10-K

                                                        UNITED STATES
                                SECURITIES AND EXCHANGE COMMISSION
                                                    Washington, D.C. 20549
Form 10-K              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                               THE SECURITIES EXCHANGE ACT OF 1934
    For the 2002 fiscal year ended December 28, 2002            Commission File No. 2-55860

Ace Hardware Corporation
                                    (Exact Name of Registrant as Specified in its Charter)

                                              DELAWARE                                                                     36-0700810
                                (State or Other Jurisdiction of                                                 (I.R.S. Employer
                                Incorporation or Organization)                                             Identification No.)

                          2200 Kensington Court, Oak Brook, IL                                                   60523
                        (Address of Principal Executive Offices)                                             (Zip Code)

Registrant's telephone number, including area code:              (630) 990-6600

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

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

        State the aggregate market value of the voting and nonvoting stock held by non-affiliates of the Registrant. This
Company's shares are only issued to and held by, its dealer-stockholders. All shares held by these stockholders can be
repurchased by the Company when the dealer-stockholder's membership agreement terminates. Thus, there is no market for
these shares. The repurchase price for each share of Class A Stock is equal to the par value of $1,000 per share. The
repurchase of Class B Stock is equal to twice the par value or $2,000 per share. The repurchase price for each share of Class
C Stock is equal to the par value of $100. As of February 17, 2003, the aggregate value of the Class A Stock, Class B Stock
and Class C Stock held by non-affiliates (dealer-stockholders) calculated on the basis of this repurchase price was
$275,876,900.

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes  X      No     

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

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

        Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable
date (applicable only to corporation Registrants). Outstanding shares as of February 17, 2003:

                        Class A (voting) Stock,                    $1,000 par value                                     3,594 shares
                        Class B (nonvoting) Stock,             $1,000 par value                                      1,928 shares
                        Class C (nonvoting) Stock,             $   100 par value                               2,684,269 shares

                                                                     PART I

Item 1. Business

        The terms "Ace," "cooperative," "we," "us," "our" and similar words refer to Ace Hardware Corporation. The terms
"member," "retailer," "dealer," "you," "your" and similar words refer to someone who purchases our stock.

        Ace Hardware Corporation was formally organized as a Delaware corporation in 1964. In 1973, as the result of a
corporate merger, it became the successor of Ace Hardware Corporation, an Illinois corporation that was organized in 1928.
Until 1973, the Illinois corporation conducted the business now being engaged in by Ace. Our main executive offices are
located at 2200 Kensington Court, Oak Brook, Illinois 60523. Our main telephone number is (630) 990-6600. Our Internet
site address is http://www.acehardware.com. We make available free of charge our annual report on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K as soon as reasonably practicable after we file with or furnish such
documents to the Securities and Exchange Commission.

        We operate primarily as a wholesaler of hardware and related products, and we also manufacture paint products. We
mainly sell our products to hardware dealers who have Membership Agreements with us. These Membership Agreements
allow the hardware dealers to purchase merchandise and services from us and, in most cases, to license one or more of our
trademarks. (See the heading "Business " , subheading "Membership Agreements").

        We operate on a cooperative basis and distribute patronage dividends to our eligible member dealers each year on the
basis of quantity or value of patronage business that we do with them. (See the heading "Business " , subheading "Distribution
of Patronage Dividends").

        As of the end of our 2002 fiscal year on December 28, 2002, there were 4,909 stores having Membership Agreements
with us. The States with the largest concentration of members are California (approximately 10%), Texas and Illinois
(approximately 6% each), Florida (approximately 5%) and Michigan and Georgia (approximately 4% each). The States where
we shipped the largest percentages of merchandise in fiscal year 2002 were California (approximately 13%), Illinois
(approximately 7%), Florida (approximately 6%), Texas, Michigan and Georgia (approximately 4% each). Approximately
4.0% of our merchandise sales were made to locations outside of the United States and its territories in fiscal 2002.

        The number of member locations that we had during each of our past three fiscal years is summarized in the following
table:
    2002         2001        2000
        Member outlets at beginning of period                                                                    4,976         5,011        5,082
        New member outlets                                                                                                        181           220           208
        Member outlets terminated                                                                                            248           255           279

        Member outlets at end of period                                                                                4,909        4,976        5,011
                                                                                                                                                 ====        ====       ====
        Dealers having one or more member outlets at end of period                               3,673        3,778        3,858

        We service our dealers by buying merchandise in quantity lots, mainly from manufacturers. We then warehouse large
quantities of this merchandise and sell it in smaller lots to our dealers. Most of the products that we distribute to our members
from our warehouses are sold at a price that we establish ("dealer cost"), to which a 10% adder ("handling charge") is
generally added. In fiscal year 2002, warehouse sales were 72% of our merchandise sales and bulletin sales were 4% of our
merchandise sales with the balance of 24% being direct shipment sales.

        The following is a breakdown of our total warehouse sales for merchandise purchases among various general classes of
merchandise for each of the past three fiscal years:

        Class of Merchandise                                                                                               2002          2001          2000
        Paint, cleaning and related supplies                                                                         22%            21%            20%
        Plumbing and heating supplies                                                                                 15%            15%            15%
        Hand and power tools                                                                                                 13%            14%            14%
        Garden, rural equipment and related supplies                                                         15%            14%            14%
        Electrical supplies                                                                                                        11%            12%            12%
        General hardware                                                                                                         11%            11%            12%
        Sundry                                                                                                                             7%              8%              7%
        Housewares and appliances                                                                                         6%             5%              6%

        We sponsor two major hardware conventions each year at various locations. We invite dealers and vendors to attend, and
dealers generally place orders that are delivered before the next convention. During the convention, there are exhibits of
regular merchandise, new merchandise and seasonal merchandise. Lawn and garden supplies and exterior paints are seasonal
merchandise in many parts of the country. Some types of goods such as holiday decorations are also seasonal.

        Warehouse sales involve the sale of merchandise that we inventory at our warehouses. Direct shipment sales involve sales
where the merchandise is shipped directly to dealers by vendors. Bulletin sales involve our special bulletin offers where we
order specific merchandise after dealers sign up to buy particular quantities of it.

        Dealers place direct shipment orders with our vendors using special purchase orders. The vendors then bill us for these
orders, which are shipped directly to dealers. We, in turn, bill the ordering dealers with an adder ("handling charge") that
varies according to the following schedule:

        Invoice Amount                                                                                Adder (Handling Charge)
        $ 1,00.00    to    $  999.99                                                                                  2.00%
        $1,000.00   to    $1,999.99                                                                                  1.75%
        $2,000.00   to    $ 2,999.99                                                                                  1.50%
        $3,000.00   to    $ 3,999.99                                                                                  1.25%
        $4,000.00   to    $ 4,999.99                                                                                  1.00%
        $5,000.00   to    $ 5,999.99                                                                                    ..75%
        $6,000.00   to    $ 6,999.99                                                                                    ..50%
        $7,000.00   to    $ 7,999.99                                                                                    ..25%
        $8,000.00 and over                                                              .00%

        We make bulletin sales based upon notices from dealers that they wish to participate in one of our special bulletin offers.
Generally, we notify dealers of our intention to purchase certain products for bulletin shipment. We then purchase these
products in the quantities that the dealers order. When the bulletin shipment arrives, we do not place it into warehouse
inventory. Rather, we break it up into smaller quantities and deliver it to the dealers who ordered it. We generally apply a 6%
adder ("handling charge") to this category of sales.

        We typically apply an additional adder of 3% to merchandise that is exported outside of the United States, its territories
and possessions. Ace dealers located outside of the United States, its territories and possessions who are not subject to the
additional 3% adder are assessed a flat 2% adder on all direct shipment sales. We maintain inventories to meet only normal
resupply orders. Resupply orders help keep our inventories at normal levels. Usually these resupply orders are filled within
one day of receipt. Bulletin orders are somewhat similar to resupply orders, but can be for future delivery. We do not backlog
normal resupply orders and therefore, no significant backlog exists at any point in time.

        Our Store Traffic Opportunity Program ("STOP") is a program where we offer our dealers specific products that we
assign to a "competitive price sales" classification. These products are delivered from our warehouses with or without the
addition of freight charges and with an adder (if any) of up to 5%, determined on an item by item basis. Management has the
authority to add and withdraw items from the STOP program, and to establish reasonable minimum or multiple item purchase
requirements for this program. We do not make any patronage dividend distributions for purchases under the STOP program.
We do, however, consider STOP purchases to be either warehouse purchases or bulletin purchases, as applicable, in
determining the forms of patronage dividend distributions. (See the heading "Business," subheading "Forms of Patronage
Dividend Distributions.")

        Our LTL Plus Program allows dealers to purchase full or partial truckloads of products from specific vendors for direct
shipment delivery. No adder or national advertising assessment applies to these purchases. (See heading "Business,"
subheading "Patronage Dividend Determinations and Allocations.")

        In addition to hosting conventions as well as other shows and product exhibits for our dealers, we also provide many
special services. We offer these services at established charges. These services include inventory control systems, as well as
price and bin ticketing. We also provide dealers with a checklist service so that they can have current information about the
merchandise that we offer. We also provide a choice of ongoing educational and training programs for dealers. (See the
heading "Business," subheading "Special Charges and Assessments.")

        Our wholly owned subsidiary, Ace Insurance Agency, Inc., offers a Group Dealer Insurance Program so that dealers can
purchase different types of insurance coverage. This program offers "all risk" property insurance and business interruption,
crime, liability and workers' compensation insurance, in addition to medical insurance for store employees. Loss Prevention
Services, Inc., another wholly owned subsidiary, offers security training and other loss prevention services to dealers.

        On February 13, 2003, we sold all of the issued and outstanding shares of Ace Hardware Canada Limited ("Ace
Canada"), our wholly owned subsidiary, to Sodisco-Howden Group Inc. Ace Canada generated less than one percent (1%) of
our consolidated revenues during fiscal year 2002.

        We operate our Company-owned retail hardware stores through our wholly owned subsidiary Ace Corporate Stores, Inc.
For further information about these stores, please see the heading "Properties."

        We manufacture paint and similar coating products at our factories in Matteson and Chicago Heights, Illinois. These
factories are the main source of the paint products that we offer for sale. We operate our paint manufacturing business as a
separate division of our Company for accounting purposes. We purchase all our raw materials for paint manufacturing from
outside sources. We have had adequate sources of raw materials in the past, and we do not currently expect any shortages of
raw materials that would have a major impact on our paint operations. Paint manufacturing is seasonal in the sense that
greater paint sales occur from April through September. Historically, our need to comply with environmental laws and
regulations has not had a major effect on our ability to conduct our paint manufacturing operations.

        Our businesses, hardware wholesaling and paint manufacturing, are not dependent on any major suppliers and we feel
that seasonal fluctuations do not have a major effect on our operations. For more discussion of our business, see
"Management's Discussion and Analysis of Financial Condition and Results of Operations."

        We also offer services to members that relate to the operation of their retail businesses. We provide these services (such
as advertising, merchandising and training programs) to assist our members and in some cases, to maximize our centralized
buying power.

Strategic Planning

        We have a strategic planning process that results in goals, objectives and programs that we want to develop in the future
for Ace and our members. Because strategic plans deal with the future, this discussion of them contains "forward looking
statements," which are based on our current expectations. The actual results of our efforts can differ greatly from the results
that we might desire. We believe that we have the facilities, the employees and the resources for ongoing success as we
implement our plans and programs. However, the future is difficult to forecast, especially related to revenues, costs, margins
and profits which are influenced by many factors. Some of these factors are discussed below.

        The effects of future growth in the hardware and hardlines-related industries are uncertain. By "hardlines-related
industries" we mean home center, do-it-yourself, rental and commercial/industrial categories. The future condition of the
economy is also uncertain, when viewed domestically, internationally or in specific geographical regions. Some other
uncertainties that could affect our plans include possible future changes in merchandise and inventory prices, and the effect of
increasingly intense competition. There could be potential shifts in market demand for some products. Lawsuits and laws,
especially laws dealing with franchising, licensing, importing, exporting and environmental matters could affect our future
business. We cannot predict whether these uncertainties might give rise to future costs or liabilities or have some other effect
on our future ability to achieve our plans.

        Through our ongoing strategic planning process we have focused our plans around four segments for future growth and
success in our competitive industry. These four segments are: Retail Success (store operations), Wholesale Success
(distribution), International growth and new member growth. Retail success for our dealers is a primary objective because, in
our opinion, it drives both their retail performance and our wholesale growth. We have therefore increased our efforts to assist
members in "retail success initiatives," which are designed to improve their retail performance and competitiveness. These
retail success initiatives include retail goals that we urge dealers to strive for within their stores and in locally competitive
markets. These goals do not, however, impose major restrictions or requirements on members. Our minimum requirements for
the acceptance of new members are outlined in the current Membership Agreement and Supplement and in the Member
Operational Requirements that apply under that Agreement. The Operational Requirements do require that, within one year,
the member must make us the primary source of supply and terminate any previous participation in the program of any other
major hardware wholesaler. There are currently no general requirements (apart from special voluntary programs) where
members have to make particular percentages of purchases from us or have to achieve minimum retail performance levels,
such as sales dollars per square foot.

        Our current strategic initiative, Vision 21, focuses on becoming a world class organization through encouraging dealers
to adopt certain merchandising, marketing and operational practices that are supported by some of our most successful dealers
to improve Ace's and the dealers' overall competitiveness and efficiency. The cornerstones to Vision 21 are to improve
retailer's sales and profits, streamline our processes, bring wholesale and retail together as one Ace team and provide ultimate
customer satisfaction. Vision 21 goals include minimizing disparities between retail and wholesale, developing dealer-friendly
procedures that take duplication and costs out of dealers' operations, achieving consistent implementation of programs more
rapidly and improving the dealers' financial performance and their ability to pursue new stores and store expansions. As
retailers become Vision 21 retailers they are afforded various benefits to assist them to succeed at retail.

Special Charges and Assessments

        We sponsor a national advertising program. To pay for this program, we assess dealers an amount equal to 1.50% of their
purchases (except purchases of LTL Plus products, building material products and certain hardware and software computer
systems), with minimum yearly assessments of $2,223.00 (effective January 1, 2003, $2,535.00 or 1.50% of the annual
purchase volume of required purchases in order for a store to avoid imposition of the low volume account service charge, if
greater). The maximum yearly assessment is $6,800.00 (based on purchases) for each store location. We grant exemptions
from these assessments and make various adjustments to them for stores located outside the continental United States, for new
stores during their start up year and for stores operating under an agreement that does not permit them to use "Ace" or "Ace
Hardware". We intend to also impose a flat charge of $100.00 on a per event basis to pay for national sales promotions
including, but not limited to, the Memorial Day sale and the day after Thanksgiving sale. The amount of our national
advertising assessment can be changed from time to time by our Board of Directors. We can also impose assessments at a flat
monthly rate or based on a percentage of sales for regional advertising not to exceed 2% of a dealer's annual purchases.
Regional advertising assessments are subject to the same minimum and maximum amounts as the national advertising
assessment.

        Through December 31, 2002, every two weeks, we billed the member store for a special low volume account service
charge of $75 if annual purchases from us were less than $50,000. We billed the member store for a special low volume
account service charge of $60 per bi-weekly billing statement period if purchases from us during such period were less than
$5,700. Effective January 1, 2003, we will bill the member store for a special low volume account service charge of $100 per
bi-weekly billing statement period if purchases from us during such period are less than $6,500. The low volume service
charges that we bill to the store in a specific year are automatically refunded if that store's total purchases increase to over
$169,000 during the year. A new store is excused from this low volume account service charge during the first 12 months that
it is a member. There are some exceptions to our low volume account service charges that are described below:

        1.    Stores which purchase $169,000 of merchandise from us during the year are given a credit on the next billing
statement for any low volume charges which we billed that store earlier in the year. We then stop billing that store for low
volume account service charges for the rest of the year, even if its current purchases on a billing statement are less than
$6,500.
        2.    We do not bill low volume account service charges every two weeks if a store's sales volume with us the year before
was at our minimum ($169,000), but we will bill these charges in a lump sum to a store's last statement of the year if that
store does not reach our applicable minimum by that time.
        3.    We will not bill low volume account service charges to members that have signed and are in compliance with a
Vision 21 Retailer and Retail Support Commitment ("Vision 21 Agreement"), but we will bill low volume account service
charges, if applicable, to members who are not in compliance with their Vision 21 Agreements.

        Low volume service charges are not included in a retailer's purchases of merchandise that qualify for patronage
dividends. An Ace store that falls below our minimum purchase levels can also be subject to termination.

        We add a late payment service charge on any past due balance that we are owed for merchandise, services, or for a stock
subscription. The current rate for the late payment service charge is .77% per bi-weekly statement period, except in Texas
where the charge is .384% and Georgia where the charge is .692%. We consider a past due balance to exist whenever we do
not receive payment of the amount shown as due on a billing statement within 10 days after the date of that statement. We can
change the rate of our late payment service charge from time to time.

        We assess members operating under a standard Membership Agreement a mandatory monthly fee for Core Retail
Services in the amount of $168 per month for all single stores or parent stores and $37 per month for all branch stores located
in the United States. Core Retail Services consist of the following elements:

        1.    ACENET. This service is our primary communications vehicle with our members. It is an electronic network that
allows defective goods claims processing, product search online or through a CD-ROM catalog, electronic communications,
employee testing and training courses, review and payment of retailer statements and numerous other applications.

        2.    Material Safety Data Sheet Subscription Service. This service provides members with access 24 hours per day and 7
days per week to information on the chemical ingredients of certain products that we sell.

        3.    Ace Training Network. This service is one of our retail training programs. Each single store or parent store is
credited with 16 points per month and each branch store is credited with 11 points per month. A single store or parent store is
one that has purchased or subscribed for a share of our Class A voting stock. A branch store is one whose membership
involves only shares (or a subscription for shares) of our nonvoting Class C Stock. (See Article XXV, Section 2 of our By-
laws). A store may use its points at any time to buy one of the training programs that we offer. If a store does not have enough
points for the program that it wants, it can use the points that it has and be billed for the difference. Multiple stores and
member groups can pool their points together to purchase our training programs.

        4.    NRHA E-Tools. These include unlimited use of certain Internet-based services offered by the National Retail
Hardware Association (NRHA), including their Advanced Course in Hardware Retailing, the Forte International
Communications Survey and their Employee Compensation Study.

        5.    Retail Pricing. This includes access to our national price shopping and ad data collected from non-Ace stores, our
suggested retail prices, our customized retail pricing strategy services and catalog updates to our suggested retail prices.

        Members operating under a Contractor agreement are assessed a mandatory monthly fee of $53 for ACENET and the
Material Safety Data Sheet Subscription Service; however, there are no members operating under a Contractor agreement as
of the date of this annual report.

Trademark and Service Mark Registrations

        The names "ACE HARDWARE" and "ACE" are used extensively by members and ourselves in the promotion,
advertising and marketing of products and services that we sell. We have had the following trademark and service mark
registrations issued by the U.S. Patent and Trademark Office for our marks:

                                                                                                                   Registration
                Description of Mark                      Type of Mark          Number          Expiration Date

    "ACE HARDWARE" with winged
        emblem design                                            Service Mark               840,176            December 5, 2007
    "ACE HARDWARE" with winged
        emblem design                                            Trademark                   898,070            September 8, 2010
    "THE PAINTIN' PLACE"                              Service Mark           1,138,654            August 12, 2010)
    "ACE HARDWARE" with winged
        emblem design                                            Trademark                1,277,581            May 15, 2004
    "ACE HARDWARE" in stylized
        lettering design                                           Trademark               1,426,137            January 27, 2007
    "ACE" in stylized lettering design               Service Mark          1,464,025            November 3, 2007
    "ACE HARDWARE" in stylized
        lettering design                                           Service Mark          1,486,528            April 26, 2008
    "ACE HARDWARE AND
        GARDEN CENTER" in stylized
        lettering design                                           Service Mark          1,487,216            May 3, 2008
    "ACE NEW EXPERIENCE" in
        stylized lettering design                            Trademark               1,554,322            September 5, 2009
    "ACE SEVEN STAR" in stylized
        lettering design                                           Trademark               1,556,389            September 19, 2009
    "ACE BEST BUYS" in circle design             Service Mark         1,560,250            October 10, 2009
    "ACENET"                                                       Service Mark         1,574,019            December 26, 2009
    "ACE IS THE PLACE"                                   Service Mark         1,602,715            June 19, 2010
    "LUB-E"                                                           Trademark              1,615,386            October 2, 2010
    "ASK ACE"                                                     Service Mark         1,653,263            August 6, 2010
    "ACE" in stylized lettering design               Trademark              1,683,538            April 21, 2012
    "ACE HARDWARE BROWN BAG
        BONANZA" with design                           Service Mark         1,761,277            April 13, 2003
    "ACE HARDWARE
        COMMITTED TO A QUALITY
        ENVIRONMENT" design                          Service Mark          1,764,803            April 13, 2003
    "CELEBRATIONS"                                        Service Mark          1,918,785            September 12, 2005
    Repetitive Stylized "A" design                    Service Mark          1,926,798            October 10, 2005
    "The NEW AGE OF ACE" design               Service Mark          1,937,008            November 21, 2005
    "ACE RENTAL PLACE"
        in stylized lettering design                        Service Mark          1,943,140            December 19, 2005
    "HELPFUL HARDWARE FOLKS"             Service Mark          1,970,828            April 30, 2006
    "ACE HOME CENTER"                                Service Mark          1,982,130            June 25, 2006
    "SEALTECH"                                                 Trademark               2,007,132            October 8, 2006
    "GREAT FINISHES"                                      Trademark              2,019,696            November 26, 2006
    "WOODROYAL"                                           Trademark              2,065,927            May 27, 2007
    "ROYAL SHIELD"                                         Trademark              2,070,848            June 10, 2007
    "ROYAL TOUCH"                                         Trademark              2,070,849            June 10, 2007
    "QUALITY SHIELD"                                     Trademark              2,102,305            September 30, 2007
    "QUALITY TOUCH"                                     Trademark              2,102,306            September 30, 2007
    "STAINHALT"                                               Trademark              2,122,418            December 16, 2007
    "ACE CONTRACTOR CENTER"                Service Mark          2,158,681            May 19, 2008
    "NHS NATIONAL
        HARDLINES SUPPLY"                             Service Mark          2,171,775            July 7, 2008
    "ACE COMMERCIAL &
        INDUSTRIAL SUPPLY"                           Service Mark          2,186,394            September 1, 2008
    "THE OAKBROOK COLLECTION"           Trademark              2,187,586            September 8, 2008
    "ACE GARDEN PLACE"                              Service Mark         2,227,729            March 2, 2009
    "ACE ROYAL"                                               Trademark              2,237,981            April 13, 2009
    "HELPFUL HARDWARE CLUB"               Service Mark         2,239,400            April 13, 2009
    "THE FOLKS IN THE RED VEST"              Service Mark        2,261,946             July 20, 2009
    "ACE CONTRACTOR PRO"                        Trademark            2,273,483             August 31, 2009
    "ILLUMINATIONS"                                      Trademark            2,353,666             May 30, 2010
    "ACE YOUR NEIGHBORHOOD
        SOLUTIONS PLACE"                                 Service Mark       2,386,359            September 12, 2010
    "ACE" with accent design                             Service Mark       2,378,123            August 15, 2010
    "ACE SOLUTIONS PLACE"                         Service Mark        2,394,181           October 10, 2010
    "ACE" with halo design                                 Service Mark        2,558,478           April 19, 2012
    "ACE HOMEPLACE"                                     Trademark            2,621,873            September 17, 2012

        As of the date of this filing, we also have the following applications for new registrations pending in the U.S. Patent and
Trademark Office:

    Mark                                                                  Type of goods/services
    "Store-It-Right"                                                     hardware products, namely, hooks,
                                                                                                          brackets, knobs, hangers and extensions
                                                                                                          for support or hanging
    "COLOR YOUR LIFE"                                                indoor and outdoor paint, coatings and
                                                                                                          varnishes
    "CONTRACTOR CENTERS OF AMERICA"
        and design                                                                               retail store services in the field of hardware
                                                                                                           and related goods
    "NATIONAL SUPPLY NETWORK"                                       wholesale store services; namely providing
                                                                                                           wholesale industrial supplies and equipment
                                                                                                           to commercial and industrial customers
    "NSN" in circle design                                                               wholesale store services; namely providing
                                                                                                           wholesale industrial supplies and equipment to
                                                                                                           commercial and industrial customers
    "SIMPLY MAGIC"                                                                     interior, exterior house paints and primers
    "COLOR YOUR LIFE"                                                               written and graphic advertisements and
                                                                                                           promotional materials of paper and signage
    "YOUR NEIGHBORHOOD ACE HARDWARE
        THE HELPFUL PLACE"                                                        retail hardware store services
    "THE HELPFUL PLACE"                                                          retail hardware store services

Competition

        Competitive conditions in the wholesale and retail hardware industry are intense and increasing. Independent hardware
retailers must remain competitive with discount stores and chain stores, such as WalMart, Home Depot, Menard's, Sears, and
Lowe's, and with other mass merchandisers. Retail hardware stores have been slowly shifting their locations to high rent
shopping centers. There has also been a trend toward longer store hours. There is intense pressure on hardware retailers to
obtain low cost wholesale supply sources. In several markets in the United States, we also compete directly with other dealer-
owned wholesalers such as TruServ Corporation, Do it Best Corporation and United Hardware Distributing Co.

Employees

        As of December 28, 2002, we have 5,268 full-time employees, of which 1,555 are salaried employees. Excluding our
Canadian operations and Company-owned retail locations, we have 4,824 full-time employees to support our domestic and
international retailers. We also have, as of the end of the 2002 fiscal year, union contracts covering one (1) truck drivers'
bargaining unit and two (2) warehouse bargaining units. We consider our employee relations with both union and non-union
employees to be good, and we have had no strikes in the past five years. In general, our employees are covered by either
negotiated or nonnegotiated benefit plans that include hospitalization, death benefits and, with few exceptions, retirement
benefits.

Limitations on Ownership of Stock

        Our members own all of our outstanding shares of capital stock. Membership in Ace is limited to approved dealers in
hardware and related products who have Membership Agreements with us. These are the only ones eligible to own or
purchase shares of any class of our stock.

        No dealer is allowed to own more than 1 share of our Class A voting stock, no matter how many store locations that
dealer owns or controls. This ensures that each stockholder in our cooperative has equal voting power. We treat an
unincorporated member or a partnership member as being controlled by someone else if 50% or more of the assets or profit
shares of that member are owned by (i) another person, partnership or corporation; or (ii) the owner(s) of 50% or more of the
assets or profit shares of another unincorporated business firm or (iii) the owner(s) of at least 50% of the capital stock of a
corporation. We treat a member that is a corporation as being controlled by someone else if at least 50% of the capital stock
of that member is owned by (i) another person, partnership or corporation; or (ii) the owner(s) of at least 50% of the capital
stock of another corporation; or (iii) the owner(s) of at least 50% of the assets or profit shares of another unincorporated
business.

Distribution of Patronage Dividends

        We operate on a cooperative basis for patronage purchases of merchandise from us that are made by dealers who have
become members of Ace. We also operate on a cooperative basis with dealers who have subscribed for shares of our stock but
who have not yet actually become "members" because they have not yet fully paid for their $1,000 par value shares of our
Class A voting stock. The dealers in either of these two categories are entitled to receive patronage dividends once a year on
an equitable basis.

        We made patronage dividend distributions at the following percentages of our sales in the warehouse, bulletin and direct
shipment categories and on the total sales of products manufactured by our Paint Division during the past three fiscal years:

                                                                                                                                2002          2001          2000
                Warehouse Sales                                                                              4.56348%     4.27330%       4.43564%
                Bulletin Sales                                                                                             2.0%             2.0%               2.0%
                Direct Shipment Sales                                                                               1.0%            1.0%                1.0%
                Paint Sales                                                                                           10.1109%      8.9371%          8.1131%

        Under our LTL Plus Program, we also calculate patronage dividends separately on sales of full or partial truckloads of
products purchased by eligible dealers from certain vendors (see discussion of LTL Plus Program under the heading
"Business.") The LTL Plus Program patronage dividend was 0.5% of these sales for fiscal year 2002, 2001 and 2000.

        Sales of merchandise under our Contractor and Industrial Distributor Programs are made on a nonpatronage basis.

Patronage Dividend Determinations and Allocations

        The amounts that we distribute as patronage dividends consist of our gross profits on patronage business that we do with
dealers who qualify for patronage dividend distributions, less a proportionate share of our expenses for administration and
operations. Our gross profits consist of the difference between our selling price for the merchandise that these dealers buy
from us and our purchase price for that merchandise. The total patronage dividend paid to members is based on net earnings
calculated in accordance with accounting principles generally accepted in the United States of America after reducing or
increasing net earnings for non-member income or losses. Our computation of patronage dividends excludes all of our income
and expenses from activities that are not directly related to patronage transactions. The excluded items primarily consist of
profits or losses generated from non-shareholder international dealers and non-shareholder retail accounts served through
National Hardlines Supply, Inc. and our industrial distributor and contractor programs, profits or losses realized from Ace
Insurance Agency, Inc., New Age Insurance Limited, Ace Hardware Canada Limited, company-owned retail locations and our
share of the profits or losses realized from our minority-owned investments including Builder Marts of America, Inc. and joint
ventures. Additionally, any income or loss that we realize from the disposition of property and equipment is excluded from
patronage dividends. The amount we distribute as patronage dividends also excludes profits or losses generated from our non-
shareholder programs. (See the heading "Business" and the subheading "Non-Shareholders Programs".)

        Patronage dividends are usually paid to members within 90 days after the close of Ace's fiscal year; however, the Internal
Revenue Code (the "Code") permits distribution of patronage dividends as late as the 15th day of the ninth month after the
close of Ace's fiscal year, and Ace may elect to distribute the annual patronage dividend at a later time than usual in
accordance with the provisions of the Code.

        Our By-laws provide that, by virtue of dealers being "members" of Ace (that is, by owning shares of our Class A voting
stock), they consent to include in their gross income for federal income tax purposes all patronage dividends that we distribute
to them. These distributions must be included in gross income for the taxable year in which the dealer receives them. Dealers
who have not yet fully paid the $1,000 purchase price for their shares of our Class A voting stock are also required to include
all patronage dividends we distribute to them in their gross income as explained above. Under our Stock Subscription
Agreement, dealers must expressly consent to take these patronage dividend distributions into their gross incomes.

        The amount of the patronage dividends which dealers must include in their gross incomes includes both the cash portion
of patronage dividends and any portion of patronage dividends that we apply against any indebtedness the dealer owes to us in
accordance with Section 7 of Article XXIV of our By-laws. It also includes any portion of patronage dividends that they
receive in shares of our Class C nonvoting stock, other property and patronage refund certificates. Ace also has the authority
to issue a portion of the patronage dividend in the form of other property.

        Under our present program, patronage dividends on each of our three basic categories of sales (warehouse sales, bulletin
sales and direct shipment sales) are allocated separately, as are patronage dividends under our LTL Plus Program. Dividend
percentage calculations are made with reference to the net earnings derived from each of the respective categories. The 2002
patronage dividend rate for the LTL Plus Program is 0.5% of our LTL Plus sales. The 2002 patronage dividend rates for direct
shipment and bulletin sales are 1.0% and 2.0%, respectively, while the current 2002 warehouse patronage dividend rate is
4.56%.

        Patronage dividends are calculated separately for full and partial truckloads of products purchased under the LTL Plus
Program. (See the heading "Business", discussion of LTL Plus Program and the subheading "Forms of Patronage Dividend
Distributions" below.)

        Any manufacturing profit realized on intracompany sales of products manufactured by our Paint Division is allocated and
distributed as patronage dividends to eligible dealers in proportion to their respective annual dollar purchases of paint and
related products from that division. The earnings we realize on wholesale sales of the Paint Division's products to our eligible
dealers are currently distributed as patronage dividends to them as part of the patronage dividends which they receive each
year in the basic patronage dividend categories of warehouse sales, bulletin sales and direct shipment sales. The 2002 paint
patronage dividend rate is 10.11%. Under Section 8 of Article XXIV of our By-laws, if the Paint Division's manufacturing
operations for any year result in a net loss instead of a profit to the Paint Division, this loss would be netted against the
earnings we realized from our other activities during the year, so that the earnings available for distribution as patronage
dividends from these other activities would be reduced for the year. Therefore, if a loss were to result from Paint Division
activities, it would result in a reduced patronage dividend to all members, irrespective of their paint purchases.

        We have established a LBM Retailer Incentive Pool Plan for our members who purchase LBM products through Builder
Marts of America, Inc. ("BMA") and are eligible participants under our Contractor Center standards. This is not a patronage
dividend plan, but rather an allocation of the increase in our stock investment in BMA. Under the plan, we calculate an annual
estimate of the amount by which our stock in BMA has increased or decreased in value from our initial investment, net of
certain expenses. We allocate this estimate to eligible members annually based on their qualifying purchases of LBM products.
A member's pool allocation only becomes vested and can only be redeemed upon the termination of the member's Ace
membership which results in the sale or redemption of Ace stock held for that location, Ace's termination of the LBM
Retailer Incentive Pool Plan, or Ace's liquidation, whichever occurs first. Negative pool balances are not charged to
members. The 2002 incentive pool rate under this plan is 0.57% of qualifying purchases.

Forms of Patronage Dividend Distributions

        We make patronage dividend distributions to our eligible dealers in cash, shares of our Class C Stock and patronage
refund certificates according to a specific plan that has been adopted by our Board of Directors. This plan can be changed
from time to time by the Board as they deem fit depending on business conditions and Ace's needs.

        This plan is summarized below for the purchases that our eligible dealers make from us for the year 2000 and subsequent
years.

        1.    For each of a dealer's eligible stores, we initially calculate the minimum cash patronage dividend distribution as
follows:
                (a)    20% of the first $5,000 of the total patronage dividends allocated for distribution each year to the dealer based
                        on the purchases made for the eligible store;
                (b)    25% of the portion of the total patronage dividends allocated for that store which exceed $5,000 but do not
                        exceed $7,500;
                (c)    30% of the portion of the total patronage dividends allocated for that store which exceed $7,500 but do not
                        exceed $10,000;
                (d)    35% of the portion of the total patronage dividends allocated for that store which exceed $10,000 but do not
                        exceed $12,500;
                (e)    40% of the portion of the total patronage dividends allocated for that store which exceed $12,500.

        2.    We distribute the portion of patronage dividends in excess of the cash or property amounts above in the form of
shares of our Class C nonvoting stock (par value $100 per share) until the total par value of all shares of all classes of our
capital stock that a dealer holds for the eligible store equals the greater of:
                (a)    $20,000; or
                (b)    the sum of purchases in the following categories that a dealer made for the eligible store during the most recent
                          calendar year:
                            (i)    15% of the volume of Ace manufactured paint and related products purchases, plus
                            (ii)   3% of the volume of drop-shipment or direct purchases (excluding Ace manufactured paint and related
                                    products), plus
                            (iii)  15% of the volume of warehouse and bulletin purchases (including Stop and excluding Ace manufactured
                                    paint and related products), plus
                            (iv)  4% of the volume of LTL Plus purchases.

        Please note, however, that we do not issue fractional shares of Class C Stock. We take any amount that would result
in a fractional share of stock and distribute it in cash or patronage refund certificates instead.

        3.    The portion of a dealer's total patronage dividends for each of the dealer's eligible stores which exceeds the sum of:
                (a)    the cash amount determined under Paragraph 1 above and
                (b)    the amount of Class C Stock determined under Paragraph 2 above is distributed to the dealer in cash up to
                         certain limits. The total amount that a dealer receives in cash for an eligible store cannot exceed 45% of that
                         store's total patronage dividends for the year. If a store's total cash distribution would exceed this 45% limit,
                         then the distribution over that amount is made instead in the form of a non-negotiable patronage refund
                         certificate. Our Board of Directors determines the maturity dates and interest rates of these patronage refund
                         certificates before they are issued. These certificates include provisions that give us a first lien on the amount of
                         any indebtedness that a dealer owes us. The certificates also contain language subordinating them to all the
                         rights and claims of our secured creditors, general creditors and our bank creditors. Historically, these patronage
                         refund certificates have matured within five years from the date we issued them.

        Article XXIV, Section 7 of our By-laws requires the cash portion of any patronage dividends to be applied against any
indebtedness a member owes us where the membership for his store is terminated before the distribution of patronage
dividends. Despite this, however, 20% of a terminated store's total annual patronage dividends will be paid in cash if we
receive a timely request for this form of payment.

        Because of the requirement of the U. S. Internal Revenue Code that we withhold 30% of the annual patronage dividends
distributed to eligible dealers whose places of business are located in foreign countries or Puerto Rico, the cash portion of
patronage dividends to these dealers is a minimum of 30%. There are exceptions to this 30% cash payment in the case of 1)
unincorporated Puerto Rico dealers owned by individuals who are U.S. citizens, 2) certain dealers incorporated in Guam,
American Samoa, the Northern Mariana Islands or the U.S. Virgin Islands. These exceptions apply if less than 25% of the
stock of these dealers is owned by foreign persons, and at least 65% of their gross income for the last three years has been
sufficiently connected with a trade or business in one of these locations or in the United States and 3) dealers located in
countries maintaining tax treaties with the United States that provide for reduced rates of withholding.

        We also have certain loan programs that allow dealers to pay us back with part of their patronage dividend distributions.
For example, to help members buy standardized exterior signs identifying their stores, our Board of Directors has authorized a
loan program. Under this program, a dealer may apply to borrow between $100 to $25,000 per location from us for this
purpose. If a dealer obtains a loan under this program, the dealer may either repay it in twelve payments billed on the regular
bi-weekly billing statement, or the dealer may apply the non-cash portion of the annual patronage dividends (for up to the next
three annual patronage dividend distributions) toward payment of the loan.

        Our Board of Directors has also authorized a loan program to help qualified dealers pay for costs of converting their
stores from another hardware distributor's program to our program. Under this loan program, these dealers can borrow up to
$95,000 per store. If the dealer obtains a loan under this program, we will apply the non-cash portion of the dealer's annual
patronage dividends (for up to the next three annual patronage dividend distributions) towards payment of the loan. Unless
extended by the Board of Directors, this loan program will remain in effect until June 1, 2003 or until 100 loans are made,
whichever occurs first.

        Our Board of Directors has also authorized finance programs to help qualified dealers buy certain computer systems from
us with patronage dividends. The amount financed cannot exceed 80% of the cost of any system. For PAINTMAKER
computers, members have applied to borrow between $4,000 to $25,000 per location repayable over a period of three (3)
years.

        Under these programs, members have directed us to first apply the patronage refund certificate portion of their patronage
dividend distributions toward the balance owed on financed items and next to apply patronage dividends which would
otherwise be payable for the same year in the form of our Class C Stock. These signage, computer financing and store
conversion programs may be revised or discontinued by our Board at any time.

        Members also have the ability to apply for a Capital Stock loan which is designed to provide them with access to their
future patronage dividends to assist them in opening new retail stores or to assist in significant store expansions. These loans
are repaid at the end of seven (7) years from patronage distributions of the non-cash portion of the annual patronage rebate on
the respective store during that period.

Federal Income Tax Treatment of Patronage Dividends

        Both the shares of Class C nonvoting stock and the patronage refund certificates that we use to pay patronage dividends
are "qualified written notices of allocation" within the meaning of Sections 1381 through 1388 of the U.S. Internal Revenue
Code. Ace may pay a portion of its dividend in the form of other qualified property pursuant to Section 1382 of the U.S.
Internal Revenue Code. These Sections of the Internal Revenue Code deal with the income tax treatment of cooperatives and
their patrons and have been in effect since 1963. The dollar amount stated on a qualified written notice of allocation and fair
market value of other qualified property must be taken into the gross income of the person to whom the notice is issued, even
though this dollar amount may not actually be paid to the person in the same year that it is taxed.

        In order for us to receive a deduction from our gross income for federal income tax purposes for the amount of any
patronage dividends that we pay to a patron (that is, to one of our eligible and qualifying dealers) in the form of qualified
written notices of allocation or other qualified property, we have to pay (or apply against any indebtedness that the patron
owes us in accordance with Section 7 of Article XXIV of our By-laws) not less than 20% of each patron's total patronage
dividend distribution in cash and the patron also has to consent to having the written notices of allocation at their stated dollar
amounts, and other qualified property at the fair market value, included in his gross income for the taxable year in which he
receives them. The Internal Revenue Code also requires that any patronage dividend distributions that we deduct on our
federal income tax return for business we do with patrons must be paid to those patrons within eight and one-half months after
the end of that taxable year.

        By becoming one of our "members" by owning 1 share of Class A voting stock, a patron is deemed under the U.S.
Internal Revenue Code to have consented to take the written notices of allocation and other qualified property that we
distribute into the patron's gross income. Such consent is deemed because of 1) the act of obtaining or retaining membership
in Ace, and 2) because our By-laws provide that the membership constitutes this consent, and we give written notification of
that By-law provision. Under another provision of the Internal Revenue Code, dealers who have subscribed for shares of our
stock are also deemed to have consented to take the dollar amounts of their written notices of allocation and other qualified
property into their gross incomes. This occurs because of the consent provisions included in the Subscription Agreement for
our stock.

        If a patron receives a patronage refund certificate as part of a patron's patronage dividends (see the subheading "Forms of
Patronage Dividend Distributions"), the patron may be deemed to have received interest income. This interest would arise in
the form of an original issue discount to the extent that the face amount of the certificate exceeds the present value of the
stated principal and interest payments that we have to pay the patron under the terms of the certificate. This interest income
would be taxable to a patron's "ratably" over the term of the certificate under Section 7872(b) (2) of the U.S. Internal
Revenue Code. Present value for this purpose is determined by using a discount rate equal to the applicable Federal rate in
effect as of the day of issuance of the certificate, compounded twice a year.

        We are required to backup withhold for federal income tax on the total patronage dividend distribution we make to
anyone who has not furnished us with a correct taxpayer identification number. We can also be required to backup withhold
federal taxes on the cash portion of each patronage dividend distribution made to someone who fails to certify to us that he is
not subject to backup withholding. This backup withholding obligation based on a failure to certify may not be applicable,
however, unless 50% or more of the total distribution is made in cash. Since we distribute all of our patronage dividends for a
given year at the same time and since our current patronage dividend plan (see the heading "Business " , subheading "Forms of
Patronage Dividend Distributions") does not permit any member store to receive more than 45% of its patronage dividends
for the year in cash, we believe that a certification failure like this should not ordinarily have any effect on Ace or any of its
dealers.

        Patronage dividends that we distribute to patrons who are located in foreign countries or certain
U.S. possessions (including those who are incorporated in Puerto Rico or who reside in Puerto Rico but have not become
citizens of the United States) have been held to be "fixed or determinable annual or periodic income." Patrons who receive
this type of income are currently required to pay a tax of 30% of the amount received under Sections 871(a)(1)(A) and
881(a)(1) of the Internal Revenue Code. When dealers are subject to this 30% tax, we must withhold it from their patronage
dividends and pay it over to the U.S. Internal Revenue Service. The above does not apply to a corporation organized in
Guam, American Samoa, the Northern Mariana Islands or the U. S. Virgin Islands if less than 25% of its stock is owned by
foreign persons and at least 65% of its gross income for the last three years has been effectively connected with the conduct of
a trade or business in that location or in the United States. A reduced rate of withholding may apply to dealers located in
countries maintaining tax treaties with the United States.

        The 20% minimum portion of the patronage dividends that must be paid in cash to patrons other than those discussed
above may not be enough, depending upon the patron's income tax bracket, to pay all of the patron's federal income tax on
his annual patronage dividend distributions. In our management's opinion, the payment of a minimum of 20% of total
patronage dividends in cash each year will not have a material adverse affect on our operations or on our ability to obtain
sufficient working capital for the normal requirements of our business.

