decree entered in
such action in favor of the prevailing party.

                  AA.      Other Improvements. If portions of the Project or
property adjacent to the Project (collectively, the "Other Improvements") are
owned by an entity other than Landlord, Landlord, at its option, may enter into
an agreement with the owner or owners of any of the Other Improvements to
provide (i) for reciprocal rights of access, use and/or enjoyment of the Project
and the Other Improvements, (ii) for the common management, operation,
maintenance, improvement and/or repair of all or any portion of the Project and
all or any portion of the Other Improvements, (iii) for the allocation of a
portion of Operating Costs and Taxes to the Other Improvements and the
allocation of a portion of the operating expenses and taxes for the Other
Improvements to the Project, (iv) for the use or improvement of the Other
Improvements and/or the Project in connection with the improvement,
construction, and/or excavation of the Other Improvements and/or the Project,
and (v) for any other matter which Landlord deems necessary. Nothing contained
herein shall be deemed or construed to limit or otherwise affect Landlord's
right to sell all or any portion of the Project or any other of Landlord's
rights described in this Lease.

                  BB.      Approvals. Except as otherwise expressly set forth in
this Lease, whenever the Lease requires an approval, consent, designation,
determination, selection or judgment by either Landlord or Tenant, such
approval, consent, designation, determination, selection or judgment and any
conditions imposed thereby shall be reasonable and shall not be unreasonably
withheld or delayed.

         26.      UNRELATED BUSINESS INCOME. If Landlord is advised by its
counsel at any time that any part of the payments by Tenant to Landlord under
this Lease may be characterized as unrelated business income under the United
States Internal Revenue Code and its regulations, then Tenant shall enter into
any amendment proposed by Landlord to avoid such income, so long as the
amendment does not require Tenant to make more payments or accept fewer services
from Landlord, than this Lease provides, or materially increase Tenant's
obligations, or otherwise materially impair Tenant's rights under the Lease.

         27.      BUILDING RENOVATIONS. It is specifically understood and agreed
that Landlord has made no representation or warranty to Tenant and has no
obligation and has made no promises to alter, remodel, improve, renovate, repair
or decorate the Premises, Building, or any part thereof and that no
representations respecting the condition of the Premises or the Building have
been made by Landlord to Tenant except as specifically set forth herein or in
the Tenant Improvement Agreement. However, Tenant hereby acknowledges that
Landlord may during the Lease Term renovate, improve, alter, or modify
(collectively, the "Renovations") the Project, the Building and/or the Premises
including without limitation the parking structure, common areas, systems and
equipment, roof, and structural portions of the same, which Renovations may
include, without limitation, (i) installing sprinklers in the Building common

                                       39



areas and tenant spaces, (ii) modifying the common areas and tenant spaces to
comply with applicable laws and regulations, including regulations relating to
the physically disabled, seismic conditions, and building safety and security,
and (iii) installing new floor covering, lighting, and wall coverings in the
Building common areas, and in connection with any Renovations, Landlord may,
among other things, erect scaffolding or other necessary structures in the
Building, limit or eliminate access to portions of the Project, including
portions of the common areas, or perform work in the Building, which work may
create noise, dust or leave debris in the Building. Tenant hereby agrees that
such Renovations and Landlord's actions in connection with such Renovations
shall in no way constitute a constructive eviction of Tenant nor entitle Tenant
to any abatement of Rent. Except to the extent of Landlord's gross negligence,
Landlord shall have no responsibility or for any reason be liable to Tenant for
any direct or indirect injury to or interference with Tenant's business arising
from the Renovations, nor shall Tenant be entitled to any compensation or
damages from Landlord for loss of the use of the whole or any part of the
Premises or of Tenant's personal property or improvements resulting from the
Renovations or Landlord's actions in connection with such Renovations, or for
any inconvenience or annoyance occasioned by such Renovations or Landlord's
actions.

         28.      HAZARDOUS SUBSTANCES.

                  A.       Prohibition Against Hazardous Substances. Tenant
shall not cause or permit any Hazardous Substances to be brought upon, produced,
stored, used, discharged or disposed of in or near the Project by Tenant, its
agents, employees, contractors or invitees, without Landlord's prior written
consent, which Landlord may give or withhold in its sole discretion. Any
handling, transportation, storage, treatment, disposal or use of any Hazardous
Substances in or about the Project by Tenant, its agents, employees, contractors
or invitees shall strictly comply with all applicable Governmental Requirements.
Tenant shall be solely responsible for obtaining and complying with all permits
necessary for the maintenance and operation of its business, including, without
limitation, all permits governing the use, handling, storage, treatment,
transport, discharge and disposal of Hazardous Substances. Tenant shall
indemnify, defend and hold Landlord harmless from and against any Claims
(including, without limitation, diminution in value of the Premises or the
Project, damages for the loss or restriction on use of leasable space or of any
amenity of the Premises or the Project, damages arising from any adverse impact
on marketing of space in the Project, Remedial Work, and sums paid in settlement
of claims) which result from or arise out of the use, storage, treatment,
transportation, release, or disposal of any Hazardous Substances on or about the
Project by Tenant or any Tenant Parties. If any lender or governmental agency
shall require testing for Hazardous Substances in the Premises, Tenant shall pay
for such testing. Tenant's obligations under this Section shall survive the
expiration or earlier termination of this Lease until all Claims within the
scope of this Section 27.A are fully, finally, and absolutely barred by the
applicable statutes of limitations.

                  B.       Landlord Notification. Tenant shall promptly provide
Landlord with complete copies of all documents, correspondence and other written
materials directed to or from, or relating to, Tenant concerning environmental
issues at the Premises or the Project, including, without limitation, documents
relating to the release, potential release, investigation, compliance, cleanup
and abatement of Hazardous Substances, and any claims, causes of action or other
legal documents related to same. Within twenty-four (24) hours of any
unauthorized

                                       40



release, spill or discharge of Hazardous Substances, in, on, or about the
Premises or Project by Tenant, Tenant shall provide written notice to Landlord
fully describing the event. Tenant shall also provide Landlord with a copy of
any document or correspondence submitted by or on behalf of Tenant to any
regulatory agency as a result of or in connection with the unauthorized release,
spill or discharge. Within twenty-four (24) hours of receipt by Tenant of any
warning, notice of violation, permit suspension or similar disciplinary measure
relating to Tenant's actual or alleged failure to comply with any environmental
law, rule, regulation, ordinance or permit, Tenant shall provide written notice
to Landlord.

                  C.       Remedial Work. If any investigation or monitoring of
site conditions or any clean-up, containment, restoration, removal or
remediation of Hazardous Substances (collectively, "Remedial Work") is required
under any Governmental Requirements due to Tenant's use of Hazardous Substances,
then Tenant shall perform or cause to be performed the Remedial Work in
compliance with Governmental Requirements or, at Landlord's option, Landlord may
cause such Remedial Work to be performed and Tenant shall reimburse Landlord for
the reasonable costs thereof within thirty (30) days after demand therefor. All
Remedial Work performed by Tenant shall be performed by one or more contractors,
selected by Tenant and approved in advance in writing by Landlord, and under the
supervision of a consulting engineer selected by Tenant and approved in advance
in writing by Landlord. All costs and expenses of such Remedial Work shall be
paid by Tenant, including, without limitation, the charges of such
contractor(s), the consulting engineer and Landlord's reasonable attorneys' and
experts' fees and costs incurred in connection with monitoring or review of such
Remedial Work.

                  D.       Environmental Questionnaire. Prior to execution of
this Lease, Tenant shall complete, execute and deliver to Landlord an
Environmental Questionnaire and Disclosure Statement. The completed
Environmental Questionnaire shall be deemed incorporated into this Lease for all
purposes, and Landlord shall be entitled to rely fully on the information
contained therein. Tenant shall immediately update and resubmit to Landlord the
Environmental Questionnaire if changes occur in the nature, content, handling,
storage, use, treatment, transport, discharge, or disposal of the Hazardous
Substances described therein. Attached hereto as Exhibit E is a form of
Environmental Questionnaire to be executed in accordance with the foregoing
provision.

                  E.       Definition of "Hazardous Substances". "Hazardous
Substances" means any hazardous or toxic substances, materials or waste which
are or become regulated by any local government authority, the state in which
the Project is located or the United States government, including those
substances described in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the
Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et
seq., any other applicable federal, state or local law, and the regulations
adopted under these laws.

         29.      EXCULPATION. Landlord shall have no personal liability under
this Lease; its liability shall be limited solely and exclusively to an amount
which is equal to the lesser of (a) the interest of Landlord in the Project or
(b) the equity interest Landlord would have in the Project if the Project were
encumbered by third-party debt in an amount equal to eighty percent (80%) of the
value of the Project (as such value is determined by Landlord). In no event
shall Landlord's liability extend to any other property or assets of Landlord,
nor shall any officer,

                                       41



director, employee, agent, shareholder, partner, member or beneficiary of
Landlord be personally liable for any of Landlord's obligations hereunder.
Further, in no event shall Landlord be liable under any circumstances for any
consequential damages or for injury or damage to, or interference with, Tenant's
business, including but not limited to, loss of profits, loss of rents or other
revenues, loss of business opportunity, loss of goodwill, or loss of use,
however occurring.

         30.      COMMUNICATIONS AND COMPUTER LINES. Tenant may install,
maintain, replace, remove or use any communications or computer wires and cables
(collectively, the "Lines") at the Project in or serving the Premises, provided
that (i) Tenant shall obtain Landlord's prior written consent, use an
experienced and qualified contractor approved in writing by Landlord, and comply
with all of the other provisions of this Lease, (ii) an acceptable number of
spare Lines and space for additional Lines shall be maintained for existing and
future occupants of the Project, as determined in Landlord's reasonable opinion,
(iii) the Lines therefor (including riser cables) shall be appropriately
insulated to prevent excessive electromagnetic fields or radiation, and shall be
surrounded by a protective conduit reasonably acceptable to Landlord, (iv) any
new or existing Lines servicing the Premises shall comply with all applicable
governmental laws and regulations, (v) as a condition to permitting the
installation of new Lines, Landlord may require that Tenant remove existing
Lines located in or serving the Premises and repair any damage in connection
with such removal, and (vi) Tenant shall pay all costs in connection therewith.
Landlord reserves the right to require that Tenant remove any Lines located in
or serving the Premises which are installed in violation of these provisions, or
which are at any time in violation of any laws or represent a dangerous or
potentially dangerous condition.