Membership Agreements

        Persons who apply to become an Ace member must sign a Subscription Agreement to purchase our stock. They must also
sign our customary Membership Agreement and Supplement and submit a payment of $1,500 ($2,500 for conversions or new
investor ground-ups) with their signed Membership Agreement and Supplement. We use this fee toward our estimated costs
of processing the membership applications. A membership may generally be terminated upon various notice periods and for
various reasons (including voluntary termination by either party). The details of these reasons and notice periods are
contained in the Membership Agreement. These reasons for termination and notice periods apply except where special laws or
regulations in certain locations limit our right to terminate memberships, or require longer notice periods.

Non-Shareholder Programs

        In 1989, our Board of Directors first authorized us to affiliate non-shareholder international dealers who operate retail
businesses outside the United States, its territories and possessions. These international dealers sign agreements that differ
from our regular Membership Agreement. They may be granted a license to use certain of our trademarks and service marks,
but they do not sign stock subscription agreements or become shareholders, nor do they receive patronage dividends.

        In 1995, our Board of Directors first authorized us to affiliate non-shareholder retail accounts other than international
dealers. These accounts, which are generally served through our wholly-owned subsidiary National Hardlines Supply, Inc.
("NHS"), are not granted an ongoing license to use our trademarks and service marks. They can purchase selected types of
products from us for resale. They are not members of our cooperative, and therefore do not own our stock or receive
patronage dividends.

        In 1996, we established a license program for international non-shareholder dealers. These international licensees
typically receive the exclusive right to use our trademarks and service marks, as well as exclusive rights to distribute the
merchandise they purchase from us in their home countries. International licensees pay us a negotiated license fee and
ongoing royalties on their retail sales in exchange for these rights, and for our ongoing training and support.

        In 1998, the Company began developing joint ventures with certain dealers as a way of increasing the Ace presence in
key markets without the need for Ace to use solely its own resources to open company stores. For each joint venture, the
Company and the member enter into a Limited Liability Company Agreement, with the retailer acting as the managing
member, and form a limited liability company ("LLC") to operate the joint venture stores. In each joint venture, we own 50%
or less of the LLC's units. Currently, Ace has an ownership interest in seven joint ventures. In the future, we may explore
other joint venture opportunities with our members; however, we consider each situation unique and we evaluate each
opportunity on its own merits.

        In our sole discretion, we may offer a member a mutually agreeable termination arrangement. In some situations, a
member who terminates on this basis may be offered the opportunity to purchase products from us (including Ace private
label products) for a period of up to 5 years after the termination of membership. The former member is not required to make
any such purchases from us, but must maintain favorable credit status in order to do so.

        In 1999, we entered into an agreement with Builder Marts of America (BMA), to combine our lumber and building
materials division (the "LBM division") with BMA, a non-cooperative buying group for lumber and building materials in the
United States. Under this agreement, we contributed certain business assets (primarily vendor rebate receivables, fixed assets
and inventories) in exchange for a non-controlling (28%) interest in the combined entity. The investment in the combined
entity is accounted for under the equity method of accounting. As a result of this transaction, we have established an LBM
Retailer Incentive Pool Plan for our members who purchase LBM products through BMA. This program is not a patronage
dividend plan but rather a process for allocating the increase in the value of our investment in BMA to those qualifying
dealers who purchase LBM products through BMA. (See the heading "Business", subheading "Patronage Dividend
Determinations and Allocations".)

        In 2001, we developed a non-shareholder industrial distributor program. These industrial distributors can purchase
selected types of products from us for resale under an Industrial Distributor Agreement or Distributor Franchise Agreement.
They are not members of our cooperative by reason of their participation in the industrial distributor program, and therefore
do not own stock or receive patronage dividends in connection with that program. These programs are made available to
cooperative members, however, members will not receive patronage dividends for purchases of products under these
programs.

        Sales to international non-shareholder dealers accounted for approximately 1.9 % of our merchandise sales in 2002,
approximately 2.0% of our merchandise sales in 2001 and approximately 2.2% of our merchandise sales in 2000. Sales to
domestic non-shareholder locations accounted for less than 1.0 % of our total sales in 2002, less than 2.0% of our total sales in
2001 and less than 3.0% of our total sales in 2000. (See Appendix A, Article XXV, section 2 of our By-laws regarding
International Retail Merchants and non-member accounts.)

        In connection with the sales of the shares of Ace Canada to Sodisco-Howden Group Inc. on February 13, 2003, we
signed a License Agreement granting Ace Canada the right to operate, and license others to operate, retail hardware stores
under our trademarks and service marks. These retail hardware dealers are not shareholders and do not receive patronage
dividends from us.

Item 2. Properties

        Our general offices are located at 2200 Kensington Court, Oak Brook, Illinois 60523. Information about our main
properties appears below:

                                                                                                Square Feet                Owned                    Lease
                                                                                                  of Facility                      or                   Expiration
                                      Location                             (Land in Acres)          Leased               Date
    General Offices:
        Oak Brook, Illinois (1)                                                            206,030               Owned    
        Oak Brook, Illinois                                                                   85,786               Leased          September 30, 2009
        Downers Grove, Illinois                                                          23,962               Leased          June 30, 2004
        Markham, Ontario, Canada (2)                                              15,372                Leased          November 30, 2002
    Distribution Warehouses:
        Lincoln, Nebraska                                                                  345,440               Leased          December 31, 2006
        Arlington, Texas                                                                    313,091               Leased          July 31, 2003
        Perrysburg, Ohio                                                                   393,720               Leased          December 31, 2004
        Tampa, Florida                                                                       391,755               Owned
        Yakima, Washington                                                            507,030               Owned
        Maumelle, Arkansas                                                            597,253                Owned
        LaCrosse, Wisconsin                                                          591,964                Owned
        Rocklin, California                                                                478,468                Leased           September 30, 2004
        Rocklin, California                                                                  75,000                Leased           July 31, 2003
        Rocklin, California (3)                                                         82 acres                Leased           January 15, 2023
        Gainesville, Georgia                                                             481,013                Owned
        Prescott Valley, Arizona                                                      631,485               Owned
        Princeton, Illinois                                                              1,094,756                Owned
        Summit, Illinois (4)                                                                 37,236                Leased            February 28, 2017
        Baltimore, Maryland (4)                                                        19,600                Leased            December 31, 2008
        Colorado Springs, Colorado                                               494,219               Owned
        Wilton, New York                                                                800,525                Leased            September 1, 2007
        Loxley, Alabama                                                                  798,698                Leased            May 27, 2009
        Brantford, Ontario, Canada (5)                                          354,000                Leased            March 31, 2006
        Prince George County, Virginia                                         798,786                Owned
        Fort Worth, Texas (4)                                                            10,915                Leased            December 31, 2005
        Cuyahoga Heights, Ohio (4)                                                21,320                Leased            April 30, 2017
    Print Shop Facility:
        Downers Grove, Illinois                                                        41,000                Leased            April 30, 2004
    Paint Manufacturing Facilities:
        Matteson, Illinois                                                                371,411                Owned
        Chicago Heights, Illinois                                                    194,000                Owned
    Other Property:
        Aurora, Illinois                                                                   72 acres                 Owned

    (1) This property was leased by Ace for its corporate office until purchased in June, 2002.
    (2) This property was leased by Ace Hardware Canada Limited for its corporate office.
    (3) Ace has entered into a ground lease for 82 acres of land containing a 619,688 square foot warehouse/office building,
          including 75,000 square feet of building space leased by Ace. Ace intends to exercise an option to purchase this property by
          September, 2003, and to develop this property for use as a distribution warehouse.
    (4) This property is leased for use as a freight consolidation center.
    (5) Our subsidiary, 3070070 Nova Scotia Company, leases this property for a distribution warehouse.

        In addition to the above, we or our subsidiary, Ace Corporate Stores, Inc., lease 26 retail hardware stores ranging from
7,000 to 25,000 square feet in size located in the following states: Colorado, Georgia, Illinois, New Jersey, Oregon,
Washington and Wisconsin.

        We also lease a fleet of trucks and equipment for the main purpose of delivering merchandise from our warehouses to our
dealers.

Item 3. Legal Proceedings

        In the normal course of our business, we are a party to various legal proceedings. We do not expect that any currently
pending proceedings will, individually or in the aggregate, have a material adverse effect on our business, results of
operations or financial condition.

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

        None.

PART II

Item 5. Market for The Registrant's Common Equity and Related Stockholder Matters

        There is no existing market for our stock and there is no expectation that one will develop. We are organized as a
Delaware corporation and operate as a cooperative corporation, and only retailers of hardware and similar merchandise who
are our members own our stock.

        The table below shows the number of stockholders of record that we had as of February 17, 2003:

                Title of Class                                                                                  Number of Record Holders
                Class A Stock, $1,000 par value                                                                        3,594
                Class B Stock, $1,000 par value                                                                         1,928
                Class C Stock, $100 par value                                                                            4,726

        Our Company's Articles of Incorporation and By-laws prohibit us from declaring dividends (other than patronage
dividends). (Please see the discussion of patronage dividends under Item 1. Business.)

Item 6. Selected Financial Data
                SELECTED FINANCIAL DATA
Income Statement Data:
December 28,       December 29,       December 30,       January 1,       January 2,
                                                                                   2002                    2001                   2000                   2000                1999       
                                                                                                                                (000's omitted)
Net sales                                                              $3,029,097         $2,923,882        $2,924,187       $3,154,057     $3,094,837
Cost of sales                                                         2,742,201           2,641,840          2,649,211         2,885,371       2,854,879  
Gross profit                                                              286,896               282,042            274,976            268,686          239,958
Total expenses and other income, net                 193,937               197,882            193,861            175,537          151,163  
Income from continuing operations                       92,959                84,160               81,115              93,149            88,795
Loss from discontinued operations, net              (10,868)             (11,091)                 (723)                (587)              (835) 

Net earnings                                                         $    82,091         $   73,069         $   80,392        $    92,562      $    87,960
                                                                                ========       ========        ========      ========     ========  
Patronage dividends (Notes A, B and C)        $   95,580          $   85,109         $   86,537        $    95,260     $     88,022
                                                                               =========      ========       ========       ========     ========   

Balance Sheet Data:
December 28,       December 29,       December 30,       January 1,       January 2,
                                                                                   2002                    2001                   2000                   2000                1999       
                                                                                                                                (000's omitted)
Total assets                                                        $1,143,352         $1,168,791        $1,123,810        $1,081,484     $1,047,580
Working capital                                                      226,267              230,314             181,724             178,369          192,744
Long-term debt                                                       163,075              170,387             105,891             111,895           115,421
Patronage refund certificates payable,
    long-term                                                               83,820                77,401               68,385               55,257             43,465
Member dealers' equity                                         280,022             281,702              285,278             271,564           262,330

(A)  The Company operates as a cooperative organization, and pays patronage dividends to member dealers on earnings
        derived from business done with such dealers. It is the practice of the Company to distribute substantially all patronage
        sourced earnings in the form of patronage dividends.
(B)  The form in which patronage dividends are to be distributed can only be determined at the end of each year when the
        amount distributable to each of the member dealers is known. Patronage dividends were payable as listed in the table
        below.
(C)  Refer to Note 6 of the Consolidated Financial Statements beginning on page F-12 of this Form 10-K.

December 28,       December 29,       December 30,       January 1,       January 2,
                                                                                   2002                    2001                   2000                   2000                1999       
                                                                                                                                (000's omitted)
In cash                                                                 $38,687          $    34,229       $    34,764         $    38,173     $   34,826
In patronage refund certificates payable              20,651                18,739              18,029               12,249           15,720
In Class C Stock                                                        26,053                23,284              24,267               21,648           26,170
In other property                                                            -                          -                        -                   10,190                -
In patronage financing deductions                       10,189                  8,857                9,477                13,000           11,306  

Total patronage dividends                                 $95,580            $  85,109        $86,537           $    95,260       $88,022
                                                                               ========          =======        =======           =======     ========

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

                                                                Management's Discussion and Analysis of
                                                            Financial Condition and Results of Operations

Operations 2002 Compared to 2001

        Consolidated sales increased 3.6%. Domestic merchandise sales increased 3.7% while International sales were flat with
2001. During 2002, sales to our domestic members increased 5.6%. The increase in domestic sales was primarily due to
higher sales to our existing retailer base, lower retailer cancellations and sales to newly affiliated retailers. This increase was
partially offset by a decrease in sales to non-coop members.

        Gross profit increased $4.9 million; however decreased as a percent of total sales from 9.65% in 2001 to 9.47% in 2002.
The increase primarily resulted from higher handling charges due to a shift in sales mix towards handled sales, lower retailer
product returns and freight costs and increased paint margin due to lower raw material costs partially offset by inventory
adjustments.

        Distribution operations expenses decreased $5.0 million from 2001 and decreased as a percent of total sales from 2.03%
in 2001 to 1.79% in 2002 primarily due to improved productivity, continued cost controls, lower fixed costs as a result of the
east coast distribution center reconfiguration and additional volume from logistics operations.

        Selling, general and administrative expenses increased $3.5 million due to increased investments in technology partially
offset by lease savings due to the purchase of the corporate office location.

        Retail success and development expenses increased $613,000 from 2001 primarily due to increased advertising and
marketing expenses offset by the continuation of cost control measures put in place in 2001. These expenses consist primarily
of field personnel and related costs, marketing, advertising, and training programs for Ace retailers and expenses of company-
owned retail operations. Ace continues to make investments in retail initiatives under its Vision 21 strategy to support Ace
Retailers.

        Interest expense decreased $1.5 million due to lower interest rates and lower average borrowing levels under the
revolving credit facility. The decline in interest rates is primarily the result of a declining interest rate environment and the
decline in LIBOR, the basis on which our interest rate is determined. The lower average borrowing levels primarily resulted
from an increase in earnings, improved receivable collections and a reduction of inventory levels.

        Other income decreased $2.4 million primarily due to a decline in retailer past due and low volume charges and lower
interest income. Additionally, 2001 included non-recurring gains on the sale of two distribution facilities offset by a write-
down of a minority-owned investment.

        Income taxes decreased $3.9 million due to the taxes incurred on the sale of two retail support centers in 2001 and
increased tax benefits from non-patronage activities in 2002.

        In 2002, the Company entered into an agreement to sell Ace  Hardware Canada Limited, a wholly-owned subsidiary for
cash proceeds of approximately US $3.7 million and an interest bearing note of US $4.0 million. The transaction closed on
February 13, 2003, at which time the sale proceeds were received and used to repay outstanding indebtedness. The Company
recognized a loss related to the disposal of this discontinued operation of US $5.4 million in 2002 and a loss from operations
of Ace Hardware Canada Limited of US $5.4 million in 2002 and US $11.1 million in 2001. The decrease in the loss from the
discontinued operation is primarily due to costs associated with the closure of the Calgary distribution center in 2001.

Operations 2001 Compared to 2000

        Consolidated sales were flat with 2000. Domestic merchandise sales increased 0.7% primarily due to conversions of new
stores to the Ace program. Sales to our existing retailer base were flat due to the soft economy and inventory reductions at
retail. International sales decreased by 18.6% primarily due to a sale of Ace affiliated stores.

        Gross profit increased $7.1 million and increased slightly as a percent of total sales from 9.40% in 2000 to 9.65% in
2001. The increase was primarily due to higher vendor rebates, paint manufacturing margin and margin from company-owned
retail locations partially offset by lower cash discounts from reduced merchandise purchases.

        Distribution operations expenses increased $3.0 million over 2000 and increased as a percent of total sales from 1.93% in
2000 to 2.03% in 2001. Increased utilities and distribution expenses associated with the new Loxley, Alabama distribution
facility which was open for a full year in 2001 and the start-up of the Prince George, Virginia distribution facility drove the
higher expenses. Higher logistics income partially offset the increased expenses.

        Selling, general and administrative expenses decreased $1.1 million primarily due to decreased expenses related to non-
patronage activities and continued cost control measures.

        Retail success and development costs decreased $4.8 million due to continued cost control measures. Expenses in this
category are directly related to retail support of the Ace retailer. These expenses consist primarily of field personnel and
related costs, marketing, advertising and training programs for Ace retailers and expense of company-owned retail operations.
The Company continues to make investments in retail initiatives under our Vision 21 strategy to support Ace retailers.

        Interest expense increased $1.4 million due to higher average borrowing levels during the year partially offset by lower
interest rates. The decline in interest rates is primarily the result of a declining interest rate environment and the decline in
LIBOR, the basis on which our interest rate is determined. The higher borrowing levels resulted from the completion of the
Loxley, Alabama and Prince George, Virginia distribution centers, the expansion of the LaCrosse, Wisconsin facility and
increased retailer dating programs.

        Other income decreased $2.2 million primarily due to an increase in the write-down of a minority-owned investment of
$1.7 million and decreased interest income due to declining interest rates offset by a $3.6 million nonrecurring gain on
pension plan termination in 2000, the gain recognized on the sale of two distribution facilities and higher income realized on
non-controlling investments in affiliates.

        Income taxes increased $3.3 million primarily due to deferred taxes recorded on the sale/exchange of two distribution
centers.

        The loss on discontinued operation increased $10.4 million primarily due to a decline in sales volume as a result of the
loss of a significant customer and costs incurred related to the closure of the Calgary distribution center.

Liquidity and Capital Resources

        Ace's ability to generate cash adequate to meet its needs ("liquidity") results from internally generated funds, short-term
lines of credit and long-term financing.

        Cash flow generated from operations provides a significant source of liquidity. For the year-ended December 28, 2002,
cash provided by operations increased to $140.5 million compared to $62.2 million for 2001. The increase was primarily due
to an increase in net earnings, improved receivable collections, and a reduction of inventory.

        Cash used in investing activities for the year-ended December 28, 2002 was $39.6 million compared to $55.8 million in
2001. The decrease was primarily due to decreased expenditures for the distribution network as 2001 included expenditures
for the construction of the Prince George, Virginia distribution center. Net capital expenditures of $30.2 million in 2002 were
financed out of current and accumulated internally generated funds and short-term borrowings.

        Cash used in financing activities for the year-ended December 28, 2002 was $101.4 million compared to $8.1 million in
2001 due to payments of short-term borrowings and 2001 proceeds of $70.0 million obtained from the issuance of Senior
Notes.

        Ace has an established, unsecured revolving credit facility with a group of banks. Ace has unsecured lines of credit of
$185.0 million of which $136.1 million was available at December 28, 2002. Borrowings under these lines of credit bear
interest at a spread over LIBOR based upon quarterly debt to EBITDA ratios. Long-term financing is arranged as determined
necessary to meet Ace's capital or other requirements, with principal amount, timing and form dependent on prevailing debt
markets and general economic conditions.

        Capital expenditures for new and improved facilities were $30.2 million, $51.4 million, and $44.6 million in 2002, 2001
and 2000, respectively. Capital expenditures for 2003 are anticipated to be approximately $63.0 million primarily for a new
distribution facility, improvements to existing facilities and technology investments.

        As a cooperative, Ace distributes substantially all of its patronage sourced earnings to its members in the form of
patronage dividends, which are deductible for income tax purposes.

        Ace expects that existing and new internally generated funds, along with established lines of credit and long-term
financing, will continue to be sufficient in the foreseeable future to finance its working capital requirements and patronage
dividend and capital expenditure programs.

        The table below presents contractual obligations and commercial commitments by year of expiration:

                                                                                                           Less than            1-3                 4-5               After 5
Contractual Obligations                                                Total                  1 Year            Years             Years               Years
                                                                                                                           (000's omitted)
Short-term borrowings                                           $48,900           $48,900         $    -            $-               $-
Long-term debt                                                        168,722              5,647            18,336        35,739           109,000
Patronage refund certificates                                  97,016            13,196            27,326        35,843              20,651
Operating leases                                                       94,772            19,522            29,422         18,385            27,443 

Total Contractual Cash Obligations                    $409,410          $87,265        $75,084       $89,967          $157,094
                                                                                   =======        ======        ======     ======         ======= 

                                                                                Total Amounts       Less than            1-3                4-5               Over 5
Other Commercial Commitments                                    Committed            1 Year            Years            Years             Years
                                                                                                                            (000's omitted)
Standby letters of credit                                        $13,848              $13,848          $   -            $    -             $    -
Guarantees                                                                 11,018                  6,905          3,396 717                   - - 

Total Commercial Commitments                           $24,866              $20,753          $3,396         $ 717            $-
                                                                                   ======            ======         ======       =====         =====

Critical Accounting Policies

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses in the financial statements. On an ongoing basis, Ace evaluates its estimates and judgments based on
historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates, and our estimates would vary under different assumptions or conditions. Management believes
these estimates and assumptions are reasonable.

        Ace annually reviews its financial reporting and disclosure practices and accounting policies to ensure that its financial
reporting and disclosures provide accurate and comprehensive information relative to the current economic and business
environment. Ace's significant accounting policies are described in the accompanying Notes to Consolidated Financial
Statements. The following represents those critical accounting policies which involve a relatively higher degree of judgment,
estimates, and complexity and where materially different amounts could be reported under different conditions or using
different assumptions.

        Valuation of Inventories

        When necessary, Ace provides allowances to adjust the carrying value of inventories to the lower of cost or market,
        including costs to sell or dispose of surplus or damaged/obsolete inventory, and for estimated shrinkage. Estimates for the
        future demand for Ace's products are key factors used by management in assessing the net realizable value of the
        inventories. While management believes that the estimates used are appropriate, an unanticipated decline in sales at retail
        outlets or a significant decline in demand for products in selected product categories, could result in valuation
        adjustments.

        Allowance for Doubtful Accounts

        The allowance for doubtful accounts reflects management's estimate of the future amount of receivables that will not be
        collected. Management records allowances for doubtful accounts based on judgements made considering a number of
        factors, including historical collection statistics, current dealer credit information, the aging of receivables, the current
        economic environment and the offsetting amounts due to members for stock, notes, interest and declared and unpaid
        dividends. While Ace believes it has appropriately considered known or expected outcomes, its dealers' ability to pay
        their obligations, including those to Ace, could be adversely affected by declining sales of hardware at retail resulting
        from such factors as contraction in the economy or competitive conditions in the wholesale and retail hardware
        industry including increased competition from discount stores, chain stores and other mass merchandisers.

Impact of New Accounting Standards

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The statement retains the previously existing accounting requirements related to the recognition and
measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of
long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is
classified as held for sale. The Company applied this statement in accounting and reporting the disposal of Ace's Canadian
operations as a discontinued operation.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at
the date of commitment to an exit or disposal plan. Ace is required to adopt the provisions of SFAS No. 146 prospectively for
exit or disposal activities initiated after December 31, 2002 and does not expect the implementation of this standard to have a
material effect on the consolidated financial statements.

        In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others". This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of
the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's
financial statements. The Company has applied the disclosure requirements of this interpretation, which were effective for
financial statements of interim or annual periods ending after December 15, 2002.

Inflation and Changes in Prices

        Ace's business is not generally governed by contracts that establish prices substantially in advance of the receipt of goods
or services. As vendors increase their prices for merchandise supplied to Ace, Ace increases the price to its dealers in an equal
amount plus the normal handling charge on such amounts. In the past, these increases have provided adequate gross profit to
offset the impact of inflation on operating expenses.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

        Ace is subject to certain market risks, including foreign currency and interest rates. Ace uses a variety of practices to
manage these market risks, including, when considered appropriate, derivative financial instruments. Ace uses derivative
financial instruments only for risk management and does not use them for trading or speculative purposes. Ace is exposed to
potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign
currencies. Ace's primary exposure is to changes in exchange rates for the U.S. dollar versus the Canadian dollar.

        Interest rate risk is managed through a combination of fixed rate debt and variable rate short-term borrowings with
varying maturities. At December 28, 2002, all long-term debt was issued at fixed rates.

        The table below presents principal amounts and related weighted average interest rates by year of maturity for Ace's
investments and debt obligations:

                                                          2003        2004        2005        2006        2007        Thereafter        Total
(000's omitted)
Assets:
    Short-term investment-
          fixed rate                                  $   -           $ 1,019        $, 251        $  630          $ 6,712            $11,735          $20,347
    Fixed interest rate                              -%          5.75%        2.65%        5.73%            5.73%              6.05%                5.75% Liabilities:
    Short-term borrowings-
          variable rate                             $ 48,900             -                  -                  -                  -                      -                    $48,900
    Average variable interest rate        1.94%             -                  -                  -                  -                      -               1.94%
    Long-term debt-fixed rate            $ 5,647       $ 5,454       $12,882     $17,882        $17,857          $109,000     $168,722
    Average fixed interest rate              7.16%        7.18%         7.18%       7.18%         7.21%               7.24%                7.16%

        Ace is exposed to credit risk on certain assets, primarily accounts receivable. Ace provides credit to customers in the
ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising Ace's customer base. Ace currently believes its
allowance for doubtful accounts is sufficient to cover customer credit risks.

        Ace's various currency exposures often offset each other, providing a natural hedge against currency risk. Ace has
utilized foreign exchange forward contracts to hedge non-U.S. equity investments. Gains and losses on these foreign currency
hedges are included in the basis of the underlying hedged investment. Ace did not have any outstanding foreign exchange
forward contracts at December 28, 2002 or December 29, 2001. Settlement of foreign sales and purchases are generally
denominated in U.S. currency resulting in limited foreign currency transaction exposure.

Item 8. Financial Statements and Supplementary Data

        Financial statements covered by the report of the Company's independent certified public accountants are listed on Page
F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

        None.

PART III

Item 10. Directors and Executive Officers of the Company

        Our directors and executive officers are:
                                                                                                                  Position(s) Currently Held
           Name                                  Age              and Business Experience (for the past 5 years)
        Jimmy Alexander                                    45              Vice President, Human Resources effective October 1, 2001;
                                                                                            General Merchandise Manager effective July 16, 1999; Merchandise
                                                                                            Manager effective November 1, 1997.
        Michael J. Altendorf                              45              Vice President, Information Technology effective January, 2001;
                                                                                            Director of Retail Technology effective January, 1999; Manager of
                                                                                            Administrative Services effective April, 1996.
        Richard F. Baalmann, Jr.                        43              Director since June, 1999; term expires 2005; President of Homart,
                                                                                            Inc., Centralia, Illinois since May, 1988.
        William J. Bauman                                  54             Vice President, Retail Support-West effective October, 1998;
                                                                                            Western Divisional Director of Retail Support effective October, 1994.
        Eric R. Bibens II                                      46             Director since June, 1997; term expires 2003; President of Bibens
                                                                                            Home Center, Inc., Springfield, Vermont since 1983.
        Michael C. Bodzewski                           53              Vice President, Marketing, Advertising, Retail Development and
                                                                                            Company Stores effective October, 2000; Vice President -
                                                                                            Marketing, Advertising and Retail Operations East effective
                                                                                            October, 1999; Vice President - Sales and Marketing effective
                                                                                            October, 1998; Vice President - Merchandising effective June,
                                                                                            1990.
        Lori L. Bossmann                           42              Vice President, Merchandising effective October, 2000; Vice
                                                                                            President - Finance effective October 1999; Vice President -
                                                                                            Controller effective September, 1997; Controller effective January,
                                                                                            1994.
        J. Thomas Glenn                                     44              Director since June, 1996; term expires 2005; President of Ace
                                                                                            Hardware of Chattanooga, Chattanooga, Tennessee since January,
                                                                                            1990.
        Ray A. Griffith                                         49             Executive Vice President, Retail effective October, 2000; Vice
                                                                                            President - Merchandising effective October, 1998; Vice President
                                                                                            Retail Development and Marketing effective September, 1997;
                                                                                            Director - Retail Operations, Western Division effective September,
                                                                                            1994.
        Daniel L. Gust                                          53             Director since June, 1998; term expires 2004; President of Garden
                                                                                            Acres Ace Hardware, Longmont, Colorado since January, 1991.
        D. William Hagan                                    45             Director since June, 1997; term expires 2003; President of Hagan
                                                                                            Ace Hardware, Orange Park, Florida since February, 1980.
        David F. Hodnik                                      55             President and Chief Executive Officer effective January, 1996;
                                                                                            President and Chief Operating Officer effective January 1, 1995.
        Paul M. Ingevaldson                              57             Senior Vice President - International and Technology effective
                                                                                            September, 1997; Vice President - Corporate Strategy and International
                                                                                            Business effective September, 1992.
        Howard J. Jung                                        55             Chairman of the Board and Director since June, 1998; term expires
                                                                                            2003; Vice President of Ace Hardware Stores, Inc., Raleigh, North
                                                                                            Carolina since June, 1997.
        Rita D. Kahle                                            46             Executive Vice President effective October, 2000; Senior Vice President
                                                                                            - - Wholesale effective September, 1997; Vice President - Finance
                                                                                            effective January, 1994.
        Richard A. Karp                                       51             Director since June, 2000; term expires 2003; President, Cole Hardware,
                                                                                            San Francisco, California since June, 1979.
        Ronald J. Knutson                                   39            Vice President, Controller effective January 1, 2003; Controller
                                                                                            effective January 1, 2000; Assistant Controller effective May 15, 1996.
        David F. Myer                                          57             Senior Vice President, Retail Support and Logistics effective October,
                                                                                            2000; Vice President - Retail Support effective September, 1997; Vice
                                                                                            President - Retail Support and New Business effective October, 1994.
        Kenneth L. Nichols                                 54            Vice President, Retail Operations effective October, 2000; Vice
                                                                                            President - Retail Operations West effective October, 1999; Vice
                                                                                            President - New Business effective October, 1998; Director - Retail
                                                                                            Operations, Eastern Division effective October, 1994.
        Daniel C. Prochaska                                45            Vice President, Retail Support-East effective November, 1998;
                                                                                            National Director of Distribution effective March, 1996.
        Jeffrey M. Schulein                                 61             Director since June, 2002; term expires 2005; Chief Executive Officer
                                                                                            of Crown Hardware, Inc., Huntington Beach, California since
                                                                                            November, 2000; President from October, 1975 to October, 2000.
        Richard W. Stine                                     57             Director since June, 1999; term expires 2005; Vice President of Stine,
                                                                                            Inc., Sulphur, Louisiana since September, 1976.
        David S. Ziegler                                       47             Director since June, 2001; term expires 2004; Vice President of Z
                                                                                            Hardware Company, Elgin, Illinois since February, 1979.

        Our By-laws provide that our Board shall have between 9 and 12 directors. A minimum of 9 directors must be dealer
directors. A maximum of two directors may be non-dealer directors. Non-dealer directors cannot exceed 25% of the total
number of directors in office at any one time. Non-dealer directors may (but do not have to) be shareholders of ours who are
in the retail hardware business. Our By-laws provide for three classes of directors who are to be elected for staggered 3-year
terms, except that one director who would not otherwise be eligible for reelection in 2001 was elected at the 2001 annual
meeting of stockholders for a two year term under Article IV, Sections 1 through 3 of our By-laws. On January 23, 2001, the
Board of Directors passed a resolution reducing the number of directors from eleven to ten effective with the 2001 Annual
Stockholders meeting on June 4, 2001.

        Our By-laws also provide that no one can serve as a dealer director unless that person is an owner, executive officer,
general partner or general manager of a retail business organization that is a shareholder of ours. Regional dealer directors are
elected from geographic regions of the United States. The Board under Article IV, Section 1 of our By-laws, determines these
regions. If the Board finds that regional dealer directors represent all regions, then dealer directors at large may be elected, so
long as the maximum number of directors allowed under our By-laws is not exceeded.

        A geographic breakdown of our current regions for the election of directors at our 2003 annual stockholders meeting to
be held on June 2, 2003 appears below:

        Region 1 - Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania,
New Jersey;

        Region 2 - Delaware, Maryland, Virginia, West Virginia, Kentucky, Tennessee, North Carolina, South Carolina,
District of Columbia, Ohio;

        Region 3 - Alabama, Mississippi, Georgia, Florida;

        Region 4 - Indiana, Illinois, Michigan, Wisconsin;

        Region 5 - Colorado, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota,
Utah, Wyoming;

        Region 6 - Arkansas, Louisiana, Oklahoma, Texas, New Mexico, Arizona;

        Region 7 - Hawaii, California, Nevada, Oregon, Washington, Alaska

        Under the procedure required by our By-laws, the following directors have been selected as nominees for reelection as
dealer directors at the 2003 annual stockholders meeting:

Nominee     Age     Class     Region    Term
Eric R. Bibens II                                                                                                       46            First               1            3 years
D. William Hagan                                                                                                     45           First               3            3 years
Richard A. Karp                                                                                                       51            First        At large      3 years

The person named below has been selected as a nominee for election to the Board for the first time at the 2003 annual
meeting as a dealer director of the class, from the region and for the term indicated:

Nominee      Age      Class     Region    Term
Lori J. Terpstra                                                                                                          37           First        At large      3 years

        Non-dealer directors and dealer directors at large are not elected from particular geographic regions.

        Article IV of our By-laws has information about the qualifications for membership on the Board of Directors, the terms
of directors, the limitations on the total period of time that a director may hold office, the procedure for the Nominating
Committee to select candidates and nominees for election to the Board of Directors and the procedure for filling vacancies on
the Board if one occurs during an unexpired term.

        None of the events described under Item 401(f) of Regulation S-K occurred during the past 5 years for any of our
directors, nominees for directorships or for any of our executive or staff officers.

Item 11. Executive Compensation

        Below is information about the cash compensation that we paid to our five highest paid executive officers earning over
$100,000 for their services in all capacities to us and our subsidiaries during fiscal years 2002, 2001 and 2000:

SUMMARY COMPENSATION TABLE
Long-Term
                                                                    Annual Compensation                            Compensation
      Name                                                                                                                                                                    &nbs p;             (3)
        and                                                                                                                                                   (2)                      All Other
    Principal                                                                                                             (1)                   Long-Term               Compen-
  Position                                  Year            Salary ($)            Bonus ($)         Payouts ($)           sation ($)

David F. Hodnik                                     2002                  $665,000                   $79,800                $505,593                     $117,032
President and Chief                               2001                    649,000                   103,840                  531,474                       102,627
Executive Officer                                    2000                    630,000    56,700                  533,829                      116,587

Rita D. Kahle                                           2002                   $327,000                 $165,080                $95,392                       $52,570
Executive Vice President                       2001                     313,000                   121,280                  99,843                         43,985
                                                                  2000                     298,000                   103,704                   85,921                        51,302

Paul M. Ingevaldson                             2002                   $305,000                 $128,100                $94,434                       $48,098
Senior Vice President,                           2001                     305,000                     72,800                 100,779                        39,953
International and Technology             2000                     295,000                     85,550  89,479                         51,495

Ray A. Griffith                                        2002                    $295,000                $143,100                 $73,736                      $44,432
Executive Vice President                       2001                     275,000                    97,300                   72,180                        34,961
Retail                                                        2000                     250,000                    76,250                   39,563  33,026

David F. Myer                                         2002                   $290,000                $130,500                 $83,681                       $45,340
Senior Vice President,                            2001                     278,000                  102,980                   86,382                         38,007
Retail Support and Logistics                2000                     263,000                    80,215                    73,967                        42,843

(1)    The Officer Incentive Plan covers each of the executive officers. Mr. Hodnik participates only in the retail sales
        component of the Officer Incentive Plan. The bonus amounts awarded to participants in the Plan are determined in
        accordance with achievement of individual performance based objectives and achievement of corporate goals. The
        maximum short-term incentive award for each executive officer is 35% to 45% of their respective salary in 2000, 2001
        and 2002. The short-term bonus award becomes payable to each participant as early as practicable at or after the end of
        the fiscal year.

(2)    Includes the long-term incentive award under the Long-Term Incentive Compensation Deferral Option Plan effective in
        1995. The long-term Officer incentive plan is based upon corporate performance over a three year period with emphasis
        on total shareholder return through maximizing both year-end patronage dividends and upfront dividends (throughout
        the year) through pricing programs and discounts. This plan maintains the commitment to long-term performance and
        shareholder return in a cooperative environment. One third of the total long-term incentive award is subject to a one year
        vesting provision.

        Effective January 1, 1995, executive officers may elect to defer a portion (20% to 100%, in 20% increments) of the
        annual award granted. Participants' compensation deferrals are credited with a specified rate of interest to provide a
        means to accumulate supplemental retirement benefits. Deferred benefits are payable over a period of 5 to 20 years.
        Annual elections are required for the upcoming deferral year by December of the preceding year. Total long-term
        incentives for the three year period ended in 2002, to be awarded in 2003, were $465,467, $84,269, $104,189, $77,378
        and $124,774 for Messrs. Hodnik, Ingevaldson, Griffith, Myer and Ms. Kahle, respectively.

(3)    Includes contributions to the Company's 401-k Savings and Retirement Plan and contributions to the Company's
        Retirement Benefits Replacement Plan. All active employees are eligible to participate in the Company's 401-k Savings
        and Retirement Plan after 90 days of service. Those active employees covered by a collective bargaining agreement
        regarding retirement benefits, which were the subject of good faith bargaining, are not eligible if such agreement does
        not include them in the plan. For the year 2002, the Company contributed a maximum of 9.9% of each participant's
        eligible compensation to the 401-k Savings and Retirement Plan (8.9% profit sharing and 1% Company 401-k match).
        During the year 2002, $19,800 was contributed to the Company's 401-k Savings and Retirement Plan by the Company
        pursuant to the Plan for each of Messrs. Hodnik, Ingevaldson, Griffith, Myer and Ms. Kahle.

        The Company has also established a Retirement Benefits Replacement Plan covering all executive officers of the
        Company. This is an unfunded Plan under which the participants therein are eligible to receive retirement benefits equal
        to the amounts by which the benefits they would otherwise have been entitled to receive under the Company's 401-k
        Savings and Retirement Plan may be reduced by reason of the limitations on contributions and benefits imposed by any
        current or future provisions of the U.S. Internal Revenue Code or other federal legislation. During the year 2002,
        amounts contributed to the Company's Retirement Benefits Replacement Plan were $97,232 for Mr. Hodnik, $28,298 for
        Mr. Ingevaldson, $24,632 for Mr. Griffith, $25,540 for Mr. Myer and $32,770 for Ms. Kahle.

        The Company also funds the base premium for a supplemental universal life insurance policy for each officer but does
        not contribute to supplemental retirement benefits through this vehicle. Participants may elect to deposit a portion (up to
        one-third) of the long-term incentive award into the variable annuity insurance policy in their name or may elect to defer
        this portion under the Deferral Option Plan.

(4)    As a cooperative whereby all stockholders are member dealers, the Company does not grant or issue stock awards of any
        kind.

        Messrs. Hodnik and Ingevaldson are employed under contracts, each commencing January 1, 2003 for respective terms
of two years, through December 31, 2004. Ms. Kahle and Mr. Myer are employed under contracts, each commencing January
1, 2002 for respective terms of two years, through December 31, 2003. Mr. Griffith is employed under a contract
commencing September 1, 2002 for a term of two years, terminating August 31, 2004. The contracts provide for annual
compensation effective January 1, 2003 of $692,000, $318,000, $347,000, $305,000 and $322,000, respectively, or such
increased amount, if any, as shall be approved by the Board of Directors. If an executive's employment is terminated without
cause, each contract provides for continuing salary payments for the balance of the current contract term, with the minimum
period for these payments being 6 months (12 months in the case of Mr. Hodnik).

        The Company also maintained a Pension Plan which was established December 31, 1970. The Plan was closed to new
entrants on December 31, 1995. Pension Plan benefit accruals were frozen as of February 29, 2000. The Company terminated
the Pension Plan effective April 30, 2000. All active employees were eligible to participate in this Plan on the first January 1
that they were working for the Company. Those active employees covered by a collective bargaining agreement regarding
retirement benefits which were the subject of good faith bargaining were not eligible if such agreement did not include them
in the plan. The Plan provided benefits at retirement at or after age 65 determined under a formula which took into account
60% of a participant's average base pay (including overtime) during the 5 highest consecutive calendar years of employment
and years of service prior to age 65, and under which an offset was applied for the straight life annuity equivalent of the
vested portion of the participant in the amount of benefits provided for them by the Company under the Profit Sharing Plan.

        Examples of yearly benefits provided by the Pension Plan (prior to reduction by the Profit Sharing Plan offset) were as
follows:

    Years of Service
Remuneration                                       10              15              20              25              30 or more
$200,000                                                             $40,000           $60,000          $80,000         $100,000                $120,000
$170,000                                                               34,000             51,000            68,000             85,000                  102,000
$150,000                                                               30,000             45,000            60,000             75,000                    90,000
$100,000                                                               20,000             30,000            40,000             50,000                    60,000
$  50,000                                                               10,000             15,000            20,000             25,000                    30,000

        The amounts shown above represent straight life annuity amounts. Maximum benefits from the Pension Plan were
attained after 30 years of service and attainment of age 65. The compensation covered by the Pension Plan consisted of base
compensation (exclusive of bonuses and non-recurring salary or wage payments) not to exceed $200,000 of such total
remuneration paid to a participant during any plan year. Remuneration and yearly benefits under the Plan were limited, and
subject to adjustment, under Sections 415(d) and 401(a)17 of the U.S. Internal Revenue Code. The amount of covered
compensation under the Pension Plan, therefore was $200,000 for each Executive Officer named in the Compensation table.
Upon termination of the plan, the credited years of service under the Pension Plan for the currently employed executive
officers named in the compensation table were as follows: David F. Hodnik - 27 years; Paul M. Ingevaldson - 20 years; Ray
A. Griffith - 6 years; David F. Myer - 18 years and Rita D. Kahle - 14 years.

Compensation Committee Report

        The Compensation Committee is responsible for approving the compensation programs, plans and guidelines for all
Corporate and Company Officers, and administering the Company's Executive Incentive Plans. Our decisions are based on
our understanding of Ace's business and its long-term strategies, as well as our knowledge of the capabilities and performance
of the Company and of the executives. We stress long-term measured results, focus on team work, accepting prudent risks
and are strongly committed to fulfilling retailer and consumer needs.

        We believe that our retailers (shareholders) are best served by running the Company with a long-term perspective while
striving to deliver consistently good year-end results. Therefore, the Company's Executive Compensation Program and
Officer Incentive Plan has been designed to attract, retain and reward superior talent that will produce positive results and
enhance Ace's position in the highly competitive hardware and home improvement marketplace. The Company is led by
exceptional leaders, many of them long-term Ace team members; while others bring experiences from outside Ace.

        We believe the compensation for our executives should be competitive with other high performing retail companies in
order to motivate and retain the talent needed to produce superior results. In that regard, our Committee conducts an overall
review of compensation programs and philosophies bi-annually. We review information supplied by an independent
Compensation consultant and other marketplace data to determine the competitiveness of Ace's total compensation package.

        The Committee believes that special leadership competencies and sensitivities are required to balance the unique
relationship between and among the Company, its employees, retailers and vendors. Therefore, we go beyond a simple
evaluation of competitive salary information and Company financial results in making compensation decisions.

        Our Committee annually establishes an executive's base salary, based on evaluation of the executive's level of
responsibility and individual performance considered in light of competitive pay practices. We gage Executive performance in
developing and executing corporate strategies; leading and developing people; initiating and leading change; passion for retail
success; balancing the many relationships within and outside the Ace family; and leading and coordinating with others,
programs which impact Company and retailer performance.

        Under the Officer Incentive Plan each officer is assigned an incentive target percent at the beginning of the year (the
greater the Officer's responsibility, the higher the target percent is of base salary). This plan has individual, team and retail
sales components. This concept is used to reflect the accomplishments of each Officer's functional organization results,
overall Company wholesale performance and retail sales growth compared to the competition.

        Consistent with our focus on long-term objectives, our long-term incentive plan is based on total corporate world-wide
performance. A three-year performance cycle is established each year with Officers receiving an award if minimum pre-
determined (by the Compensation Committee) performance goals are achieved at the end of each annual cycle. As a pay for
performance plan, the long-term incentive plan is intended to motivate and reward executives by directly linking the amount
of any award to specific long-term corporate financial goals and total team performance. There is a direct shared relationship
between what a retail owner receives in patronage rebate and what the Officer group receives as an award pool.