         31.      OPTION TO EXTEND.

                  A.       Subject to the terms and conditions set forth below,
Tenant may at its option ("Renewal Option") extend the Term of this Lease for
one (1) additional three (3) year period (the "Renewal Term"). If Tenant
exercises the Renewal Option hereunder, all of the terms, covenants and
conditions of this Lease shall continue in full force and effect during the
Renewal Term, including provisions regarding payment of Additional Rent, which
shall remain payable on the terms herein set forth, except that (i) the Base
Rent payable by Tenant during the Renewal Term shall be as calculated in
accordance with Section 31.C below, (ii) Tenant shall continue to possess and
occupy the Premises in their existing condition, "as is" as of the commencement
of the Renewal Term, and Landlord shall have no obligation to repair (except for
normal repairs that are landlord's responsibility during the Term), remodel,
improve or alter the Premises, to perform any other construction or other work
of improvement upon the Premises, or to provide Tenant with any construction or
refurbishing allowance whatsoever, and (iii) Tenant shall have no further rights
to extend the Term of this Lease after the expiration of the Renewal Term.

                  B.       To exercise the Renewal Option, Tenant must deliver
an unconditional binding notice to Landlord via certified mail or hand delivery
not sooner than three hundred sixty-five (365) days nor later than one hundred
eighty (180) days prior to the expiration of the initial Term of this Lease.
Thereafter, the Market Rate for the Renewal Term shall be calculated pursuant to
Subsection C below.. Such calculations shall be final and shall not be
recalculated at the actual commencement of such Renewal Term. If Tenant fails to
timely give its notice of exercise, Tenant will be deemed to have waived its
Renewal Option.

                                       42



                  C.       The Base Rent during the Renewal Term shall be
ninety-five percent (95%) of the prevailing market rental rate for the Premises,
determined by evaluating Comparable Space (as defined below) for a term
commencing on or about the commencement date of the Renewal Term (the "Market
Rate"). For this purpose, "Comparable Space" shall mean commercial space
comparable to the Premises that is (i) not subleased; (ii) not subject to
another tenant's expansion rights; (iii) not leased to a tenant that holds an
ownership interest in the landlord; (iv) comparable in size, location, and
quality to the Premises; (v) leased for a term comparable to the Renewal Term;
and (vi) located in the Building or other comparable industrial projects in the
vicinity of the Building. In determining the Market Rate, the parties shall
include all escalations and take into consideration (a) free rent and other
rental abatement concessions, if any, being granted to tenants in connection
with the Comparable Space; and (b) tenant improvements or allowances provided or
to be provided for the Comparable Space, and the value of the existing
improvements in the Premises to Tenant, based on age, quality, and layout of the
improvements.

                  D.       The Base Rent shall be determined as follows:

                           1.       If Tenant provides Landlord with its
unconditional binding notice of exercise pursuant to Subsection B above, then,
prior to the commencement of the Renewal Term, Landlord shall deliver to Tenant
a good faith written proposal of the Market Rate. Within twenty-one (21) days
after receipt of Landlord's proposal, Tenant shall notify Landlord in writing
(a) that Tenant accepts Landlord's proposal or (b) that Tenant elects to submit
the determination of Market Rate to arbitration in accordance with Subsections
31.D(2) through 31.D(4) below. If Tenant does not give Landlord a timely notice
in response to Landlord's proposal, Landlord's proposal of Market Rate shall be
binding upon Tenant.

                           2.       If Tenant timely elects to submit the
determination of Market Rate to arbitration, Landlord and Tenant shall first
negotiate in good faith in an attempt to determine the Market Rate. If Landlord
and Tenant are able to agree within thirty (30) days following the delivery of
Tenant's notice to Landlord electing arbitration (or if Tenant accepts
Landlord's initial proposal), then such agreement shall constitute a
determination of Market Rate for purposes of this Section, and the parties shall
immediately execute an amendment to this Lease stating the Base Rent for the
Renewal Term. If Landlord and Tenant are unable to agree on the Market Rate
within such negotiating period, then within fifteen (15) days after the
expiration of such negotiating period, the parties shall meet and concurrently
deliver to each other in envelopes their respective good faith estimates of the
Market Rate (set forth on a net effective rentable square foot per annum basis).
If the higher of such estimates is not more than one hundred five percent (105%)
of the lower, then the Market Rate shall be the average of the two. Otherwise,
the dispute shall be resolved by arbitration in accordance with Subsections (3)
and (4) below.

                           3.       Within seven (7) days after the exchange of
estimates, the parties shall select as an arbitrator an independent real estate
broker with at least five (5) years of experience in leasing industrial space in
the metropolitan area in which the Project is located (a "Qualified Appraiser").
If the parties cannot agree on a Qualified Appraiser, then within a second
period of seven (7) days, each shall select a Qualified Appraiser and within ten
(10) days thereafter the two appointed Qualified Appraisers shall select an
independent Qualified Appraiser and the independent Qualified Appraiser shall be
the sole arbitrator. If one party shall

                                       43



fail to select a Qualified Appraiser within the second seven (7) day period,
then the Qualified Appraiser chosen by the other party shall be the sole
arbitrator.

                           4.       Within twenty-one (21) days after submission
of the matter to the arbitrator, the arbitrator shall determine the Market Rate
by choosing whichever of the estimates submitted by Landlord and Tenant the
arbitrator judges to be more accurate. The arbitrator shall notify Landlord and
Tenant of its decision, which shall be final and binding. If the arbitrator
believes that expert advice would materially assist him, the arbitrator may
retain one or more qualified persons to provide expert advice. The fees of the
arbitrator and the expenses of the arbitration proceeding, including the fees of
any expert witnesses retained by the arbitrator, shall be paid by the party
whose estimate is not selected. Each party shall pay the fees of its respective
counsel and the fees of any witness called by that party.

                           5.       Until the matter is resolved by agreement
between the parties or a decision is rendered in any arbitration commenced
pursuant to this Section 31, Tenant's monthly payments of Base Rent during the
Renewal Term shall be in an amount equal to Landlord's determination of the
Market Rate. Within ten (10) business days following the resolution of such
dispute by the parties or the decision of the arbitrator, as applicable, Tenant
shall pay to Landlord, or Landlord shall pay to Tenant, the amount of any
deficiency or excess, as the case may be, in the Base Rent theretofore paid.

                  E.       Except with respect to a Permitted Transfers,
Tenant's right to exercise the Renewal Option is personal to, and may be
exercised only by, the original named Tenant under this Lease or a Permitted
Transferee. If Tenant shall assign this Lease or sublet all of the Premises
under a sublease which is effective at any time during the final twelve (12)
months of the initial Term, then immediately upon such assignment or subletting,
Tenant's right to exercise the Renewal Option shall simultaneously terminate and
be of no further force or effect. No assignee or subtenant other than the
Permitted Transferees shall have any right to exercise the Renewal Option
granted herein. In addition, if Tenant is in default under this Lease (after any
applicable notice and cure period) at the time it exercises the Renewal Option
or at any time thereafter until the commencement of the Renewal Term or if
Tenant has been in default under this Lease (after any applicable notice and
cure period) at any time prior to its exercise of the Renewal Option, Landlord
shall have, in addition to all of its other rights and remedies under this
Lease, the right (but not the obligation) to terminate the Renewal Option and to
unilaterally revoke Tenant's exercise of the Renewal Option, in which case this
Lease shall expire on the Termination Date, unless earlier terminated pursuant
to the terms hereof, and Tenant shall have no further rights under this Lease to
renew or extend the Term.

         32.      PERSONAL PROPERTY. On the Effective Date Landlord shall convey
to Tenant all of its right title and interest in and to use all of the
furniture, workstations and other personal property located in the Premises as
of the date of this Lease (collectively, the "Existing Personal Property") more
particularly described in the Bill of Sale attached hereto as Exhibit I. Tenant
acknowledges, however, that Landlord makes, and has made, no representations or
promises to Tenant as to the quality or condition of the furniture or its
suitability for Tenant's purposes. Upon the expiration or earlier termination of
this Lease, Tenant, at its sole cost, shall remove all of the Existing Personal
Property from the Premises and, without limiting any other

                                       44



of Tenant's obligations under this Lease, repair any and all damage caused to
the Building and/or Project resulting from such removal.

         33.      NO EXISTING TENANT. Landlord represents and warrants that (a)
the existing tenant at the Premises has vacated the Premises, (b) the term if
the existing lease at the Premises expires on February 28, 2003, and (c)
Landlord holds title to the Existing Personal Property.

         IN WITNESS WHEREOF, the parties hereto have executed this Lease.

LANDLORD:

CARRAMERICA REALTY CORPORATION,
a Maryland corporation

By:___________________________________________________________
         Christopher S. Peatross
         Managing Director

Date of Execution:____________________________________________

TENANT:

SCM MICROSYSTEMS, INC.,
a Delaware corporation

By:___________________________________________________________

Name:_________________________________________________________

Title:________________________________________________________
         [chairman, president or vice-president]

By:___________________________________________________________

Name:_________________________________________________________

Title:________________________________________________________
         [secretary, assistant secretary,
         chief financial officer or assistant treasurer]

Date of Execution:____________________________________________

                                       45



                                    EXHIBIT A

                               OUTLINE OF PREMISES

                                  See Attached



                                    EXHIBIT B

                              RULES AND REGULATIONS

         1.       Tenant shall not place anything, or allow anything to be
placed near the glass of any window, door, partition or wall which may, in
Landlord's reasonable judgment, appear unsightly from outside of the Project.

         2.       The sidewalks, exits and entrances located in the common areas
of the Project shall not be obstructed by Tenant or used by Tenant for any
purposes other than for ingress to and egress from the Premises. Tenant shall
lend its full cooperation to keep such areas free from all obstruction and in a
clean and sightly condition and shall move all supplies, furniture and equipment
as soon as received directly to the Premises and move all such items and waste
being taken from the Premises (other than waste customarily removed by employees
of the Building) directly to the shipping platform at or about the time arranged
for removal therefrom.