        The President and CEO participates in the base salary, Retail Sales Incentive and Long-Term Incentive Plan
compensation programs described in this report consistent with our compensation philosophy. At risk compensation
represents a major portion of the President and CEO's total compensation package. The President and CEO's compensation
includes a competitive base salary, a significant long-term incentive award to maintain our commitment to long-term company
performance and shareholder return and a retail sales award.

Compensation of Directors

        Effective January 1, 2002, each member of the Board of Directors (other than the Chairman of the Board) received a
monthly fee of $3,083 for their services, which was increased to $3,208 per month effective January 1, 2003. Each member of
the Board of Directors (other than the Chairman of the Board) also receives $1,500 per Board of Directors meeting attended.
In addition, each Board of Director Committee Chairperson receives $1,000 per meeting chaired. Mr. Jung is paid an annual
fee of $155,000 in his capacity as Chairman of the Board. 

        The Company has adopted a Directors' Deferral Option Plan. Like the Officers' Long-Term Incentive Compensation
Deferral Option Plan, under this Directors' Plan, directors may elect to defer a portion (5% to 100%, in 5% increments) of
their annual director's fee. Deferred benefits are payable over a period of 5 to 20 years, as elected. Annual elections are
required for the upcoming deferral year by December 15 of the preceding year.

        Each member of the Board is also reimbursed for the amount of travel and lodging expenses incurred in attending
meetings of the Board and of the Committees of the Board. The expenses incurred by them in attending the semi-annual
conventions and exhibits which the Company sponsors are also paid by the Company. Each member of the Board is also paid
$300 per diem compensation for special committee meetings and nominating committee regional trips attended.

Item 12. Security Ownership of Certain Beneficial Owners and Management

        No shares of our stock are held by any of our officers except for the shares held by Mr. Jung. He is a director, but his
position as Chairman of the Board is also an executive officer position under Article VIII Section 1 of our By-laws. We are
not aware of anyone who holds more than five percent of our outstanding voting stock, whether in their own names, or on
behalf of someone else.

        The table below shows the shares of our Class B and Class C Stock that is held (directly or indirectly), by our directors,
officers and nominees for directorships as of February 17, 2003:

    Class B Stock Owned     Class C Stock Owned
                                                                                                                    Number        Percent          Number        Percent
                                                                                                                   of Shares    of Class  of Shares     of Class

Richard F. Baalmann, Jr.                                                                                 4               ..207                   3,919               ..146
Eric R. Bibens II                                                                                               - -                     - -                   1,353               ..050
J. Thomas Glenn                                                                                              4               ..207                 11,672               ..435
Daniel L. Gust                                                                                                   - -                     - -                      661               ..025
D. William Hagan                                                                                            4                ..207                  4,148               ..155
Howard J. Jung                                                                                                - -                      - -                     815               ..030
Richard A. Karp                                                                                               - -                      - -                  5,425               ..202
Jeffrey M. Schulein                                                                                         - -                      - -                10,211               ..380
Richard W. Stine                                                                                             4                ..207                11,109               ..414
Lori J. Terpstra                                                                                                 - -                     - -                      811               .030
David S. Ziegler                                                                                               -                     -                 10,044               .374  
All above directors and officer as a group                                                16                 .828               60,168             2.241
                                                                                                                     ======         ======       =======         ====== 

    We are not aware of any contracts or securities pledges that may result in a change in control of our Company at a later
date.

Item 13. Certain Relationships and Related Transactions

        The term "owner" as used in this section pertains to owners of our shares. It includes both those who are named as
owners of shares on our corporate books and records, as well as those who are not named as owners of record, but for whose
benefit someone else is holding the shares. No director, executive officer or shareholder whom we know to be the owner of
more than five percent of any class of our voting securities or any member of their immediate families had during fiscal year
2002 or is currently expected to have any significant interest (whether direct or indirect) in any transaction over $60,000 with
us, except that those of our directors who are also Ace Hardware dealers purchased merchandise and services from us and
participated in our programs for their stores, including but not limited to our lending programs, in the ordinary course of
business. None of these directors received special terms in connection with these transactions (including, but not limited to
our lending programs) or any benefits that were not available to the other cooperative members that we supply.

Item 14. Controls and Procedures

        Our Chief Executive Officer and Principal Financial Officer have concluded, based on their evaluation within 90 days of
the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing
the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been
no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to
the date of the previously mentioned evaluation.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
    (a)    1.    Financial Statements
                    The financial statements listed in the accompanying index (page F-1) to the consolidated financial statements are
                    filed as part of this annual report.
             2.    Financial Statement Schedules
                    None.
             3.    Exhibits
                    The exhibits listed on the accompanying index to exhibits (pages E-1 through E-6) are filed as part of this annual
                    report.
    (b)    Reports on Form 8-K
            A Form 8-K was filed on October 23, 2002 reporting under Item 5: A letter of intent entered into by Ace Hardware
            Corporation to sell all issued and outstanding shares of its wholly-owned subsidiary Ace Hardware Canada, Limited.

                                                                                                    SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

                                                                                                                ACE HARDWARE CORPORATION

                                                                                                                By                HOWARD J. JUNG                   
                                                                                                                                        Howard J. Jung
                                                                                                                        Chairman of the Board and Director
DATED: March 24, 2003

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

                                    Signature                                                                  Title                                                Date


                            HOWARD J. JUNG                                        Chairman of the Board                         March 24, 2003
                                Howard J. Jung                                                    and Director


                            DAVID F. HODNIK                                                   President                                     March 24, 2003
                               David F. Hodnik                                        and Chief Executive Officer


                              RITA D. KAHLE                                        Executive Vice President                         March 24, 2003
                                  Rita D. Kahle                                         (Principal Financial Officer)


                        RONALD J. KNUTSON                                  Vice President, Controller                       March 24, 2003
                            Ronald J. Knutson


Richard F. Baalmann, Jr., Eric R. Bibens II,                                           Directors
J. Thomas Glenn, Daniel L. Gust, D. William
Hagan, Richard A. Karp, Jeffrey M. Schulein,
Richard W. Stine, and David S. Ziegler



*By              DAVID F. HODNIK                                                                                                                March 24, 2003
                        David F. Hodnik


*By                  RITA D. KAHLE                                                                                                                 March 24, 2003
                            Rita D. Kahle

                    *Attorneys-in-fact

                                        CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER

        I, David F. Hodnik, certify that:

                1. I have reviewed this annual report on Form 10-K of Ace Hardware Corporation;

                2. Based on my knowledge, this annual 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 annual report;

                3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

                4. The registrant's other certifying officers 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 annual 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 annual report (the "Evaluation Date"); and

                    c) presented in this annual 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 officers and I have disclosed, based on our most recent evaluation, to the
                    registrant's auditors and the audit committee of the registrant's board of directors (or persons performing
                    equivalent functions):

                    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 officers and I have indicated in this annual 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: March 24, 2003                                                                        By                             DAVID F. HODNIK                

                                                                                                                                                            David F. Hodnik
                                                                                                                                            President and Chief Executive Officer

                                            CERTIFICATION OF EXECUTIVE VICE PRESIDENT
                                                        (PRINCIPAL FINANCIAL OFFICER)

        I, Rita D. Kahle, certify that:

                1. I have reviewed this annual report on Form 10-K of Ace Hardware Corporation;

                2. Based on my knowledge, this annual 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 annual report;

                3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

                4. The registrant's other certifying officers 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 annual 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 annual report (the "Evaluation Date"); and

                    c) presented in this annual 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 officers and I have disclosed, based on our most recent evaluation, to the
                    registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
                    equivalent functions):

                    a) all significant deficiencies 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 officers and I have indicated in this annual 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: March 24, 2003                                                                      By                           RITA D. KAHLE                           

                                                                                                                                                        Rita D. Kahle
                                                                                                                                            Executive Vice President
                                                                                                                                          (Principal Financial Officer)


                                                                 INDEX TO EXHIBITS
             Exhibits
                Enclosed                                                                                      Description

10-P                   Copy of Lease dated June 19, 2002 for the Registrant's distribution center in Rocklin,
                           California.

10-a-20              Copy of Fourth Amendment to Ace Hardware Corporation Restated Officer Incentive
                           Plan adopted December 11, 2002 and effective January 1, 2003.

10-a-21              Copy of current standard form of National Supply Network Distributor Franchise
                           Agreement.

10-a-22              Copy of Ground Lease dated January 13, 2003 for lease of 82 acres of real estate in
                           Placer County, California.

10-a-23               Copy of Lease dated February 7, 2002 for the Registrant's freight consolidation center
                            in Cuyahoga  Heights, Ohio.

10-a-24               Copy of Option Agreement and Joint Escrow Instructions dated January 13, 2003 for
                            purchase of 82 acres of real estate in Placer County, California.

21                        Subsidiaries of the Registrant.

23                        Consent of KPMG LLP.

24                        Powers of Attorney.

99.1                     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
                            Sarbanes-Oxley Act of 2002.

99.2                     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
                            Sarbanes-Oxley Act of 2002.

    Exhibits
Incorporated
by Reference                                                                                      Description

3-A                  Copy of Restated Certificate of Incorporation of the Registrant, as amended through June 3,
                         1996, filed as Exhibit 3-A to Post-Effective Amendment No. 6 to the Registrant's Form S-2
                         Registration Statement (Registration No. 33-58191) on or about March 22, 2001 and
                         incorporated herein by reference.

3-B                   Copy of By-laws of the Registrant as amended through January 26, 2002 filed as Exhibit                      3-B to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) filed
   on or about March 22, 2002 and incorporated herein by reference.

4-A                  Specimen copy of Class B Stock certificate as revised as of November, 1984 filed as Exhibit
                        4-A to Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement
                        (Registration No. 2-82460) on or about March 15, 1985 and incorporated herein by reference.

4-B                  Specimen copy of Patronage Refund Certificate as revised in 1988 filed as Exhibit 4-B to
                        Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement
                        (Registration No. 33-4299) on or about March 29, 1988 and incorporated herein by reference.

4-C                  Specimen copy of Class A Stock certificate as revised in 1987 filed as Exhibit 4-C to
   Post-Effective Amendment No. 2 to the Registrant's Form S-1 Registration Statement
   (Registration No. 33-4299) on or about March 29, 1988 and incorporated herein by reference.

4-D                  Specimen copy of Class C Stock certificate filed as Exhibit 4-I to the Registrant's Form S-1
   Registration Statement (Registration No. 2-82460) on or about March 16, 1983 and
   incorporated herein by reference.

4-E                  Copy of current standard form of Subscription for Capital Stock Agreement to be used for
   dealers to subscribe for shares of the Registrant's stock in conjunction with new membership
   agreements submitted to the Registrant filed as Exhibit 4-E to the Registrant's Form S-2
   Registration Statement (Registration No. 333-84792) filed on or about March 22, 2002 and
   incorporated herein by reference.

4-F                  Copy of plan for the distribution of patronage dividends with respect to purchases of
   merchandise made from the Registrant for the year 2000 and subsequent years adopted by the
   Board of Directors of the Registrant on December 6, 2000 and filed as Exhibit 4-F to
   Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration Statement
   (Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.

4-G                  Copy of LBMRetailer Incentive Pool Plan adopted on December 8, 1999 by the Board of
                        Directors of the Registrant filed as Exhibit 4-G to Post-Effective Amendment No. 5 to the
                        Registrant's Form S-2 Registration Statement (Registration No. 33-58191) filed on or about
                        March 15, 2000 and incorporated herein by reference.

10-A            Copy of Ace Hardware Corporation Retirement Benefits Replacement Plan Restated and
                        Adopted December 7, 1993, consolidated and refiled with First, Second, Third and Fourth
   Amendments as Exhibit 10-A to the Registrant's Form S-2 Registration Statement (Registration
                        No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.

10-B                Copy of Ace Hardware Corporation Directors' Deferral Option Plan Amended and Restated as
   of January 1, 1997 (for years 1995-2001), consolidated and refiled with First and Second
   Amendments as Exhibit 10-B to the Registrant's Form S-2 Registration Statement (Registration
   No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.

10-C                Copy of First Amendment to Ace Hardware Corporation Deferred Compensation Plan adopted
   on August 19, 1997 filed as Exhibit 10-C to Post-Effective Amendment No. 3 to the Registrant's
   Form S-2 Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and
   incorporated herein by reference.

10-D                Copy of Restated PREP Plan (formerly known as Executive Supplemental Benefit Plans)
   adopted on December 6, 2000 filed as Exhibit 10-D to Post-Effective Amendment No. 6 to the
   Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
   22, 2001 and incorporated herein by reference.

10-E                Copy of Ace Hardware Corporation Restated Officer Incentive Plan effective January 1, 1999
                        consolidated and refiled with First, Second and Third Amendments as Exhibit 10-E to the
                        Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about March
                        22, 2002 and incorporated herein by reference .

10-F                Copy of Second Modification of Amended and Restated Note Purchase and Private Shelf
                        Agreement dated as of August 23, 1996 as amended by the First Modification of Amended
   and Restated Purchase and Private Shelf Agreement dated as of April 2, 1997 with The
   Prudential Insurance Company of America filed as Exhibit 10-F to Post-Effective Amendment
   No. 3 to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or
   about March 18, 1998 and incorporated herein by reference.

10-G                Copy of Participation Agreement with PNC Commercial Corp. dated December 17, 1997
   establishing a $10,000,000 discretionary leasing facility for the purchase of land and
   construction of retail hardware stores filed as Exhibit 10-G to Post-Effective Amendment No. 3
   to the Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about
   March 18, 1998 and incorporated herein by reference.

10-H                Copy of form of Executive Officer Employment Agreement effective January 1, 1996 filed as
                        Exhibit 10-a-17 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration
                        Statement (Registration No. 33-58191) filed on or about March 11, 1996 and incorporated
                        herein by reference.

10-I                Copy of Note Purchase and Private Shelf Agreement with The Prudential
                        Insurance Company of America dated September 27, 1991 securing 8.74% Senior Series A
                        Notes in the principal sum of $20,000,000 with a maturity date of July 1, 2003 filed as Exhibit
                        10-A-q to the Registrant's Form S-2 Registration Statement (Registration No. 33-46449) on or
                        about March 23, 1992 and incorporated herein by reference.

10-J                 Copy of current standard form of Ace Hardware Corporation International
   Franchise Agreement filed as Exhibit 10-J to Post-Effective Amendment No. 6 to the
   Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
   22, 2001 and incorporated herein by reference.

10-K                Copy of current standard form of Ace Hardware Membership Agreement filed as Exhibit 10-P
   to Pre-Effective Amendment No. 2 to the Registrant's Form S-2 Registration Statement
   (Registration No. 33-58191) on or about April 26, 1995 and incorporated herein by reference.

10-L                Copy of Supplement to Ace Hardware Membership Agreement effective April 1, 2000, filed as
   Exhibit 10-L to Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration
   Statement (Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by
   reference.

10-M               Copy of 6.47% Senior Series A notes in the aggregate principal sum of $30,000,000 issued
   September 22, 1993 with a maturity date of June 22, 2008 and $20,000,000 Private Shelf Facility,
   pursuant to Note Purchase and Private Shelf Agreement with the Prudential Insurance
   Company of America dated as of September 22, 1993 filed as Exhibit 10-R to Post-Effective
   Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No.
   33-46449) on or about March 23, 1994 and incorporated herein by reference.

10-N                Copy of Lease dated March 24, 1997 for print shop facility of Registrant in Downers Grove,
   Illinois filed as Exhibit 10-N to Post-Effective Amendment No. 3 to the Registrant's Form S-2
   Registration Statement (Registration No. 33-58191) on or about March 18, 1998 and
   incorporated herein by reference.

10-O                Copy of Lease dated September 30, 1992 for general offices of the Registrant in Oak Brook,
   Illinois filed as Exhibit 10-a-u to the Post-Effective Amendment No.1 to the Registrant's Form
   S-2 Registration Statement (Registration No. 33-46449) on or about March 22, 1993 and
   incorporated herein by reference.

10-P                 No exhibit incorporated by reference. See Index to Exhibits, Exhibits Enclosed for the
                        applicable materials.

10-Q                Copy of Ace Hardware Corporation Deferred Compensation Plan effective January 1, 1994
   filed as Exhibit 10-X to Post-Effective Amendment No. 2 to the Registrant's Form S-2
   Registration Statement (Registration No. 33-46449) on or about March 23, 1994 and
                        incorporated herein by reference.

10-R                Copy of current standard form of Ace Hardware Corporation License Agreement for
   international licensees filed as Exhibit 10-R to Post-Effective Amendment No. 6 to the
   Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
   22, 2001 and incorporated herein by reference.

10-S                 Copy of Lease dated May 4, 1994 for freight consolidation center of the Registrant in Chicago,
   Illinois filed as Exhibit 10-Z to the Registrant's Form S-2 Registration Statement (Registration
   No. 33-58191) on or about March 23, 1995 and incorporated herein by reference.

10-T                Copy of Long-Term Incentive Compensation Deferral Option Plan of the Registrant effective
   January 1, 2000 filed as Exhibit 10-a-13 to the Registrant's Form S-2 Registration Statement
   (Registration No. 33-58191) on or about March 15, 2000 and incorporated herein by reference.

10-U                Copy of Ace Hardware Corporation Directors' Deferral Option Plan effective January 1, 2001
   filed as Exhibit 10-U to Post-Effective Amendment No. 6 to the Registrant's Form S-2
   Registration Statement (Registration No. 33-58191) on or about March 22, 2001 and
   incorporated herein by reference.

10-V                Copy of Ace Hardware Corporation Long-Term Compensation Deferral Option Plan effective
   January 1, 1995 consolidated and refiled with First, Second and Third Amendments as Exhibit
   10-V to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or
   about March 22, 2002 and incorporated herein by reference.

10-W               Copy of Lease dated July 28, 1995 between A.H.C. Store Development Corp. and Tri-R
   Corporation for retail hardware store premises located in Yorkville, Illinois filed as Exhibit
   10-a-11 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement
   (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference.

10-X                Copy of Lease dated October 31, 1995 between Brant Trade & Industrial Park, Inc. and Ace
   Hardware Canada Limited for warehouse space in Brantford, Ontario, Canada filed as Exhibit
   10-a-12 to Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement
   (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference.

10-Y                Copy of Lease dated November 27, 1995 between 674573 Ontario Limited and Ace Hardware
   Canada Limited for general office space in Markham, Ontario, Canada filed as Exhibit 10-a-13 to
   Post-Effective Amendment No. 1 to the Registrant's Form S-2 Registration Statement
   (Registration No. 33-58191) on or about March 11, 1996 and incorporated herein by reference.

10-Z                Copy of Executive Healthcare Plan adopted by the Board of Directors of the Registrant on
   August 25, 1998 filed as Exhibit 10-Z to Post-Effective Amendment No. 4 to the Registrant's
   Form S-2 Registration Statement (Registration No.
   33-58191) on or about March 15, 1999 and incorporated herein by reference.

10-a-1              Copy of Ace Hardware Corporation Executive Benefit Security Trust Agreement effective July
   19, 1995 filed as Exhibit 10-a-18 to Post-Effective Amendment No. 1 to the Registrant's Form
   S-2 Registration Statement (Registration No. 33-58191) on or about March 11, 1996 and
   incorporated herein by reference.

10-a-2              Copy of current standard form of International Retail Merchant Agreements filed as Exhibit
   10-a-2 to Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration Statement
   (Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.

10-a-3              Copy of Lease Agreement dated as of September 1, 1996 for the Registrant's project facility in
   Wilton, New York filed as Exhibit 10-a-13 to Post-Effective Amendment No. 2 to the
   Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
   12, 1997 and incorporated herein by reference.

10-a-4              Copy of 6.47% Series A Senior Notes in the aggregate principal amount of $30,000,000 issued
   August 23, 1996 with a maturity date of June 22, 2008 and $70,000,000 Private Shelf Facility,
   pursuant to Amended and Restated Note Purchase and Private Shelf Agreement with the
   Prudential Insurance Company dated August 23, 1996 filed as Exhibit 10-a-14 to Post-Effective
   Amendment No. 2 to the Registrant's Form S-2 Registration Statement (Registration No.
   33-58191) on or about March 12, 1997 and incorporated herein by reference.

10-a-5              Copy of First Amendment to Ace Hardware Corporation Directors' Deferral Option Plan
                        (effective January 1, 2001) adopted December 5, 2001 and effective January 1, 2002 filed as
                        Exhibit 10-a-5 to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792)
                        on or about March 22, 2002 and incorporated herein by reference.

10-a-6              Copy of Lease Agreement dated May 27, 1999 for the Registrant's project facility in Loxley,
   Alabama filed as Exhibit 10-a-9 to Post-Effective Amendment No. 5 to Registrant's Form S-2
   Registration Statement (Registration No. 33-58191) on or about March 15, 2000 and
   incorporated herein by reference.

10-a-7              Copy of current standard form of Industrial Distributor Agreement filed as Exhibit 10-a-7 to the
                        Registrant's Form S-2 Registration Statement (Registration No. 333-84792) filed on or about
                        March 22, 2002 and incorporated herein by reference.

10-a-8              Copy of First Amendment to Ace Hardware Corporation Long-Term Incentive Compensation
                        Deferral Option Plan (effective January 1, 2000) adopted December 5, 2001 and effective
                        January 1, 2002 filed as Exhibit 10-a-8 to the Registrant's Form S-2 Registration Statement
                        (Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.

10-a-9              Copy of Lease dated October 19, 2001 for the Registrant's freight consolidation center in
                        Baltimore, Maryland filed as Exhibit 10-a-9 to the Registrant's Form S-2 Registration Statement
                        (Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.

10-a-10         Copy of Amendment dated April 24, 2001 to Note Purchase and Private Shelf Agreement dated
                        as of September 27, 1991, and Restated Note Purchase and Private Shelf Agreement dated as
                        of August 23, 1996 with The Prudential Insurance Company of America filed as Exhibit 10-a-10
                        to the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about
                        March 22, 2002 and incorporated herein by reference.

10-a-11            Copy of $175,000,000 Revolving Credit Facility Agreement dated as of May 2, 2000 filed as
   Exhibit 10-a-11 to Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration
   Statement (Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by
   reference.

10-a-12            Copy of Lease effective November 27, 2000 for freight consolidation center of the Registrant
   in Fort Worth, Texas filed as Exhibit 10-a-12 to Post-Effective Amendment No. 6 to the
   Registrant's Form S-2 Registration Statement (Registration No. 33-58191) on or about March
   22, 2001 and incorporated herein by reference.

10-a-13            Copy of Lease (Reference Date April 1, 2000) for the Registrant's additional general office
   space at 1220 and 1300 Kensington Rd., Oak Brook, Illinois filed as Exhibit 10-a-13 to
   Post-Effective Amendment No. 6 to the Registrant's Form S-2 Registration Statement
   (Registration No. 33-58191) on or about March 22, 2001 and incorporated herein by reference.

10-a-14            Copy of current standard form of Limited Liability Company Agreement for retail joint
   ventures filed as Exhibit 10-a-14 to Post-Effective Amendment No. 6 to the Registrant's Form
   S-2 Registration Statement (Registration No. 33-58191) on or about March 22, 2001 and
   incorporated herein by reference.

10-a-15            Copy of Amendment dated September 25, 2000 to Restated Note Purchase and Private Shelf
   Agreement dated as of August 23, 1996 with The Prudential Insurance Company of America
   filed as Exhibit 10-a-15 to Post-Effective Amendment No. 6 to the Registrant's Form S-2
   Registration Statement (Registration No. 33-58191) on or about March 22, 2001 and
   incorporated herein by reference.

10-a-16            Copy of Lease dated June 30, 2000 for the Registrant's supplemental warehouse space in
   Rocklin, California filed as Exhibit 10-a-16 to the Registrant's Form S-2 Registration Statement
                        (Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.

10-a-17            Copy of Lease dated January 16, 2002 for the Registrant's freight consolidation center in
                        Summit, Illinois filed as Exhibit 10-a-17 to the Registrant's Form S-2 Registration Statement
                        (Registration No. 333-84792) on or about March 22, 2002 and incorporated herein by reference.

10-a-18            Copy of Amendment dated September 10, 2001 to Note Purchase and Private Shelf Agreement
                        dated as of September 27, 1991, and Restated Note Purchase and Private Shelf Agreement
                        dated as of August 23, 1996 with The Prudential Insurance Company of America filed as
                        Exhibit 10-a-18 to the Registrant's Form S-2 Registration Statement (Registration No.
                        333-84792) on or about March 22, 2002 and incorporated herein by reference.

10-a-19            Copy of Note Purchase Agreement dated April 15, 2001 for the issuance and sale of up to
                        $100,000,000 of Senior Notes, under which $70,000,00 of 7.27% Senior 2001-A Notes with a
                        maturity date of April 30, 2013 have been sold to various purchasers filed as Exhibit 10-a-19 to
                        the Registrant's Form S-2 Registration Statement (Registration No. 333-84792) on or about
                        March 22, 2002 and incorporated herein by reference.

     Upon request of the Commission, we agree to furnish copies of any agreements regarding indebtedness that does not
exceed ten percent of our total assets and the assets of our subsidiaries on a consolidated basis.

        Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants which
have not Registered Securities Pursuant to Section 12 of the Act.

        As of the date of the Report mentioned above, proxy soliciting materials for our 2003 annual meeting have not been sent
to our shareholders. Copies of proxy soliciting materials will be sent to our shareholders and furnished to the Securities and
Exchange Commission at a later date.

                                 Index to Consolidated Financial Statements and Financial Statement Schedules


        Independent Auditors' Report

        Consolidated Balance Sheets at December 28, 2002 and December 29, 2001

        Consolidated Statements of Earnings and Consolidated Statements of
              Comprehensive Income for each of the years in the three-year period
              ended December 28, 2002

        Consolidated Statements of Member Dealers' Equity for each of the years in the
              three-year period ended December 28, 2002

        Consolidated Statements of Cash Flows for each of the years in the three-year
              period ended December 28, 2002

        Notes to Consolidated Financial Statements

        All schedules have been omitted because the required information is not present or is not present in amounts sufficient to
require submission of the schedule or the required information is included in the consolidated financial statements or the notes
thereto.

INDEPENDENT AUDITORS' REPORT

The Board of Directors

Ace Hardware Corporation:

        We have audited the accompanying consolidated balance sheets of Ace Hardware Corporation and subsidiaries as of
December 28, 2002 and December 29, 2001, and the related consolidated statements of earnings, comprehensive income,
member dealers' equity and cash flows for each of the years in the three-year period ended December 28, 2002. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Ace Hardware Corporation and subsidiaries as of December 28, 2002 and December 29, 2001, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 28, 2002 in conformity
with accounting principles generally accepted in the United States of America.

            KPMG LLP

Chicago, Illinois
January 27, 2003


                                        ACE HARDWARE CORPORATION

                                      CONSOLIDATED BALANCE SHEETS
                                    December 28, 2002 and December 29, 2001

                                                                ASSETS
                                                                                                                                    December 28,                December 29,
                                                                                                                                           2002                                2001        
                                                                                                                                                       (000's omitted)
Current assets:
    Cash and cash equivalents                                                                                $           21,605                   $         22,147
    Short-term investments                                                                                                   20,347                              17,158
    Receivables:
        Trade                                                                                                                            287,422                             303,367
        Other                                                                                                                              58,224                               63,435  
                                                                                                                                              345,646                             366,802 
        Less allowance for doubtful receivables                                                                  (3,194)                              (2,304)  
            Net receivables                                                                                                      342,452                              364,498
    Inventories (Note 3)                                                                                                      399,133                              404,302
    Prepaid expenses and other current assets                                                                 18,182                                16,244
    Assets of discontinued operation held for sale (Note 2)                                          10,274                                18,082  
        Total current assets                                                                                                  811,993                              842,431    
Property and equipment:
    Land                                                                                                                                  17,152                                15,466
    Buildings and improvements                                                                                      239,364                              232,015
    Warehouse equipment                                                                                                 100,683                               97,892
    Office equipment                                                                                                           115,442                             106,811
    Manufacturing equipment                                                                      16,285                                15,197
    Transportation equipment                                                                      16,328                                15,871
    Leasehold improvements                                                                       17,285                                 16,048                                                                                                         522,539                               499,300
        Less accumulated depreciation and amortization                                              (238,507)                            (213,955)  
            Net property and equipment                                                                              284,032                               285,345 
Other assets                                                                                           47,327                                41,015  
                                                                                                                                        $1,143,352                          $1,168,791
                                                                                                                                        ========                         ========

                                        See accompanying notes to consolidated financial statements.
                                      ACE HARDWARE CORPORATION

                                      CONSOLIDATED BALANCE SHEETS
                                    December 28, 2002 and December 29, 2001

                            LIABILITIES AND MEMBER DEALERS' EQUITY
                                                                                                                                    December 28,                December 29,
                                                                                                                                           2002                                2001        
                                                                                                                                                       (000's omitted) Current liabilities:
    Current installments of long-term debt (Note 5)                                               $          5,647                    $   7,151
    Short-term borrowings (Note 4)                                                                                    48,900                              72,600
    Accounts payable                                                                                                        385,750                             406,471
    Patronage dividends payable in cash (Note 6)                                                          38,687                               34,229
    Patronage refund certificates payable (Note 6)                                                         13,196                                 9,084
    Accrued expenses                                                                                                          86,747                               78,843
    Liabilities from discontinued operation held for sale (Note 2)                                  6,799                                 3,739  
        Total current liabilities                                                                                              585,726                             612,117
Long-term debt (Note 5)                                                                                                  163,075                             170,387
Patronage refund certificates payable (Note 6)                                                             83,820                                77,401
Other long-term liabilities                                                                                                  30,709                               27,184  
        Total liabilities                                                                                                           863,330                             887,089  
Member dealers' equity (Notes 6 and 9):
    Class A Stock of $1,000 par value                                                                                3,617                                   3,693
    Class B Stock of $1,000 par value                                                                                 6,499                                   6,499
    Class C Stock of $100 par value                                                                                269,612                               260,224
    Class C Stock of $100 par value, issuable to dealers for
          patronage dividends                                                                                               26,053                                 23,284
    Additional stock subscribed, net                                                                                     243                                      303
    Retained deficit                                                                                                            (31,080)                                (17,591)
    Contributed capital                                                                                                        13,485                                  13,485
    Accumulated other comprehensive income                                                   703                                       587
                                                                                                                                            289,132   290,484
    Less: Treasury stock, at cost   (9,110)                                 (8,782)
        Total member dealers' equity                                                                                  280,022                                281,702  
Commitments (Notes 7 and 11)                                                                                                                                                       
                                                                                                                                        $1,143,352                           $1,168,791
                                                                                                                                        =========                        ========

                                        See accompanying notes to consolidated financial statements.
                                      ACE HARDWARE CORPORATION

                            CONSOLIDATED STATEMENTS OF EARNINGSYear Ended                                               
                                                                                                    December 28,                December 29,                December 30,
                                                                                                           2002                                2001                                2000         
                                                                                                                                             (000's omitted)
Net sales                                                                                         $3,029,097                      $2,923,882                      $2,924,187
Cost of sales                                                                                    2,742,201                        2,641,840                        2,649,211
    Gross profit                                                                                    286,896                            282,042                           274,976    
Operating expenses:
    Distribution operations   54,346   59,333   56,318
    Selling, general and administrative   60,637   57,160   58,277
    Retail success and development   67,893   67,280   72,069     Total operating expenses                                                        182,876                            183,773                            186,664     
Interest expense (Note 12)                                                               (21,583)                        (23,100)                            (21,670)
Other income, net                                                                               10,055                              12,409                               14,600
Income taxes (Note 8)                                                          467                               (3,418)   (127)   
        Income from continuing operations   92,959                               84,160                               81,115    
   Discontinued operation:
            Loss from discontinued operation                                       (5,421)                            (11,091)                                (723) 
            Loss on disposal of discontinued operation                     (5,447)                                 - ---                                        - ---    
Net earnings                                                                                    $   82,091                      $      73,069                       $     80,392
                                                                                                      ============          ============              ==========
Retained earnings (deficit) at beginning of year                       $     (17,591)                   $    (5,551)                      $           594
Net earnings                                                                                            82,091                           73,069                               80,392
Patronage dividends (Note 6)                                                             (95,580)                         (85,109)                            (86,537)    
Retained deficit at end of year                                                     $     (31,080)                $     (17,591)                    $       (5,551)                                                                                                 =============            ============               ==========
                                        See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEYear Ended                                               
                                                                                                    December 28,                December 29,                December 30,
                                                                                                           2002                                2001                                2000         
                                                                                                                                             (000's omitted)
Net earnings                                                                                $        82,091                    $     73,069                       $       80,392
Foreign Currency Translation, net                                                      1,826                            (1,206)                                  (911)
Unrealized gains on securities                                                                116                                 129                                     458 Comprehensive income                                                         $   84,033                     $     71,992                       $       79,939
                                                                                                     ===========                ===========                ===========
                                        See accompanying notes to consolidated financial statements.                                       ACE HARDWARE CORPORATION

                  CONSOLIDATED STATEMENTS OF MEMBER DEALERS' EQUITY
                                                Three Years Ended December 28, 2002        (000's omitted)
Class C Stock
                                                                                                           Issuable to                                                                 Accumulated
                                                                                                           Dealers for    Additional       Retained                           Other Com-
                                                  Class A       Class B         Class C         Patronage         Stock           Earnings   Contributed       prehensive    Treasury
                                                   Stock           Stock            Stock           Dividends     Subscribed*     (deficit)        Capital         Income/(loss)      Stock         Total Balance at January 1, 2000               $3,856         $6,499         $241,226    $21,648          $498              $594          $13,485          $     -            $(8,134)     $279,672
Net earnings      -              -     -     -                  -       80,392       -                      -               -            80,392 Net payments on subscriptions              -                 - -                   -                     - -               1,830                - -                  -                       - -                 -               1,830
Patronage financing deductions            -              -                   -                     (158)             -                   -         -                       -                 -                (158)
Stock issued                                   234             -                 23,391           (21,490)        (1,977)               -                  -                       -              -                 158
Stock repurchased       -                -                    -                     -                   -                  -                  -                       -             (14,804)      (14,804)  
Stock retired                                   (307)            -                (14,137)               -                   -                  -                  -                       -           14,444            -
Patronage dividends issuable              -                -                 -                 24,267               -           -                  -                       -            -            24,267
Patronage dividends payable      -                -                    -                     -           -             (86,537)             -                       -               -           (86,537)
Accumulated other comprehensive income (loss)                                -            -                   -                      -              -              -                  -                    458          -                458    
Balance at December 30, 2000             3,783           6,499           250,480       24,267           351             (5,551)        13,485                 458             (8,494)  285,278
Net earnings                                        -                -                    -                        -                -             73,069            -        -       -             73,069
Net payments on subscriptions      -                -                    -                        -            1,479                -                  -           -                  -         1,479
Patronage financing deductions       -                -          -                  (1,324)              -                  -                  -                      -                  -         (1,324)
Stock issued                                   170        -                 24,202           (22,943)        (1,527)               -                  -                      -                  -                (98)
Stock repurchased      -                 -           -                      -                 -                  -                -                      -             (15,006)     (15,006)
Stock retired      (260)              -                (14,458)             -                  -                  -             -                       -              14,718            -
Patronage dividends issuable                   -           -                     -          23,284              -                 -                  -                      -                -           23,284
Patronage dividends payable       -                -             -                      -           -            (85,109)         -                      -                -         (85,109)
Accumulated other comprehensive
income (loss)     -                -          -                       -                 -                 -                   -                    129             -              129      Balance at December 29, 2001           3,693            6,499            260,224            23,284        303          (17,591)        13,485                  587            (8,782)  281,702
Net earnings                                         -                 -                    -                        -           -             82,091           -                       -           -        82,091
Net payments on subscriptions             -                  -                    -                        -           1,322           -                  -                       -         -        1,322
Patronage financing deductions     -                  -                    -                        -          -                  -                  -                       -                  -              -
Stock issued      171             -                 24,495           (23,284)      (1,382)               -                  -                       -                  -               -
Stock repurchased       -                  -          -                        -           -           -                 -                       -            (15,682)     (15,682)
Stock retired       (247)               -          (15,107)                  -                -                  -                 -                      -          15,354           -
Patronage dividends issuable      -                 -                    -                   26,053             -             -                 -                       -                -          26,053
Patronage dividends payable                     -                 -                    -           -           -           (95,580)              -                       -                   -         (95,580)
Accumulated other comprehensive
    income (loss)       -              -                    -                        -                -                  -                  -                    116               -          116    
Balance at December 28, 2002             $3,617          $6,499         $269,612             $26,053        $243         $(31,080)        $13,485           $703           $(9,110)    $280,022

*Additional stock subscribed is comprised of the following amounts at December 30, 2000, December 29, 2001 and December 28, 2002:

2000        2001        2002
                        Class A Stock                                                  $    41        $   94        $    40
                        Class B Stock                                                          -               -                 -
                        Class C Stock                                                        975          977            874                                                                                                         1016         1071           914
                        Less unpaid portion                                            665           768            671 
                                                                                                   $   351       $  303        $  243
                                                                                                   =====      =====      ===== 
                                        See accompanying notes to consolidated financial statements
                                      ACE HARDWARE CORPORATION

                          CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended                                               
                                                                                                        December 28,                December 29,                December 30,
                                                                                                               2002                                2001                                2000         
                                                                                                                                             (000's omitted) Operating Activities:
Income from continuing operations                                            $        92,959                    $   84,160   $   81,115
Adjustments to reconcile income from continuing
    operations to net cash provided by operating activities:
   Depreciation and amortization   31,659   28,295   30,930
        Gain on sale of property and equipment,
           net of deferred taxes of $1,681   -   (3,264)   -
        Decrease (increase) in accounts receivable, net   22,046   (1,812)   (3,778)
        Decrease (increase) in inventories                                       5,169                          (24,852)   (26,540)
        Increase in prepaid expenses and
           other current assets   (2,090)   (1,724)   (1,519)
        Decrease in accounts payable and accrued expenses               (12,817)   (20,899)                              (5,032)
        Increase in other long-term liabilities   3,525   2,261   2,523                Net Cash Provided by Operating Activities                      140,451                              62,165                               77,699 
Investing Activities:
    Purchase of short-term investments   (3,189)   (4,386)   (12,772)
        Purchase of property and equipment   (30,194)   (51,430)   (44,649)
        Proceeds from sale of property and equipment   -   -   9,664
     Increase in other assets                                                                     (6,196)                                  (23)                           (10,831)                 Net Cash Used in Investing Activities                                (39,579)                           (55,839)                             (58,588) 
Financing Activities:
     Proceeds (payments) of short-term borrowings                           (23,700)   (8,900)                               33,501
Proceeds from issuance of long-term debt                                         -   70,000                                    - -
        Payments on long-term debt   (8,816)   (5,174)   (3,001)
        Payment of cash portion of patronage dividend   (34,229)   (34,764)   (38,173)
        Payments of patronage refund certificates and
            patronage financing deductions   (20,309)   (15,713)   (9,956)
        Proceeds from sale of common stock   1,322   1,479   1,830
        Repurchase of common stock   (15,682)   (15,006)   (14,804)                Net Cash Used in Financing Activities                                (101,414)                          (8,078)                              (30,603)
Decrease in Cash and Cash Equivalents                                                       (542)                          (1,752)       (11,492)
Cash and Cash Equivalents at Beginning of Year                                    22,147                           23,899                                 35,391
Cash and Cash Equivalents at End of Year                              $   21,605            $   22,147                  $    23,899
                                                                                                         =============           ============                ============
                                        See accompanying notes to consolidated financial statements

                                        ACE HARDWARE CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)    Summary of Significant Accounting Policies
         (a)    The Company and Its Business
         Ace Hardware Corporation (the Company) operates as a wholesaler of hardware and related products, and manufactures
paint products. As a dealer-owned cooperative, the Company distributes substantially all of its patronage sourced earnings in
the form of patronage dividends to member dealers based on their volume of merchandise purchases.

        (b)   Cash Equivalents and Investments
          The Company considers all highly liquid investments with an original maturity of three months or less to be cash
equivalents. Short-term investments consist primarily of corporate and government agency bonds and are classified as
available for sale.

   (c)    Consolidation
         The accompanying consolidated financial statements include the accounts of the Company and subsidiaries. All
significant intercompany transactions have been eliminated. The equity method of accounting is used for the Company's 50%
or less owned affiliates over which the Company has the ability to exercise significant influence.

        (d)    Receivables
        Receivables from dealers include amounts due from the sale of merchandise and special equipment used in theoperation
of dealers' businesses. Other receivables are principally amounts due from suppliers for promotional andadvertising
allowances.

        (e)    Revenue Recognition
        The Company's policy is to recognize revenues from product sales when earned, following the guidance in SEC Staff
Accounting Bulletin ("SAB") No. 101. Specifically, revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. Revenue is not
recognized until title and risk of loss have transferred to the customer, which is upon delivery of products. Provisionsfor
returns are made for at the time the related sales are recorded, and are reflected as a reduction of sales.

        (f)    Inventories
        Inventories are valued at the lower of cost or net realizable value. Cost is determined primarily using the last-in,first-out
method.

        (g)    Property and Equipment
        Property and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance,
repairs and renewals of relatively minor items are generally charged to earnings. Significant improvements orrenewals are
capitalized.

        Depreciation expense is computed on both straight-line and acceleratedmethods based on estimated useful lives as
follows:
                                                                                                                                     Useful Life                    Principal
Years    Depreciation Method

Buildings and improvements                                                                          10-40              Straight line
Warehouse equipment                                                                                      5-10              Accelerated
Office equipment                                                                                                3-10              Various
Manufacturing equipment                                                                                3-20              Straight line
Transportation equipment                                                                                3-7                Straight line

Leasehold improvements are generally amortized on a straight-line basis over the term of the respective lease.

        (h)    Foreign Currency Translation
        Substantially all assets and liabilities of foreign operations are translated at the rate of exchange in effect at the balance
sheet date while revenues and expenses are translated at the average monthly exchange rates prevailing during the year. The
Company has utilized foreign exchange forward contracts to hedge non-U.S. equity investments. Gains and losses on these
foreign hedges are included in the basis of the underlying hedged investment. Foreign currency translation adjustments, net of
gains on foreign exchange contracts, are reflected in the accompanying Consolidated Statements of Comprehensive Income
for 2002, 2001 and 2000. The Company did not have any outstanding foreign exchange forward contracts at December 28,
2002 or December 29, 2001.

        ( i)    Financial Instruments
         The carrying value of assets and liabilities that meet the definition of a financial instrument included in the accompanying
Consolidated Balance Sheets approximate fair value.

         ( j)    Retirement Plans
         The Company has retirement plans covering substantially all non-union employees. Costs with respect to the
noncontributory pension plans are determined actuarially and consist of current costs and amounts to amortize prior service
costs and unrecognized gains and losses. The Company contribution under the profit sharing plan is determined annually by
the Board of Directors and charged to expense in the period it is earned by employees.

         (k)    Use of Estimates
         The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America 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. Actual
results could differ from those estimates. With respect to the Company's discontinued operation, actual losses could differ
from those estimates and will be reflected as adjustments in future financial statements when probable and estimable.

         (l)    Shipping and Handling Costs
         Amounts billed to customers for shipping and handling costs are included in net sales. Amounts incurred for shipping and
handling are included in cost of sales.

         (m)    Fiscal Year
         The Company's fiscal year ends on the Saturday nearest December 31st. Accordingly, 2002, 2001 and 2000 ended on
December 28, 2002, December 29, 2001 and December 30, 2000, respectively.