         3.       Tenant shall not bring upon, use or keep in the Premises or
the Project any kerosene, gasoline or inflammable or combustible fluid or
material, or any other articles deemed hazardous to persons or property, except
those disclosed by Tenant in the completed Environmental Questionnaire provided
to Landlord pursuant to Section 27.E of the Lease.

         4.       Landlord shall have sole power to direct electricians as to
where and how telephone and other wires are to be introduced. No boring or
cutting for wires is to be allowed without Landlord's prior written consent (not
to be unreasonably withheld or delayed). The location of telephones, call boxes
and other office equipment affixed to the Premises shall be subject to
Landlord's prior approval (not to be unreasonably withheld or delayed).

         5.       No additional locks shall be placed upon any doors, windows or
transoms in or to the Premises without Landlord's prior written consent (not to
be unreasonably withheld or delayed). Tenant shall not change existing locks or
the mechanism thereof without Landlord's prior written consent (not to be
unreasonably withheld or delayed). Upon termination of the Lease, Tenant shall
deliver to Landlord all keys and passes for offices, rooms, parking lot and
toilet rooms which shall have been furnished Tenant. If the keys so furnished
are lost, Tenant shall pay Landlord therefor. Tenant shall not make, or cause to
be made, any such keys and shall order all such keys solely from Landlord and
shall pay Landlord for any keys in addition to the two sets of keys originally
furnished by Landlord for each lock.

         6.       Tenant shall not install linoleum, tile, carpet or other floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as reasonably approved by Landlord.

         7.       No furniture, packages, supplies, equipment or merchandise
will be received in the Project, except between such hours as shall be
reasonably designated by Landlord.

         8.       Without Landlord's prior written consent (not to be
unreasonably withheld or delayed), Tenant shall not use the name of the Project
or any picture of the Project in connection

                                       1



with, or in promoting or advertising the business of, Tenant, except Tenant may
use the address of the Project as the address of its business.

         9.       Tenant assumes full responsibility for protecting the Premises
from theft, robbery and pilferage, which may arise from a cause other than
Landlord's negligence or willful misconduct, which includes keeping doors locked
and other means of entry to the Premises closed and secured.

         10.      Peddlers, solicitors and beggars shall be reported to the
office of the Project or as Landlord otherwise requests.

         11.      Tenant shall not advertise the business, profession or
activities of Tenant conducted in the Project in any manner which violates the
letter or spirit of any code of ethics adopted by any recognized association or
organization pertaining to such business, profession or activities.

         12.      Tenant shall not make or permit any noise, vibration or odor
to emanate from the Premises, or do anything therein tending to create, or
maintain, a nuisance.

         13.      Tenant acknowledges that Building security problems may occur
which may require the employment of extreme security measures in the day-to-day
operation of the Project.

         Accordingly:

                  (a)      Landlord may, at any time, or from time to time, or
for regularly scheduled time periods, as deemed advisable by Landlord and/or its
agents, in their sole discretion, require that persons entering or leaving the
Building or the Project identify themselves to watchmen or other employees
designated by Landlord, by registration, identification or otherwise.

                  (b)      Tenant agrees that it and its employees will
cooperate fully with Project employees in the implementation of any and all
security procedures.

                  (c)      Such security measures shall be the sole
responsibility of Landlord, and Tenant shall have no liability for any action
taken by Landlord in connection therewith, it being understood that Landlord is
not required to provide any security procedures and shall have no liability for
such security procedures or the lack thereof.

         14.      Tenant shall not disturb the quiet enjoyment of any other
tenant.

         15.      Landlord may retain a pass key to the Premises and, subject to
the terms of the Lease, be allowed admittance thereto at all times to enable its
representatives to examine the Premises from time to time and to exhibit the
same and Landlord may place and keep on the windows and doors of the Premises at
any time during the last six (6) months of the Term, signs advertising the
Premises for Rent.

         16.      No equipment, mechanical ventilators, awnings, special shades
or other forms of window covering shall be permitted either inside or outside
the windows of the Premises without

                                       2



Landlord's prior written consent (not to be unreasonably withheld or delayed),
and then only at the expense and risk of Tenant, and they shall be of such
shape, color, material, quality, design and make as may be reasonably approved
by Landlord.

         17.      Tenant shall not during the term of this Lease canvas or
solicit other tenants of the Building for any purpose.

         18.      Tenant shall not install or operate any phonograph, musical or
sound- producing instrument or device, radio receiver or transmitter, TV
receiver or transmitter, or similar device in the Building, nor install or
operate any antenna, aerial, wires or other equipment inside or outside the
Building, nor operate any electrical device from which may emanate electrical
waves which may interfere with or impair radio or television broadcasting or
reception from or in the Building or elsewhere, without in each instance
Landlord's prior written approval (not to be unreasonably withheld or delayed).
The use thereof, if permitted, shall be subject to control by Landlord to the
end that others shall not be disturbed.

         19.      Tenant shall promptly remove all rubbish and waste from the
Premises.

         20.      Tenant shall not exhibit, sell or offer for sale, rent or
exchange in the Premises or at the Project any article, thing or service, except
those ordinarily embraced within the use of the Premises specified in Section 6
of this Lease, without Landlord's prior written consent.

         21.      Tenant shall not overload any floors in the Premises or any
public corridors or elevators in the Building.

         22.      Tenant shall not do any painting in the Premises, or mark,
paint, cut or drill into, drive nails or screws into, or in any way deface any
part of the Premises or the Building, outside or inside, without Landlord's
prior written consent (not to be unreasonably withheld or delayed).

         23.      Whenever Landlord's consent, approval or satisfaction is
required under these Rules, then unless otherwise stated, any such consent,
approval or satisfaction must be obtained in advance, such consent or approval
may be granted or withheld in Landlord's reasonable discretion, and Landlord's
satisfaction shall be determined in its reasonable judgment.

         24.      Tenant and its employees shall cooperate in all fire drills
conducted by Landlord in the Building.

                                       3



                                    EXHIBIT C

                          TENANT IMPROVEMENT AGREEMENT

         This Tenant Improvement Agreement ("Agreement") is an integral part of
the Lease dated March 3, 2003 ("Lease") relating to certain Premises described
therein, and except where clearly inconsistent or inapplicable, the provisions
of the Lease are incorporated into this Agreement. Capitalized terms used in
this Agreement not otherwise defined herein shall have the meaning given such
terms in the Lease. Landlord and Tenant agree as follows with respect to the
Tenant Improvements, if any, to be installed in the Premises:

         1.       INITIAL TENANT IMPROVEMENTS.

                  (a)      Landlord shall cause to be performed as soon as
reasonably practicable the initial alterations, additions and improvements (the
"Tenant Improvements") to the Premises identified on the Space Plan and related
Notes attached to the Lease as Exhibit C-1 (collectively, the "Approved Space
Plan"), subject to and in accordance with Landlord's standard specifications for
the Building ("Building Standard Specifications") including, but not limited to,
the standard building materials which are currently being used by Landlord for
the Building. Landlord will provide Tenant with a copy of the Building Standard
Specifications upon Tenant's request. The work of constructing the Tenant
Improvements is referred to as "Landlord's Work".

                  (b)      Following execution of the Lease, Landlord shall
cause to be prepared, at its sole cost and expense, and delivered to Tenant, for
Tenant's review and approval, final working drawings for Landlord's Work (the
"Final Plans"). Tenant shall have deemed to approved the Final Plans if it fails
to notify Landlord of its disapproval within three (3) business days after
delivery of the Final Plans. Tenant may only disapprove the Final Plans if the
Final Plans differ from the Approved Space Plan or the Building Standard
Specifications. The Tenant Improvements shown on the Final Plans shall be
substantially consistent with those initially identified on the Approved Space
Plan, and Landlord shall cause Landlord's Work to be performed substantially as
shown on the Final Plans, excepting only minor variations (i.e., variations
which are not inconsistent with the intent of the Final Plans) as Landlord may
deem advisable, and any Change Orders approved by Landlord.

         2.       CHANGE ORDERS. If, prior to the Substantial Completion Date,
Tenant shall request improvements or changes to the Premises in addition to,
revision of or substitution for the Tenant Improvements identified on the
Approved Space Plan, including, without limitation, any request for
above-Building standard finishes or other detailed specifications (individually
or collectively, "Change Order Requests"), Tenant shall deliver to Landlord for
its approval, which approval shall not be unreasonably withheld or delayed,
plans and specifications for such Change Order Requests. If Landlord does not
approve of the plans for such Change Order Requests, Landlord shall advise
Tenant of the revisions required. Tenant shall revise and redeliver the plans
and specifications to Landlord within five (5) days of Landlord's advice or
Tenant shall be deemed to have abandoned its request for such Change Order
Requests. Tenant shall pay for the preparation and revision of plans and
specifications relating to Change Order Requests, and any increase in the cost
of construction of the Tenant Improvements resulting from Change Order Requests.

                                       1



         3.       TENANT IMPROVEMENT COSTS. Landlord shall bear the cost of
construction of the Tenant Improvements, except for the following, which shall
be Tenant's responsibility: (a) any increase in the cost of construction of the
Tenant Improvements resulting from Change Order Requests, and (b) any costs and
expenses incurred by Landlord in connection with, or as a consequence of, any
Tenant Delay (as defined in Section 4 below). If Landlord and Tenant agree on
any Change Order Requests as provided in Section 2 above, Landlord shall furnish
Tenant with an invoice specifying the estimated increase in the cost of the
Tenant Improvements resulting therefrom, and Tenant shall pay such estimated
increase to Landlord within three (3) days thereafter. Tenant acknowledges and
agrees that any such invoice shall be based solely on an estimate of the
increase in the cost of the Tenant Improvements, and shall not be binding on
Landlord or Landlord's contractor, nor shall Tenant's payment on account of such
estimate limit Tenant's obligation hereunder to pay the amount specified in
clauses (a) and (b) above.