         (n)    Reclassifications
         Certain financial statement reclassifications have been made to prior year amounts to conform to comparable
classifications followed in 2002. During 2002, the Company reclassified as sales and cost of sales certain shipping and
handling costs that had previously been presented on a net basis within distribution operations expenses and reclassified
certain amounts within selling, general and administrative expenses to distribution operations expenses. These
reclassifications had no effect on previously reported income.

(2)    Discontinued Operations
         In August of 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144") which supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed O f " . While SFAS 144 retains many of the fundamental recognition and measurement provisions of
SFAS 121, it changes the criteria required to be met to classify an asset as held for sale. SFAS 144 also supercedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", and
among other things, broadens reporting for discontinued operations to include a component of an entity, rather than just a
segment of a business. The Company adopted SFAS 144 in 2002, and applied its provisions in reporting discontinued
operations in 2002.
         In 2002, the Company entered into an agreement to sell Ace Hardware Canada Limited, a wholly-owned subsidiary for
cash proceeds of approximately US $3.7 million and an interest bearing note of US $4.0 million. The transaction closed on
February 13, 2003, at which time the sale proceeds were received and used to repay outstanding indebtedness.
         The Company recognized a loss related to the disposal of this discontinued operation of US $5.4 million in 2002. Losses
from operations of Ace Hardware Canada Limited were US $5.4 million in 2002, US $11.1 million in 2001 and US $723,000 in 2000.
         The Company has classified the assets and liabilities of Ace Hardware Canada Limited as held for sale in the accompanying
consolidated financial statements, and reclassified the financial statement and related notes for all periods presented to display
the operating results of this business as discontinued operations. For business segment reporting purposes, Ace Hardware
Canada Limited results were previously included in the "Wholesale" segment.
     Net sales from the discontinued operation for the years 2002, 2001 and 2000 were US $24.6 million, US $27.9 million
and US $75.3 million, respectively. Total assets of the discontinued operation for the years 2002 and 2001 were US $10.3
million and US $18.1 million, respectively. Total liabilities of the discontinued operation for the 2002 and 2001 were US $6.8
million and US $3.7 million, respectively.

(3)    Inventories
         Inventories consist primarily of merchandise inventories. Substantially all of the Company's domestic inventories are
valued on the last-in, first-out (LIFO) method; the excess of replacement cost over the LIFO value of inventory was
approximately $57,295,000 and $57,809,000 at December 28, 2002 and December 29, 2001, respectively. Indirect costs,
consisting primarily of warehousing costs, are absorbed as inventory costs rather than period costs.

(4)    Short-Term Borrowings
         At December 28, 2002 the Company has available a revolving credit facility with a group of banks providing for $175.0
million in committed lines of credit and also has available $10.0 million in uncommitted lines. The facility requires the
Company to comply with various financial covenants for which the Company was in compliance at December 28, 2002 and
December 29, 2001. The facility expires on May 2, 2005. The maximum amount outstanding at any month-end during the
period was $104.4 million in 2002 and $128.0 million in 2001. The monthly weighted average borrowing levels during 2002
and 2001 were $57.3 million and $77.9 million, respectively. The interest rate under the revolving credit facility is based
upon a spread over LIBOR based upon quarterly debt to EBITDA ratios. The weighted average interest rate effective as of
December 28, 2002 and December 29, 2001 was 1.94% and 2.58%, respectively. Short- term borrowings outstanding as of
December 28, 2002 and December 29, 2001 were $48.9 million and $72.6 million, respectively. The aggregate unused line
of credit available at December 28, 2002 and December 29, 2001 was $136.1 million and $112.4 million, respectively. At
December 28, 2002 the Company had no compensating balance requirements.

(5)   Long-Term Debt
               Long-term debt is comprised of the following:
    December 28,                    December 29,
                                                                                                                                       2002                                    2001         
                                                                                                                                                    (000's omitted) Notes Payable:
    $20,000,000 due in quarterly installments of $540,500
         with interest payable quarterly at a fixed rate of 8.74% and a
         maturity date of July 1, 2003                                                                       $            1,622                        $           3,784
    $30,000,000 due in semi-annual installments of $2,000,000
         with interest payable quarterly at a fixed rate of 6.47% and a
         maturity date of June 22, 2008   22,000                                   26,000
    $20,000,000 due in quarterly installments of $714,300
         commencing September 15, 2004 with interest payable quarterly
         at a fixed rate of 7.49% and a maturity date of June 15, 2011   20,000               20,000
    $30,000,000 due in annual installments of $6,000,000
         commencing March 25, 2005 with interest payable quarterly
         at a fixed rate of 7.55% and a maturity date of March 25, 2009   30,000       30,000
    $25,000,000 due in annual installments of $5,000,000
         commencing February 9, 2006 with interest payable quarterly
         at a fixed rate of 6.61% and a maturity date of February 8, 2010   25,000           25,000
    $70,000,000 due in annual installments of $14,000,000
         commencing April 30, 2009 with interest payable semi-annually
         at a fixed rate of 7.27% and a maturity date of April 30, 2013                             70,000                                70,000
Installment notes with maturities through 2006 at a fixed rate of 6.00%     100                                     2,754                                                                                                                                                168,722                                  177,538
Less current installments                                                                                                  (5,647)                                    (7,151)                                                                                                                                  $        163,075                     $   170,387                                                                                                                               ===========                    ===========
The debt covenants on the notes payable are substantially consistent with the revolving credit facility. Aggregate
maturities of long-term debt are $5,647,000, $5,454,000, $12,882,000, $17,882,000 and $17,857,000 in 2003 through 2007,
respectively, and $109,000,000 thereafter.

(6)    Patronage Dividends and Refund Certificates Payable
The Company operates as a cooperative organization and has paid or will pay patronage dividends to member dealers on
the portion of earnings derived from business done with such dealers. Patronage dividends are allocated in proportion to the
volume of purchases by member dealers during the period. The amount of patronage dividends to be remitted in cash depends
upon the level of dividends earned by each member outlet, ranging from 20% on the total dividends under $5,000 and
increasing by 5% on total dividends for each subsequent $2,500 earned to a maximum of 40% on total dividends exceeding
$12,500. Amounts exceeding the cash portion will be distributed in the form of Class C $100 par value stock, to a maximum
based upon the current year purchase volume or $20,000 whichever is greater, and thereafter in a combination of additional
cash and patronage refund certificates having maturity dates and bearing interest as determined by the Board of Directors. A
portion of the dealer's annual patronage dividends distributed under the above plan in a form other than cash can be applied
toward payment of principal and interest on any balances outstanding for approved patronage financing programs.

        The patronage dividend composition for 2002, 2001 and 2000 follows:

   Subordinated            Class     Patronage      Total
                                                            Cash    Refund                  C      Financing                Patronage
                                                          Portion        Certificates   Stock              Deductions            Dividends                                                                                                                (000's omitted)
                 2002                               $38,687                  $20,651               $26,053                        $10,189                  $95,580
   2001                                 34,229                    18,739                 23,284                            8,857                       85,109
   2000   34,764                    18,029                 24,267                            9,477                       86,537

    Patronage dividends are allocated on a fiscal year basis with issuance in the following year.

    The patronage refund certificates outstanding or issuable at December 28, 2002 are payable as follows:
                                                                                                                                                                          &nb sp; Interest
                   January 1,                                                                                          Amount                                Rate
                                                                                                                          (000's omitted)
                    2003                                                                                                    $13,196                                 6.00%
                    2004                                                                                                      15,094                                 6.00%
                    2005                                                                                                      12,232                                 6.25%
                    2006                                                                                                      17,331                                 6.50%
                    2007                                                                                                      18,512                                 6.00%
                    2008                                                                                                      20,651                                 6.00%

(7)    Retirement Plans
        The Company has two defined benefit pension plans covering substantially all non-union employees, the Employees'
Pension Plan and Trust and the Employees' Retirement Income Plan and Trust. The Company terminated the Employees'
Pension Plan and Trust effective April 30, 2000. Benefits in these plans are based on years of service, highest average
compensation (as defined) and the related profit sharing and primary social security benefit. Contributions to the plans are
based on the Entry Age Normal, Frozen Initial Liability actuarial funding method and are limited to amounts that are currently
deductible for tax reporting purposes. As of December 28, 2002 plan assets in the Employees' Retirement Income Plan and
Trust were held in a group annuity contract.

        Pension expense for 2002, 2001 and 2000 included the following components:
                                                                                                        December 28,                December 29,                December 30,
                                                                                                               2002                                2001                                2000         
                                                                                                                                                (000's omitted)
                    Service cost - benefits earned during the
                        period                                                                        $            43                        $            41                       $            52
                    Interest cost on projected benefit obligation                      121                                   116                                   112
                    Expected return on plan assets                                            (131)                                 (123)                                (115)
                    Net amortization and deferral                                                   - -                                        - -                                      (31)
                    Gain on curtailment                                                                    - -                                      (58)                                     - -     
                    Net periodic pension expense (income)                    $          33                         $          (24)                       $          18
                                                                                                        ===========                ===========                ===========

        The following table sets forth the funded status of the plans and amounts recognized in the Company's Consolidated
Balance Sheets at December 28, 2002 and December 29, 2001:

                                                                                                                                            December 28,                  December 29,
                                                                                                                                                    2002                                 2001        
                                                                                                                                                                (000's omitted)             Change in benefit obligation:
                        Benefit obligation at beginning of year                                                     $  1,714                               $  1,656
                        Service cost                                                                                                             43                                        41
                        Interest cost                                                                                                           121                                     116
                        Actuarial losses                                                                                                    123                                        91
                        Curtailment and settlements                                                                                -                                       (141)
                        Benefits paid                                                                                                          (67)                                     (49)      
                    Benefit obligation at end of year                                                                         1,934                                   1,714     
                    Change in plan assets:
                        Fair value of plan assets at beginning of year                                               1,645                                   1,560
                        Actual return on plan assets                                                                               108                                         91
                        Employer contribution                                                                                           64                                          43
                        Benefits paid                                                                                                          (67)                                       (49)    
                    Fair value of plan assets at end of year                                                               1,750                                    1,645    
                        Funded status                                                                                                       (184)                                      (69)
                        Unrecognized transition asset                                                                                 5                                           6
                        Unamortized prior service cost                                                                               (3)                                        (4)
                        Unrecognized net actuarial losses                                                                       224                                         78    
                    Prepaid pension asset                                                                                    $            42                              $        11
                                                                                                                                            ============                ===========

        The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was
6.75% in 2002 and 7.25% in 2001. The related expected long-term rate of return was 8.0% in 2002 and 2001. The rate of
increase in future compensation was projected using actuarial salary tables plus 1.0% in 2002 and 2001.

        Ace also participates in several multi-employer plans covering union employees. Amounts charged to expense and
contributed to the plans totaled approximately $304,000, $212,000 and $222,000 in 2002, 2001 and 2000, respectively.

        The Company's profit sharing plan contribution for 2002, 2001 and 2000 was approximately $17,040,000, $14,253,000
and $14,586,000, respectively.

(8)    Income Taxes
        As a cooperative, the Company distributes substantially all of its patronage sourced earnings to
its members in the form of patronage dividends. The 2002, 2001 and 2000 provisions (benefit) for federal income taxes were
$(756,000), $3,037,000 and $(162,000), respectively, and for state income taxes were $289,000, $381,000 and $289,000,
respectively.

        The Company made tax payments of $374,000, $807,000 and $1,095,000 during 2002, 2001 and 2000, respectively.

(9)    Member Dealers' Equity
        The Company's classes of stock are described below:

                                                                                                                                            December 28,                  December 29,
                                                                                                                                                    2002                                 2001        

Class A Stock, voting, redeemable at par value -
    Authorized                                                                                                                 10,000                              10,000
    Issued and outstanding                                                                                             3,617                                3,693
Class B Stock, nonvoting, redeemable at not less than
 twice par value-
    Authorized                                                                                                                   6,500                                6,500
    Issued                                                                                                                           6,499                                6,499
    Outstanding                                                                                                                1,944                                 2,108
    Treasury stock                                                                                                            4,555                                 4,391
Class C Stock, nonvoting, redeemable at not less
 than par value -
    Authorized                                                                                                             4,000,000                         4,000,000
    Issued and outstanding                                                                                       2,696,122                         2,602,243
    Issuable as patronage dividends                                                                           260,526                            232,839
Additional Stock Subscribed:
    Class A Stock                                                                                                                     40                                    94
    Class B Stock                                                                                                                       -                                       -
    Class C Stock                                                                                                                 8,740                               9,770

        At December 28, 2002 and December 29, 2001, there were no common shares reserved for options, warrants,
conversions or other rights; nor were any options granted or exercised during 2002, 2001 or 2000. Upon voluntary or
involuntary liquidation or bankruptcy, Class B and Class C shareholders would first receive amounts to repurchase the shares
at prices previously set by the Company's Board of Directors from the net assets of the Company. If the available net assets
are not sufficient, each outstanding share of Class B and Class C stock will share in the distribution of the Company's net
assets in proportion to its purchase or redemption price to the total available for payment.

        Member dealers may subscribe for the Company's stock in various prescribed combinations. Only one share of Class A
Stock may be owned by a dealer with respect to the first member retail outlet controlled by such dealer. Only four shares of
Class B Stock may be owned by a dealer with respect to each retail outlet controlled by such dealer, but only if such outlet
was a member of the Company on or before February 20, 1974. An appropriate number of shares of Class C Stock must be
included in any subscription by a dealer in an amount to provide that such dealer has a par value of all shares subscribed for
equal to $5,000 for each retail outlet. Unregistered shares of Class C Stock are also issued to dealers in connection with
patronage dividends. No dividends can be declared on any shares of any class of the Company's Stock.

        Upon termination of the Company's membership agreement with any retail outlet, all shares of stock of the Company
held by the dealer owning or controlling such outlet, must be sold back to the Company, unless a transfer of such shares is
made to another party accepted by the Company as a member dealer with respect to the same outlet.

        A Class A share is issued to a member dealer only when the share subscribed has been fully paid. Class B and Class C
shares are only issued when all such shares subscribed with respect to a retail outlet have been fully paid. Additional stock
subscribed in the accompanying statements represents the par value of shares subscribed, reduced by the unpaid portion.

        All shares of stock are currently issued and repurchased at par value, except for Class B Stock which is repurchased at
twice its par value, or $2,000 per share. Upon retirement of Class B shares held in treasury, the excess of redemption price
over par is allocated equally between contributed capital and retained earnings.

        Treasury stock transactions during 2000, 2001 and 2002 are summarized below:

                                                                                                                                            Shares Held in Treasury
                                                                                                                        Class A                    Class B                    Class C
Balance at January 1, 2000                                                                                - -                              4,067                            - -
    Stock issued                                                                                                    - -                                 - -                                - -
    Stock repurchased                                                                                       307                             180                        141,365
    Stock retired                                                                                                (307)                             - -                          (141,365)   
Balance at December 30, 2000                                                                          - -                              4,247                            - -
    Stock issued                                                                                                   - -                                 - -                                 - -
    Stock repurchased                                                                                       260                             144                        144,584
    Stock retired                                                                                                (260)                             - -                          (144,584)
Balance at December 29, 2001                                                                        - -                                4,391                             - -        
    Stock issued                                                                                                 - -                                   - -                                  - -
    Stock repurchased                                                                                      247                              164                        151,070
    Stock retired                                                                                                (247)                             - -                           (151,070)
Balance at December 28, 2002                                                                        - -                                4,555                            - -
                                                                                                                        ======                    ======                    =======

(10)    Segments
        The Company is principally engaged as a wholesaler of hardware and related products and is a manufacturer of paint
products. The Company's customers consist principally of its member dealers. No single customer or commonly-controlled
group of customers accounted for more than 10% of the Company's consolidated sales during 2002, 2001, or 2000.

        The Company identifies segments based on management responsibility and the nature of the business activities of each
component of the Company. The Company measures segment earnings as operating earnings including an allocation for
interest expense and income taxes. The net sales from external customers included in the Other category are primarily
generated from company-owned retail locations. Information regarding the identified segments and the related reconciliation
to consolidated information are as follows:

                                                                                                                                    December 28, 2002
                                                                                                                                       (000's omitted)
                                                                                                                                                                 Elimination of
                                                                                                              Paint                                            Intersegment
                                                                       Wholesale                 Manufacturing               Other                 Activities              Consolidated
Net sales from external customers          $2,961,217             $      18,977              $ 48,903            $       -                    $3,029,097
Intersegment sales                                           24,211                      119,110                        -                (143,321)                        -
Interest expense                                              21,583                           1,127                      817                 (1,944)                       21,583
Depreciation and amortization                      28,079                           1,751                   1,829                      -                            31,659
Segment profit (loss)
from continuing operations                          84,534                         13,414                   (4,756)                   (233)                      92,959
Identifiable segment assets                     1,032,473                         60,661                   69,809                (19,591)                1,143,352
Expenditures for long-lived assets              26,399                           1,954                     1,841                     -                            30,194

                                                                                                                                    December 29, 2001
                                                                                                                                       (000's omitted)
                                                                                                                                                                 Elimination of
                                                                                                              Paint                                            Intersegment
                                                                       Wholesale                 Manufacturing               Other                 Activities              Consolidated
Net sales from external customers          $2,852,240                $     18,668               $ 52,974             $      -                     $2,923,882
Intersegment sales   27,881                     110,621                       - -                   (138,502)                      - -
Interest expense                                               23,100                        1,094                     1,459                   (2,553)                     23,100
Depreciation and amortization                       24,594                        1,768                     1,933                      - -                            28,295
Segment profit (loss)
from continuing operations                            74,595                      11,255                    (1,330)                    (360)                     84,160
Identifiable segment assets                       1,053,139                      62,205                    71,961                (18,514)                1,168,791
Expenditures for long-lived assets                47,165                        1,673                      2,592                     - -                            51,430

                                                                                                                                    December 30, 2000
                                                                                                                                       (000's omitted)
                                                                                                                                                                 Elimination of
                                                                                                              Paint                                            Intersegment
                                                                       Wholesale                 Manufacturing               Other                 Activities              Consolidated
Net sales from external customers          $2,858,988                $    20,852                $ 44,347             $     -                     $2,924,187
Intersegment sales                                            28,641                   100,780                        -                   (129,421)                     -
Interest expense                                                21,670                       1,209                     1,278                  (2,487)                    21,670
Depreciation and amortization                        27,833                       1,694                     1,403                     -                            30,930
Segment profit (loss)
from continuing operations                             74,263                       9,739                    (2,452)                 (435)                    81,115
Identifiable segment assets                        1,013,093                     68,130                    61,812                (19,225)               1,123,810
Expenditures for long-lived assets                 39,807                          937                      3,905                    -                            44,649

Net sales and long-lived assets by geographic region based upon customer location for 2002, 2001 and 2000 were as follows:

                                                                            December 28, 2002            December 29, 2001         December 30, 2000
                                                                                                                                (000's omitted)
Net sales:
    United States   $2,930,255   $2,825,302   $2,803,116
    Foreign countries   98,842   98,580   121,071
        Total   $3,029,097   $2,923,882   $2,924,187
                                                                                     ========                            ========                                ========
Long-lived assets, net:
    United States                                                        $284,032                            $, 285,345   $, 258,802
    Foreign countries   -   -   -      Total                                                                   $    284,032                         $  285,345                                $   258,802
                                                                                     =========                         =========                              ======== (11)    Commitments
    The Company primarily rents buildings, warehouse and office space and certain other equipment under operating
leases. At December 28, 2002 annual minimum rentalcommitments under leases that have initial or remaining noncancelable
terms in excess of one year are as follows:
                                                                                                                                         December 28,Year Ending,                                                                                                                      2002        
                                                                                                                                       (000's omitted)
2003                                                                                                                                    $    19,522 
2004                                                                                                                                          16,650
2005                                                                                                                                          12,772
2006                                                                                                                                          10,416
2007                                                                                                                                            7,969
Thereafter                                                                                                                                27,443      Total minimum lease payments                                                                              $    94,772
                                                                                                                                         ===========

   All leases expire in or prior to 2017. Under certain leases, the Company pays real estate taxes, insurance and maintenance
expenses in addition to rental expense. Management expects that in the normal course of business, leases that expire will be
renewed or replaced by other leases. Rent expense was approximately $46,436,000, $49,336,000 and $45,514,000 in 2002,
2001 and 2000, respectively. Rent expense includes $9,276,000, $9,793,000 and $9,977,000 in contingent rentals paid in
2002, 2001 and 2000, respectively, primarily for transportation equipment mileage.

(12)    Other Information
The Company expenses advertising costs the first time the advertising takes place. Gross advertising expense, prior to
reimbursements from dealers and suppliers, amounting to $100,781,000, $94,553,000 and $93,340,000 was charged to
operations in 2002, 2001 and 2000, respectively. Cost reimbursements from dealers and suppliers amounted to $96,261,000,
$92,376,000 and $93,535,000 for 2002, 2001 and 2000, respectively.

   Interest paid was $20,084,000, $20,574,000 and $20,256,000 in 2002, 2001 and 2000, respectively, net of capitalized
interest of $289,000 and $715,000 in 2001 and 2000, respectively.

   Other income, net consists primarily of interest income, past due and low volume retailer charges, gains on the sales of
property and equipment, and earnings, losses or adjustments of minority-owned investments as follows:

   2002              2001              2000
Interest income   $    5,000   $     6,389             $   7,190
Past due and low volume retailer charges                                                    4,413                    5,318                4,620
Gains on the sales of property and equipment, net    -                       4,945                      418
Earnings of minority-owned investments                                                     1,462                   1,048                      764
Adjustment of minority-owned investment                                                     - -                      (5,000)                 (3,300)
Gain on pension plan termination   -                        -   3,599
Other                                                                                                                     (820)                    (291)   1,309
Total                                                                                                              $  10,055             $   12,409            $   14,600
                                                                                                                       =======            =======            =======

        In the normal course of business, the Company enters into commercial commitments including standby letters of credit
and guarantees that could become contractual obligations. Letters of credit are issued generally to insurance agencies and
financial institutions in direct support of the Company's corporate and retailer insurance programs and retailer lending
programs. As of December 28, 2002 and December 29, 2001, the Company had outstanding letters of credit with expiration
terms less than 1 year of $13,848,000 and $13,160,000, respectively. The Company enters into both limited and full
guarantees primarily to financial institutions in direct support of retailer lending programs. Outstanding guarantees were
$11,018,000 and $14,711,000 at December 28, 2002 and December 29, 2001, respectively. Aggregate expirations of
guarantees are $6,905,000 in 2003, $3,396,000 in 2004 through 2006, and $717,000 in 2007 through 2008.

EX-10

                                                                      LEASE

                                                                      between

                            SUNSET-SCE, LLC, a California limited liability company,
                                as to an undivided 75% interest as tenant-in-common,

                                                                        AND

                           JL INTERESTS, LLC, a California limited liability company,
                                as to an undivided 25% interest as tenant-in-common

                                                         collectively, as Landlord

                                                                         and

                                ACE HARDWARE CORPORATION, a Delaware corporation

                                                                    as Tenant

                                                            dated June 19, 2002


1.            Certain Definitions
2.            Demise of Premises
3.            Term
4.            Rent
5.            Net Lease: True Lease
6.            Title and Condition
7.            Payment of Impositions and Additional Obligations; Compliance with Law
8.            Use
9.            Maintenance and Repair
10.          Liens
11.          Alterations
12.          Condemnation
13.          Insurance
14.          Damage, Destruction
15.          Restoration
16.          Subordination to Financing
17.          Assignment, Subleasing
18.          Permitted Contests
19.          Default
20.          Landlord's Remedies
21.          Bankruptcy; Insolvency
22.          Notices
23.          Memorandum Lease; Estoppel Certificates
24.          Surrender and Holding Over
25.          No Merger of Title
26.          Landlord and Lender Exculpation
27.          Hazardous Substances
28.          Statements
29.          No Usury
30.          Broker
31.          Waiver of Landlord's Lien
32.          No Waiver
33.          Separability
34.          Indemnification
35.          Headings
36.          Modification
37.          Successors, Assigns
38.          Counterparts
39.          Governing Law


                                                                LEASE


            THIS LEASE ("Lease") is made by and between SUNSET-SCE, LLC, a California
limited liability company, as to an undivided 75% interest as tenant-in-common, having an office
at 4168 Douglas Blvd., Suite 200, Granite Bay, CA 95746, and JL INTERESTS, LLC, a
California limited liability company, as to an undivided 25% interest as tenant-in-common
(collectively, "Landlord"), and ACE HARDWARE CORPORATION, a Delaware corporation,
having its principal office at 2200 Kensington Court, Oak Brook, Illinois 60523-2100
("Tenant").

            In consideration of the rents and provisions herein stipulated to be paid and performed,
Landlord and Tenant hereby covenant and agree as follows:

            1.        Certain Definitions.

                        (a)        "Additional Rent" shall mean all sums required to be paid by Tenant to
Landlord hereunder other than Basic Rent, which sums shall constitute rental hereunder.

                        (b)        "Adjoining Property" shall mean all sidewalks, curbs, gores and vault
spaces adjoining any of the Premises.

                        (c)        "Alteration" or "Alterations" shall mean any or all changes, additions,
improvements, reconstructions or replacements of any of the Improvements, both interior or
exterior, and ordinary and extraordinary.

                        (d)        "Basic Rent" shall mean Basic Rent as defined in Paragraph 4.

                        (e)        "Basic Rent Payment Dates" shall mean the Basic Rent Payment Dates as
defined in Paragraph 4.

                        (f)        "Commencement Date" shall mean the Commencement Date as defined in
Paragraph 3.

                        (g)        "Condemnation" shall mean a Taking and/or a Requisition.

                        (h)        "Default Rate" shall mean an annual rate of interest equal to the maximum
rate of interest allowed by law in the State.

                        (i)        "Event of Default" shall mean an Event of Default as defined in
Paragraph 19.

                        (j)        "Insurance Requirement" or "Insurance Requirements" shall mean, as the
case may be, any one or more of the terms of each insurance policy required to be carried by
Tenant under this Lease and the requirements of the issuer of such policy, and whenever Tenant
shall be engaged in making any Alteration or Alterations, repairs or construction work of any
kind (collectively, "Work"), the term "Insurance Requirement" or "Insurance Requirements"
shall be deemed to include a requirement that Tenant obtain or cause its contractor to obtain
completed value builder's risk insurance when the estimated cost of the Work in any one instance
exceeds the sum of Fifty Thousand Dollars ($50,000.00) and that Tenant or its contractor shall
obtain worker's compensation insurance or other adequate insurance coverage covering all
persons employed in connection with the Work, whether by Tenant, its contractors or
subcontractors.

                        (k)        "Landlord's Trade Fixtures" shall mean all counters, cases, shelving and
similar fixtures, desks, movable partitions and other office furniture and personal property owned
by Landlord at the Premises, including without limitation those items listed in Exhibit C attached
hereto.

                        (l)        "Law" shall mean any constitution, statute or rule of law.

                        (m)      "Legal Requirement" or "Legal Requirements" shall mean, as the case
may be, any one or more of all present and future laws, codes, ordinances, orders, judgments,
decrees, injunctions, rules, regulations and requirements, even if unforeseen or extraordinary, of
every duly constituted governmental authority or agency (but excluding those which by their
terms are not applicable to and do not impose any obligation on Tenant, Landlord, Lender, or the
Premises) and all covenants, restrictions and conditions now or hereafter of record which may be
applicable to Tenant, to Landlord or to any of the Premises, or to the use, manner of use,
occupancy, possession, operation, maintenance, alteration, repair or reconstruction of any of the
Premises, including, without limitation, that certain Declaration of Covenants, Conditions and
Restrictions for Cambridge Business Center ("CC&R's"), made July 6, 1987, by Stanford Ranch,
Inc., a California corporation, and recorded in the Official Records of Placer County on July 10,
1987, at Book 3224 Page 555, any amendments thereto, the Design Guidelines and any other
Project Documents, all as defined in the CC&R's, even if compliance therewith (i) necessitates
structural changes or improvements (including changes required to comply with the "Americans
with Disabilities Act") or results in interference with the use or enjoyment of any of the Premises
or (ii) requires Tenant to carry insurance other than as required by the provisions of this Lease.

                        (n)        "Lender" shall mean any entity which has made or makes a Loan to
Landlord, secured in whole or in part by a Mortgage and evidenced by a Note or which is the
holder of a Mortgage and Note as a result of an assignment thereof, and when a Mortgage secures
multiple Notes held by one or more note holders, the trustee acting on behalf of such holders.

                        (o)        "Loan" shall mean a loan made by a Lender to Landlord secured in whole
or in part by a Mortgage and evidenced by a Note or Notes.

                        (p)        "Mortgage" shall mean a mortgage, deed of trust, or similar security
instrument now existing or hereafter executed covering the Premises from Landlord to Lender.

                        (q)        "Net Award" shall mean the entire award payable to Landlord by reason of
a Condemnation, less any actual and reasonable expenses incurred by Landlord in collecting such
award.

                        (r)        "Net Proceeds" shall mean the entire proceeds of any property casualty
insurance required under Paragraph 13(a), less any actual and reasonable expenses incurred by
Landlord in collecting such proceeds.

                        (s)        "Note" or "Notes" shall mean a promissory note or notes now or hereafter
executed from Landlord to Lender, which Note or Notes are secured in whole or in part by a
Mortgage and an assignment of leases and rents.

                        (t)        "Permitted Encumbrances" shall mean:

                                    (i) easements, rights-of-way, servitudes, other similar reservations, rights
and restrictions and other defects and irregularities in the title to the Premises, none of which
materially lessens the value of the Premises or materially impairs the use of the Premises for the
purposes held by Tenant;

                                    (ii) matters set forth in [Schedule B, Part I] of the owner's title insurance
policy relating to the Premises issued to Landlord in connection with the purchase of the
Premises, including without limitation that certain Declaration of Covenants, Conditions and
Restrictions, made July 6, 1987, and recorded in the Official Records of Placer County on July
10, 1987, at Book 3224 Page 555 ("CC&R's");

                                    (iii) any condemnation right reserved to or vested in any municipality or
public authority with respect to the Premises or any interest therein; and

                                    (iv) any Liens for Impositions not then delinquent and any Liens of
mechanics, materialmen and laborers for work or services performed or materials furnished in
connection with the Premises which are not then overdue or the existence, amount or validity of
which is being contested by Tenant pursuant to, and as permitted by, Paragraph 18.

                        (u)        "Purchase Agreement" shall mean that certain Agreement of Purchase and
Sale by and between Landlord, as buyer, and Tenant, as seller, for the purchase and sale of the
Premises.

                        (v)        "Requisition" shall mean any temporary condemnation or confiscation of
the use or occupancy of any of the Premises by any governmental authority, civil or military,
whether pursuant to an agreement with such governmental authority in settlement of or under
threat of any such requisition or confiscation, or otherwise.

                        (w)        "Restoration" shall mean the restoration or repair of the Premises after any
Taking or damage by casualty as nearly as possible to their value, condition and character
existing immediately prior to such Taking or damage.

                        (x)        "State" shall mean the State in which the Premises are situated.

                        (y)        "Taking" shall mean any taking of any of the Premises in or by
condemnation or other eminent domain proceedings pursuant to any law, general or special, or by
reason of any agreement with any condemnor in settlement of or under threat of any such
condemnation or other eminent domain proceedings or by any other means, or any de facto
condemnation, by a duly constituted authority or agency having jurisdiction.

                        (z)        "Taxes" shall mean taxes of every kind and nature (including real, ad
valorem and personal property, income, franchise, withholding, profits and gross receipts taxes),
all charges and/or taxes for any easement or agreement maintained for the benefit of any of the
Premises, all general and special assessments, levies, permits, inspection and license fees, all
utility charges, all ground rents, and all other public charges and/or taxes whether of a like or
different nature, even if unforeseen or extraordinary, imposed upon or assessed, prior to or during
the Term, against Landlord, Lender, Tenant or any of the Premises as a result of or arising in
respect of the ownership, occupancy, leasing, use, maintenance, operation, management, repair or
possession thereof, or any activity conducted on the Premises, or the Basic Rent or Additional
Rent, including without limitation, any gross income tax, sales tax, occupancy tax or excise tax
levied by any governmental body on or with respect to such Basic Rent or Additional Rent.

                     (aa)         "Tenant's Trade Fixtures" shall mean all warehouse storage racking,
warehouse shelving, shelving-supported mezzanine and conveyor systems (collectively, the
"Racking/Shelving Items"), any counters, cases, shelving, and similar fixtures, desks, movable
partitions and other office furniture and personal property owned by Tenant and used in the
operation of the business conducted on the Premises.

                     (bb)         "Term" shall mean the term of this Lease.

                     (cc)         "Termination Date" shall mean the Termination Date as defined in
Paragraph 12(b).

            2.        Demise of Premises.    Landlord hereby leases, demises and lets to Tenant and Tenant
hereby takes and leases from Landlord for the Term or terms and upon the provisions hereinafter
specified the following described property (collectively, the "Premises"): (i) the premises
described in Exhibit A attached hereto and made a part hereof together with the easements, rights
and appurtenances thereunto belonging or appertaining (collectively, the "Land"); (ii) the
buildings, structures, fixtures and other improvements constructed and to be constructed on the
Land (collectively, the "Improvements"), together with Landlord's Trade Fixtures, all Alterations
and other additions and accessions thereto, substitutions therefor and replacements thereof
permitted by this Lease. Pursuant to Section 10.3 of the CC&R's, this Lease is subject to, and
Tenant shall comply with the provisions of, the Project Documents (as defined in the CC&R's),
which provisions are an integral part of this Lease.

            3.         Term.    Tenant shall have and hold the Premises for a term commencing on the date
hereof (the "Commencement Date") and ending upon the date which is the last day of the twenty-
seventh (27th) month after the Commencement Date (the "Expiration Date"). Notwithstanding
the foregoing, Tenant shall have the right to terminate this Lease, effective upon the date which is
the last day of the eighteenth (18th) month after the Commencement Date, or which is the last day
of any succeeding month through the twenty-sixth (26th) month after the Commencement Date,
upon delivery of at least four (4) months' prior written notice to Landlord of Tenant's intention
to terminate this Lease. Landlord shall have the right (i) to advertise the availability of the
Premises for sale or for reletting, and to erect upon the Premises signs indicating such availability
(provided that such signs do not unreasonably interfere with the use of the Premises by Tenant),
and (ii) to show the Premises to prospective purchasers or tenants at reasonable times during
normal business hours upon reasonable notice to Tenant. Provided Tenant is not in default under
this Lease, if (a) Tenant has delivered to Landlord four (4) months' written notice of Tenant's
intention to terminate this Lease effective upon a date which is prior to the last day of the
eighteenth (18th) month after the Commencement Date, (b) Tenant has vacated the Premises in
accordance with the provisions of this Lease on or prior to the termination date set forth in such
termination notice, and (c) Landlord has entered into a new lease with a new tenant for the
Premises with a rent commencement date prior to the last day of the eighteenth (18th) month
after the Commencement Date (provided that nothing in this Paragraph 3 shall obligate Landlord
to obtain a new lease or tenant), then this Lease shall terminate upon the rent commencement
date of the new lease. If the foregoing conditions are not satisfied, Tenant shall remain obligated
to pay rent through the last day of the eighteenth (18th) month after the Commencement Date.

            4.        Rent.

                        (a)        Tenant shall pay to Landlord or Lender, if directed by Landlord, as annual
rent for the Premises during the Term, the amount of One Million Two Hundred Fifty Thousand
and No/100 Dollars ($1,250,000.00) ("Basic Rent"), subject to adjustment as set forth below,
which rent shall be paid in advance in equal monthly installments of One Hundred Four
Thousand One Hundred Sixty-Six and 66/100 Dollars ($104,166.66) commencing on the
Commencement Date and continuing on the first day of each month thereafter during the Term
(the said days being called the "Basic Rent Payment Dates"), and shall pay the same at
Landlord's address set forth below, or at such other place or to such other person or persons and
in such proportions as Landlord from time to time may designate to Tenant in writing, in funds
which at the time of such payment shall be legal tender for the payment of public or private debts
in the United States of America and if required by Lender by wire transfer in immediately
available federal funds to such account in such bank as Lender shall designate from time to time.
Pro rata Basic Rent for the period from the Commencement Date to the first day of the month
next following the Commencement Date shall be paid in advance on the Commencement Date.
In addition, if Tenant fails to make any payment of Basic Rent or Additional Rent to Landlord on
the date due, Tenant shall pay a late charge equal to ten percent (10%) of the amount past due.

                        (b)        If any installment of Basic Rent or Additional Rent is not paid on the date
due, Tenant shall pay to the party entitled to receive such installment interest on such overdue
payment at the Default Rate, accruing from the due date of such payment until the same is paid.

                        (c)        Tenant shall pay and discharge before the imposition of any fine, lien,
interest or penalty may be added thereto for late payment thereof, as Additional Rent, all other
amounts and obligations which Tenant assumes or agrees to pay or discharge pursuant to this
Lease, together with every fine, penalty, interest and cost which may be added by the party to
whom such payment is due for nonpayment or late payment thereof. In the event of any failure
by Tenant to pay or discharge any of the foregoing, Landlord and Lender shall have all rights,
powers and remedies provided herein, by law or otherwise, in the event of nonpayment of Basic
Rent. Any Additional Rent payable to Landlord shall be paid to the party to whom Basic Rent is
to be paid.

            5.        Net Lease: True Lease.

                        (a)        It is the intention of the parties hereto that the obligations of Tenant
hereunder shall be separate and independent covenants and agreements, and that Basic Rent,
Additional Rent and all other sums payable by Tenant hereunder shall continue to be payable in
all events, and that the obligations of Tenant hereunder shall continue unaffected, unless the
requirement to pay or perform the same shall have been terminated pursuant to an express
provision of this Lease. This is a net Lease and Basic Rent, Additional Rent and all other sums
payable hereunder by Tenant shall be paid without notice or demand, and without setoff,
counterclaim, recoupment, abatement, suspension, deferment, diminution, deduction, reduction
or defense, except as otherwise specifically set forth herein. This Lease shall not terminate and
Tenant shall not have any right to terminate this Lease during the Term (except as otherwise
expressly provided herein). Tenant agrees that, except as otherwise expressly provided herein, it
shall not take any action to terminate, rescind or void this Lease notwithstanding (i) the
bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding-up or other proceeding affecting Landlord, (ii) the exercise of any remedy, including
foreclosure, under the Mortgage, (iii) any action with respect to this Lease (including the
disaffirmance hereof) which may be taken by Landlord under the Federal Bankruptcy Code or by
any trustee, receiver or liquidator of Landlord or by any court under the Federal Bankruptcy Code
or otherwise, (iv) the Taking of the Premises or any portion thereof (except as specifically
provided in Paragraph 12(b) below), (v) the prohibition or restriction of Tenant's use of the
Premises under any Legal Requirement or otherwise, (vi) the destruction of the Premises or any
portion thereof, (vii) the eviction of Tenant from possession of the Premises, by paramount title
or otherwise, or (viii) default by Landlord hereunder or under any other agreement between
Landlord and Tenant. All costs, expenses and obligations of every kind and nature whatsoever
relating to the Premises and the appurtenances thereto and the use and occupancy thereof which
may arise or become due and payable with respect to the period which ends on the expiration or
earlier termination of the Lease Term in accordance with the provisions hereof (whether or not
the same shall become payable during the Lease Term or thereafter) shall be paid by Tenant. It is
the purpose and intention of the parties to this Lease that the Basic Rent due hereunder shall be
absolutely net to Landlord and that this Lease shall yield, net to Landlord, the Basic Rent
provided in this Lease. Tenant waives all rights which are not expressly stated herein, but which
may now or hereafter otherwise be conferred by law to quit, terminate or surrender this Lease or
any of the Premises, to any setoff, counterclaim, recoupment, abatement, suspension, deferment,
diminution, deduction, reduction or defense of or to Basic Rent, Additional Rent or any other
sums payable under this Lease, except as otherwise expressly provided herein, and for any
statutory lien or offset right against Landlord or its property.

                        (b)        Landlord and Tenant agree that this Lease is a true lease and does not
represent a financing arrangement. Each party shall reflect the transaction represented hereby in
all applicable books, records and reports (including income tax filings) in a manner consistent
with "true lease" treatment rather than "financing" treatment.

                        (c)        Tenant shall pay directly to the proper authorities charged with the
collection thereof all charges for water, sewer, gas, oil, electricity, telephone and other utilities or
services used or consumed on the Premises during the Term, whether designated as a charge, tax,
assessment, fee or otherwise, including, without limitation, water and sewer use charges and
taxes, if any, all such charges to be paid as the same from time to time become due. It is
understood and agreed that Tenant shall make its own arrangements for the installation or
provision of all such utilities and that Landlord shall be under no obligation to furnish any
utilities to the Premises and shall not be liable for any interruption or failure in the supply of any
such utilities to the Premises.

            6.        Title and Condition.

                        (a)        The Premises are demised and let subject to the Permitted Encumbrances
and all Legal Requirements and Insurance Requirements, including any existing violation of any
thereof, without representation or warranty by Landlord; it being understood and agreed,
however, that the recital of the Permitted Encumbrances herein shall not be construed as a revival
of any thereof which for any reason may have expired.

                        (b)        Without limiting the effect of Landlord's covenant set forth in
Paragraph 8(c), the Landlord makes no, and expressly hereby denies any, representations or
warranties regarding the condition or suitability of, or title to, the Premises. Tenant agrees that it
takes the Premises "as is," without any such representation or warranty. The Premises are leased
to Tenant in their present condition without representation or warranty by Landlord and subject
to the rights of parties in possession, to the existing state of title and any state of facts which an
accurate survey or physical inspection might reveal, to all applicable Legal Requirements now or
hereafter in effect and subject to the Permitted Encumbrances. Tenant has examined the
Premises and title to the Premises and has found all of the same satisfactory for all purposes.
Tenant acknowledges that immediately prior to this Lease it owned and occupied the Premises
and that Tenant is fully familiar with the physical condition of the Premises and that Landlord
makes no representation or warranty, express or implied, with respect to same. THE LEASE OF
THE PREMISES IS ON AN "AS IS" BASIS, IT BEING AGREED THAT TENANT WILL
LEASE THE PREMISES IN ITS PRESENT CONDITION, WITH ALL FAULTS.
LANDLORD HEREBY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR
PURPOSE RELATIVE TO THE PREMISES OR ANY COMPONENT PART THEREOF.
Tenant acknowledges and agrees that no representations or warranties have been made by
Landlord, or by any person, firm or agent acting or purporting to act on behalf of Landlord, as to
(i) the presence or absence on or in the Premises of any particular materials or substances
(including, without limitation, asbestos, hydrocarbons or hazardous or toxic substances), (ii) the
condition or repair of the Premises or any portion thereof, (iii) the value, expense of operation or
income potential of the Premises, (iv) the accuracy or completeness of any title, survey, structural
report, environmental audit or other information provided to Tenant by any third party contractor
relative to the Premises (regardless of whether the same were retained or paid for by Landlord),
or (v) any other fact or condition which has affected or might affect the Premises or the
condition, repair, value, expense of operation or income potential thereof. Tenant represents that
the officers of Tenant are knowledgeable and experienced in the leasing of properties comparable
to the Premises and agrees that Tenant will be relying solely on Tenant's inspections of the
Premises in leasing the Premises. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN
NEGOTIATED AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND
NEGATION BY THE LANDLORD OF, AND THE LANDLORD DOES HEREBY
DISCLAIM, ANY AND ALL WARRANTIES BY THE LANDLORD, EXPRESS OR
IMPLIED, WITH RESPECT TO THE PREMISES OR ANY PORTION THEREOF,
WHETHER ARISING PURSUANT TO THE UNIFORM COMMERCIAL CODE OR ANY
OTHER LAW NOW OR HEREAFTER IN EFFECT OR OTHERWISE, AND TENANT
HEREBY ACKNOWLEDGES AND ACCEPTS SUCH EXCLUSION, NEGATION AND
DISCLAIMER.