         4.       SUBSTANTIAL COMPLETION. The "Substantial Completion Date"
shall be the date that Landlord, its architect, engineer or construction manager
determines that Landlord's Work has been completed, except for (A) finishing
details, minor omissions, mechanical adjustments, and similar items of the type
customarily found on an architectural punch-list (the "Punch-List Items"), the
correction or completion of which will not substantially interfere with Tenant's
occupancy and use of the Premises; and (B) trade fixtures, workstations,
telecommunications or computer cabling or built-in furniture or equipment to be
installed by Tenant ("Substantial Completion"); provided, however, that if
Landlord is delayed in completing Landlord's Work or in delivering possession of
the Premises to Tenant as a result of any Tenant Delay (as defined below), the
Substantial Completion Date shall be deemed to have occurred on the date the
Substantial Completion Date would have occurred in the absence of such Tenant
Delay, as reasonably determined by Landlord or Landlord's architect. Tenant
shall be responsible for and shall pay any costs and expenses incurred by
Landlord in connection with, or as a consequence of, any Tenant Delay. As used
in this Lease, the term "Tenant Delay" means a delay in the completion of
Landlord's Work or the delivery of possession of the Premises to Tenant, to the
extent caused by the act, omission, neglect or failure of Tenant or any of
Tenant's agents, employees, contractors or subcontractors, including, without
limitation, any Change Order Requests. Tenant shall have the right to submit (a)
a list of Punch-List Items to Landlord within thirty (30) days of Substantial
Completion and (b) a list of latent defects within one (1) year following the
Substantial Completion Date, setting forth any defective item of construction,
and provided that Tenant has submitted such lists within the foregoing periods,
Landlord shall promptly cause such items to be corrected.

         5.       CONDITION OF TENANT IMPROVEMENTS. Effective upon delivery of
the Premises to Tenant, Landlord warrants that (a) construction of the Tenant
Improvements was performed in accordance with all Laws and the Final Plan and in
a good and workmanlike manner, and (b) all material and equipment installed in
the Premises conformed to the Final Plan and was new and otherwise of good
quality.

         6.       MISCELLANEOUS. Terms used in this Exhibit C shall have the
meanings assigned to them in the Lease. The terms of this Exhibit C are subject
to the terms of the Lease.

                                       2



                                   EXHIBIT C-1

                                 LANDLORD'S WORK

         As provided in Section 3.A of the Lease to which this Exhibit is
attached, Landlord is leasing the Premises to Tenant "as is", without any
obligation to alter, remodel, improve, repair or decorate any part of the
Premises and without any express or implied representations or warranties of any
kind, except for the following Landlord's Work:

         1.       Carpets to be cleaned. The exception being the lobby carpet
                  which shall be replaced.

         2.       New paint throughout the Premises.

         3.       All windows (inside and out) shall be cleaned and washed.

         4.       All interior blinds to be cleaned.

         5.       All tile floors shall be stripped and waxed.

         6.       An additional 10' counter in the kitchen area shall be
                  installed (without a sink).

         7.       VCT flooring shall be installed in warehouse area.

         8.       Replace all broken, discolored or odd variety ceiling tiles.

         9.       Replace all burned out or discolored fluorescent bulbs.

         10.      Install drop ceiling, HVAC and lighting in warehouse area to
                  create a lab environment, including painting the walls and
                  installing insulation, a ceiling and carpet to conform to the
                  remainder of the Premises

         11.      Replace grade door with a glass version grade door.

         12.      Remove blinds and screens in lobby.

         13.      Convert the janitor closet in the training room to a unisex
                  shower (shall be completed by Landlord at Tenant's sole cost).

                                       3



                               APPROVED SPACE PLAN

                                  See Attached

                                       4



                                   EXHIBIT D

                         COMMENCEMENT DATE CONFIRMATION

         THIS CONFIRMATION AGREEMENT is entered into as of _______________ __,
20__ by and between CARRAMERICA REALTY CORPORATION, a Maryland corporation
("Landlord"), and SCM MICROSYSTEMS, INC., a Delaware corporation ("Tenant"),
with respect to that certain Lease dated as of March 3, 2003 (the "Lease")
respecting certain premises (the "Premises") located in the building known as
225-231 Charcot Avenue, San Jose, California.

         Pursuant to Section 1.A of the Lease, Landlord and Tenant hereby
confirm and agree that the Commencement Date (as defined in the Lease) is
________________ __, 20___ and that the Termination Date (as defined in the
Lease) is _______________ __, 20__.

         This Confirmation Agreement supplements, and shall be a part of, the
Lease.

         IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered
this Confirmation Agreement as of the day and year first above written.

LANDLORD:

CARRAMERICA REALTY CORPORATION,
a Maryland corporation

By:___________________________________________________________
         Christopher S. Peatross
         Managing Director

Date of Execution:____________________________________________

TENANT:

SCM MICROSYSTEMS, INC.
a Delaware corporation

By:___________________________________________________________

Name:_________________________________________________________

Title:________________________________________________________

Date of Execution:____________________________________________

                                       1



                                    EXHIBIT E

                           ENVIRONMENTAL QUESTIONNAIRE

         As a new tenant of the Project, answer based upon: (1) any existing or
previous operations of the same kind which Tenant has conducted elsewhere, and
(2) Tenant's plans for the new space. For each answer, specify which
operation(s) you are describing.

1. SOLID WASTE.

         a. Does the facility have an EPA Hazardous Waste generator number?

         b. Does the facility produce Hazardous Waste? Other chemical waste?

         c. Describe each type of waste generated (whether or not hazardous).

         d. If the facility produces hazardous waste, is it classified as a
large quantity generator, small quantity generator or conditionally exempt small
quantity generator?

         e. Are hazardous waste manifests maintained for three years on site?

         f. Please identify the waste disposal contractor.

2. WASTEWATER.

         a. Does the facility produce any "process wastewater," meaning any
wastewater that has come in contact with chemicals or other materials in process
(essentially, any discharge of water other than from sinks and toilets)?

         b. If so, please describe each type of process wastewater produced.

         c. Is any water discharged down the floor drains?

         d. Does the facility have a permit for its wastewater discharges?

3.  AIR EMISSIONS.

         a. Does the facility emit any chemicals or wastes into the air?

         b. Does the facility have an air permit?

         c. Does the facility treat any of its air emissions to remove air
pollutants?

         d.  Describe the ventilation system for the facility.



4. GENERAL.

         a. Has the facility ever been charged with any violation of, or found
in violation of any environmental requirements? If yes, please describe.

         b. Are you aware of any testing of soil or groundwater to determine
whether any contamination exists in or around the facility? If so, please
provide results.

         c. Please describe any hazardous materials present on site, their
respective quantities and the containment measures for those materials.



                                    EXHIBIT H

                               INITIAL ALTERATIONS

               NO INITIAL ALTERATIONS APPROVED PRIOR TO EXECUTION



                                    EXHIBIT I

                                  BILL OF SALE

         FOR VALUABLE CONSIDERATION, receipt and adequacy of which is hereby
acknowledged, the undersigned, Carramerica Realty Corporation, a Maryland
corporation ("Landlord"), hereby sells, transfers, assigns and conveys to SCM
Microsystems, Inc., a Delaware corporation ("Tenant"), all of Landlord's right,
title and interest, if any, in and to the furniture, workstations and other
personal property (collectively, the "Personal Property") described on Schedule
1 attached hereto and made a part hereof.

         This Bill of Sale is given pursuant to that certain Lease Agreement
("Lease") dated as of March 3, 2003 by and between Landlord and Tenant,
pertaining to certain premises located at 225 Charcot Avenue, San Jose,
California, as more particularly described in the Lease (the Premises").
Capitalized terms not otherwise defined herein shall have the meanings ascribed
to them in the Lease.

         Tenant acknowledges that the Personal Property is being conveyed by
Landlord and accepted by Tenant "AS IS, WHERE IS", AND WITHOUT ANY WARRANTIES
WHATSOEVER, EXPRESS OR IMPLIED, IT BEING THE INTENTION OF LANDLORD AND TENANT
EXPRESSLY TO NEGATE AND EXCLUDE ALL WARRANTIES, INCLUDING WITHOUT LIMITATION,
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR
PURPOSE, WARRANTIES CREATED BY ANY AFFIRMATION OF FACT OR PROMISE OR BY ANY
DESCRIPTION OF THE PROPERTY CONVEYED HEREUNDER, AND ALL OTHER WARRANTIES
WHATSOEVER CONTAINED IN OR CREATED BY THE CALIFORNIA COMMERCIAL CODE.

         This Bill of Sale may be executed in one or more counterparts, each of
which so executed and delivered shall be deemed an original, but all of which
taken together shall constitute but one and the same instrument.

                        [SIGNATURES FOLLOW ON NEXT PAGE]



         IN WITNESS WHEREOF, Landlord and Tenant have executed this Bill of Sale
as of March ___, 2003.

LANDLORD:

CARRAMERICA REALTY CORPORATION,
a Maryland corporation

By:___________________________________________________________
         Christopher S. Peatross
         Managing Director

TENANT:

SCM MICROSYSTEMS, INC.,
a Delaware corporation

By:___________________________________________________________

Name:_________________________________________________________

Title:________________________________________________________



                                   SCHEDULE 1

         1.       All Westinghouse cubicles including chairs in the Premises.

         2.       All office furniture including chairs in the Premises.

         3.       All tables and chairs in the training room in the Premises.

         4.       All conference room furniture in the Premises.

EX-99.1

                                                                    EXHIBIT 99.1

      CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
                                   PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         I, Robert Schneider, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of SCM Microsystems, Inc. on Form 10-Q for the quarter ended
March 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such
Quarterly Report on Form 10-Q fairly presents in all material respects the
financial condition and results of operations of SCM Microsystems, Inc.

                                             By:  /s/ ROBERT SCHNEIDER
                                                --------------------------------
                                             Name:   Robert Schneider
                                             Title:  Chief Executive Officer

         I, Andrew Warner, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Quarterly Report of SCM Microsystems, Inc. on Form 10-Q for the quarter ended
March 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such
Quarterly Report on Form 10-Q fairly presents in all material respects the
financial condition and results of operations of SCM Microsystems, Inc.

                                             By:  /s/ ANDREW WARNER
                                                --------------------------------
                                             Name:   Andrew Warner
                                             Title:  Vice President, Finance and
                                                     Chief Financial Officer