                        (c)        Landlord hereby conditionally assigns, without recourse or warranty
whatsoever, to Tenant, all warranties, guaranties and indemnities, express or implied, and similar
rights which Landlord may have against any manufacturer, seller, engineer, contractor or builder
in respect of any of the Premises, including, but not limited to, any rights and remedies existing
under contract or pursuant to the Uniform Commercial Code (collectively, the "guaranties").
Such assignment shall remain in effect so long as no Event of Default exists hereunder or until
the termination of this Lease. Landlord shall also retain the right to enforce any guaranties so
assigned in the name of Tenant upon the occurrence of an Event of Default. Landlord hereby
agrees to execute and deliver at Tenant's sole cost and expense such further documents,
including powers of attorney, as Tenant may reasonably request (and which in the good faith
judgment of Landlord, do not adversely affect a substantial general interest of Landlord), in order
that Tenant may have the full benefit of the assignment effected or intended to be effected by this
Paragraph 6. Upon the occurrence of an Event of Default or termination of this Lease, the
guaranties shall automatically revert to Landlord. The foregoing provision of reversion shall be
self-operative and no further instrument of reassignment shall be required. In confirmation of
such reassignment Tenant shall execute and deliver promptly any certificate or other instrument
which Landlord may request at Tenant's sole cost and expense. Any monies collected by Tenant
under any of the guaranties after the occurrence of and during the continuation of an Event of
Default shall be held in trust by Tenant and promptly paid over to Landlord.

                        (d)        Landlord agrees to enter into with Tenant, at Tenant's expense, such
easements, covenants, waivers, approvals or restrictions for utilities, parking or other matters as
desirable for operation of the Premises or properties adjacent thereto (collectively, "Easements")
as requested by Tenant, subject to Lender's and Landlord's approval thereof, not to be
unreasonably withheld or delayed; provided, however, that no such Easement shall result in any
diminution in the value or utility of the Premises for its legal use and further provided that no
such Easement shall render the use of the Premises dependent upon any other property or
condition the use of the Premises upon the use of any other property or require payment or
performance by Landlord at any time, each of which Tenant shall certify to Landlord and Lender
in writing delivered with Tenant's request with respect to such Easement. Tenant's request shall
also include Tenant's written undertaking acknowledging that Tenant shall remain liable
hereunder as a principal and not merely as a surety or guarantor notwithstanding the
establishment of any Easement.

                        (e)        Encroachments. In the event that any Improvement now or hereafter
constructed shall (i) encroach upon any property, street or right-of-way on or adjoining the
Premises, (ii) violate the provisions of any restrictive covenant affecting the Premises, (iii) hinder
or obstruct any easement or right-of-way to which the Premises is subject, or (iv) impair the
rights of others in, to or under any of the foregoing, then, promptly after written request of
Landlord, Tenant shall at Tenant's sole cost and expense either (x) obtain valid and effective
waivers or settlements of all claims, liabilities and damages at Tenant's sole cost and expense
resulting from each such encroachment, violation, hindrance, obstruction or impairment, whether
the same shall affect Landlord, Tenant or both, or (y) take such action as shall be necessary to
remove such encroachment, hindrance or obstruction and to end such violation or impairment. If
such action is in the form of an Alteration, such Alteration shall conform to the provisions of
Paragraph 11.

            7.        Payment of Impositions and Additional Obligations; Compliance with Law.

                        (a)        Impositions. Subject to the provisions of Paragraph 18, and except as
otherwise provided in this Paragraph 7(a), Tenant shall, before delinquency thereof, pay and
discharge the following whether the same became due and payable before, on or after the
Commencement Date (collectively, the "Impositions"): all taxes (including sales, use, and gross
rental taxes), assessments, levies, fees, water and sewer rents and charges, utilities and
communications taxes and charges and all other governmental charges, general and special,
ordinary and extraordinary, foreseen and unforeseen, which are, at any time, prior to or during the
Term, imposed upon or assessed against (i) the Premises, (ii) any Basic Rent, Additional Rent or
other sum payable hereunder, (iii) this Lease, the leasehold estate created hereby, (iv) Landlord,
Lender, or Tenant, as a result of or arising out of the ownership, acquisition, occupancy, leasing,
use, maintenance, management, repair, possession or operation of the Premises (including
without limitation, any taxes on revenues, rents, income, awards, proceeds, capital gains, profits,
excess profits, gross receipts, sales, use, excise and other taxes, duties or imports whether similar
or not in nature, assessed, levied or imposed against Tenant, Landlord or the Premises by any
governmental authority). If any assessment may be paid in installments, Tenant shall have the
option to pay such assessment in installments; in such event, Tenant shall be liable only for those
installments which become due and payable during the Term. Tenant shall prepare and file all
tax reports required by governmental authorities which relate to the Impositions. Tenant shall
upon Landlord's request, deliver to Landlord copies of all receipts for payment of Impositions.
Landlord shall either request the applicable taxing authority to deliver tax notices or tax bills
directly to Tenant, or provide Tenant with complete and correct copies of such tax notices or tax
bills promptly upon Landlord's receipt thereof. Notwithstanding the foregoing, Impositions will
not include federal, state or local (i) franchise, capital stock or similar taxes, of Landlord, (ii) net
income, net rental, excess profits or other taxes, of Landlord, or (iii) any estate, inheritance,
succession, gift, capital levy or similar tax, unless such taxes referred to in clauses (i) and (ii)
above are in lieu of, or a substitute for, any tax, assessment, levy or charge which, if it were in
effect on the Commencement Date, would be payable by Tenant under this Lease. Upon the
expiration or earlier termination of this Lease, Landlord and Tenant shall prorate any pre-paid
real property taxes applicable to the period after such expiration or termination date and any
unpaid real property taxes attributable to the period prior to such expiration or termination date.

                        (b)        Compliance with Law. Subject to the provisions of Paragraph 18, Tenant
shall at all times comply with and cause the Premises to comply with and conform to all Legal
Requirements applicable to the Premises or its ownership, occupancy or use, including those
which require structural, unforeseen or extraordinary changes to the Premises. Notwithstanding
anything to the contrary in this Lease, Tenant shall not be required to make any structural
improvements to the Premises required by a change in Legal Requirements in effect as of the
date of this Lease.

                        (c)        Additional Obligations. Tenant shall pay and perform all obligations of
Landlord, as the owner of the Premises, that may now or hereafter exist under any Permitted
Encumbrances or any other matter that would be a Permitted Encumbrance created by or with the
consent of Tenant.

            8.         Use.

                        (a)        Tenant may use the Premises for any lawful purpose other than any use
that will (i) have a material adverse effect on the value of the Premises, (ii) materially increase
the likelihood that Tenant, Landlord or Lender would incur liability under any provisions of the
Act referred to in Paragraph 27 of this Lease, or (iii) result or give rise to any material
environmental deterioration or degradation of the Premises. In no event shall the Premises be
used for any purpose which shall violate any of the provisions of any recorded covenants,
restrictions or agreements applicable to the Premises. Tenant agrees that with respect to any such
recorded covenants, restrictions or agreements, Tenant shall observe, perform and comply with
and carry out the provisions thereof required therein to be observed and performed by Landlord.

                        (b)        Subject to Tenant's rights of contest under Paragraph 18 hereof, Tenant
shall not permit any unlawful occupation, business or trade to be conducted on any of the
Premises or any use to be made thereof contrary to applicable Legal Requirements or Insurance
Requirements. Subject to Tenant's rights of contest under Paragraph 18 hereof, Tenant shall not
use, occupy or permit any of the Premises to be used or occupied, nor do or permit anything to be
done in or on any of the Premises, in a manner which would (i) violate any certificate of
occupancy or equivalent certificate affecting any of the Premises, (ii) make void or voidable any
insurance which Tenant is required hereunder to maintain then in force with respect to any of the
Premises, (iii) affect in any manner the ability of Tenant to obtain any insurance which Tenant is
required to furnish hereunder, (iv) cause any injury or damage to any of the Improvements unless
pursuant to Alterations permitted under Paragraph 11 hereof, or (v) constitute a public or private
nuisance or waste.

                        (c)        Subject to all of the provisions of this Lease, so long as no Event of
Default exists hereunder, Landlord covenants that neither it nor any party claiming by, through or
under it, shall do any act to disturb the peaceful and quiet occupation and enjoyment of the
Premises by Tenant. Landlord may enter upon and examine any of the Premises at reasonable
times after reasonable notice and during business hours without notice and exercise any rights
and privileges granted to Landlord under the provisions of this Lease.

            9.        Maintenance and Repair.

                        (a)        Except for any alterations that Tenant is permitted to make hereunder,
Tenant shall at all times, including any Requisition period, put, keep and maintain the Premises,
including, without limitation, the roof, roof membrane, landscaping, walls (interior and exterior),
footings, foundations, parking lots, plumbing, conveyor systems and structural and non-structural
components of the Premises, and the Adjoining Property, in good repair and appearance, and
shall promptly make all repairs and replacements (substantially equivalent in quality and
workmanship to the original work) of every kind and nature, whether foreseen or unforeseen,
which may be required to be made upon or in connection with any of the Premises in order to
keep and maintain the Premises in as good repair and appearance as they were as of the
Commencement Date, except for ordinary wear and tear. Notwithstanding the foregoing, Tenant
shall not be required to make structural repairs or structural replacements to the Improvements,
the Land or Landlord's Trade Fixtures, unless such repair or replacement is needed because of
Tenant's act or failure to maintain such items. Tenant shall not be required to maintain the
Racking/Shelving Items in the Premises in the same condition as at the Commencement Date;
provided, however, that Tenant shall make any structural repairs or structural replacements
necessary to the Racking/Shelving Items so that the system is operable for its intended purpose.
Tenant shall do or cause others to do all that is necessary to plow or otherwise remove any and
all accumulated snow from the Premises and Adjoining Property and keep both in safe condition.
Tenant shall do or cause others to do all shoring of the Premises or Adjoining Property or of
foundations and walls of the Improvements and every other act necessary or appropriate for
preservation and safety thereof, by reason of or in connection with any excavation or other
building operation upon any of the Premises or Adjoining Property, whether or not Landlord
shall, by reason of any Legal Requirements or Insurance Requirements, be required to take such
action or be liable for failure to do so. Landlord shall not be required to make any repair,
whether foreseen or unforeseen, or to maintain any of the Premises or Adjoining Property in any
way, and Tenant hereby expressly waives the right to make repairs at the expense of the
Landlord, which right may otherwise be provided for in any law now or hereafter in effect.
Nothing in the preceding sentence shall be deemed to preclude Tenant from being entitled to
insurance proceeds or condemnation awards for Restoration pursuant to the terms of this Lease.
Tenant shall, in all events, make all repairs for which it is responsible hereunder promptly, but in
no event longer than thirty (30) days after a repair or replacement becomes prudent, and all
repairs shall be in a good, proper and workmanlike manner, and diligently pursued to completion.

                        (b)        If Tenant shall be in default under any of the provisions of this
Paragraph 9, Landlord or Lender may, after thirty (30) days' notice to Tenant and failure of
Tenant to commence to cure during said period or to diligently prosecute such cure to completion
once begun, but immediately upon notice in the event of an emergency (that is, imminent danger
of injury to persons or property), do whatever is necessary to cure such default as may be
reasonable under the circumstances for the account of and at the expense of Tenant. In the event
of an emergency, before Landlord may avail itself of its rights under this Paragraph 9(b),
Landlord shall send notice to Tenant of the situation by telephone or other available
communication. All actual and reasonable costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses) so incurred by Landlord or Lender, together with
interest thereon at the Default Rate from the date of payment or incurring the expense, shall
constitute Additional Rent payable by Tenant under this Lease and shall be paid by Tenant to
Landlord or Lender (as applicable) on demand. Tenant agrees that, in the event of an emergency,
expenditures which might otherwise be unreasonable (such as overtime) may nevertheless be
reasonable under the circumstances.

                        (c)        Tenant shall from time to time replace with other similar operational
equipment or parts any of the mechanical systems or other equipment included in the
Improvements which shall have become worn out, obsolete or unusable for the purpose for which
it is intended, been taken by a Condemnation as provided in Paragraph 12, or been lost, stolen,
damaged or destroyed as provided in Paragraph 14. Tenant shall repair at its sole cost and
expense all damage to the Premises caused by the removal of equipment or any other personal
property of Tenant at any time, including upon expiration or termination of the Lease.

            10.        Liens.    Tenant will promptly remove and discharge any charge, lien, security
interest or encumbrance upon the Premises or any Basic Rent, Additional Rent or other sums
payable hereunder which arise for any reason, including all liens which arise out of the
possession, use, occupancy, construction, repair or rebuilding of the Premises or by reason of
labor or materials furnished or claimed to have been furnished to Tenant or for the Premises, but
not including (i) the Permitted Encumbrances, and (ii) any mortgage, charge, lien, security
interest or encumbrance created by Landlord on or after the Commencement Date without the
consent of Tenant. Nothing contained in this Lease shall be construed as constituting the consent
or request of Landlord, express or implied, to or for the performance by any contractor, laborer,
materialmen, or vendor of any labor or services or for the furnishing of any materials for any
construction, alteration, addition, repair or demolition of or to the Premises or any part thereof
which would result in any liability of the Landlord for payment thereof. Notice is hereby given
that Landlord will not be liable for any labor, services or materials furnished or to be furnished to
Tenant, or to anyone holding an interest in the Premises or any part thereof through or under
Tenant, and that no mechanic's or other liens for any such labor, services or materials shall attach
to or affect the interest of Landlord in and to the Premises.

            11.        Alterations.    Tenant shall not make any Alterations which would diminish the value
of the Premises or adversely affect any building systems or equipment. Tenant may make any
other Alterations without the prior written consent of the Landlord provided: (i) such Alterations
comply with all of the provisions of the following sentence and (ii) such Alterations are
nonstructural. All Alterations shall be performed in a good and workmanlike manner, and shall
be expeditiously completed in compliance with all Legal Requirements. All work done in
connection with any such Alteration shall comply with all Insurance Requirements. Tenant shall
promptly pay all costs and expenses of any such Alteration, and shall discharge all liens filed
against any of the Premises arising out of the same. Tenant shall procure and pay for all permits
and licenses required in connection with any such Alteration. All such Alterations shall be the
property of Landlord and shall be subject to this Lease. All structural Alterations and any
Alteration the estimated cost of which in any one instance exceeds Fifty Thousand Dollars
($50,000.00) shall be made under the supervision of a licensed architect or engineer in
accordance with detailed plans and specifications which shall be submitted to Landlord and
Lender at least twenty (20) days prior to the commencement of the Alterations. Upon completion
of any structural Alteration or one in excess of Fifty Thousand Dollars ($50,000.00) Tenant will
provide as-built plans and specifications or record drawings to Landlord and Lender.

            12.        Condemnation.

                        (a)        Immediately upon obtaining knowledge of the institution of any
proceeding for Condemnation, Tenant shall notify Landlord and Lender thereof and Landlord and
Lender shall be entitled to participate in any Condemnation proceeding at their own expense.
Landlord and Lender, immediately upon obtaining knowledge of the institution of any
proceeding for Condemnation, shall notify Tenant thereof and Tenant shall have the right to
participate in such proceedings at its own expense. Subject to the provisions of this Paragraph 12
and Paragraph 15, Tenant hereby irrevocably assigns to Lender or to Landlord, in that order, any
award or payment in respect of any Condemnation of Tenant's interest in the Premises, except
that nothing in this Lease shall be deemed to require (i) the assignment to Landlord or Lender of
any award or payment on account of Tenant's Trade Fixtures, or other tangible personal property,
moving expenses and similar claims, if available, to the extent Tenant shall have a right to make
a separate claim therefor against the condemnor or (ii) any act or circumstance that impairs
Tenant's right to any such award or payment; it being agreed, however, that Tenant shall in no
event be entitled to any payment that reduces the award to which Landlord is or would be entitled
for the condemnation of Landlord's interest in the Premises.

                        (b)        If (i) the entire Premises or (ii) at least fifty percent (50%) of the Land or
the building constructed on the Land, the loss of which even after Restoration would, in Tenant's
reasonable business judgment, be substantially and materially adverse to the business operations
of Tenant, shall be the subject of a Taking, then Tenant shall have the right to, not later than sixty
(60) days after a Taking has occurred, serve notice upon Landlord ("Tenant's Termination
Notice") of its intention to terminate this Lease on any Basic Rent Payment Date specified in
such notice, which date (the "Termination Date") shall be no sooner than the first Basic Rent
Payment Date occurring at least thirty (30) days after the date of Tenant's Termination Notice
and not later than the third Basic Rent Payment Date occurring after the date of Tenant's
Termination Notice.

            In the event that Tenant shall serve Tenant's Termination Notice upon Landlord, this
Lease and the Term hereof shall terminate on the Termination Date. In such event the entire
award made in Condemnation proceeding shall be paid to Lender, or to Landlord, in that order.

                        (c)        In the event of any Condemnation of part of the Premises which does not
result in a Termination of this Lease, subject to the requirements of Paragraph 15, the Net Award
of such Condemnation shall be retained by Landlord or Lender and, promptly after such
Condemnation, Landlord shall commence and diligently continue to perform the Restoration, but
only to the extent of that portion of the Net Award designated for such work.

            In the event of a Requisition of any of the Premises, Landlord shall apply the Net Award
of such Requisition, to the extent available, to the installments (proportionately in the same ratio
of the Premises taken to the otherwise whole Premises) of Basic Rent, Additional Rent or other
sums payable by Tenant hereunder thereafter payable and Tenant shall pay the balance remaining
thereafter. Upon the expiration of the Term, any portion of such Net Award that shall not
previously have been credited to Tenant on account of the Basic Rent and Additional Rent shall
be retained by Landlord or Lender.

                        (d)        No agreement with any condemnor in settlement of or under threat of any
Condemnation shall be made by Tenant without the written consent of Landlord and of Lender, if
the Premises are then subject to a Mortgage, which consent shall not be unreasonably withheld or
delayed provided such award or payment is applied in accordance with this Lease.

            13.        Insurance.

                        (a)        Type of Insurance. Tenant shall maintain at its sole cost and expense the
following insurance on the Premises:

                                    (i)        Special Form property insurance (including flood insurance and
earthquake insurance each to the extent applicable and/or required by Lender; provided, however,
that the limit of any such earthquake insurance policy shall not be greater than $5,000,000)
against all risk of direct physical loss or damage to the Improvements in amounts not less than
the full replacement cost of the Improvements, if the same are actually replaced, or actual cash
value (replacement cost minus depreciation) if the same are not replaced, excluding footings and
foundations and other parts of the Improvements which are not insurable, with an "Amendment
of the Pollution Exclusion Endorsement" for damage caused by heat, smoke, or fumes from a
hostile fire. Tenant shall also obtain: (i) business interruption or rental interruption insurance, as
requested by Landlord, in an amount equal to one hundred percent (100%) of the Basic Rent and
Additional Rent for a period of no less than eighteen (18) months and shall make any proceeds
therefrom available to Landlord and Lender, and (ii) ordinance and law coverage, including, but
not limited to, for extra costs and/or loss of value to the Premises because of any changes in
building codes.

                                    (ii)        Commercial General Liability insurance against claims for bodily
injury, death or property damage occurring on, in, or about the Premises, which insurance shall:
(i) be written on a so-called "occurrence basis," with combined single limit coverage of not less
than Ten Million Dollars ($10,000,000.00), or in such increased limits as Landlord may
reasonably request from time to time and (ii) include premises and operations liability coverage,
products and completed operations liability coverage, blanket contractual liability coverage,
including, to the maximum extent possible, coverage for the indemnification obligations of
Tenant under this Lease, a "severability of interest" clause or endorsement which precludes the
insurer from denying the claim of Tenant or Landlord because of the negligence or other acts of
the other, and personal and advertising injury coverage. Policies for such insurance shall be for
the mutual benefit of Landlord, Tenant and any Lender.

                                    (iii)        Workers' compensation insurance covering all persons employed in
connection with any work done on or about the Premises (or in lieu of such workers'
compensation insurance, a program of self-insurance complying with the rules, regulations and
requirements of the appropriate agency of the State), including employer's liability coverage with
limits of at least Five Hundred Thousand Dollars ($500,000.00) with "stop gap" and "all states"
endorsements.

                                    (iv)        Any other insurance coverage that is customarily carried by owners
or tenants of similar properties in the same geographic area and engaged in businesses similar to
Tenant's business or that may from time to time be reasonably required by Landlord or by Lender
in order to protect their respective interests.

                        (b)        Insurance Requirements. The insurance required by Paragraph 13(a) shall
be written by companies, licensed to do business in the State, of recognized financial standing
which are rated A- or better by A. M. Best Company or A3 or better by Moody's Investors
Services, in either case with asset size rating of "VIII" or better by A. M. Best Company. The
insurance shall (i) be for a term of not less than twelve (12) months; (ii) be in amounts sufficient
at all times to satisfy any co-insurance requirements thereof; (iii) provide an "Additional Insured-
Managers or Lessors of Premises Endorsement"; (iv) provide that the insurance company has the
duty to defend all insureds under the policy; (v) provide that defense costs are paid in addition to
and do not deplete any of the policy limits; (vi) (except for the workers' compensation insurance
referred to in Subparagraph 13(a)(iii) above) name Landlord, Tenant, and any Lender as insured
parties as their respective interests may appear; (vii) provide that such insurance cannot be
canceled, invalidated, or suspended on account of the conduct of Tenant, its officers, directors,
employees, or agents; (viii) provide that any "no other insurance" clause in the insurance policy
shall exclude any policies of insurance maintained by Landlord and the insurance policy shall not
be brought into contribution with insurance maintained by Landlord; (ix) provide that the policy
of insurance shall not be terminated, canceled or substantially modified without at least thirty
(30) days' prior written notice to Landlord, Lender and to any other lender covered by any
standard mortgage clause endorsement; (x) provide that the insurer shall not have the option to
restore the Premises if Landlord elects to terminate this Lease in accordance with the terms
hereof; (xi) provide that the interests of Landlord and Lender shall not be invalidated by any
action or inaction of the Landlord, Tenant, or any other person, and such insurance shall insure
the Lender regardless of any breach or violation by the Tenant, the Landlord, or any other person
of any warranties, declarations, or conditions contained in the policies relating to such insurance
or application therefore; and (xii) provide that all insurance proceeds payable under any policy of
property, sprinkler, or flood insurance with respect to the Premises shall be paid to Lender as sole
loss payee under a standard mortgagee clause (or if no Lender exists, to Landlord). If said
insurance or any part thereof shall expire, be withdrawn, become void by breach of any condition
thereof by Tenant, or become void or unsafe by reason of the failure or impairment of the capital
of any insurer, or if for any other reasonable cause said insurance shall become unsatisfactory to
Landlord or Lender, Tenant shall promptly obtain new or additional insurance satisfactory to
Landlord and Lender. Tenant shall provide Landlord with certificates of insurance (ACORD
Form 27) of all such insurance policies; provided, however, that upon the occurrence of any
event insured by such an insurance policy, or if otherwise required by Lender, Tenant shall
provide Landlord with a copy of such insurance policy.

                        (c)        Each insurance policy referred to above shall, to the extent applicable,
contain standard non-contributory mortgagee clauses in favor of any Lender. As evidence of the
insurance specified in Paragraph 13(a)(i), required to be maintained by Tenant, Tenant shall
deliver to Landlord an ACORD 27 Evidence of Property Insurance or other certificate providing
at least the same assurances (or, if limited by Legal Requirements, then a certificate providing as
many of the same assurances as allowed by applicable law). As evidence of the insurance
specified in Paragraph 13(a)(ii) and (iii), required to be maintained by Tenant, Tenant shall
deliver to Landlord an ACORD 25 Certificate of Insurance or other certificate providing at least
the same assurances. The coverage provided by Tenant in respect of each policy shall also
provide that any loss otherwise payable thereunder shall be payable notwithstanding (i) any act or
omission of Landlord, Lender or Tenant which might, absent such provision, result in a forfeiture
of all or a part of such insurance payment, (ii) the occupation or use of any of the Premises for
purposes more hazardous than permitted by the provisions of such policy, (iii) any foreclosure or
other action or proceeding taken by any Lender pursuant to any provision of the Mortgage upon
the happening of an event of default therein, or (iv) any change in title or ownership of any of the
Premises.

                        (d)        Tenant shall pay as they become due all premiums for the insurance
required by this Paragraph 13, shall renew or replace each policy prior to the expiration date
stated on the policy then in effect, and shall deliver to Landlord and Lender the appropriate
assurances for such renewals or replacements in accordance with the provisions of this
Paragraph 13(d) before expiration of the then-effective coverage. In the event of Tenant's failure
to comply with any of the foregoing requirements of this Paragraph 13 within five (5) days of
written notice from Landlord, Landlord or Lender shall be entitled to procure such insurance.
Any sums expended by Landlord or Lender, as the case may be, in procuring such insurance shall
be Additional Rent and shall be repaid by Tenant, together with interest thereon at the Default
Rate, from the time of payment by Landlord or Lender, as the case may be, until fully paid by
Tenant immediately upon written demand therefor by Landlord or Lender, as the case may be.

                        (e)        Anything in this Paragraph 13 to the contrary notwithstanding, any
insurance which Tenant is required to obtain pursuant to Paragraph 13(a) may be carried under a
"blanket" policy or policies covering other properties or liabilities of Tenant, provided that such
"blanket" policy or policies otherwise comply with the provisions of this Paragraph 13. In the
event any such insurance is carried under a blanket policy, Tenant shall deliver to Landlord and
Lender a certified copy of those provisions of the blanket policy that pertain to the Premises, if
any, to evidence the issuance and effectiveness of the policy, the amount and character of the
coverage with respect to the Premises and the presence in the policy of provisions of the
character required in the above sections of this Paragraph 13.

                        (f)        With respect to any risk covered by property damage insurance, except for
any obligations arising under this Lease, Landlord and Tenant hereby waive any rights each may
have against the other on account of any loss or damage occasioned to Landlord or to Tenant, as
applicable, their respective property, the Improvements, or their contents, or to other
improvements, to the extent of any insurance proceeds received by the waiving party for such
loss or damage. The parties each, on behalf of their respective insurance companies insuring the
property of either Landlord or Tenant against any such loss, waive any right of subrogation that
they may have against Landlord or Tenant, as applicable. 

            14.        Damage, Destruction.

                        (a)        In the event of any casualty loss exceeding Ten Thousand Dollars
($10,000.00), Tenant shall give Landlord and Lender immediate notice thereof. Tenant shall
adjust, collect and compromise any and all such claims, with the consent of Lender and Landlord,
not to be unreasonably withheld or delayed, and Landlord and Lender shall have the right to join
with Tenant therein. All proceeds of any insurance shall be paid to a Trustee which shall be a
federally insured bank or other financial institution, selected by Landlord and Tenant and
reasonably satisfactory to Lender (the "Trustee"). If the Premises shall be covered by a
Mortgage, Lender, if it so desires, shall be the Trustee. Each insurer is hereby authorized and
directed to make payment under said policies directly to such Trustee instead of to Landlord and
Tenant jointly, and Tenant hereby appoints such Trustee as Tenant's attorney-in-fact to endorse
any draft therefor for the purposes set forth in this Lease after approval by Tenant of such
Trustee, if Trustee is other than Lender, such approval not to be unreasonably withheld or
delayed.

                        (b)        In the event of any casualty (whether or not insured against) resulting in
damage to (i) the entire Premises or (ii) at least fifty percent (50%) of the Premises, the loss of
which even after Restoration would, in Tenant's reasonable business judgment, be substantially
and materially adverse to the business operations of Tenant, Tenant shall have the right, not later
than sixty (60) days after such casualty has occurred, to serve a Tenant's Termination Notice
upon Landlord. If Tenant shall serve a Tenant's Termination Notice upon Landlord, this Lease
shall terminate on the Termination Date, which shall be as set forth in Paragraph 12(b), specified
in such Termination Notice; however, Tenant shall assign and make available to Landlord all
insurance proceeds for such casualty and pay to Landlord any deductible therefor, before any
such Termination becomes effective. If this Lease is not terminated pursuant to this Paragraph
14(b), Landlord shall commence and diligently continue to perform the Restoration to the
Premises. Tenant shall be responsible for any deductible under any insurance required under
Paragraph 13. Upon the Trustee's receipt of the entire proceeds of any insurance required under
Paragraph 13, together with any self-insurance payment required of Tenant, less any expenses
incurred by Landlord, Tenant, or any Lender in collecting such proceeds or payment ("Net
Proceeds"), the Trustee shall, to the extent available, make the Net Proceeds available to
Landlord for Restoration, in accordance with the provisions of Paragraph 15.

                        (c)        In the event that any damage or destruction shall occur at such time as
Tenant shall not have maintained third-party insurance in accordance with Paragraph 13(a)(i),
Tenant shall pay to the Trustee the amount of the proceeds that would have been payable had
such insurance program been in effect (the "Tenant Insurance Payment").

            15.        Restoration.    The Net Proceeds and Tenant Insurance Payment (the aggregate of
which and any interest being herein defined as the "Restoration Fund") paid to the Trustee shall
be disbursed by the Trustee to Landlord. Landlord shall only be obligated to restore the Premises
to the extent of the funds Landlord receives from the Restoration Fund. Any sum in the
Restoration Fund which remains in the Restoration Fund upon the completion of Restoration
shall be paid to Tenant. 

            16.        Subordination to Financing.

                        (a)        Subject to the following provisions of this Paragraph 16(a), Tenant agrees
that this Lease shall, upon Landlord's and Lender's (if any) written request, be subject and
subordinate to the lien of any Mortgage, and Tenant agrees, upon demand, without cost, to
execute instruments as may be required to further effectuate or confirm such subordination. So
long as no Event of Default shall be outstanding, Tenant's tenancy shall not be disturbed, nor
shall this Lease be affected by any default under such Mortgage, and in the event of a foreclosure
or other enforcement of any such Mortgage, or sale in lieu thereof, the purchaser at such
foreclosure sale shall be bound to Tenant for the Term of this Lease and any extensions thereof,
the rights of Tenant hereunder shall expressly survive, and this Lease shall in all respects
continue in full force and effect so long as no Event of Default by Tenant has occurred and is
continuing. So long as no Event of Default by Tenant has occurred and is continuing, Tenant
shall not be named as a party defendant in any such foreclosure suit, except as may be required
by law.

                        (b)        Notwithstanding the provisions of subdivision (a) of this Paragraph 16, the
holder of the Mortgage to which this Lease is subject and subordinate, as provided in said
subdivision (a), shall have the right, at its sole option, at any time, to subordinate and subject the
Mortgage, in whole or in part, to this Lease by recording a unilateral declaration to such effect.

                        (c)        At any time prior to the expiration of the Term, Tenant agrees, at the
election and upon demand of any owner of the Premises, or of Lender who has granted non-
disturbance to Tenant pursuant to Paragraph 16(a) above, to attorn, from time to time, to any
such owner or Lender, upon the then executory terms and conditions of this Lease, for the
remainder of the term originally demised in this Lease and for any renewal term, provided that
such owner or Lender shall then be entitled to possession of the Premises subject to the
provisions of this Lease. The provisions of this subdivision (c) shall enure to the benefit of any
such owner or Lender, shall apply notwithstanding that, as a matter of law, this Lease may
terminate upon the foreclosure of the Mortgage, shall be self-operative upon any such demand,
and no further instrument shall be required to give effect to said provisions.

                        (d)        Tenant and Landlord agree that, if requested by the other, each shall,
 without charge, enter into (i) a subordination, non-disturbance and attornment agreement
reasonably requested by Lender, provided such agreement contains provisions relating to non-
disturbance in accordance with the provisions of subparagraph (a), and (ii) an agreement with
Lender whereby Tenant shall agree for the benefit of Lender that Tenant will not, without in each
case the prior written consent of Lender, (a) amend, modify, cancel or surrender the term of this
Lease except as expressly permitted by the provisions of this Lease, or enter into any agreement
with Landlord so to do, or (b) pay any installment of Basic Rent more than one (1) month in
advance of the due date thereof or otherwise than in the manner provided for in this Lease.

                        (e)        At any time after Landlord has advised Tenant of the existence of a
"Lender" hereunder, and before such Lender has confirmed to Tenant that the lien of its
Mortgage has been released, Tenant shall not (and shall not be obligated, even upon the request
of Landlord, to) execute any agreement or document purporting to subordinate this Lease to the
lien of any mortgage or deed of trust other than the Mortgage held by Lender.

            17.        Assignment, Subleasing.

                        (a)        Tenant is currently in occupancy and is operating its business at the
Premises. Tenant may not assign its interest in this Lease or sublease any portion(s) of the
Premises without the prior written consent of Landlord, which consent shall not be unreasonably
withheld or delayed. No sublease under, or assignment or other transfer of, this Lease shall
relieve Tenant of its obligations hereunder, which shall continue as the obligations of a principal
and not as the obligations of a surety or a guarantor. The joint and several liability of Tenant
named herein and any immediate and remote successor in interest of Tenant (by assignment or
otherwise), and the due performance of the obligations of this Lease on Tenant's part to be
performed or observed, shall not in any way be discharged, released or impaired by any (i)
agreement which modifies any of the rights or obligations of the parties under this Lease, (ii)
stipulation which extends the time within which an obligation under this Lease is to be
performed, (iii) waiver of the performance of an obligation required under this Lease, or (iv)
failure to enforce any of the obligations set forth in this Lease, unless in each case, the same has
been consented to by Landlord and Lender.

                        (b)        Each sublease of the Premises or any part thereof shall be subject and
subordinate to the provisions of this Lease. Tenant agrees that in the case of an assignment,
Tenant shall, not less than ten (10) days prior to the execution and delivery of any such
assignment as described in this Paragraph 17(b), give notice of such assignment to Landlord.
Tenant further agrees that in the case of such assignment, Tenant shall, within fifteen (15) days
after the execution and delivery of any such assignment, deliver to Landlord (i) a duplicate
original of such assignment in recordable form and (ii) an agreement executed and acknowledged
by the assignee in recordable form wherein the assignee shall agree to assume and agree to
observe and perform all of the terms and provisions of this Lease on the part of the Tenant to be
observed and performed from and after the date of such assignment, and, in the case of a
sublease, Tenant shall, within fifteen (15) days after the execution and delivery of such sublease,
deliver to Landlord a duplicate original of such sublease.

                        (c)        Upon the occurrence of an Event of Default under this Lease, Landlord
shall have the right to collect and enjoy all rents and other sums of money payable under any
sublease of any of the Premises, and Tenant hereby irrevocably and unconditionally assigns all
rights under any such sublease including rents and money to Landlord, which assignment may be
exercised upon and after (but not before) the occurrence of an Event of Default.

                        (d)        Any sublease shall provide that upon notice from Landlord and Lender of
an Event of Default, all rent due under such sublease shall be paid as so directed. In no event
shall Landlord or Lender have the right to direct the payment of sublease rents to any party other
than Tenant except in an aggregate amount equal to or less than the aggregate amounts due
hereunder.

            18.        Permitted Contests.    Notwithstanding any provision of this Lease to the contrary,
after prior written notice to Landlord and Lender and provided Landlord shall not have elected to
terminate this Lease as a result of an Event of Default, Tenant shall not be required to (i) pay any
Tax, (ii) comply with any Legal Requirement, or (iii) discharge or remove any lien, so long as
Tenant shall contest, in good faith and at its expense, the existence, the amount or the validity
thereof, the amount of the damages caused thereby, or the extent of its or Landlord's liability
therefor, by appropriate proceedings which shall operate during the pendency thereof to prevent
(v) the collection of, or other realization upon, the Tax or lien so contested, (w) the sale,
forfeiture or loss of any of the Premises, any Basic Rent or any Additional Rent to satisfy the
same or to pay any damages caused by the violation of the same, (x) any interference with the use
or occupancy of any of the Premises, (y) any interference with the payment of any Basic Rent or
any Additional Rent, and (z) the cancellation of any fire or other insurance policy. In no event
shall Tenant pursue any contest with respect to any Tax, Legal Requirement, or lien referred to
above in such manner that exposes Landlord, Tenant or Lender to any criminal liability, penalty
or sanction or material civil liability for which Tenant has not made provisions reasonably
acceptable to Landlord and Lender. Tenant shall be deemed to have made provisions reasonably
acceptable to Landlord and Lender if Tenant shall have provided Lender or Landlord in that order
as security for such contest, an amount of cash or bond equal to one hundred twenty-five percent
(125%) of the amount being contested, or other security satisfactory in the reasonable opinion of
Lender or Landlord in that order, in assuring the payment, compliance, discharge, removal or
other action, including all costs, attorneys' fees, interest and penalties, in the event that the
contest is unsuccessful. While any such proceedings are pending and the required security is
held by Lender or Landlord, in that order, Lender or Landlord, as the case may be, shall not have
the right to pay, remove or cause to be discharged the Tax, Legal Requirement or lien thereby
being contested unless Landlord or Lender reasonably believes that any one or more of the
conditions in subdivisions (v) through (z) shall not be prevented during the pendency of the
contest. Tenant further agrees that each such contest shall be promptly and diligently prosecuted
to a final conclusion, except that Tenant shall, so long as all of the conditions of the first sentence
of this Paragraph 18 are at all times complied with, have the right to attempt to settle or
compromise such contest through negotiations. Tenant shall pay any and all judgments, decrees
and costs (including all attorneys' fees and expenses) in connection with any such contest and
shall, promptly after the final determination of such contest, fully pay and discharge the amounts
which shall be levied, assessed, charged or imposed or be determined to be payable therein or in
connection therewith, together with all penalties, fines, interest, costs and expenses thereof or in
connection therewith, and perform all acts the performance of which shall be ordered or decreed
as a result thereof.

            19.        Default.    The occurrence of any one or more of the following events shall constitute
an Event of Default under this Lease:

                        (a)        Tenant's failure to make any payment of Basic Rent, Additional Rent or
other sum herein required to be paid by Tenant when due which continues unremedied for a
period of three (3) business days after notice thereof from Landlord or Lender; provided,
however, that neither Landlord nor Lender shall have any obligation to give Tenant notice of
such failure if Landlord or Lender has given such notice to Tenant three (3) times in any
consecutive twelve (12) month period.

                        (b)        An event occurs which is described in Paragraph 21 (Bankruptcy;
Insolvency) or Tenant causes, or gives cause for, the institution of any bankruptcy or receivership
proceedings as are described in Paragraph 21.

                        (c)        The estate or interest of Tenant in any of the Premises shall be levied upon
or attached in any proceeding and such estate or interest is about to be sold or transferred or such
process shall not be vacated or discharged within forty-five (45) days after such levy or
attachment.

                        (d)        A default occurs pursuant to the Purchase Agreement.

                        (e)        Tenant's failure to duly perform and observe, or Tenant's violation or
breach of, any other provision hereof not identified in (a) through (d) above, if such failure shall
continue for a period of thirty (30) days after notice thereof from Landlord or Lender, or if such
failure cannot be cured within such period of thirty (30) days, such period shall be extended for
such longer time as reasonably necessary provided that Tenant has commenced to cure such
default within said period of thirty (30) days and is actively, diligently and in good faith
proceeding with continuity to remedy such failure.

            20.        Landlord's Remedies.    After the occurrence of an Event of Default by Tenant,
Landlord shall have the right to exercise the following remedies:

                        (a)        Landlord may, at its option, continue this Lease in full force and effect,
without terminating Tenant's right to possession of the Premises, in which event Landlord shall
have the right to collect Basic Rent and all other rent and charges when due. In the alternative,
Landlord shall have the right to peaceably re-enter the Premises on the terms set forth in
subparagraph (b) below, but without such re-entry being deemed a termination of the Lease or an
acceptance by Landlord of a surrender thereof. Landlord shall also have the right, at its option,
from time to time, without terminating this Lease, to relet the Premises, or any part thereof, with
or without legal process, as the agent, and for the account, of Tenant upon such terms and
conditions as Landlord may deem advisable in its sole and absolute discretion (which terms may
be materially different from the terms of this Lease), in which event the rents received on such
reletting shall be applied (i) first to the reasonable and actual expenses of such reletting and
collection, including without limitation necessary renovation and alterations of the Premises,
reasonable and actual attorneys' fees and any reasonable and actual real estate commissions paid,
and (ii) thereafter toward payment of all sums due or to become due Landlord hereunder. If a
sufficient amount to pay such expenses and sums shall not be realized or secured, then Tenant
shall pay Landlord any such deficiency monthly, and Landlord may bring an action therefor as
such monthly deficiency shall arise. Landlord shall not, in any event, be required to pay Tenant
any sums received by Landlord on a reletting of the Premises in excess of the rent provided in
this Lease, but such excess shall reduce any accrued present or future obligations of Tenant
hereunder. Landlord's re-entry and reletting of the Premises without termination of this Lease
shall not preclude Landlord from subsequently terminating this Lease as set forth below.

                        (b)        Landlord may terminate this Lease by written notice to Tenant specifying a
date therefor, and this Lease shall then terminate on the date so specified as if such date had been
originally fixed as the expiration date of the Term. In the event of such termination, Landlord
shall be entitled to recover from Tenant the worth at the time of the award of all of the following:

                                    (i)        Any obligation which has accrued prior to the date of termination,
plus

                                    (ii)        The amount of unpaid Basic Rent and all other charges which
would have accrued after termination until the time of award.

                                    (iii)        The amount of unpaid rent for the balance of the Term (excluding
any option periods or portions thereof not previously exercised).

            As used in this Paragraph 20(b) the term, "worth at the time of the award," shall be
computed by allowing simple interest at the Default Rate for past due obligations, and using a
discount rate equal to the federal discount rate per annum on anticipated future obligations, on
the amount of the obligations payable on the date of such calculation. In the event this Lease
shall be terminated as provided above, by summary proceedings or otherwise, Landlord, its
agents, servants or representatives may immediately or at any time thereafter peaceably re-enter
and resume possession of the Premises and remove all persons and property therefrom, by
summary dispossession proceedings.

            In the event Landlord has any duty to mitigate damages hereunder following an Event of
Default and in any action or claim by Landlord or Lender against Tenant due to breach of this
Lease following an Event of Default, Landlord shall not be required to construct, repair, modify
or install any improvements in the Premises or to divide the Premises for multiple leaseholds in
any way whatsoever.

                        (c)        Landlord may recover from Tenant, and Tenant shall pay to Landlord upon
demand, as Additional Rent such reasonable and actual expenses as Landlord may incur
in recovering possession of the Premises, placing the same in good order and condition and
repairing the same for reletting, and all other reasonable and actual expenses, commissions and
charges incurred by Landlord in exercising any remedy provided herein or as a result of any
Event of Default by Tenant hereunder (including without limitation reasonable attorneys' fees),
provided that in no event shall Landlord be obligated to incur any such expenses or take any such
action in order to mitigate Tenant's damages.

            Except as provided in Paragraph 9 or 13(d), at any time upon prior notice to Tenant,
Landlord and Lender shall have the right, but shall not be required, to pay such sums or do any
act which requires the expenditure of monies which may be necessary or appropriate by reason of
the failure or neglect of Tenant to comply with any of its obligations under this Lease (Landlord
and Lender shall not, however, exercise any such rights unless the failure or neglect shall have
ripened into an Event of Default), and in the event of the exercise of such right by Landlord or
Lender, Tenant agrees to pay to Landlord or Lender forthwith upon demand, as Additional Rent,
all such sums including reasonable attorneys fees, together with interest thereon at the Default
Rate.

                        (d)        The various rights and remedies reserved to Landlord herein, are
cumulative, the rights and remedies described in Paragraph 20(a)-(d) shall survive termination of
this Lease and Landlord may pursue any and all such rights and remedies and any other available
to Landlord under applicable law or equity, whether at the same time or otherwise (to the extent
not inconsistent with specific provisions of this Lease); provided, however, that no remedy of
termination shall be available to Landlord except as expressly set forth in Paragraph 20(b) after
the occurrence of an Event of Default. Notwithstanding anything herein to the contrary,
Landlord expressly waives its right to forcibly dispossess Tenant from the Premises, whether
peaceably or otherwise, without judicial process, such that Landlord shall not be entitled to any
"commercial lockout" or any other provisions of applicable law which permit landlords to
dispossess tenants from commercial properties without the benefit of judicial review.

            21.        Bankruptcy; Insolvency.

                        (a)        Immediate Default.    Tenant shall be deemed to be in default under this
Lease (without Landlord giving any notice declaring such), upon the occurrence of an "Event of
Bankruptcy," which for the purposes of this Lease shall mean where Tenant or any part of the
Premises are placed in the hands of a receiver or trustee, or should Tenant file a voluntary
petition in bankruptcy, make an assignment for the benefit of creditors, become unable to or
admit in writing that it cannot pay its debts as such become due, or be finally adjudicated a
bankrupt or insolvent, or should Tenant petition or institute any proceedings under the United
States Bankruptcy Code or under any other state or federal act or law relating to the subject of
bankruptcy wherein Tenant seeks to be adjudicated a bankrupt, or to be dismissed of its debts, or
to effect a plan of dissolution, liquidation, readjustment, composition, arrangement, or
reorganization, or should any involuntary proceeding equivalent or similar to any of the
foregoing be filed against Tenant under any such bankruptcy laws, and not be dismissed within
sixty (60) days thereafter. The provisions of this Article shall also apply to each guarantor of this
Lease to the same extent as if the word "Tenant" were replaced by the name of such guarantor
throughout this Section, except that the first word hereof shall remain "Tenant."

                        (b)        Assumption of Lease.    If an Event of Bankruptcy occurs, the receiver or
trustee of Tenant's bankruptcy estate or Tenant as a debtor-in-possession may assume the Lease,
and may subsequently assign it, only if it performs the following within sixty (60) days after the
date of the filing of the voluntary petition, the entry of the order for relief or the date of
conversion or admission of inability to pay debts as such become due (or such additional time as
a court of competent jurisdiction may grant, for cause, upon a motion made within the original
sixty (60) day period):

                                    (i)        1 files a motion to assume the Lease with the appropriate court;

                                    (ii)        satisfies each of every one of the following conditions which
Landlord and Tenant acknowledge to be commercially reasonable:

                                    (iii)        cures all monetary and nonmonetary defaults under the Lease or
provides Landlord with Adequate Assurance (as defined in Paragraph 21(c) below) that it will be
able to cure all monetary defaults under the Lease within ten (10) days and all nonmonetary
defaults within thirty (30) days from the date of assumption and actually so cures all such
monetary and nonmonetary defaults under the Lease within said time periods;

                                    (iv)        compensates Landlord or provides Landlord with Adequate
Assurance that within ten (10) days after the date of assumption it will compensate Landlord for
any pecuniary loss that Landlord incurred as a result of the default of Tenant, the trustee or
debtor-in-possession, including without limitation, Landlord's reasonable costs and expenses,
including attorney's fees;

                                    (v)        provides Landlord with Adequate Assurance of Future
Performance (as defined in Paragraph 21(c) below) of all Tenant's future obligations under the
Lease; and

                                    (vi)        delivers to Landlord a written statement that the conditions in this
Paragraph 21(b) have been satisfied.

                        (c)        Need for Adequate Assurance and Adequate Assurance of Future Performance.

                                    (i)        For the purposes only of Paragraph 21(b) above, and in addition to
any other requirements under the Bankruptcy Code, any future federal bankruptcy laws and
applicable case law, "Adequate Assurance" shall mean at least entering an order segregating
sufficient cash to pay Landlord under Paragraph 21(b) above and granting to Landlord a valid
first lien and security interest (in a form acceptable to Landlord) in Tenant's property or its
bankruptcy estate, which lien and security interest secures the receiver's, trustee's or
debtor-in-possession's obligation to cure the monetary and nonmonetary defaults under the Lease
within the periods set forth in Paragraph 21(b) above.

                                    (ii)        For the purposes only of Paragraph 21(b) above, and in addition to
any other requirements under the Bankruptcy Code, any future federal bankruptcy law and
applicable case law, "Adequate Assurance of Future Performance" shall mean at least:

                                    (iii)        the receiver, trustee, or debtor-in-possession depositing with
Landlord, as security for the timely payment of rent and other monetary obligation, an amount
equal to the sum of two (2) months' Basic Rent;

                                    (iv)        the receiver, trustee or debtor-in-possession agreeing to pay in
advance, on each day that the Basic Rent is payable;

                                    (v)        the receiver, trustee or debtor-in-possession providing adequate
assurance, in a form acceptable to Landlord, of the source of the rent and other consideration due
under the Lease;

                                    (vi)        Tenant's bankruptcy estate and the receiver, trustee or
debtor-in-possession, providing adequate assurance, in a form acceptable to Landlord, that the
bankruptcy estate (and any successor after the conclusion of Tenant's bankruptcy proceedings)
will continue to have sufficient unencumbered assets after the payment of all secured obligations
and administrative expenses to assure Landlord that the bankruptcy estate (and any successor
after the conclusion of Tenant's bankruptcy proceedings) will have sufficient funds to fulfill
Tenant's obligations under the Lease and to keep the Premises properly staffed with sufficient
employees to conduct a fully operational, actively promoted business on the Premises.

                        (d)        Assignment of Lease.

                                    (i)        If the receiver, trustee or debtor-in-possession assumes the Lease
under Paragraph 21(b) above and applicable law, it may assign its interest in this Lease only if
the proposed assignee first provides Landlord with Adequate Assurance of Future Performance
of all of Tenant's obligations under the Lease and if Landlord determines in the exercise of its
reasonable business judgement that the assignment of the Lease will not breach any other Lease,
mortgage, financing agreement, or other agreement relating to the Premises by which Landlord is
bound (and Landlord is not required to obtain consents or waivers from any third party required
under any Lease, mortgage or financing agreement or other agreement by which Landlord is
bound);

                                    (ii)        For purposes of this Paragraph 21(d)(ii) only, and in addition to
any other requirements under the Bankruptcy Code, any future bankruptcy law and applicable
case law, "Adequate Assurance of Future Performance" shall mean at least the satisfaction of the
following conditions which Landlord and Tenant agree and acknowledge to be commercially
reasonable;

                                    (iii)        the proposed assignee submitting a current financial statement,
audited by a certified public accountant, that shows a tangible net worth and working capital in
amounts determined in the reasonable business judgment of Landlord to be sufficient to assure
the future performance by the assignee of all Tenant's obligations under the Lease;

                                    (iv)        if requested by Landlord in the exercise of its reasonable business
judgment, the proposed assignee obtaining a guarantee (in form and substance satisfactory to
Landlord) from one or more persons who satisfy Landlord's standards of credit worthiness;

                                    (v)        the proposed assignee submitting written evidence satisfactory to
Landlord in the exercise of its reasonable business judgment, of substantial business experience
in operating facilities similar to the Premises.

                        (e)        Debtors' Obligations.    Upon the filing of a petition by or against Tenant
under any bankruptcy provision, Tenant, as debtor and debtor-in-possession, and any trustee who
may be appointed agree to adequately protect Landlord as follows: (i) to perform each and every
obligation of Tenant under this Lease until such time as this Lease is either rejected or assumed
by bankruptcy court order; (ii) to pay currently all monetary obligations required under this
Lease, including without limitation, the payment of all sums payable hereunder which are
considered to be reasonable compensation for the use and occupancy of the Premises; and (iii) to
provide Landlord a minimum of thirty (30) days' written notice, unless a shorter period is agreed
to in writing by the parties, of any proceeding relating to any assumption of this Lease or any
intent to abandon the Premises, which abandonment shall be deemed a rejection of this Lease.

            22.        Notices.    All notices, demands, requests, consents, approvals, offers, statements and
other instruments or communications required or permitted to be given pursuant to the provisions
of this Lease (collectively "Notice" or "Notices") shall be in writing and shall be deemed to have
been given for all purposes (i) three (3) days after having been sent by United States mail, by
registered or certified mail, return receipt requested, postage prepaid, addressed to the other party
at its address as stated below, (ii) one (1) day after having been sent by Federal Express or other
nationally recognized air courier service, or (iii) upon receipt after having been personally
delivered, to the Addresses stated below:

                        (a)        If to Landlord, at the address set forth on the first page of this Lease.

                        (b)        If to Tenant:

                                    Ace Hardware Corporation
                                    2200 Kensington Court
                                    Oak Brook, Illinois 60523-2100
                                    Attention: Corporate Property Manager


                                    With a copy to:

                                    Ace Hardware Corporation
                                    2200 Kensington Court
                                    Oak Brook, Illinois 60523-2100
                                    Attention: John Van Zeyl, Esq.

If any Lender shall have advised Tenant by Notice in the manner aforesaid that it is the holder of
a Mortgage and stating in said Notice its address for the receipt of Notices, then simultaneously
with the giving of any Notice by Tenant to Landlord, Tenant shall serve one or more copies of
such Notice upon Lender in the manner aforesaid and no Notice shall be effective unless and
until Lender shall be sent a copy thereof. For the purposes of this Paragraph, any party may
substitute its address by giving fifteen days' notice to the other party in the manner provided
above; however, Tenant must provide a street address within the State for personal delivery.

            23.        Memorandum Lease; Estoppel Certificates.    Tenant shall execute, deliver and
record, file or register from time to time all such instruments as may be required by any present
or future law in order to evidence the respective interests of Landlord and Tenant in any of the
Premises, and shall cause a memorandum of this Lease, substantially in the form attached hereto
as Exhibit B (the "Memorandum"), and any supplement hereto or to such other instrument, if
any, as may be appropriate, to be recorded, filed or registered and re-recorded, refiled or re-
registered in such manner and in such places as may be required by any present or future law in
order to give public notice and protect the validity of this Lease. In the event of any discrepancy
between the provisions of said recorded memorandum of this Lease or any other recorded
instrument referring to this Lease and the provisions of this Lease, the provisions of this Lease
shall prevail. Tenant shall, at any time and from time to time, within twenty (20) days after
written request by Landlord (or, in the case of an estoppel certificate, within twenty (20) days
after written request of Landlord or Lender), execute, acknowledge and deliver to the other a
statement in writing, executed by Tenant or, if other than an individual, by a President, Vice
President or authorized general partner, principal officer or agent certifying (i) that this Lease is
unmodified and in full effect (or, if there have been modifications, that this Lease is in full effect
as modified, setting forth such modifications); (ii) the dates to which Basic Rent payable
hereunder has been paid; (iii) that to the knowledge of the party executing such certificate no
default by either Landlord or Tenant exists hereunder or specifying each such of which such party
may have knowledge; (iv) the remaining Term hereof; (v) that there are no proceedings pending
or threatened against Tenant before or by any court or administrative agency which if adversely
decided would materially and adversely affect the financial condition and operations of Tenant or
if any such proceedings are pending or threatened to said party's knowledge, specifying and
describing the same; and (vi) such other facts regarding the Lease, Premises or Tenant that are
reasonably requested by Landlord. It is intended that any such statements may be relied upon by
Lender, the recipient of such statements or their assignees or by any prospective mortgagee,
purchaser, or assignee of Landlord.

            24.        Surrender and Holding Over.    Upon the expiration or earlier termination of this
Lease, Tenant shall peaceably leave and surrender the Premises (except as to any portion thereof
with respect to which this Lease has previously terminated) to Landlord in the same condition in
which the Premises were originally received from Landlord at the commencement of this Lease,
except as to the Racking/Shelving Items as set forth in Paragraph 9(a), any repair or Alteration as
permitted or required by any provision of this Lease, and except for ordinary wear and tear and
damage by fire, casualty or condemnation but only to the extent Tenant is not required to repair
the same hereunder. Notwithstanding the foregoing, within one (1) year after the
Commencement Date, Tenant shall, at its sole cost and expense: (a) repair the roof to a
Serviceable Condition (as defined on Exhibit D attached hereto and incorporated herein by this
reference) and (b) repair the deferred maintenance items set forth in paragraph two of Landlord's
letter of February 21, 2002, a copy of which is attached hereto as Exhibit E and incorporated
herein by this reference). Prior to the expiration or earlier termination of this Lease, Tenant shall,
at Tenant's sole cost and expense, remove the Racking/Shelving Items from the Building and
repair any damage caused by such removal including without limitation capping all in-rack
sprinklers, cutting all bolts and leaving the floor in a smooth condition. Tenant may remove at
Tenant's sole cost and expense from the Premises on or prior to such expiration or earlier
termination Tenant's Trade Fixtures and personal property which are owned by Tenant or third
parties other than Landlord, and Tenant at its expense shall, on or prior to such expiration or
earlier termination, repair any damage caused by such removal. Tenant's Trade Fixtures and
personal property not so removed at the end of the Term or within thirty days after the earlier
termination of the Term for any reason whatsoever shall become the property of Landlord, and
Landlord may thereafter cause such property to be removed from the Premises. Landlord shall
not in any manner or to any extent be obligated to reimburse Tenant for any property which
becomes the property of Landlord as a result of such expiration or earlier termination. Upon
such expiration or earlier termination, no party shall have any further rights or obligations
hereunder except as specifically provided herein.

            Any holding over by Tenant of the Premises after the expiration or earlier termination of
the term of this Lease or any extensions thereof shall operate and be construed as tenancy from
month to month only, at one hundred fifty percent (150%) of the Basic Rent reserved herein and
upon the same terms and conditions as contained in this Lease. Notwithstanding the foregoing,
any holding over without Landlord's consent for a period greater than thirty (30) days shall
entitle Landlord, in addition to collecting Basic Rent at a rate of two hundred percent (200%)
thereof, to exercise all rights and remedies provided by law or in equity, including the remedies
of Paragraph 20. During any holding over by Tenant of the Premises, Tenant shall be obligated
to pay Landlord, in addition to Basic Rent as set forth in this Paragraph 24, all Additional Rent
due under this Lease.

            25.        No Merger of Title.    There shall be no merger of this Lease nor of the leasehold
estate created by this Lease with the fee estate in or ownership of any of the Premises by reason
of the fact that the same person, corporation, firm or other entity may acquire or hold or own,
directly or indirectly, (i) this Lease or the leasehold estate created by this Lease or any interest in
this Lease or in such leasehold estate and (ii) the fee estate or ownership of any of the Premises
or any interest in such fee estate or ownership. No such merger shall occur unless and until all
persons, corporations, firms and other entities having any interest in (x) this Lease or the
leasehold estate created by this Lease and (y) the fee estate in or ownership of the Premises
including, without limitation, Lender's interest therein, or any part thereof sought to be merged
shall join in a written instrument effecting such merger and shall duly record the same.

            26.        Landlord and Lender Exculpation.    Anything contained herein to the contrary
notwithstanding, any claim based on or in respect of any liability of Landlord under this Lease
shall be enforced only against the Landlord's interest in Premises and shall not be enforced
against the Landlord individually or personally. Tenant agrees that any assignment by Landlord
of Landlord's interest in this Lease, or the rents payable hereunder, whether absolute or
conditional in nature or otherwise, which assignment is made to Lender solely as additional
collateral related to a mortgage, and the acceptance thereof by Lender shall never be treated as an
assumption by Lender of any obligations of Landlord hereunder unless Lender shall, by notice
sent to Tenant, specifically elect, and that Lender shall be treated as having assumed Landlord's
obligations hereunder only upon purchase of the Premises pursuant to foreclosure of the
Mortgage or by deed in lieu thereof, or other conveyance, and then only subject to the limitations
set forth in the first sentence hereof.

            27.        Hazardous Substances.

                        (a)        Tenant represents, warrants and covenants that it will not on, about, or
under the Premises, make, treat or dispose of any "hazardous substances" as that term is defined
in the Comprehensive Environmental Response, Compensation and Liability Act, and the rules
and regulations promulgated pursuant thereto, as from time to time amended, 42 U.S.C. § 9601 et
seq. (the "Act"), but the foregoing shall not prevent the use to the extent necessary and customary
in normal operations of Tenant's business of any such substances in accordance with applicable
laws and regulations and Tenant represents, warrants and covenants that it will at all times
comply with the Act and any other federal, state or local laws, rules or regulations governing
Hazardous Materials. "Hazardous Materials" as used herein shall include, without limitation, all
"hazardous substances" (as defined in the Act), chemicals, petroleum, crude oil or any fraction
thereof, hydrocarbons, polychlorinated biphenyls (PCBs), asbestos, asbestos-containing materials
and/or products, urea formaldehyde, or any substances which are classified as "hazardous" or
"toxic" under the Act; hazardous waste as defined under the Solid Waste Disposal Act, as
amended 42 U.S.C. § 6901; air pollutants regulated under the Clean Air Act, as amended, 42
U.S.C. § 7401, et seq.; pollutants as defined under the Clean Water Act, as amended, 33 U.S.C.
§ 1251, et seq., any pesticide as defined by Federal Insecticide, Fungicide, and Rodenticide Act,
as amended, 7 U.S.C. § 136, et seq., any hazardous chemical substance or mixture or imminently
hazardous substance or mixture regulated by the Toxic Substances Control Act, as amended, 15
U.S.C. § 2601, et seq., any substance listed in the United States Department of Transportation
Table at 45 CFR 172.101; any chemicals included in regulations promulgated under the above
listed statutes or any modifications thereof or successor statutes thereto; any explosives,
radioactive material, and any chemical regulated by state statutes similar to the federal statutes
listed above and regulations promulgated under such state statutes.

                        (b)        To the extent required by the Act and/or any federal, state or local laws,
rules or regulations governing Hazardous Materials, Tenant shall remove any Hazardous
Materials whether now or hereafter existing on the Premises and whether or not arising out of or
in any manner connected with Tenant's occupancy of the Premises during the Initial Term or any
extension or renewal Term thereof. Tenant shall and hereby does agree to defend, indemnify and
hold Lender and Landlord, their members, officers, directors, shareholders, partners and
employees harmless from and against any and all causes of actions, suits, demands or judgments
of any nature whatsoever, obligations, losses, damages, penalties, expenses, fees, claims, costs
(including response and remedial costs), and liabilities, including, but not limited to, attorneys'
fees and expenses and costs of litigation, arising out of or in any manner connected with (i) the
violation of any applicable federal, state or local environmental law with respect to the Premises
or (ii) the "release" or "threatened release" of, or failure to remove as required by this
Paragraph 26, Hazardous Materials on or from the Premises or any portion or portions thereof,
now or hereafter existing during the initial term and any extension or renewal Term whether or
not arising out of or in any manner connected with Tenants' occupancy of the Premises during
the Initial Term or any extension or renewal Term. Tenant's indemnification obligations under
this Paragraph 27(b) are in addition to, and in no way limit, Tenant's indemnification obligations
under Paragraph 35.

                        (c)        Tenant shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Materials without the express prior written consent of
Landlord and timely compliance (at Tenant's sole cost and expense) with all applicable Legal
Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below
ground storage tank; (ii) the generation, possession, storage, use, transportation, or disposal of a
Hazardous Materials that requires a permit from, or with respect to which a report, notice,
registration, or business plan is required to be filed with, any governmental authority; and/or (iii)
the presence at the Premises of any Hazardous Materials with respect to which any applicable
Legal Requirement requires that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the foregoing, Tenant may use any ordinary and
customary materials reasonably required to be used in the normal course of Tenant's business (in
compliance with the use set forth in Paragraph 8 above) so long as such use is in compliance with
all applicable Legal Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or expose Landlord to
any liability therefor. In addition, Landlord may condition its consent to any Reportable Use
upon receiving such additional assurances as Landlord reasonably deems necessary to protect
itself, the public, the Premises, and/or the environment against damage, contamination, injury,
and/or liability, including, but not limited to, the installation (and removal on or before Lease
expiration or termination) of protective modifications (such as concrete encasements). Tenant
will not store combustible or flammable materials on the Premises in violation of the Act and any
other federal, state or local laws, rules or regulations governing Hazardous Materials. The
provisions of this Paragraph 27 shall survive the expiration or earlier termination of this Lease.

            28.        Entry by Landlord and Lender.    Landlord, Lender and their authorized
representatives shall have the right upon reasonable notice (which shall be not less than twenty-
four (24) hours except in the case of emergency) to enter the Premises at all reasonable business
hours, (and at all other times in the event of an emergency), for (i) the purpose of inspecting the
same, including, but not limited to, conducting soil, hydrology, environmental, and all other
testing and examinations it deems necessary, or for the purpose of doing any work under
Paragraph 9, and may take all such action thereon as may be necessary or appropriate for any
such purpose (but nothing contained in this Lease or otherwise shall create or imply any duty
upon the part of Landlord or Lender to make any such inspection or do any such work), and (ii)
the purpose of showing the Premises to prospective purchasers and mortgagees and, at any time
within twelve (12) months prior to the expiration of the term of this Lease for the purpose of
showing the same to prospective tenants. No such entry shall constitute an eviction of Tenant but
any such entry shall be done by Landlord in such reasonable manner as to minimize any
disruption of Tenant's business operation.

            29.        Statements.    Tenant named herein shall submit to Lender and Landlord within 90
days of the end of each fiscal year, annual balance sheets, income and cash flow statements for
Tenant named herein, certified by an independent public accountant. Copies of the l0Ks filed
with the Securities and Exchange Commission will satisfy the requirement contained in this
Paragraph 29. The obligations of Tenant named herein shall continue whether or not this Lease
shall have been assigned.

            30.        No Usury.    The intention of the parties being to conform strictly to the usury laws
now in force in the State, whenever any provision herein provides for payment by Tenant to
Landlord of interest at a rate in excess of the legal rate permitted to be charged, such rate herein
provided to be paid shall be deemed reduced to such legal rate.

            31.        Broker.    Landlord and Tenant each hereby represents and warrants to the other that
no brokers represented Landlord and Tenant with respect to this Lease. Each party hereby agrees
to indemnify, protect, hold harmless and defend the other against all claims by any party for
broker fees, finder fees or any other fee or commission in connection with this Lease based upon
the actions of the indemnifying party.

            32.        Waiver of Landlord's Lien.    Landlord hereby waives any right to distrain Tenant's
Trade Fixtures or any property of Tenant and any Landlord's lien or similar lien upon Tenant's
Trade Fixtures and any other property of Tenant regardless of whether such lien is created or
otherwise. Landlord agrees, at the request of Tenant, to execute a waiver of any Landlord's or
similar lien for the benefit of any present or future holder of a security interest in or lessor of any
of Tenant's Trade Fixtures or any other personal property of Tenant. Landlord acknowledges
and agrees in the future to acknowledge (in a written form reasonably satisfactory to Tenant) to
such persons and entities at such times and for such purposes as Tenant may reasonably request
that Tenant's Trade Fixtures are Tenant's property and not part of Improvements (regardless of
whether or to what extent such Tenant's Trade Fixtures are affixed to the Improvements) or
otherwise subject to the terms of this Lease; however, Landlord shall not be obligated or
responsible to notify any such person of Tenant's default hereunder or keep safe any such
Tenant's Trade Fixtures for the benefit of any such person, or allow any sales or auctions of such
Tenant's Trade Fixtures on the Premises, and any such person shall be obligated to pay to
Landlord rental or moving or storage fees incurred by Landlord for such Tenant's Trade Fixtures
after the termination of this Lease and to repair any damage to the Premises caused by such
person's removal of any Tenant's Trade Fixtures. Tenant shall be obligated to pay Landlord's
attorney fees for the review and/or preparation of any such acknowledgment. 

            33.        No Waiver.    No delay or failure by either party to enforce its rights hereunder shall
be construed as a waiver, modification or relinquishment thereof.

            34.        Separability.    If any term or provision of this Lease or the application thereof to any
provision of this Lease or the application thereof to any person or circumstances shall to any
extent be invalid and unenforceable, the remainder of this Lease, or the application of such term
or provision to person or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be
valid and shall be enforced to the extent permitted by law.

            35.        Indemnification.    Tenant agrees to defend, pay, protect, indemnify, save and hold
harmless Landlord, Landlord's members, partners, officers, directors, shareholders, employees
and agents, and Lender (collectively, "Indemnitees") from and against any and all liabilities,
losses, damages, penalties, costs, expenses (including reasonable attorneys' fees and expenses),
causes of action, suits, claims, demands or judgments of any nature whatsoever, howsoever
caused, arising from any of the Premises or Adjoining Property, the use, non-use, occupancy,
condition, design, construction, maintenance, repair or rebuilding of any of, or otherwise relating
to, the Premises or Adjoining Property, the failure to perform any of Tenant's obligations under
this Lease, and any injury to or death of any person or persons or any loss of or damage to any
property, real or personal, in any manner arising therefrom connected therewith or occurring
thereon (collectively, "Losses"), whether or not any of the Indemnitees has or should have
knowledge or notice of the defect or conditions, if any, causing or contributing to said Loss. In
case any action or proceeding is brought against any of the Indemnitees by reason of any such
Loss, Tenant covenants upon notice from any of the Indemnitees to defend such Indemnitee in
such action, with the expenses of such defense paid by Tenant, and such Indemnitee will
cooperate and assist in the defense of such action or proceeding if reasonably requested so to do
by Tenant. The obligations of Tenant under this Paragraph 35 shall survive any termination of
this Lease.

            36.        Headings.    The paragraph headings in this Lease are used only for convenience in
finding the subject matters and are not part of this Lease or to be used in determining the intent of
the parties or otherwise interpreting this Lease.

            37.        Modifications.    This Lease may be modified, amended, discharged or waived only
by an agreement in writing signed by the party against whom enforcement of any such
modification, amendment, discharge or waiver is sought. Each of Tenant and Landlord agrees
that it will not modify or amend this Lease without the written consent of Lender within any
period during which there is a Lender hereunder. In the event of any inconsistent instruction
from Landlord and Lender, Tenant shall comply with instruction of Lender.

            38.        Successors, Assigns.    The covenants of this Lease shall run with the Land and bind
Tenant, the heirs, distributees, personal representatives, successors and permitted assigns of
Tenant and all present and subsequent encumbrancers and subtenants of any of the Premises, and
shall inure to the benefit of and bind Landlord, its successors and assigns. In the event Tenant is
comprised of more than one individual or entity, the obligation of each shall be joint and several.
The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of
Landlord are concerned, shall be limited to mean and include only the owner or owners of the
Premises or holder of the Mortgage in possession at the time in question of the Premises and in
the event of any transfer or transfers of the title of the Premises, the Landlord herein named (and
in case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed
and relieved from and after the date of such transfer and conveyance of all personal liability as
respects the performance of any covenants or obligations on the part of Landlord contained in
this Lease thereafter to be performed.

            39.        Counterparts.    This Lease may be executed in several counterparts, which together
shall be deemed one and the same instrument.

            40.        Governing Law.    This Lease shall be governed by and construed according to the
laws of the State.

                                                        [Signatures follow immediately]


            IN WITNESS WHEREOF, Landlord and Tenant have caused this instrument to be
executed as of June 19, 2002.

LANDLORD:                                                        TENANT:

SUNSET-SCE, LLC, a California limited                ACE HARDWARE CORPORATION, a
liability company                                                      Delaware corporation

By:    Sierra Crest Equities, LLC, a
         California limited liability company                   By:                                                         

          By:                                                                Name:  David F. Myer
          Name:  James B. Allen
          Its:       Chief Executive Officer                       Its:       Senior Vice President Retail Support

          By:                                              
          Name:  Brett R. Baumgarten
          Its:        President

JL INTERESTS, LLC, a California limited
liability company

By:                                                         
Name:  John Lazovich
Its:       Sole Member


                                                              EXHIBIT "A"

                                                    (Legal Descripition of Land)

That certain real property located in the City of Rocklin, County of Placer, State of California,
 more particularly described as follows:

THAT PORTION OF THE SOUTH ONE-HALF OF SECTIONS 10 AND 11, TOWNSHIP 11
NORTH, RANGE 6 EAST, M.D.B.&M., INCLUDED WITHIN THE BOUNDARIES OF THE
LAND SHOWN AND DESIGNATED AS PARCEL "A" OF PARCEL MAP NO. DL-86-08,
FILED FOR RECORD IN THE OFFICE OF THE RECORDER OF PLACER COUNTY,
CALIFORNIA, ON JULY 10, 1987, IN BOOK 23 OF PARCEL MAPS, AT PAGE 69.

APN: 017-081-024


                                                              EXHIBIT "B"

                                                        (Memorandum Lease)

RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:


Stephen G. Stwora-Hail, Esq.
Downey, Brand, Seymour & Rohwer LLP
555 Capitol Mall
10th Floor
Sacramento, California 95814
Tel: (916) 441-0131

                                                                                                                         (SPACE ABOVE THIS LINE FOR RECORDER'S USE)

                                                                    MEMORANDUM LEASEThis Memorandum Lease ("Memorandum") made as of the ____ day of __________,
2002, by and between ACE HARDWARE CORPORATION, a Delaware corporation ("Tenant")
and SUNSET-SCE, LLC, a California limited liability company, as to an undivided 75% interest
as tenant-in-common, and JL INTERESTS, LLC, a California limited liability company, as to an
undivided 25% interest as tenant-in-common (collectively, "Landlord").

                                                            WITNESSETH:

            1.        Landlord and Tenant entered into a lease, dated __________, 2002 (the "Lease"),
for certain real property located in the City of Rocklin, County of Placer, State of California, and
commonly known as 1101 Sunset Boulevard, Rocklin, California, as more particularly described
on Exhibit "A" attached hereto and made a part hereof ("Property").

            2.        The Lease has a term commencing on _____________, 2002 ("Commencement
Date") and continuing to the end of the twenty-seventh (27th) month thereafter, and the Lease
provides that Tenant shall have the right to terminate the Lease, effective upon the date which is
the last day of the eighteenth (18th) month after the Commencement Date, or which is the last
day of any succeeding month through the twenty-sixth (26th) month after the Commencement
Date, upon delivery of at least four (4) months' prior written notice to Landlord of Tenant's
intention to terminate the Lease.

            3.        The terms and conditions of the Lease are incorporated herein by this reference.
 This Memorandum is prepared and recorded for the purpose of putting the public on notice of the
Lease, and in no way modifies the terms and conditions of the Lease.  In the event of any
inconsistency between the terms and conditions of this Memorandum and the terms and
conditions of the Lease, the terms and conditions of the Lease shall control.

                                                        [Signatures follow immediately]


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

LANDLORD:                                                        TENANT:

SUNSET-SCE, LLC, a California limited                ACE HARDWARE CORPORATION, a
liability company                                                      Delaware corporation

By:    Sierra Crest Equities, LLC, a
         California limited liability company                   By:                                                         
                                                                               Name:                                                    
          By:                                                                Title:                                                       
          Name:  James B. Allen
          Its:       Chief Executive Officer

          By:                                              
          Name:  Brett R. Baumgarten
          Its:        President

JL INTERESTS, LLC, a California limited
liability company

By:                                                         
Name:  John Lazovich
Its:       Sole Member


STATE OF ________________________

COUNTY OF ______________________

            On __________________, 2002, before me, a notary public, in and for said State,
personally appeared _____________________________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.

            WITNESS my hand and official seal.


                                                                                    ______________________________
                                                                                    Notary Public

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

STATE OF ________________________

COUNTY OF ______________________

            On __________________, 2002, before me, a notary public, in and for said State,
personally appeared _____________________________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.

            WITNESS my hand and official seal.


                                                                                    ______________________________
                                                                                    Notary Public

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

STATE OF ________________________

COUNTY OF ______________________

            On __________________, 2002, before me, a notary public, in and for said State,
personally appeared _____________________________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.

            WITNESS my hand and official seal.


                                                                                    ______________________________
                                                                                    Notary Public

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

STATE OF ________________________

COUNTY OF ______________________

            On __________________, 2002, before me, a notary public, in and for said State,
personally appeared _____________________________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence) to be the
person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.

            WITNESS my hand and official seal.


                                                                                    ______________________________
                                                                                    Notary Public

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


                                                              EXHIBIT "C"

                                                     (Landlord's Trade Fixtures)
1.        carpet tiles
2.        TV Monitors
3.        miniblinds
4.        fire extinguishers
5.        first aid kits
6.        coffee machines
7.        ice machine
8.        bulletin boards
9.        wall clocks
10.      plants
11.      trash/aluminum recycle cans
12.      sound masking/PA system
13.      HVAC automated control system
14.      fire alarm system
15.      card access system
16.      intrusion alarm system
17.      grease/dry erase boards
18.      lobby furniture/rug
19.      paintings
20.      adjustable wall shelving
21.      lawn irrigation system
22.      parking lot signs
23.      lawn lights
24.      exterior lights
25.      CCTV cameras and recorders
26.      outside trash receptacles
27.      picnic tables
28.      phone room equipment
29.      audio/visual screens
30.      in-rack sprinkler systems
31.      warehouse signage
32.      corrugated cardboard baler


                                                              EXHIBIT "D"

                                                       (Serviceable Condition)

            "Serviceable Condition" shall mean in a water-tight condition, as required by applicable
by law.


                                                              EXHIBIT "E"

                                            (Landlord's Letter of February 21, 2002)

                                                            [To be attached]

EX-10

                                                                FOURTH AMENDMENT
                                                                                TO
                                                       ACE HARDWARE CORPORATION
                                                  RESTATED OFFICER INCENTIVE PLAN

    Pursuant to Section 5 of the Ace Hardware Corporation Restated Officer Incentive Plan ("The Plan"),
    effective January 1, 2003, the Company hereby amends the Plan as follows:

1. Exhibit A is restated to set forth the participants and tiers for the ST Plan and VA Plan for plan
   years commencing January 1, 2003 as set forth on Exhibit A (2003).
   
   
2. Exhibits B and BB are modified and restated to set forth the multiplier matrix for the team portion
   of the short term goal, and the method of calculation for the retail portion of the short term goal, as
   set forth on Exhibit B (2003) and Exhibit BB (2003), respectively.
   
   
3. Exhibit C is modified and restated and presents a financial model which supports the VA Plan, as set
   forth in Exhibit C (2003).
   
   
4. Section 7 shall be amended by deleting the third and fourth paragraph of Subsection Performance
   Measure as amended by the First Amendment and substituting the following:

                Following is a presentation of ratios in effect as of January 1, 2003 pertaining to the VA Plan.
                These ratios may be adjusted from time to time by the Board (as set forth on Exhibit A).

• Gross Patronage Dividend Threshold for actual RSC sales remains at 5.4 percent.
• Permanent Sharing Ratio remains at 4.91 percent.

5. This Fourth Amendment is effective January 1, 2003.

    Except as specifically amended herein, the Plan and the First, Second and Third Amendments to the
    Plan shall remain in full force and effect as prior to this Fourth Amendment.

    Dated: December 11, 2002                                    Ace Hardware Corporation
                                                                                  a Delaware corporation

                                                                                  By:_________________________________
                                                                                  Chairman of the Board of Directors

                                                                                  and

                                                                                  By:_________________________________
                                                                                  President and CEO

EX-10

                                             ACE HARDWARE CORPORATION

                                                NATIONAL SUPPLY NETWORK

                                       DISTRIBUTOR FRANCHISE AGREEMENT




                                                    TABLE OF CONTENTS

PARAGRAPH

        1.        DEFINITIONS AND BACKGROUND
        2.        GRANT OF FRANCHISE
        3.        DURATION AND RENEWAL
        4.        LOCATION AND DEVELOPMENT OF FRANCHISED BUSINESS
        5.        TRAINING AND SUPPORT SERVICES
        6.        MARKS
        7.        PROPRIETARY INFORMATION
        8.        RELATIONSHIP OF THE PARTIES
        9.        FRANCHISE AND OTHER FEES
      10.        PURCHASES OF PRODUCT
      11.        OPERATING STANDARDS
      12.        ADVERTISING
      13.        TRANSFER
      14.        TERMINATION OF THIS AGREEMENT
      15.        RIGHTS OF THE COMPANY AND OBLIGATIONS OF DISTRIBUTOR
                   UPON TERMINATION OR EXPIRATION OF THE FRANCHISE
      16.        ENFORCEMENT
      17.        NOTICES AND PAYMENTS
      18.        PERSONAL GUARANTY


RIDERS:  

        A.    TRADE NAME AND ADDRESS OF DISTRIBUTOR'S BUSINESS 

        B.    GUARANTY AND ASSUMPTION OF OBLIGATIONS


                                            ACE HARDWARE CORPORATION
                                               NATIONAL SUPPLY NETWORK
                                       DISTRIBUTOR FRANCHISE AGREEMENT


This Franchise Agreement, made this              day of                                    ,            , by and
between ACE HARDWARE CORPORATION, a Delaware corporation having its principal
place of business at 2200 Kensington Court, Oak Brook, Illinois 60523 (the "Company"), and 
                                                                                                                           , having its
principal place of business at   ____                                                                ("Distributor").


1.    DEFINITIONS AND BACKGROUND: 

        a.    The Company, as the result of the expenditure of time, skill, effort and money has
developed and owns a proprietary System ("System") identified by certain Marks (as hereinafter
defined) relating to a commercial/industrial distribution system for the Company's non-private
labeled commercial/industrial products (the "Product" or "Products").  The System includes, but
is not limited to, inventory and end user consumer supply and marketing support.

        b.    The Company, as a wholesaler of the Products, wishes to develop a distributorship
relationship with existing businesses ("Distributors") pursuant to which the Distributors will
purchase from the Company an ongoing volume of Products, for resale to the Distributors'
commercial/industrial customers, including, but not limited to, industrial plants, government,
and private institutions, building owners, contractors, equipment manufacturers, and a wide
variety of users of "MRO" (maintenance, repair and operations) materials.  

        c.    The Company has a separate line of business, which is the establishment of "Ace
Hardware" retail stores, supplying consumer (as distinguished from commercial or industrial)
hardware products.  Those retail stores are owned by Member/Owners of the Company, which is
a cooperative.  The Members do business as "Ace Hardware" and they sell certain Ace brand
merchandise and products bearing the Ace trademarks.

        d.    The distinguishing characteristics of the System include, but are not limited to, the
National Supply Network confidential and proprietary information ("Proprietary Information");
techniques for merchandising and marketing of products and services and end customer support
tools, all of which Company may, but is not required to, periodically change, improve and
further develop.

        e.    On March 1, 2002 and March 29, 2002, the Company filed applications to register
the marks "National Supply Network" and "NSN," respectively, on the Principal Register
or Supplemental Register of the United States Patent and Trademark Office as part of the
System ("Marks").

        f.    The Company continues to develop, use and control the Marks for use by itself,
its affiliates, subsidiaries, dealers, licensees and franchisees in order to represent the System's
high standards of operations, quality, products, appearance and service.

        g.    The Company grants to certain qualified persons franchises to be an authorized
National Supply Network Distributor, providing non-private labeled commercial/industrial
products and services furnished by the Company to sell in their business ("Franchised Business")
using the System and the Marks.

        h.    Distributor has an existing supply business under the trade name described on
Rider "A" of this Agreement, and located at the address described on Rider "A." 

        i.    Distributor desires to be an authorized National Supply Network Distributor under
the Company's System and to obtain a franchise from the Company for that purpose, as well as
to receive the support services provided by the Company.

        j.    Distributor understands and acknowledges the importance of the Company's high
standards of quality and service and the necessity of being an authorized National Supply
Network Distributor in conformity with the Company's standards and specifications.

        k.    The Company expressly disclaims the making of and Distributor acknowledges
that Distributor has not received or relied upon, any warranty or guaranty, express or implied, as
to the revenues, profits or success of the business venture contemplated by this Agreement.

        l.    Distributor acknowledges that it has no knowledge of any representations made by
Company, its subsidiaries and their respective officers, directors, shareholders, employees or
agents that are contrary to the statements made in Company's Uniform Franchise Offering
Circular or to the terms and provisions contained in this Agreement.

        m.    Distributor acknowledges that it has read this Agreement and the Company's
Uniform Franchise Offering Circular; and that it understands and accepts the terms, conditions
and covenants contained in this Agreement as being reasonably necessary to maintain the
Company's high standards of quality and service and thereby to protect and preserve the goodwill
of the Marks and the System.  Distributor acknowledges that it has conducted an independent
investigation of the business venture contemplated by this Agreement and recognizes that the
nature of the business or its market area are subject to change over time, that the Distributor's
investment involves business risks, and that the success of the venture is dependent upon
numerous factors including, but not limited to, the business abilities of Distributor, demographics
and/or economic factors, such as competition from other similar businesses.  

        n.    Distributor further represents to the Company, as an inducement to its entry into
this Agreement, that Distributor has made no misrepresentations in obtaining the franchise.

2.    GRANT OF FRANCHISE.

        a.    Grant.    Upon and subject to the provisions of this Agreement, the Company
hereby grants to Distributor a franchise ("Franchise") to be an authorized National Supply
Network Distributor of Products and MRO sold to Distributor by the Company, at the location
identified on Rider "A," and to use the Marks and the System in the operation thereof.
Termination or expiration of this Agreement shall constitute a termination or expiration of the
Franchise.  Distributor agrees that it will at all times faithfully, honestly and diligently perform
its obligations hereunder, and that it will continuously exert its best efforts to promote and
enhance the business of the Franchise and the goodwill of the Marks.

        b.    Distributor's Existing Business.    Distributor represents and warrants to the
Company that Distributor operates an existing business primarily engaged in the resale of
merchandise to commercial/industrial accounts at the location identified on Rider "A," and
further represents, as an inducement to the Company to enter into this Agreement, that
Distributor's purchases of Product from the Company are either for its own consumption in the
operation of such business or for rental or resale by Distributor to its commercial/industrial
customers in connection with Distributor's operation of such business.

        c.    Nonexclusivity.    Distributor acknowledges that nothing contained in this
Agreement shall be deemed to grant Distributor any exclusive territory or exclusive rights to sell
or distribute Products purchased from the Company.  The Company expressly reserves the right
to enter into agreements for the licensing of its Marks or for the granting of other franchises to
others to own or operate outlets which offer products or services similar to those of Distributor at
any locations and within any proximity to the Distributor's location set forth on Rider "A" as the
Company, in the exercise of its sole and exclusive discretion, shall determine.  Nothing in this
Agreement shall limit, deny or otherwise restrict the right of either party to accept or establish
additional accounts, or to engage in any business activities whatsoever, even if those accounts or
business activities involve direct competition between them or their respective other suppliers or
customers. 

        d.    Rights Reserved By the Company.    Except as otherwise provided herein, the
Company (on behalf of itself and its subsidiaries) retains the right, in its sole discretion and
without granting any rights to Distributor:

                i. to grant other persons the right to operate, NSN Distributorships at such
            locations and on such conditions as the Company deems appropriate; and

                ii. to sell the Products and services offered to Distributor under the Marks or
            other trademarks, service marks and commercial symbols through similar or dissimilar
            channels of distribution and pursuant to such conditions as the Company deems
            appropriate.

3.    DURATION AND RENEWAL.

        a.    Duration.    The duration of this Agreement (the "Duration") shall commence on
the date of this Agreement and expire five (5) years from such date, unless sooner terminated as
provided in Paragraph 14. 

        b.    Renewal.   

                    i.    Distributor may, at its option, renew the Franchise for an unlimited
            number of additional Durations, each of one (1) year, provided that:

                        (1)    Distributor has given the Company written notice of its election to
                renew not less than six (6) months nor more than twelve (12) months prior to the
                end of the then-current Duration;

                        (2)    Distributor has substantially complied with all the provisions of this
                Agreement and has met the operating and quality standards and procedures
                prescribed by the Company for National Supply Network Distributors during the
                Duration; and 

                        (3)    Distributor has reimbursed the Company its out-of-pocket costs
                incurred in connection with the renewal.

                    ii.    Renewal of this Agreement shall be effectuated by the execution by the
            Company and Distributor of the then current form of standard franchise agreement and all
            other agreements and legal instruments and documents then customarily used by the
            Company in the granting of Franchises for National Supply Network Distributors, which
            may contain substantially different provisions from this Agreement, including higher or
            lower fees. 

                    iii.    Notwithstanding anything to the contrary contained in this Agreement, in
            the event that Distributor fails to give the Company notice at least six (6) months prior to
            the expiration date of this Agreement, or of any additional Duration, of its intent to not
            renew the Franchise, the Duration of this Agreement shall automatically renew on its
            expiration date ("Renewal Date"), for a renewal Duration of one (1) year. 

                    iv.    The Distributor's right to renew this Agreement shall not be interpreted to
            supersede or otherwise limit the Company's right to terminate under Paragraphs 14.b,
            14.c., 14.d., and/or 14.e.

4.    LOCATION AND DEVELOPMENT OF FRANCHISED BUSINESS.

        Distributor may operate the Franchised Business only at the location specified in
Rider "A" to this Agreement and may not relocate the Franchised Business except with the
Company's prior written consent.  

5.    TRAINING AND SUPPORT SERVICES.

        a.    Training.    The Company may, but is not required to, furnish annually, a three-
day training program entitled "NSN University," to be held in Oak Brook, Illinois, Pittsburgh,
Pennsylvania, or such other location designated by the Company.  Attendance by at least one
person representing Distributor is highly recommended but not mandatory.

        b.    Training Fee.    The fee for the training program shall be at the Company's then-
current fee schedule.  Distributor is responsible for the attendees' own travel, lodging, meals,
salary, and other expenses incurred during the training program.

        c.    Optional Supplemental Training.    The Company may make available
professional sales training from an outside consultant.  The supplemental training is optional, and
the Company will charge its then-current fee for such training.

        d.    Support Services.    The Company may make available to Distributor the
following: (1) a database of end user product catalogs, line cards and other marketing material;
(2)  marketing analysis to enhance the Distributors' position in the marketplace; (3) E-commerce
tool to assist in advancing the Distributors' market position; (4) web site development; (5) On
Line Custom Catalogs to connect the Distributors' products and services to end user accounts;
and (6) business planning support tools.

6.    MARKS.

        a.    Ownership and Goodwill of Marks.    Distributor acknowledges that the
Company owns the Marks.  Distributor's right to use the Marks is derived solely from this
Agreement and is limited to the conduct of business pursuant to and in compliance with this
Agreement and all applicable specifications, standards and operating procedures prescribed by the
Company from time to time during the Duration.  Any unauthorized use of the Marks by
Distributor shall constitute an infringement of the rights of the Company in and to the Marks. 
Distributor agrees that all usage of the Marks by Distributor and any goodwill established thereby
shall inure to the exclusive benefit of the Company, and Distributor acknowledges that this
Agreement does not confer any goodwill or other interests in the Marks upon Distributor.
 Distributor shall not, at any time during the Duration of this Agreement or after its termination or
expiration, contest the validity or ownership of any of the Marks or assist others in contesting the
validity or ownership of any of the Marks.  All provisions of this Agreement applicable to the
Marks shall apply to any additional trademarks, service marks, logo forms and commercial
symbols hereafter authorized for use by and licensed to Distributor pursuant to this Agreement.

        b.    Limitations on Use of Marks.    Distributor agrees to use the Marks to identify
itself as an authorized Distributor of the Company in the manner prescribed by the Company.
 However, Distributor shall continue to operate its overall business under the trade name
described on Rider "A."  Distributor shall not use the Marks as part of any corporate or trade
name or with any prefix, suffix or other modifying words, nicknames, terms, designs or
symbols, or in any modified form (including, without limitation, any local or special adaptations
or artistic variations of any of the Marks).  Distributor may not use any Mark in connection with
the sale of any product or service that the Company deems offensive, or in any other manner not
expressly authorized in writing by the Company.  However, Distributor will have the right to use
the Company's Marks in conjunction with and adjacent to Distributor's business name and/or
mark, consistent with the examples set forth in the Orientation Guide.  Distributor shall not
register the Marks for its own account on the Internet or any other computer on-line service,
create or maintain its own web site on the Internet using the Marks, or use the Marks on the
Internet in any other manner, other than as expressly permitted in writing by the Company, and
except for website materials furnished Distributor by the Company.  Distributor agrees to display
the Marks in the manner prescribed by the Company on signs, forms, and other materials and
articles.  Distributor may not use "National Supply Network" "NSN," or a derivative thereof in
its corporate, assumed, or other formal name.  Distributor must obtain the Company's prior
written approval of any items bearing the Marks or logos that are from suppliers other than the
Company.

        c.    Notification of Infringements and Claims.    Distributor shall notify the Company
immediately in writing of any apparent infringement of or challenge to Distributor's use of any
Mark, or claim by any person other than the Company or its affiliates of any rights in any Mark
or any similar trade name, trademark, or service mark of which Distributor becomes aware.
Distributor shall not communicate with any person other than the Company and its counsel in
connection with any such infringement, challenge or claim.  The Company has sole discretion to
take such action as it deems appropriate and to control exclusively any litigation, U. S. Patent
and Trademark Office proceeding or any other administrative proceeding arising out of any
infringement, challenge or claim or otherwise relating to any Mark.  Distributor agrees to
execute any and all instruments and documents, render such assistance and do such acts and
things as may, in the opinion of counsel for the Company, be necessary or advisable to protect
and maintain the interests of the Company in any such litigation, U.S. Patent and Trademark
Office proceeding or other administrative proceedings or otherwise to protect and maintain the
interests of the Company in the Marks.

        d.    Discontinuance of Use of Marks.    If it becomes advisable at any time, in the
Company's sole discretion, for the Company to modify or discontinue use of any Mark, and/or
use one or more substitute trademarks or service marks, Distributor agrees to comply therewith,
by changing all items bearing the Marks, including but not limited to signs, letterhead, and other
tangible items bearing the Marks, within a reasonable time after notice thereof by the Company,
at Distributor's own expense.  

7.    PROPRIETARY INFORMATION.

        a.    The Proprietary Information.    The Company possesses certain proprietary
information (the "Proprietary Information"), consisting of the Orientation Guide, price lists,
pricing information, catalogs, order forms, product databases, quoting tools and procedures,
methods, techniques, formats, specifications, procedures, information, systems, and knowledge
of and experience in the operation and marketing of National Supply Network Distributors.  Any
and all other information, processes or techniques which the Company designates as confidential
or proprietary shall be deemed Proprietary Information.  

        b.    Limitations on Distributor's Use.    Distributor acknowledges and agrees that it
will not acquire any interest in the Proprietary Information, other than the right to utilize the
same in the operation of the Franchised Business pursuant to this Agreement and in accordance
with the terms of this Agreement or other agreements between Distributor and the Company, and
that the use or duplication of the Proprietary Information in any other business would constitute
an unfair method of competition.  Distributor hereby agrees that Distributor and its affiliates,
officers, directors, partners and all owners of any interest in Distributor and/or the Franchised
Business will at no time display, disclose, or use any Proprietary Information for any purpose
other than its transactions with the Company, or as otherwise specifically required by law or
authorized in writing by the Company.  

8.    RELATIONSHIP OF THE PARTIES.

        a.    Independent Contractors.    It is understood and agreed by the parties that this
Agreement does not create a fiduciary relationship between them, that the Company and
Distributor shall be independent contractors and that nothing in this Agreement is intended to
make either party a general or special agent, legal representative, subsidiary, joint venturer,
partner, employee or servant of the other for any purpose.

        b.    Negation of Liability.    Except for any express purchasing arrangements made
between the Company, Distributor, and certain suppliers, neither the Company nor Distributor
shall make any express or implied agreements or representations or incur any debt in the name of
or on behalf of the other or represent that their relationship is other than that of
franchisor/franchisee or seller/purchaser.  Neither the Company nor Distributor shall be
obligated by or have any liability under any agreements or representations made by the other.
The Company shall have no liability or obligation for any damages to any person or property
directly or indirectly arising out of the development or operation of the Distributor's Franchised
Business.  The Company shall have no liability for any sales, use, excise, gross receipts,
property or other taxes of Distributor or its Franchised Business.

        c.    Indemnification.    Distributor agrees to assume full responsibility for and to
indemnify and hold the Company harmless from and against any and all claims or liabilities asserted by or against the Company or costs and expenses incurred by the Company as more fully
set forth below to the extent that the same do not arise solely from the negligence or wrongful
conduct of the Company.  Included, without limitation, are all monetary obligations, all actual,
special, and consequential damages, punitive damages to the extent the indemnification thereof is
not prohibited by applicable law or public policy, the reasonable fees of accountants, attorneys,
paralegals and expert witnesses, the costs of investigation and proof of facts, court costs and any
other litigation expenses or fees and any related travel and lodging expenses incurred by the
Company in any of the following types of matters:

                    i.    those based upon or arising out of any representation by Distributor, its
            employees or agents to end users that a Product purchased from the Company can be used
            for a purpose for which the Product was not intended by its manufacturer, or in a manner
            contrary to its labeling;

                    ii.    those based upon or arising out of any act, advice or assistance of the
            Distributors, its employees or agents in selecting or using a Product purchased from the
            Company;

                    iii.    those arising out of services performed or merchandise sold to the
            Distributor by anyone other than the Company, or based upon allegations that Distributor
            or its employees functioned as an agent of the Company, or that the Company is
            otherwise vicariously liable for the acts or omissions of Distributor, or which in any way
            involve the Distributor's operation of its business premises, the use or operation of any
            fixtures or equipment at the Distributor's business premises, or the sale of any services
            including, without limitation, installation services by the Distributor;

                    iv.    those arising out of the collection by or on behalf of the Company of any
            past due balances or other sums of money due and owing by Distributor to the Company;

                    v.    those arising out of the failure by Distributor to conduct its activities in
            strict accordance with the requirements of any and all applicable federal, state and local
            laws, regulations, or ordinances; or

                    vi.    those arising out of the Company's obtaining relief from the automatic stay
            provisions of the U.S. Bankruptcy Code or otherwise protecting any secured or unsecured
            interest of the Company in any property of Distributor in the event that Distributor
            becomes the subject of voluntary or involuntary bankruptcy or liquidation proceedings.

        d.    Survival.    The indemnities and assumptions of liabilities and obligations herein
shall continue in full force and effect subsequent to and notwithstanding the expiration or
termination of this Agreement.

9.    FRANCHISE AND OTHER FEES.   

        a.    Initial Franchise Fee.    Distributor agrees to pay to the Company, upon execution
of this Agreement, an initial Franchise Fee of Four Thousand Dollars ($4,000.00).  The initial
Franchise Fee shall be fully earned by the Company upon its payment and shall be non-
refundable.

        b.    Account Service Fee.    Distributor agrees to pay to the Company monthly throughout the
Duration of this Agreement, an Account Service Fee at the then-current rate. The Company has
the right to increase the Account Service Fee upon sixty (60) days notice, but the Account
Service Fee shall not be increased by more then Fifty Dollars ($50.00) per month, nor shall it be
increased more frequently than annually.  The Account Service Fee shall be due monthly on the
date specified by the Company.

        c.    Payment for Purchases of Product.    Distributor shall pay all amounts invoiced
or shown as currently due for purchases of Product, services, supplies, freight and/or delivery,
and fees on the Company's billing statements or invoices promptly on or before the due date.  In
the event Distributor's account with the Company becomes past due, the entire balance remaining
under any extended payment terms shall be automatically accelerated and become immediately
due and payable by Distributor upon receipt of the Company's demand therefor.  Any credits
issued by the Company to Distributor shall be processed in accordance with the Company's
internal procedures and posted to Distributor's account and billing statements.  Under no
circumstances shall Distributor be entitled to take any offsets against or deduct any chargebacks
from amounts due the Company.

        d.    Returned Goods.    Distributor agrees not to return any Products to the Company
without the advance written approval of the Company.  Distributor agrees to comply with all
marking, shipping and other instructions issued by the Company in connection with any approved
return of Products.

        e.    Past Due Service Charge.    Distributor agrees that all amounts not paid when due
shall accrue a past due service charge equal to 1.6683% per month of the past due balance (or if
lower, the maximum rate permitted by the state where Distributor's business is operated).
 Distributor agrees that the Company has the right from time to time to change (reduce or
increase) the past due service charge, which change shall be effective upon written notice from
the Company to Distributor.

        f.    Creditworthiness.    Distributor shall furnish the Company from time to time upon
request such reasonable information and documents as the Company deems necessary or
desirable to establish Distributor's creditworthiness.  If Distributor fails or refuses to comply
with the Company's request for such information, or if the Company at any time reasonably
believes that circumstances do not support the extension of requested credit to Distributor, then
the Company may limit or deny such extension of credit, or may otherwise limit the manner or
terms of payment applicable to orders that the Company elects to accept from Distributor.

        g.    For Distributors Who Are Also Ace Members, the following shall apply.
Distributor acknowledges that the Company's first lien upon, and right of set-off against,
Distributor's Ace stock and patronage refund certificates, shall also secure any indebtedness
owed by Distributor to the Company under this Agreement. 

10.    PURCHASES OF PRODUCT.   

        a.    Minimum Annual Purchase Requirements.    Products sold by the Company to
Distributor shall be in mutually agreed quantities at mutually acceptable prices.  However, the
Distributor acknowledges and agrees that Distributor's failure to purchase the minimum annual
purchase requirements ("Minimum Annual Purchase Requirements") of Product from the
Company shall constitute cause for termination of this Agreement.  The Minimum Annual
Purchase Requirements are as follows:

                Year of this Agreement            Minimum Annual Purchase Requirements*   

                            1st                                                            10%
                            2nd                                                           15%
                            3rd and thereafter                                      20%

* The annual amount of Distributor's purchases of Product from the Company, in relation to
Distributor's total annual purchases from all sources, must be at least this percentage in order for
Distributor to not be in default of this Agreement.  Distributor will furnish the Company with
either Distributor's audited financial statements or income tax returns prepared by an independent
licensed tax preparer with sufficient detail to allow the Company to compare the amount of
Distributor's purchases of Product from the Company with the total cost of goods purchased
from all sources.

All orders are subject to acceptance by the Company at its headquarters in Oak Brook, Illinois,
and transactions hereunder shall be upon and subject to the Company's then-current standard
Terms and Conditions (as hereinafter defined in Paragraph 11.c.).

At the Company's sole discretion it may, under special circumstances, such as with Distributors
that sell highly specialized products that the Company does not make available, reduce the
Minimum Annual Purchase Requirements of Product.  However, any such reduction shall be
effective only upon written agreement by the Company.

        b.    Ace Private Label.    The Company shall not be obligated under this Agreement to
supply Distributor with any Ace private label merchandise, except as otherwise agreed in
writing.  Under no circumstances shall the placing of any order for private label merchandise by
Distributor or the acceptance thereof by the Company be deemed to establish between the parties
a course of dealing or usage of trade with regard to such merchandise.

        c.    Incentives/Rebates.     The Company will pay Distributor the following incentives
(rebates), based on purchases made by Distributor from the Company's warehouse each calendar
year: 

        Level One:  volume incentive of 0.5% for warehouse purchases back to "dollar one" if
        Distributor reaches $100,000 in warehouse purchases.  The eligible range for Level One
        is $100,000 to $149,999.

        Level Two:  volume incentive of 0.75% for warehouse purchases back to "dollar one" if
        Distributor reaches $150,000 in warehouse purchases.  The eligible range for Level Two
        is $150,000 to $199,999.

        Level Three:  volume incentive of 1.0% for warehouse purchases back to "dollar one" if
        Distributor reaches $200,000 in warehouse purchases.  The eligible range for Level
        Three is $200,000 and above.

The Company retains the right to apply any rebates earned by Distributor against any amounts
past due from Distributor to Company.

        d.    Low Volume Service Charge.    The Company has the right, upon thirty (30)
days written notice to Distributor, to invoke a Low Volume Service Charge to be paid by
Distributor.  The Low Volume Service Charge, if invoked, would be a separate and distinct
requirement from the Minimum Annual Purchase Requirements described in Paragraph 10.a.
above.  The amount, due dates, and manner of calculating the Low Volume Service Charge are
established by the Company's Board of Directors. 

11.    OPERATING STANDARDS.

        a.    Operating Procedures.    Distributor agrees to comply with all mandatory
specifications, standards and operating procedures relating to the function and operation of a
National Supply Network Distributorship as set forth in the Terms and Conditions.

        b.    Compliance with Laws and Good Business Practices.    Distributor shall secure
and maintain in force in its name all required licenses, permits and certificates relating to the
operation of the Franchised Business.  Distributor shall operate the Franchised Business in full
compliance with all applicable laws, ordinances and regulations including, without limitation, all
government regulations relating to health and safety, workers' compensation insurance,
unemployment insurance and withholding and payment of federal and state income taxes, social
security taxes and sales taxes. 

        c.    Terms and Conditions.    Distributor will be bound by the "Terms and
Conditions" promulgated by the Company from time to time, which Terms and Conditions will
be incorporated into each purchase of Product made by Distributor.  The Terms and Conditions
shall contain mandatory and suggested terms and conditions, specifications, standards, and
operating procedures prescribed from time to time by the Company for a National Supply
Network Distributorship and information relative to other obligations of Distributor hereunder.
The Terms and Conditions may be modified from time to time to reflect changes in the specifications, standards and operating procedures of National Supply Network Distributors.  The
Company may furnish Distributor with written or electronic notice of any changes in the Terms
and Conditions.  Distributor shall keep its copy of the Terms and Conditions current by
immediately inserting all modified pages furnished by the Company and received by Distributor.
In the event of a dispute relative to the contents of the Terms and Conditions, the master copy
maintained by the Company at its Connoquenessing, Pennsylvania office shall be controlling.

        d.    Sales Support.    Distributor agrees to have one outside sales support employee
for every $2,500,000 in annual sales of Product to end users.

        e.    Insurance.    During the Duration of the Franchise, Distributor shall maintain in
force the following minimum insurance:

                    i.    Property insurance, including business interruption, against fire and
            extended coverage perils, vandalism and malicious mischief perils in amounts adequate to
            replace inventory, fixtures, equipment and leasehold improvements.  If renting
            equipment, Distributor shall carry rental insurance with coverage including Conversion,
            listing equipment on the policy. 

                    ii.    General liability insurance, including products and completed operations
            liability against bodily injury, property damage, and personal and advertising injury to the
            public for a $1,000,000 per occurrence and $2,000,000 in the aggregate arising out of the
            control, operation, use and occupancy of the business premises, and storage and sale of
            merchandise.

                    iii.    Automotive liability insurance against bodily injury, property damage and
            personal injury to the public for a $1,000,000 combined single limit to cover all vehicles
            used by Distributor.

                    iv.    Umbrella of $2,000,000 with coverage on a following-form basis.

                    v.    Workers compensation insurance against worker's compensation,
            occupational disease and employer's liability with statutory limits, and Employer's
            Liability coverage of at least $500,000.

Distributor shall provide evidence of such insurance with companies and firms acceptable to the
Company, and as to the coverage specified in Paragraphs 11.e.i, 11.e.ii, and 11.e.iii, above,
name the Company (Ace Hardware Corporation, 2200 Kensington Court, Oak Brook, Illinois
(60523) as an additional party insured.  The insurance maintained by Distributor shall be deemed
to be primary over any similar insurance maintained by the Company.

12.    ADVERTISING.

        a.    Ads.    The Company will create and produce print ads that will be available to
Distributor.  The Company will furnish Distributor 100 ads four (4) times per year at no charge
to Distributor, on condition that Distributor commits to purchase at least 100 additional ads from
the Company at the Company's published prices, and to mail a minimum of 200 ads.  Distributor
may purchase more than 100 ads from the Company at the Company's published prices.
Distributor is responsible for all postage costs.

        b.    Catalogs, Product Line Cards, Marketing Brochures.    The Company will
create and produce catalogs, Product Line Cards, marketing brochures, and other support
materials, and make them available to Distributor.  Distributor has the option of purchasing such
materials from the Company at the Company's published prices.

13.    TRANSFER.

        a.    By the Company.    This Agreement is fully transferable by the Company and shall
inure to the benefit of any transferee or other legal successor to the interests of the Company
herein.

        b.    Changes in Ownership or Control of Distributor.    Distributor agrees to notify
the Company promptly in writing of:

                    i.    any changes in the legal form of ownership of Distributor; or

                    ii.    the death of any general partner of Distributor if Distributor is a
            partnership, or the death of any stockholder owning 50% or more of the voting stock of
            Distributor if Distributor is a corporation; or the death of any member owning 25% of
            more of the membership interests if Distributor is a limited liability company.

        c.    Transfer By Distributor.

                    i.    Distributor May Not Transfer Without Approval of the Company.  
            Distributor understands and acknowledges that the rights and duties created by this
            Agreement are personal to Distributor (and its owners) and that the Company has granted
            the Franchise to Distributor (and its owners) in reliance upon the individual or collective
            character, skill, aptitude, attitude, business ability and financial capacity of Distributor
            (and its owners).  Accordingly, neither this Agreement nor the Franchise (or any interest
            therein), nor any part or all of the ownership of Distributor may be transferred, sold,
            assigned, pledged, mortgaged or liened without the prior written approval of the
            Company.  Any such transfer without such approval shall constitute a breach hereof and
            convey no rights to or interests in this Agreement, the Franchise or the Distributor.

                    ii.    Conditions for Approval of Transfer.    If Distributor (and its owners) are
in full compliance with this Agreement, the Company shall not unreasonably withhold its
approval of a transfer that meets all the applicable requirements of this Paragraph.
  
                            (1)    The proposed transferee and its owners must be individuals of good
                    moral character and otherwise meet the Company's then applicable standards for
                    National Supply Network Distributorship franchisees.  

                            (2)    The Company may withhold approval of the transfer if the
                    proposed transferee's customer base conflicts with those of other Distributors of
                    the Company.

                            (3)    Distributor or the transferee shall pay the Company prior to the
                    consummation of the assignment a transfer fee equal to the greater of:  Two
                    Thousand Dollars ($2,000.00) or one-half the then-current initial Franchise Fee.

                            (4)    The location of the proposed transferee is the same location of
                    Distributor, unless the Company in its sole discretion consents to a new location
                    for the transferee.

14.    TERMINATION OF THIS AGREEMENT.  

        a.    By Distributor.    Distributor may terminate this Agreement at any time by giving
the Company at least sixty (60) days prior written notice.

        b.    By the Company for Cause and Without Distributor's Opportunity to Cure.
The Company may terminate this Agreement effective immediately upon notice to Distributor in
the following events:

                    i.    Distributor abandons, surrenders, transfers control of, loses the right to
            occupy the premises of the Franchised Business, or fails to actively operate the
            Franchised Business;

                    ii.    Distributor is adjudged bankrupt, becomes insolvent or makes a general
            assignment for the benefit of creditors;

                    iii.    Distributor or any of its owners is convicted of or pleads no contest to a
            felony or is convicted or pleads no contest to any crime or offense that is likely to
            adversely affect the reputation of the Franchised Business or the goodwill associated with
            the Marks;

                    iv.    Distributor fails on three (3) or more separate occasions within any twelve
            (12) consecutive month period to pay when due the Account Service Fees, amounts due
            for purchases from the Company or its subsidiaries or other payments due to the
            Company or its subsidiaries, or otherwise fails to comply with this Agreement, whether
            or not such failures to comply are corrected after notice thereof is given to Distributor;

                    v.    Distributor or any of its owners discloses or divulges the Proprietary
            Information or other confidential information provided to Distributor by the Company
            contrary to provisions of this Agreement, or makes any unauthorized use of the Marks; or

                    vi.    Distributor is in default under any other agreement between Distributor
            and the Company, including, but not limited to any Ace membership agreement.

        c.    By the Company for Cause, With Notice and an Opportunity to Cure.    The
Company may terminate this Agreement in the event Distributor materially breaches this
Agreement.  "Material breach" includes, but is not limited to:

                    i.    Failure or refusal to pay any amounts due the Company, after the
            Company gives Distributor written notice of default and a ten (10) day opportunity to
            cure. 

                    ii.    Failure to purchase the Minimum Annual Purchase Requirements of
            Product from the Company as set forth in Paragraph 10.a. above.  The Company will
            give Distributor written notice of this default and a thirty (30) day opportunity to cure. 

                    iii.    For any other material breaches of this Agreement, the Company will give
            Distributor written notice of the default and a thirty (30) day opportunity to cure. 

        d.    By the Company upon Termination of the NSN Program.    The Company may
terminate this Agreement effective upon sixty (60) days' notice to Distributor in the event the
Company in its sole discretion determines it is terminating the NSN Program nationwide.

        e.    By the Company without Cause.    Unless prohibited by applicable state and/or
federal law, the Company may terminate this Agreement effective upon sixty (60) days' notice to
Distributor for no cause.

15.    RIGHTS OF THE COMPANY AND OBLIGATIONS OF DISTRIBUTOR UPON TERMINATION OR EXPIRATION OF THE FRANCHISE.

        a.    Payment of Amounts Owed to the Company.    Distributor agrees to pay, within
fifteen (15) days after the effective date of termination or expiration of the Franchise, all amounts
due and owing to the Company, including amounts accrued even though not necessarily invoiced
as of the effective date of termination or expiration of the Franchise.

        b.    Marks.    Distributor agrees that after the termination or expiration of the
Franchise it will:  (1) not directly or indirectly at any time or in any manner identify itself or any
business as a current or former National Supply Network Distributorship, or as a franchisee or
licensee of or as otherwise associated with the Company, use any Mark or any colorable
imitation thereof in any manner or for any purpose or utilize for any purpose any trade name,
trade or service mark or other commercial symbol that suggests or indicates a connection or
association with the Company; and (2) return to the Company or destroy all forms and materials
containing any Mark or otherwise identifying or relating to a National Supply Network
Distributorship.  In the event Distributor continues to display at or have affixed to its business
any such identification signs bearing any Marks of the Company, following such termination,
then Distributor agrees to pay to the Company a fee in the amount of Ten Thousand Dollars
($10,000.00) per month, payable on the first day of each and every month during which any such
identification sign continues to be affixed to or displayed at Distributor's business for one or
more days.

        c.    Proprietary Information.    Distributor agrees that, upon termination or expiration
of the Franchise, it will immediately cease to use any Proprietary Information of the Company
disclosed to or otherwise learned or acquired by Distributor in any business or otherwise and
return to the Company all copies of any Proprietary Information and materials which have been
lent or made available to it by the Company.

16.    ENFORCEMENT.

        a.    Severability and Substitution of Valid Provisions.    The parties agree that if any
provision of this Agreement is deemed invalid or unenforceable by any court of competent
jurisdiction, the Agreement shall be deemed to be restricted in scope or otherwise reformed to the
extent necessary to render it valid and enforceable.  If any provision of this Agreement cannot be
restricted or reformed so as to be valid and enforceable, then it shall be deleted from this
Agreement and the Agreement shall be construed and enforced as if such provision had not
originally been included.

        b.    Waiver of Obligations.   

                    i.    The Company and Distributor may by written instrument unilaterally
            waive or reduce any obligation of or restriction upon the other under this Agreement,
            effective upon delivery of written notice thereof to the other or such other effective date
            stated in the notice of waiver.  Any waiver granted by the Company shall be without
            prejudice to any other rights the Company may have, will be subject to continuing review
            by the Company and may be revoked, in the Company's sole discretion, at any time and
            for any reason, effective upon delivery to Distributor of thirty (30) days' prior written
            notice.  The Company and Distributor shall not be deemed to have waived or impaired
            any right, power or option reserved by this Agreement (including, without limitation, the
            right to demand exact compliance with every term, condition and covenant herein or to
            declare any breach thereof to be a default and to terminate the Franchise prior to its
            expiration date) by virtue of any custom or practice of the parties at variance with the
            terms hereof; any failure, refusal or neglect of the Company or Distributor to exercise
            any right under this Agreement or to insist upon exact compliance by the other with its
            obligations hereunder including, without limitation, any mandatory specification, standard
            or operating procedure; any waiver, forbearance, delay, failure or omission by the
            Company to exercise any right, power or option, whether of the same, similar or different
            nature, with respect to any other National Supply Network Distributorship; or the
            acceptance by the Company of any payments from Distributor after any breach by
            Distributor of this Agreement.

                    ii.    The Company makes no warranties or guaranties upon which Distributor
            may rely, and assumes no liability or obligation to Distributor, by granting any waiver,
            approval or consent to Distributor, or by reason of any neglect, delay or denial of any
            request therefor.  Any waiver granted by the Company shall be without prejudice to any
            other rights the Company may have, will be subject to continuing review by the
            Company, and may be revoked, in the Company's sole discretion, at any time and for any
            reason, effective upon delivery to Distributor of thirty (30) days' prior written notice.

                    iii.    Neither the Company nor Distributor shall be liable to the other for
            defaults or delays in the performance of their respective obligations hereunder in any case
            where such performance is rendered commercially impractical by reason of any Acts of
            God, or the public enemy, acts or demands of any government or governmental agency;
            strikes, fires, floods, accidents or other unforeseen causes beyond its reasonable control
            and not due to its fault or negligence.  The party seeking relief hereunder by reason of
            such circumstances will promptly notify the other party in writing of the existence and
            expected duration thereof.  Any delay resulting from any of said causes shall extend
            performance accordingly or excuse performance, in whole or in part, as may be
            reasonable.

        c.    Rights of Parties are Cumulative.    The rights of the Company and Distributor
hereunder are cumulative and no exercise or enforcement by the Company or Distributor of any
right or remedy hereunder shall preclude the exercise or enforcement by the Company or
Distributor of any other right or remedy hereunder or which the Company or Distributor is
entitled by law to enforce.

        d.    Governing Law/Consent to Jurisdiction.    This Agreement and the Franchise
shall be governed by the laws of the State of Illinois without reference to its choice of law
principles.  Distributor agrees that the Company may institute any action against Distributor to
enforce the provisions of this Agreement in any state or federal court of general jurisdiction in
the State of Illinois, and Distributor irrevocably submits to the exclusive jurisdiction of such
courts and waives any objection it may have to either the jurisdiction or venue of such court.

        e.    Waiver of Jury Trial.    Each party irrevocably waives trial by jury in any action,
proceeding or counterclaim, whether at law or in equity, brought by either party.

        f.    Binding Effect.    This Agreement is binding upon the parties hereto, and their
respective executors, administrators, heirs, assigns and successors in interest.

        g.    Modification.    Neither this Agreement nor the Terms and Conditions shall be
amended or modified, nor shall any of their respective provisions be waived verbally, by the
actions of the parties, by the printed Terms and Conditions of any purchase order,
acknowledgement or other document from Distributor, or by any course of dealing or usage of
trade at variance with the provisions hereof.  The terms of this Agreement can only be changed
by a written or electronic notification of a type that is expressly permitted hereunder, or by
writing expressly referring to this Agreement and signed by the party against whom enforcement
of such amendment, modification or waiver is sought.  Notwithstanding the preceding sentence,
the Company may modify the Terms and Conditions pursuant to Paragraph 11.c. 

        h.    Construction.    The Definitions and Background, riders, and the Terms and
Conditions (as amended from time to time) are a part of this Agreement, which constitutes the
entire agreement of the parties, and there are no other oral, electronic, or written understandings
or agreements between the Company and Distributor relating to the subject matter of this
Agreement.  Nothing in this Agreement is intended, nor shall be deemed, to confer any rights or
remedies upon any person or legal entity not a party hereto.  Except where this Agreement
expressly obligates the Company reasonably to approve or not unreasonably to withhold its
approval of any action or request by Distributor, the Company has the absolute right to refuse
any request by Distributor or to withhold its approval of any action or omission by Distributor.
The headings of the several sections and paragraphs hereof are for convenience only and do not
define, limit or construe the contents of such sections or paragraphs.  The term "attorneys' fees"
shall include, without limitation, reasonable legal fees, whether incurred prior to, in preparation
for or in contemplation of the filing of any written demand or claim, action, hearing or
proceeding to enforce the obligations of this Agreement.  The term "affiliate" as used herein is
applicable to any company directly or indirectly owned or controlled by the Company, under
common control with the Company or any principal of the Company.  References to a
"controlling interest" in Distributor shall mean more than fifty percent (50+%) or more of the
voting control of Distributor.  The term "Distributor" as used herein is applicable to one or more
persons, a corporation, an LLC, or a partnership, as the case may be, and the singular usage
includes the plural and the masculine and neuter usages include the other and the feminine.  If
two or more persons are at any time Distributor hereunder, whether or not as partners or joint
venturers, their obligations and liabilities to the Company shall be joint and several.  This
Agreement shall be executed in multiple copies, each of which shall be deemed an original.

                    i.    Time is of the Essence.    Time is of the essence of this Agreement.

17.    NOTICES AND PAYMENTS.    All written notices and reports permitted or required to
be delivered by the provisions of this Agreement shall be personally delivered or mailed to the
other party via registered, certified, or first class mail or via UPS, Federal Express or another
similar delivery services, except in the case of notifications by the Company of changes in the
Terms and Conditions as expressly permitted hereunder, which in addition to the other manners
of notice provided for above, may be communicated by posting in electronic format to a
computerized network or system established for the placing of orders or transmission of
communications between the Company and Distributor.  Notices issued in paper format shall be
directed to the following addresses, or to another address which the party has designated for the
receipt of notices hereunder:

            If to the Company:                        National Supply Network
                                                                a Division of Ace Hardware Corporation
                                                                116 Dogwood Lane
                                                                Suite 200
                                                                P.O. Box 158
                                                                Connoquenessing, Pennsylvania 16027-0158

                                                                Attn:  General Manager - Industrial Accounts

                with copy to:                            Ace Hardware Corporation
                                                                2200 Kensington Court
                                                                Oak Brook, Illinois 60523-2100.

                                                                Attn:  General Counsel

            If to Distributor (if the following is not filled in, then to the address on Rider "A")

                                    ___________________________________

                                    ___________________________________

The effective date of notice shall be the date of delivery in the case of notices that are personally
delivered, and the date of deposit in the United States mails or with the delivery service, or the
date of confirmed electronic transmission, as the case may be, for other notices.

18.    PERSONAL GUARANTY.    In the event Distributor is a corporate entity or a legal
entity other than individual persons, all persons who have an ownership interest in Distributor
shall, at the Company's request, execute the Guaranty and Assumption of Obligations attached as
Rider "B" to this Agreement.


IN WITNESS WHEREOF  the parties hereto have executed, sealed, and delivered this
Agreement in    2     counterparts effective on the day and year first above written.


The Company:                                                   Distributor:
ACE HARDWARE CORPORATION            Legal Entity Signature:
a Delaware corporation                                     ____________________________________
                                                                           a _________________(corporation)
                                                                            (partnership)(limited liability company)


By: ________________________________     By: ________________________________
Title:  ______________________________     Title:  _______________________________
Date Accepted:  ______________________     Date Signed:  _________________________


                                                                       If Distributor is an Individual: 


                                                                       __________________________________

                                                         Rider A

             TRADE NAME AND ADDRESS OF DISTRIBUTOR'S BUSINESS


TO THAT CERTAIN NATIONAL SUPPLY NETWORK DISTRIBUTOR FRANCHISE AGREEMENT BY AND BETWEEN ACE HARDWARE CORPORATION AND __________ _____________________________________________________________ DATED
___________________, 20____ (the "Franchise Agreement").

Distributor has an existing supply business under the following trade name, located at the
following address:

                    Trade Name: ______________________________________________

                    Address:______________________________________________

                                  ______________________________________________

        The parties hereto agree that the National Supply Network business to be operated by
Distributor pursuant to the Franchise Agreement shall be located at the above address ("Premises").
Distributor acknowledges and agrees that the Company's approval of the Premises at the above
location for Distributor's National Supply Network business does not constitute a representation or
warranty of any kind, expressed or implied, as to the suitability of the Premises for a National
Supply Network business.  Distributor acknowledges that demographic and/or economic factors,
including competition from other businesses, could alter the potential of a site and Premises.  The
uncertainty and instability of such factors are beyond the Company's control, and Distributor agrees
that the Company will not be responsible for the failure of a site and Premises approved by the
Company to meet expectations as to potential revenue or operational criteria.  Distributor further
acknowledges and agrees that its acceptance of a franchise for the operation of a National Supply
Network distributorship at the above Premises is based on its own independent investigation
of the suitability of the Premises.


ACE HARDWARE CORPORATION              __________________________________
a Delaware Corporation                                        Distributor


By__________________________________     __________________________________
Title: _______________________________       Distributor


                                                         Rider B

                 GUARANTY AND ASSUMPTION OF OBLIGATIONS

    THIS GUARANTY AND ASSUMPTION OF OBLIGATIONS is given this _______ day
of __________________, 20____, by ___________________________________________
_________________________________________________________________________.


1.        In consideration of, and to induce Ace Hardware Corporation (the "Company") to enter
into the National Supply Network Distributor Franchise Agreement dated _______________
________________, 20_____ (the "Franchise Agreement"), with ____________________
___________________________________ ("Franchisee"), each of the undersigned hereby
personally and unconditionally (a) guarantees to the Company, and its successors and assigns, for
the Duration of the Agreement and thereafter as provided in the Agreement, that the Franchisee
shall punctually pay and perform each and every undertaking, agreement and covenant set forth
in the Agreement; and (b) agrees to be personally bound by, and personally liable for the breach
of, each and every provision in the Agreement (all of which shall be referred to as the
"Obligations").

2.        Each of the undersigned waives:  (1) acceptance and notice of acceptance by the Company
of the foregoing undertakings; (2) notice of demand for payment of any indebtedness or
nonperformance of any Obligations hereby guaranteed; (3) protest and notice of default to any
party with respect to the indebtedness or nonperformance of Obligations hereby guaranteed;
(4) any right he may have to require that an action be brought against Franchisee or any other
person as a condition of liability; (5) any and all other notices and legal or equitable defenses to
which he may be entitled; and (6) any right to disclosures from the Company regarding the
financial condition of Franchisee or any guarantor of Franchisee.

3.        Each of the undersigned consents and agrees that: (1) his direct and immediate liability
under this guaranty shall be joint and several; (2) he shall render any payment or performance
required under the Agreement upon demand if Franchisee fails or refuses punctually to do so; (3)
such liability shall not be contingent or conditioned upon pursuit by the Company of any
remedies against Franchisee or any other person; (4) such liability shall not be diminished,
relieved or otherwise affected by any extension of time, credit or other indulgence which the
Company may from time to time grant to Franchisee or to any other person, including without
limitation the acceptance of any partial payment or performance, or the compromise or release of
any claims, none of which shall in any way modify or amend his guaranty, which shall be
continuing and irrevocable during the Duration of the Agreement; and (5) no claim, including a
claim for contribution or subrogation, which any of the undersigned may have against a co-
guarantor of any of the Obligations or Franchisee shall be enforced nor any payment accepted
until the Obligations are paid in full and the payments are not subject to any right of recovery. 

4.        The Company may collect the Obligations from any of the undersigned without first
trying to collect from Franchisee or another of the guarantors of the Obligations.  To the extent
not prohibited by law, each of the undersigned consents that venue of any legal proceedings
relating to the collection of the Guaranty shall be, at the Company's option, in DuPage County,
Illinois.

5.        Each of the undersigned acknowledges and agrees that the Company has not made any
representations or warranties with respect to, does not assume any responsibility to any of the
undersigned for, and has no duty to provide information to any of the undersigned regarding the
collectibility or enforceability of any of the Obligations or the financial condition of Franchisee or
any guarantor.  Each of the undersigned has independently determined the credit worthiness of
Franchisee and the collectibility and enforceability of the Obligations, and until the Obligations
are paid in full, each of the undersigned will independently and without reliance on the Company
continue to make such determinations.

6.        This is a continuing guaranty and shall remain in full force and effect so long as the
Franchise Agreement is in effect, and thereafter so long as any Obligations remain in effect and
not satisfied.

7.        The validity, construction and enforcement of this Guaranty and Assumption of
Obligations are governed by the internal laws of Illinois.  All terms not otherwise defined have
the meanings assigned to them by the Illinois Uniform Commercial Code. The invalidity of any
provision of this Guaranty shall not affect the validity of any other provision.

In witness whereof, each of the undersigned has executed this Guaranty and Assumption of
Obligations

Percentage
Ownership of
Franchisee


                                                X                                                     
                                                   Guarantor:

                                                X                                                     
                                                   Guarantor:

                                                X                                                     
                                                   Guarantor:

                                     Total (must total 100%)

EX-10

                                                    GROUND LEASE

                                                        by and between


                                 REYNEN & BARDIS (KMS PLACER), L.P.,
                                            a California limited partnership

                                                              as

                                                        "Landlord"


                                                             and


                                    ACE HARDWARE CORPORATION,
                                                 a Delaware corporation

                                                               as

                                                          "Tenant"


I.         LEASED PREMISES
            1.1.        Premises
            1.2.        Title and Quiet Enjoyment

II.        LEASE TERM
            2.1.        Commencement and Expiration Dates
            2.2.        Option to Extend Term
            2.3.        Holdover

III.       RENT
            3.1.        Base Rent
            3.2.        Rent Commencement
            3.3.        Interest and Late Charges
            3.4.        Triple Net Lease

IV.      USE OF PROPERTY
            4.1.        Use of Property
            4.2.        Compliance With Laws

V.       DESIGN AND CONSTRUCTION BY TENANT
            5.1.        Tenant's Right to Build
            5.2.        Easements and Dedications
            5.3.        Governmental Approvals
            5.4.        Landlord's Duty of Cooperation
            5.5.        Quality of Work
            5.6.        Notice of Nonresponsibility
            5.7.        Tenant's Ownership of Improvements and Fixtures
            5.8.        Construction Indemnity
            5.9.        Development Management

VII.     TAXES, UTILITIES AND OTHER CHARGES
            7.1.        Tenant to Pay Taxes
            7.2.        Timing of Payment of Taxes
            7.3.        Installment Payment
            7.4.        Proration of Taxes
            7.5.        Landlord's Right to Cure
            7.6.        Utilities
            7.7.        Contesting Taxes and Liens

VIII.    INSURANCE
            8.1.        Tenant's Insurance
            8.2.        Landlord's Insurance
            8.3.        Policy Standards
            8.4.        Protection of Proceeds
            8.5.        Certificates of Insurers
            8.6.        Waiver of Subrogation

IX.      INDEMNIFICATION
            9.1.        Tenant's Indemnification
            9.2.        Landlord's Indemnification
            9.3.        Landlord and Tenant Exculpation

X.       MAINTENANCE AND REPAIR OF IMPROVEMENTS
            10.1.      Tenant's Duty to Maintain
            10.2.      Casualty; Tenant's Duty to Repair Damage
            10.3.      No Abatement of Rent

XI.      CONDEMNATION OF THE PROPERTY
            11.1.      Termination and Proceeds
            11.2.      Partial Taking
            11.3.      Temporary Taking
            11.4.      Separate Awards
            11.5.      Participation
            11.6.      Notice of Proceeding

XII.     ASSIGNMENT AND SUBLETTING

XIII.    MORTGAGES
            13.1.      Leasehold Mortgages
            13.2.      Rights and Obligations of Leasehold Mortgagees
            13.3.      Cooperation for Leasehold Mortgagee

XIV.    DEFAULT AND REMEDIES
            14.1.      Events of Default
            14.2.      Notice of Tenant's Default
            14.3.      Landlord's Remedies
            14.4.      No Waiver
            14.5.      Landlord's Default

XV.     SURRENDER AND REMOVAL
            15.1.      Surrender
            15.2.      Tenant's Personal Property

XVI.   LANDLORD'S RIGHT OF ENTRY AND INSPECTION

XVII.  GENERAL PROVISIONS
            17.1.      Notices
            17.2.      Broker's Commission
            17.3.      Attorneys' Fees and Court Costs
            17.4.      Assignment
            17.5.      Survival
            17.6.      Further Assurances
            17.7.      Time of Essence
            17.8.      Counterparts
            17.9.      Captions; Recitals
            17.10.    No Obligations to Third Parties
            17.11.    Exhibits
            17.12.    Amendment of this Lease
            17.13.    Waiver
            17.14.    Applicable Law
            17.15.    Fees and Other Expenses
            17.16.    Entire Agreement
            17.17.    Successors and Assigns
            17.18.    Time Period Computation
            17.19.    Cooperation in Drafting
            17.20.    Severability
            17.21.    Waiver of Jury Trial
            17.22.    Relationship of the Parties
            17.23.    Interpretation and Definitions
            17.24.    Memorandum
            17.25.    Representation of Authority
            17.26.    Estoppel Certificates
            17.27.    Consents


        This Ground Lease ("Lease") is entered into as of January 13, 2003, by and between
Reynen & Bardis (KMS Placer), L.P., a California limited partnership ("Landlord"), and Ace
Hardware Corporation, a Delaware corporation ("Tenant").

RECITALS

                    A.    Landlord is the owner of that certain real property located in the County of
Placer, State of California, consisting of certain improvements and land as more specifically
described below (and defined below as the "Property").

                    B.    As of the date hereof, Landlord leases portions of the Property to Pacific
Gas & Electric Company, to Hewlett-Packard and to Tenant on long term leases, and to other
tenants on month-to-month leases (collectively, and as further described below, the "Existing
Leases" and singularly, an "Existing Lease").

                    C.    Concurrent with the execution of this Lease, Landlord and Tenant are
entering into that certain Option Agreement and Joint Escrow Instructions, of even date herewith
("Option Agreement"), by and between Landlord, as seller, and Tenant, as buyer, pursuant to
which Landlord is granting to Tenant, and Tenant is obtaining from Landlord, an option to
purchase the Property, subject to the terms and conditions of the Option Agreement, which is
incorporated herein by this reference.

                    D.    Concurrent with the execution of this Lease, Tenant and KMS
Development, L.P., a California limited partnership ("KMS"), are entering into that certain
Development Management Agreement of even date herewith ("Development Agreement")
pursuant to which KMS will act as construction manager for Tenant in connection with
construction of certain improvements at the Property.

                    E.    Landlord and Tenant desire to enter into this Lease to evidence the terms
and conditions of the lease of the Property.

                    NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, Landlord and Tenant hereby agree as follows:

I.        LEASED PREMISES.

            1.1        Premises. Landlord hereby leases to Tenant, and Tenant hereby rents and accepts
from Landlord, for the term and upon the covenants, terms and conditions set forth herein (i) that
certain real property located at 3301 Industrial Avenue, situated in the City of Rocklin, County
of Placer, State of California, as more particularly described in Exhibit A attached hereto (the
"Land"), and (ii) together with two (2) buildings located thereon, containing approximately
619,688 square feet of space and 8,000 square feet of space, respectively, associated parking
areas and other improvements located thereon (the "Existing Improvements"). The Land and the
Existing Improvements are referred to herein collectively as the "Property." The Property is
leased to Tenant subject to the Existing Leases as described in Exhibit B attached hereto.
Notwithstanding the foregoing, Landlord and Tenant hereby agree that the Existing Lease
between Landlord and Tenant shall be terminated effective as of the Commencement Date. On
the Break Date (as defined in Exhibit D attached hereto), Landlord shall assign to Tenant and
Tenant shall assume Landlord's rights and obligations under the Existing Leases and Landlord
and Tenant shall execute a Lease Assignment and Assumption Agreement with respect to the
Existing Leases in the form attached hereto as Exhibit C. No modification shall be made to an
Existing Lease during the Term (as defined below) without the prior written consent of Tenant.

            1.2        Title and Quiet Enjoyment. As set forth in the Option Agreement, on or before
the Commencement Date Placer Title Company shall have irrevocably committed to issue the
Option Binder Policy (as such term is defined in the Option Agreement). Subject to Tenant's
compliance with the provisions of this Lease and all applicable covenants, conditions,
restrictions, and matters of record approved by Tenant as set forth in the Option Agreement (the
"Recorded Matters"), Landlord hereby warrants that during the Term, Tenant shall have the quiet
enjoyment and uninterrupted right of use and possession of the Property free from interference
by Landlord or anyone claiming by, through or under Landlord.

II.       LEASE TERM.

            2.1        Commencement and Expiration Dates.

                        (a)        This Lease shall be for a term of twenty (20) years (the "Term") which
shall commence on January 15, 2003 (the "Commencement Date") and shall expire at 11:59 P.M.
on the date that is one day before the twentieth (20th) anniversary of the Commencement Date
(the "Expiration Date"), unless this Lease is terminated earlier or extended pursuant to the provisions
hereof.

                        (b)        It is Landlord's and Tenant's intent that this Lease be expressly
conditioned upon the approval and execution of the Option Agreement. In the event that Tenant
exercises its option or Landlord exercises its put pursuant to the Option Agreement, this Lease
shall automatically terminate on the date of Tenant's acquisition of fee title to the Property. In
such event, neither Landlord nor Tenant shall have any further rights or obligations under this
Lease, except for their respective obligations to indemnify each other pursuant to the provisions
of this Lease which indemnity obligations shall survive any termination of this Lease.

             2.2        Option to Extend Term. Landlord hereby grants to Tenant the option to extend
the Term for up to three (3) additional consecutive periods of ten (10) years each (each, an
"Option Period"). Each option must be exercised by written notice (the "Option Notice")
received by Landlord no later than eighteen (18) months prior to the expiration of the
then-current Term. Provided that Tenant has properly exercised the particular option, the Term
shall be extended by the respective Option Period and all provisions of this Lease shall remain
unmodified and in full force and effect. In the event of an extension hereunder, "Term" as used
in this Lease shall include each Option Term which is the subject of a timely delivered Option
Notice and the "Expiration Date" shall be extended to 11:59 P.M. of the last day of such Option
Period. Annual Base Rent payable during each Option Period shall be as provided in Exhibit D
attached hereto.

            2.3        Holdover. Subject to Section 2.2 above, Tenant shall have no right to hold over
after the Expiration Date without the prior written consent of Landlord, which Landlord may
withhold in its absolute discretion. Any holding over by Tenant after the Expiration Date shall
not constitute a renewal or extension or give Tenant any rights in or to the Property or any
Improvements (as defined in Section 5.1 below) thereon.

III.      RENT.

            3.1        Base Rent. Tenant agrees to pay to Landlord, without setoff, demand or delay
(except as provided in the immediately following sentence), the rent (the "Base Rent") for the
Property as set forth in Exhibit D attached hereto, as adjusted in accordance with Section 2.2
above. In the event Tenant cures a default pursuant to the Nondisturbance, Attornment and
Recognition Agreement entered into among Landlord, Tenant and Landlord's lender Western
Sierra National Bank relating to the $12,780,000 loan from Western Sierra National Bank to
Landlord secured by the Property, Tenant shall have the right at its option to deduct the amount
necessary to cure such default from any Base Rent or other rent then due and/or next becoming
due to Landlord under this Lease, provided that Tenant may not deduct any amounts in excess of
the minimum amount necessary to cure such default.

            3.2        Rent Commencement. Base Rent shall be payable commencing on the
Commencement Date and continuing on the first day of each succeeding calendar month during
the Term. Rent attributable to any partial calendar month at the commencement or end of the
Term shall be prorated on a daily basis for the period from the date the payment is due to the end
of such calendar month or to the end of the Term at a rate per day which is equal to 1/365 of the
applicable monthly Base Rent. As used in this Lease, the term "rent" shall mean any payments
owed by Tenant pursuant to this Section and any other payments to be made by Tenant to or for
the benefit of Landlord, including, without limitation, Taxes (as defined in Section 7.1 below).
All rent shall be remitted to Landlord at its address set forth in Section 17.1 below or at such
place or to such person as Landlord may from time to time designate by notice to Tenant, and
shall be paid by check.

            3.3        Interest and Late Charges. If Landlord does not receive any payment of rent
within five (5) days after the due date, Tenant shall pay Landlord a late charge equal to five
percent (5%) of the overdue amount, which charge Landlord and Tenant agree represents a fair
and reasonable estimate of the costs Landlord will incur by reason of late payment. Landlord's
acceptance of the late charge shall in no event constitute a waiver of Tenant's default with
respect to any overdue amount nor prevent Landlord from exercising any other rights or
remedies granted under this Lease and/or applicable law. In addition, if any amount payable by
Tenant to Landlord hereunder is not received by Landlord within five (5) days after the due date,
such amount shall bear interest from the due date until paid at the rate of ten percent (10%) per
year.

            3.4        Triple Net Lease. Except as otherwise provided in Exhibit D attached hereto, it is
the parties' intention that this be a "triple-net lease" with no expenses being paid by Landlord
relating to the ownership, operation or use of the Property.

 IV.     USE OF PROPERTY.

            4.1        Use of Property. Tenant may use or permit use of the Property for the
construction, development and maintenance of additional buildings and related improvements on
the Property and use as a distribution center for its products and such other uses as Tenant may
desire. Tenant shall not use or permit the use of the Property in a manner that amounts to waste
at the Property; provided, however, the exercise of Tenant's right to construct Tenant
Improvements (as defined below) which may require demolition of Existing Improvements
and/or previously constructed Tenant Improvements shall not be waste. Landlord acknowledges
that Tenant, in the regular course of business, receives, stores and distributes various Hazardous
Substances (as defined in Article VI below) and Tenant's storage of the same on the Property
shall not be deemed a violation of this Lease, provided Tenant, at all times, complies with Article
VI below.

            4.2        Compliance With Laws. Tenant shall not use or permit any other person to use
the Property, the Existing Improvements, or the Tenant Improvements (as defined in Section 5.1
below) thereon or any part of either thereof in violation of (i) any governmental law, ordinance
or regulation, or (ii) any of the Recorded Matters; provided that Tenant shall have no such
obligations with respect to any portion of the Property subject to the Existing Leases except as
otherwise provided at Exhibit D attached hereto. Without limiting the foregoing, Tenant agrees
to comply with all the requirements now in force, or which may hereafter be in force, of all
governmental authorities pertaining to the maintenance, operation, use and occupation of the
Property and the Improvements (as defined in Section 5.1 below) thereon, as well as operations
conducted thereon (collectively, the "Applicable Laws").

V.        DESIGN AND CONSTRUCTION BY TENANT.

            5.1        Tenant's Right to Build.

                        (a)        Tenant, at its sole cost and expense, may design and construct or cause
to be constructed on the Property additional building(s) and related improvements and/or
refurbishments or other improvements to Existing Improvements (such building(s), related
improvements, refurbishments or other improvements are referred to herein as the "Tenant
Improvements"). Tenant shall have the right to make such Tenant Improvements, including but
not limited to changes, alterations and new construction, structural or otherwise, with respect to
the Property, including but not limited to the Existing Improvements, as Tenant shall deem
necessary or desirable, and shall be entitled to demolish any portion of the Existing
Improvements in conjunction with such changes, alterations or new construction. Such Tenant
Improvements, changes, alterations, new construction or demolition to the Improvements (as
defined below) (collectively, the "Work") shall be subject to Landlord's approval, which shall
not be unreasonably withheld or delayed, and the conditions herein set forth which Tenant
covenants to observe and perform. The Existing Improvements and the Tenant Improvements
are collectively referred to as the "Improvements."

                        (b)        So long as KMS is acting as Tenant's construction manager, Landlord's
approval of the Work shall be deemed given without the necessity of Tenant providing any
information or request for approval to Landlord. If KMS is no longer acting as Tenant's
construction manager, any request by Tenant for approval of the Work or for the execution of
certain instruments as contemplated by Sections 5.2 and 5.3 below shall be in writing
accompanied by reasonable backup information. Within five (5) business days after receipt of
such request from Tenant, Landlord shall (i) grant such consent and execute (and acknowledge
where appropriate) any such instruments or (ii) provide a written explanation as to its refusal to
provide such consent or execute such instruments. Failure of Landlord to provide such written
explanation within such five (5) business day period shall be deemed Landlord's consent and
approval.

                        (c)        Before the commencement of construction of the Tenant Improvements or
performance of Work, Tenant shall obtain all insurance required under Article VIII below.

            5.2        Easements and Dedications. Tenant and Landlord each recognize that in order
to provide for the orderly development of the Property, it may be necessary or desirable that
street, water, sewer, drainage, gas, power line, and other easements, dedications and similar
rights be granted or dedicated over or within portions of the Property. Landlord agrees that it
shall, from time to time during the Term and upon the reasonable request of Tenant and at
Tenant's sole cost and expense (including, without limitation, the cost of reasonable attorneys'
fees and reasonable outside consultants' fees), join with Tenant in executing and delivering such
documents as may be reasonably appropriate, necessary or required by governmental bodies,
public utility companies or other persons for the purpose of granting such easements, dedications
and similar rights. So long as KMS is acting as Tenant's construction manager, any request by
Tenant for Landlord to join in the execution and delivery of documents for granting easements,
dedications, and similar rights shall be deemed reasonable.

            5.3        Governmental Approvals. Tenant shall acquire, from the appropriate
government bodies, all zoning changes, variances, conditional use permits and other permits
required for the development of the Property and construction and operation of the
Improvements (the "Governmental Approvals"). Upon the reasonable advance notice from
Tenant, Landlord shall execute and deliver such documents, petitions, applications and
authorizations as may be reasonably appropriate or required for the purpose of obtaining the
Governmental Approvals. So long as KMS is acting as Tenant's construction manager, any
request by Tenant for Landlord to execute and deliver such documents, petitions, applications
and authorizations shall be deemed reasonable.

            5.4        Landlord's Duty of Cooperation. Landlord acknowledges its duty to cooperate
fully with Tenant's (i) construction at the Property and (ii) efforts pursuant to Sections 5.2 and
5.3 above. In furtherance of such duty, Landlord designates Thomas Manz as its agent with
authority to bind Landlord and execute any and all documents required of Landlord pursuant to
this Article V.

            5.5        Quality of Work. All work done in connection with any Work shall be done in a
good and workmanlike manner and in compliance with all Recorded Matters and all Applicable
Laws.

            5.6        Notice of Nonresponsibility. Tenant shall notify Landlord of Tenant's intention
to commence any construction work on the Property at least ten (10) days before commencement
of any such work or delivery of any materials therefor. At all times during the Term, Landlord
shall have the right to post and maintain on the Property any notices of non-responsibility
provided for under Applicable Laws.

            5.7        Tenant's Ownership of Improvements and Fixtures. The Tenant
Improvements, and any fixtures, machinery and equipment at any time constructed, placed or
maintained by or on behalf of Tenant on any part of the Property shall be and remain the
property of Tenant (or its sublessees or licensees as their interests may appear) during the Term.
Upon expiration of the Term or earlier termination of this Lease, Tenant (or its sublessees or
licensees) may remove any inventory, furniture or furnishing, or other personal property that is
not attached to the Improvements. Tenant may also remove any personal property that is
attached to the Improvements, unless such removal would significantly and irreparably damage
the Improvements and provided that Tenant repairs, at its sole cost and expense, any damage
caused by such removal. Upon the expiration of the Term or earlier termination of this Lease not
in conjunction with Tenant's acquisition of fee title to the Property, Tenant (or its sublessees and
licensees) shall deliver to Landlord the possession of the Property and the Tenant Improvements
shall become the property of Landlord.

            5.8        Construction Indemnity. To the extent not covered by Tenant's insurance set
forth in Article VIII below, Tenant agrees to indemnify, defend and hold harmless Landlord from
and against any and all liability for any injury to or death of any person or persons or any
damage to property in any way arising out of or in connection with the construction of the
Tenant Improvements or performance of Work, and from all costs, expenses and liabilities
(including, but not limited to, court costs and reasonable attorneys' fees) incurred by Landlord in
connection therewith, excepting, however, (i) any liability arising prior to the Commencement
Date or (ii) any liability caused by or resulting from the negligence or willful misconduct of
Landlord or its agents, employees, licensees or contractors. If any action or proceeding is
brought against Landlord by reason of any of the foregoing matters, Tenant shall have the right,
upon notice, to defend or participate in Landlord's defense of the same at Tenant's expense by
counsel reasonably satisfactory to Landlord. Landlord shall cooperate with Tenant in such
defense.

            5.9        Development Management. Landlord and Tenant hereby acknowledge that
KMS shall act as construction manager for Tenant pursuant to the Development Agreement.
Landlord shall cooperate fully with Tenant and KMS with respect to construction and
development at the Property.

VI.       HAZARDOUS SUBSTANCES.

            Tenant hereby agrees that it and its agents, employees, contractors, affiliates, lessees,
subtenants, licensees or invitees shall not generate, manufacture, store, dispose of or otherwise
use or hold on, under or about the Property or any Improvements thereon or transport to, from or
across the Property or any such Improvements any Hazardous Substances (as defined below),
except in compliance with Hazardous Substance Laws (as defined below). As used herein,
"Hazardous Substances" means any chemical, substance, material, controlled substance, object,
condition, waste, living organism, or combination thereof which is or may be hazardous to
human health or safety or to the environment due to its radioactivity, ignitability, corrosivity,
reactivity, explosivity, toxicity, carcinogenicity, mutagenicity, phytotoxicity, reproductive
toxicity, infectiousness or other harmful or potentially harmful properties or effects, including,
without limitation, petroleum and petroleum products, asbestos, radon, polychlorinated
byphenyls (PCBs), and all of those chemicals, substances, materials, controlled substances,
objects, conditions, wastes, living organisms, or combinations thereof, which are now or become
in the future listed, defined or regulated in any manner by any Environmental Law based upon,
directly or indirectly, such properties or effects. As used herein "Environmental Law" means
any and all federal, state or local environmental, health and/or safety-related laws, regulations,
standards, decisions of the courts, ordinances, rules, codes, orders, decrees, directives,
guidelines, permits or permit conditions, currently existing and as amended, enacted, issued or
adopted in the future, which are or become applicable to the Property.

VII.      TAXES, UTILITIES AND OTHER CHARGES.

            7.1        Tenant to Pay Taxes. Except as otherwise provided in Exhibit D, in addition to
the rent described in Article III above, Tenant shall pay and discharge as additional rent all
Taxes. As used herein, the term "Taxes" shall include any form of real property, general or
special tax, supplemental tax assessed pursuant to Chapter 3.5 commencing with Section 75 of
the California Revenue and Taxation Code, gross receipts tax (including any fee, levy, or charge
imposed on the gross receipts of Landlord under and measured solely by this Lease), assessment,
 license fee, license tax, business license fee, business license tax, commercial rental tax, levy,
charge, penalty, tax or similar imposition, imposed by any authority having the direct power to
tax, including any city, county, state or federal government or any school, agricultural, lighting,
drainage or other improvement or special assessment district thereof, as against any legal or
equitable interest of Landlord or Tenant in the Property and/or any Improvements thereon,
including, without limitation, (i) any of such items imposed by reason of a change in ownership
of the Property or ownership in Landlord or (ii) any tax, fee, levy or charge in substitution,
partially or totally, of any tax, fee, levy or charge previously included within the definition of
Taxes, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the
voters of the State of California in the June 1978 election and that taxes, fees, levies and charges
may be imposed by governmental agencies for such services as fire protection, street, sidewalk
and road maintenance, refuse removal and other governmental services formerly provided
without charge to property owners or occupants. It is the intention of Tenant and Landlord that
all such new and increased taxes, fees, levies and charges and all similar taxes, fees, levies and
charges be included with the definition of Taxes for the purposes of this Lease. Tenant shall not,
however, pay or be responsible for and the definition of Taxes for purposes of this Lease shall
not include any taxes, fees, levies or charges imposed on or measured by the income, inheritance,
franchise, excess profits, items of tax preference or gross receipts of Landlord (other than a tax,
fee, levy or charge imposed on the gross receipts of Landlord under and measured solely by this
Lease).

            7.2        Timing of Payment of Taxes. Subject to Tenant's right to pay Taxes in
installments as provided below, all payments of Taxes to be made by Tenant pursuant to this
Article shall be made before any fine, penalty, interest or costs may be added thereto for
non-payment. Tenant shall furnish to Landlord, no later than fifteen (15) days after the date
when any Taxes payable by Tenant pursuant to this Lease would become delinquent, appropriate
evidence establishing the payment thereof.

            7.3        Installment Payment. If by law any Tax is payable or may, at the option of the
taxpayer, be paid in installments, Tenant may pay such Tax, together with any accrued interest
on the unpaid balance of such Tax, in installments as they become due.

            7.4        Proration of Taxes. All Taxes for the fiscal tax years in which the Term
commences or ends shall be prorated between Landlord and Tenant.

            7.5        Landlord's Right to Cure. Subject to the provisions of Section 7.7 below, if
Tenant, in violation of the provisions of this Lease, fails to timely pay and discharge any Tax,
Landlord may (but shall not be obligated to) pay or discharge it, provided that Tenant shall have
failed to pay such Tax within fifteen (15) days after notice from Landlord of Landlord's intention
to pay the same. Any amount so paid by Landlord and the amount of all costs, expenses, interest
and penalties connected therewith (including reasonable attorneys' fees) shall be payable by
Tenant as additional rent and shall be reimbursed to Landlord by Tenant on demand, with
interest thereon at the rate of ten percent (10%) per year.

            7.6        Utilities. Except as otherwise provided in Exhibit D, Tenant shall be solely
responsible for and shall pay all charges for water, gas, heat, electricity, telephone service and all
other utilities delivered to the Property. Landlord shall not be liable in damages or otherwise for
any failure or interruption of any utility service, and no such failure or interruption shall entitle
Tenant to terminate this Lease or abate the rent and other charges hereunder.

            7.7        Contesting Taxes and Liens. Tenant shall have the right to contest the amount
or validity of any Tax or lien by appropriate legal proceedings, provided that Tenant protects
Landlord, the Property and all Improvements by adequate surety bond or other appropriate
means reasonably satisfactory to Landlord. This right shall not be deemed or construed in any
way as relieving or modifying Tenant's covenants to pay any such Tax or obligation imposed by
a lien at the time and in the manner provided in this Article. Landlord shall, upon written request
and at Tenant's sole cost and expense, join in any such proceedings, if Tenant determines that it
shall be necessary or appropriate for Landlord to do so in order for Tenant to properly prosecute
such proceedings. Tenant hereby agrees to indemnify and defend Landlord from any costs,
expenses, and liabilities (including, without limitation, reasonable attorneys' fees) arising from
any such proceeding. In the event that Landlord joins in any such proceedings, absent a request
by Tenant to so join, Landlord shall be solely responsible for any and all of Landlord's costs and
expenses incurred therewith.

 VIII.    INSURANCE.

            8.1        Tenant's Insurance. During the Term, Tenant shall at all times maintain in
effect the following policies of insurance:

                        (a)        Comprehensive General Liability Insurance for the Property in a
combined coverage for bodily injury and property damage in an amount not less than Three
Million Dollars ($3,000,000). Tenant shall name Landlord as additional insured under such
policy;

                        (b)        During any period of construction of the Improvements, Builder's Risk
Property Insurance in form mutually acceptable to Tenant and by Landlord; and

                         (c)        Upon completion of any of the Tenant Improvements, a policy of all risk
property insurance insuring the Tenant Improvements in an amount at least equal to the
replacement cost thereof as reasonably approved by Landlord.

                        Such coverages shall be from such companies and on such other terms and
conditions as Tenant from time to time may reasonably determine. At Tenant's option, such
insurance coverage may include the risks of earthquake, flood damage or other perils; business
income (rental loss) and extra expense coverage; and loss payee endorsements in favor of any
Leasehold Mortgagee.

            8.2        Landlord's Insurance. Prior to the Break Date, Landlord shall at all times
maintain in effect the following policies of insurance:

                        (a)        A policy of all risk property insurance insuring the Existing Improvements
in an amount at least equal to the replacement cost thereof as reasonably approved by Tenant,
provided that (i) Landlord shall not be responsible for such insurance from and after the Break
Date (which coverage shall then be Tenant's obligation); and

                        (b)        Comprehensive General Liability Insurance for the Property in a
combined coverage for bodily injury and property damage in an amount not less than Three
Million Dollars ($3,000,000). Landlord shall name Tenant as additional insured under such
policy; and

                         Such coverages shall be from such companies and on such other terms and
conditions as Landlord from time to time may reasonably determine. At Landlord's option, such
insurance coverage may include the risks of earthquake, flood damage or other perils; business
income (rental loss) and extra expense coverage; and loss payee endorsements in favor of the
holders of any mortgages or deeds of trust encumbering the interest of Landlord in the Existing
Improvements or underlying lessors of all or part of the Existing Improvements.

                        From and after the Break Date, Tenant shall be responsible to maintain and pay
for all insurance described in this Section 8.2.

            8.3        Policy Standards. All policies of insurance to be provided hereunder shall be
written by companies of nationally recognized financial standing and which are legally qualified
to issue such insurance and have a Best Services rating of at least A. Each policy of insurance
held by Landlord and Tenant shall contain reasonable deductibles and shall (i) name the other as
an additional insured; (ii) be non-contributing with, and shall apply only as primary and not
excess to, any other insurance available to the insureds; and (iii) provide that it shall not be
cancelled or amended or its coverage reduced except upon thirty (30) days' prior written notice
by certified or registered mail to each of the insureds. Landlord and Tenant shall not obtain or
carry separate insurance concurrent in form or contributing, in the event of loss, with that
required by this Section unless the other is an additional insured therein. Landlord or Tenant, as
applicable, shall immediately notify the other whenever any such separate insurance is obtained
and shall deliver to the other certificates evidencing the same. Any insurance required hereunder
may be provided under blanket policies provided that the coverage afforded shall not be reduced
or diminished by reason of the use of a blanket policy.

            8.4        Protection of Proceeds. Every policy referred to in this Article VIII shall
provide that it shall not be invalidated by any act or neglect of Landlord or Tenant, by any
termination of this Lease, other than the expiration of the Lease as set forth herein, or by change
in title to the leasehold estate or to the Property.

            8.5        Certificates of Insurers. Landlord and Tenant shall each deliver to the other 
ertificates of insurers evidencing the existence of all insurance which is required to be
maintained by Landlord and Tenant, respectively, hereunder. Delivery shall be made (i)
promptly after the Commencement Date and (ii) no later than fifteen (15) days prior to the
expiration of any insurance.

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

IX.      INDEMNIFICATION.

            9.1.        Tenant's Indemnification. Tenant does hereby agree to defend, indemnify and
hold Landlord harmless from and against any and all liability for any injury to or death of any
person or persons or any damage to property in any way arising out of or in connection with the
condition, use or occupancy of the Property, or activities of Tenant or Tenant's affiliates,
officers, directors, executives, shareholders, attorneys, employees, agents, contractors, successors
and assigns and their respective officers, agents, servants, employees, and independent
contractors (collectively, the "Tenant Affiliates") in or about the Property and from all costs,
expenses and liabilities (including, but not limited to, court costs and reasonable attorneys' fees)
incurred by Landlord in connection therewith, excepting, however, (i) any liability arising prior
to the Commencement Date, (ii) any liability caused by or resulting from the negligence or
willful misconduct of Landlord, or (iii) the Existing Leases other than the Ace Lease.

            9.2        Landlord's Indemnification. Landlord does hereby agree to defend, indemnify
and hold Tenant harmless from and against any and all liability for any injury to or death of any
person or persons or any damage to property to the extent arising out of or in connection with the
condition, use or occupancy of the Property, or activities of Landlord or Landlord's affiliates,
officers, directors, executives, shareholders, attorneys, employees, agents, contractors, successors
and assigns and their respective officers, agents, servants, employees, and independent
contractors (collectively, the "Landlord Affiliates") in or about the Property and from all cost,
expenses and liabilities (including, but not limited to, court costs and reasonable attorneys' fees)
incurred by Tenant in connection therewith, excepting, however, (i) any liability arising after the
Commencement Date other than matters for which Landlord has responsibility in connection
with the Existing Leases as provided at Exhibit D attached hereto or (ii) any liability caused by
or resulting from the negligence or willful misconduct of Tenant.

            9.3        Landlord and Tenant Exculpation. The Landlord Affiliates shall not have any
personal liability for any default by Landlord under this Lease and the Tenant Affiliates shall not
have any personal liability for any default by Tenant under this Lease.

X.        MAINTENANCE AND REPAIR OF IMPROVEMENTS.

            10.1.      Tenant's Duty to Maintain. Except as provided in Exhibit D, throughout the
Term, and subject to the provisions of this Lease, Tenant shall, at Tenant's sole cost and
expense, maintain the Property and all Improvements thereon in good condition and repair and in
accordance with all Recorded Matters and all laws, ordinances and regulations of governmental
bodies having or claiming jurisdiction and all their respective agencies, departments, bureaus,
and officials materially affecting the Property.

            10.2      Casualty; Tenant's Duty to Repair Damage. If the Existing Improvements
shall be damaged or destroyed by any cause whatsoever during the Term, Tenant shall, subject to
Article V above, with reasonable promptness, rebuild, repair or restore the same, at its sole cost
and expense, to at least substantially the condition existing immediately prior to such damage or
destruction; and Tenant shall do so even though the proceeds of any insurance policies covering
the loss shall be insufficient to reimburse Tenant therefor. If such proceeds of insurance are
more than sufficient to pay the cost of any such repair or restoration, Tenant shall be entitled to
retain any surplus. If the Tenant Improvements shall be damaged or destroyed by any cause
whatsoever during the Term, Tenant may, subject to Article V above, (i) rebuild, repair or restore
the same, at its sole cost and expense, to at least substantially the condition existing immediately
prior to such damage or destruction, or (ii) restore the Property to its condition as of the date
hereof.

            10.3      No Abatement of Rent.

                        (a)        Tenant shall not be entitled to any abatement of rent, nor shall its
obligations under this Lease be terminated during the Term, notwithstanding any destruction or
damage to any Improvements on the Property by any cause whatsoever; provided, however, that
if such improvements are substantially destroyed by fire or other casualty at any time during the
last five (5) years of the Term, then Tenant may terminate this Lease by written notice given to
Landlord within sixty (60) days after the date of such destruction, and rental and other charges
hereunder shall be apportioned as of the date of destruction. In the event of such termination, all
proceeds of insurance covering the loss of such improvements (excluding proceeds of insurance
covering Tenant's furniture and equipment and the proceeds of business interruption insurance)
shall be paid as follows:

                                 (i)    To Tenant, an amount equal to Tenant's unamortized capital costs
of the Tenant Improvements (capital costs shall be amortized on a straight line basis over a
period of twenty (20) years (including interest at six percent (6%)); and

                                (ii)    To Landlord, the balance of the insurance proceeds.

                        (b)        Any insurance proceeds received as and for loss of income shall belong
entirely to Tenant. Subject to the rights of any Leasehold Mortgagee, the proceeds of insurance
shall be tendered directly to Tenant.

XI.       CONDEMNATION OF THE PROPERTY.

            11.1      Termination and Proceeds.

                        (a)        If, at any time during the Term, title to the whole or substantially all of the
Premises shall be taken in condemnation proceedings or by any right of eminent domain, the rent
and any additional payments due under this Lease shall be apportioned and paid to the date of
taking. For purposes of this Article, "substantially all of the Property" shall be deemed to have
been taken if the untaken portion cannot be practically and economically used by Tenant for the
purposes for which the Property were being used immediately prior to the taking.

                        (b)        Notwithstanding that this Lease shall terminate by operation of law or
otherwise upon the date of such taking:

                                (i)    Landlord shall be entitled to receive (A) such portion of the award
or awards (with the interest thereon, if any) paid by the condemning authority as shall
represent compensation for the value of the Property or the part thereof so taken,
exclusive of the value of the Tenant Improvements and all Work performed, and (B) such
portion of such award or awards (with the interest thereon, if any) paid by the
condemning authority as shall represent consequential damages, if any, to the portion of
the Property not so taken; and

                                (ii)    Subject to the amounts reserved to Landlord in clause (i) above,
Tenant shall be entitled to receive the balance of such award or awards (including
compensation for any Tenant Improvements or portion thereof taken and damages, if any,
to the parts of any Tenant Improvements not so taken).

            11.2        Partial Taking.

                        (a)        In the event of any such taking of less than the whole or substantially all
of the Property, the Term shall not be reduced or affected in any way. In such event:

                                (i)    Landlord shall be entitled to receive (A) such portion of the award
or awards (with the interest thereon, if any) paid by the condemning authority as shall
represent compensation for the value of the Property or the part thereof so taken,
exclusive of the value of the Tenant Improvements and all Work performed, and (B) such
portion of such award or awards (with the interest thereon, if any) paid by the
condemning authority as shall represent consequential damages, if any, to the portion or
portions of the Property not so taken; and

                                (ii)    Subject to the amounts reserved to Landlord in clause (i) above,
Tenant shall be entitled to receive the balance of such award or awards (including
compensation for any Tenant Improvements or portion thereof taken and damages, if any,
to the parts of the Tenant Improvements not so taken).

                        (b)        Tenant may repair, alter and restore the remaining part of the Property as
Tenant shall elect, with such repair, alteration or restoration to be done in conformity with the
applicable provisions of Article V above.

                        (c)        The Base Rent for the balance of the Term shall be reduced, effective as of
the date of such partial taking, so that the Base Rent thereafter payable shall be an amount equal
to the result obtained by multiplying the Base Rent which would otherwise be payable under the
terms of this Lease by a fraction, the numerator of which shall be the number of square feet of 
he land area of the Property remaining subject to the provisions hereof after such taking and the
denominator of which shall be the number of square feet of the land area of the Property covered
by this Lease immediately prior to such taking.

            11.3        Temporary Taking. If the whole or any part of the Property or of Tenant's
interest in this Lease shall be taken in condemnation proceedings or by any right of eminent
domain for a temporary use or occupancy, the Term shall not be reduced or affected in any way.
Tenant shall continue to pay in full the rent and other charges herein reserved or provided for
without reduction or abatement in the manner and at the times herein specified; and, except only
to the extent that Tenant is prevented from so doing pursuant to the terms of the order of the
condemning authority, Tenant shall continue to perform and observe all of the other provisions
of this Lease as though such taking had not occurred. In the event of any such temporary taking,
Tenant shall be entitled to receive the entire amount of any award made for such taking whether
such award is paid by way of damages, rent or otherwise; provided, however, that if such period
of temporary use or occupancy shall extend beyond the Expiration Date, such award (after
payment to Landlord therefrom of the estimated cost of restoration of the Property to the extent
that any such award is intended to compensate for damage to the Property) shall be apportioned
to Landlord and Tenant as of the Expiration Date in the same ratios that the part of the entire
period for which such compensation is made falling before the Expiration Date and that part
falling thereafter each bear to such entire period.

            11.4        Separate Awards. Landlord and Tenant shall each seek separate awards in all
such condemnation proceedings, and each agrees to use its best efforts to see that such separate
awards are made at all stages of all such proceedings.

            11.5        Participation. Tenant and Landlord shall each have the right, at its own expense,
to appear in any condemnation proceedings and to participate in any and all hearings, trials and
appeals therein.

            11.6        Notice of Proceeding. In the event Landlord or Tenant shall receive notice of
any proposed or pending condemnation proceeding affecting the Property, the party receiving
such notice shall promptly notify the other party.

XII.    ASSIGNMENT AND SUBLETTING.

Tenant shall not (i) assign, pledge or hypothecate this Lease, (ii) sublease the Property or
any portion thereof, (iii) encumber its leasehold interest, or (iv) make any total or partial
conveyance or other transfer of the whole of the Property or the Improvements thereon, to any
person or entity, including, but not limited to, the resultant entity of a merger, reorganization or
reconstitution of Tenant, without the prior written consent of Landlord, which consent shall not
be unreasonably withheld or delayed. In no event shall such assignment, sublease or otherwise,
release Tenant from its rights and obligations hereunder. If Tenant desires at any time to assign
this Lease or sublet the Property, Tenant shall notify Landlord, at least ten (10) days prior to the
proposed effective date of the assignment or sublease, of Tenant's intent to do so. Tenant shall
furnish to Landlord, prior to the effective date of any assignment or the commencement date of
any sublease, a copy of the fully executed assignment of lease agreement containing a covenant
of assumption by the assignee or, in the case of a sublease, a copy of the fully executed sublease.

XIII.    MORTGAGES.

            13.1        Leasehold Mortgages. At any time and from time to time during the Term,
Tenant (or any assignee permitted under this Lease) shall have the right to mortgage, pledge,
hypothecate, deed in trust, assign rents, issues and profits belonging to Tenant, and/or
collaterally assign its interest in this Lease or the leasehold estate created by any sublease, and to
assign or pledge assignment of the same as security for any debt (the holder of any such
mortgage (including, without limitation, a construction or permanent lender)), pledge or other
encumbrance, and the beneficiary of any such deed of trust or assignment being referred to in
this Lease as a "Leasehold Mortgagee"; and the mortgage, pledge, hypothecation, deed of trust,
assignment or other security instrument being referred to in this Lease as a "Leasehold
Mortgage"), at Tenant's sole cost and expense and upon and subject to the following conditions:

                        (a)        Each Leasehold Mortgage may be made for any purpose and upon any
terms (including, without limitation, term of the loan, interest rate, payment terms, and
prepayment privileges or restrictions) as desired by Tenant.

                        (b)        A Leasehold Mortgage may, except as hereinafter provided, cover all of
Tenant's interest in (i) this Lease; (ii) the Property; (iii) the Improvements; (iv) the rents, issues
and profits belonging to Tenant; and (v) equipment, personal property and fixtures used at or in
the operation of the Property. Tenant shall be permitted, without Landlord's approval, (i) to
allow a Leasehold Mortgage to cover more (for example, a blanket lien covering this and other
real property owned by Tenant), but not less than, Tenant's entire interest in this Lease, the
Property and the Improvements, or (ii) to allow a Leasehold Mortgage to encumber a sublessee's
interest in a leasehold estate created by any sublease (to which Landlord has consented).
Landlord shall not be required to join in any Leasehold Mortgage. Landlord shall not have any
liability whatsoever for payment of the principal sum secured by any Leasehold Mortgage, or
any interest accrued thereon, or any other sum secured thereby or accruing thereunder; and the
Leasehold Mortgagee shall seek no damages against Landlord for any or all of the same.
Leasehold Mortgagees shall have all the benefits provided in this Article or provided elsewhere
in this Lease; and the provisions set forth in this Lease for the benefit of Leasehold Mortgagees
may be enforced by them.

                        (c)        No Leasehold Mortgage shall be binding upon Landlord in the
enforcement of its rights and remedies herein and by law provided, unless and until a copy
(certified as true and correct by the County Recorder of Placer County) of the original thereof
bearing the date and instrument number or book and page of recordation thereof and a copy of
the original note (certified as true and correct by Tenant) secured by such Leasehold Mortgage
has been delivered to Landlord, together with written notice of the address of the Leasehold
Mortgagee to which notices may be sent. In the event of an assignment of such Leasehold
Mortgage, such assignment shall not be binding upon Landlord unless and until a copy thereof
(certified as true and correct by the County Recorder of Placer County) bearing the date and
instrument number or book and page of recordation thereof, together with written notice of the
address of the assignee thereof to which notices may be sent, have been delivered to Landlord.

                        (d)        Any of the types of Leasehold Mortgages permitted hereunder may consist
of two (2) or more separate loans from two (2) or more separate Leasehold Mortgagees

                        (e)        All Leasehold Mortgages shall require the Leasehold Mortgagee to give
Landlord notice of any default by Tenant under the Leasehold Mortgage.

                        (f)        All Leasehold Mortgages shall contain provisions permitting the
disposition and application of insurance proceeds and condemnation awards in the manner
provided in this Lease.

                        (g)        All rights acquired by a Leasehold Mortgagee under any Leasehold
Mortgage shall be subject to each and all of the provisions this Lease, and to all rights of
Landlord thereunder, none of which provisions is or shall be waived by Landlord by reason of
the giving of such Leasehold Mortgage; but nothing herein shall limit or restrict the rights of
leasehold Mortgagees as set forth in this Article. Landlord and Tenant agree that while any
Leasehold Mortgage is in existence, there shall not be any agreement between Landlord and
Tenant for the modification or amendment of this Lease without the consent of the Leasehold
Mortgagee, provided that such consent shall not be unreasonably withheld. The Leasehold
Mortgagee shall use its best efforts to respond to any request for a modification or amendment
within a reasonable period of time, which period shall in no event exceed thirty (30) days after
the receipt of such request. The Leasehold Mortgage shall provide that if the Leasehold
Mortgagee does not respond to any such request within such thirty (30) day period, the request
shall be deemed automatically approved and the Leasehold Mortgagee shall be bound thereby.

                        (h)        Notwithstanding any foreclosure of any Leasehold Mortgage, Tenant shall
remain liable for the payment of all rent and other sums described in this Lease and the
performance of all of the provisions of this Lease which are to be performed by Tenant.

            13.2        Rights and Obligations of Leasehold Mortgagees. If Tenant shall mortgage its
leasehold interest hereunder, or any portion thereof, in accordance with the provisions of this
Article, then, as long as any such Leasehold Mortgage shall remain unsatisfied of record and
Landlord has received the notice specified in paragraph (c) of Section 13.1 above, the following
provisions shall apply:

                        (a)        If the Leasehold Mortgagee shall register with Landlord its name and
address in writing, no Event of Default shall be grounds for the termination of this Lease by
Landlord unless and until (i) a notice thereof has been concurrently mailed to Tenant and to the
Leasehold Mortgagee at their respective addresses registered with Landlord (the "Notice of
Default") and (ii) the cure period set forth in paragraph (b) next below has expired without cure
having been completed.

                        (b)        In the event Tenant shall be in default hereunder, the Leasehold
Mortgagee shall, within the period and otherwise as herein provided, have the right (but not the
obligation) to remedy such default, or cause the same to be remedied; and Landlord shall accept
such performance by or at the instigation of such Leasehold Mortgagee as if the same had been
done by Tenant. The Leasehold Mortgagee shall have thirty (30) days more than the period
provided Tenant under this Lease after Landlord's delivery of the Notice of Default for curing
the default or causing the same to be cured. Such additional thirty-day period shall be extended
if (i) the default is other than the payment of money and such that it is not practicable to cure
within such additional thirty-day period and (ii) the Leasehold Mortgagee diligently prosecutes
such cure to completion. Tenant hereby constitutes and appoints the Leasehold Mortgagee as
Tenant's agent and attorney-in-fact with full power, in Tenant's name, place and stead, and at
Tenant's sole cost and expense, to enter upon the Property and the Improvements and to perform
all acts required to be performed herein or in any sublease made hereunder by Tenant.

                        (c)        While any such Leasehold Mortgage remains unsatisfied of record, and an
event or events shall occur which shall entitle Landlord to terminate this Lease, the Leasehold
Mortgagee shall have the right to acquire all of Tenant's right under this Lease, provided such
Leasehold Mortgagee shall:

                                (i)    before the expiration of thirty (30) days after the date of service of
a notice of termination under this Lease (but in no event prior to the last day on which the
Leasehold Mortgagee is entitled to cure such default as provided in subparagraph (b)
above), promptly cure all defaults which may be cured by the payment of a sum of
money and undertake to cure any other existing default of Tenant;

                                (ii)    continue to pay the rent and all other amounts payable by Tenant
under this Lease;

                                (iii)    promptly thereafter initiate and diligently pursue steps to acquire
Tenant's interest in this Lease by foreclosure of its Leasehold Mortgage or otherwise; and

                                (iv)    promptly execute all documents reasonably requested by Landlord
effecting the transaction contemplated by this Section and this Lease.

                        (d)        In the event of the termination of this Lease prior to the natural expiration
of the Term due to default of Tenant or operation of law (including the bankruptcy of Tenant),
Landlord shall notify the Leasehold Mortgagee (of which Landlord has been notified pursuant to
this Section) of such termination pursuant to the notice provisions of this Lease, and deliver to
such Leasehold Mortgagee a statement of any and all sums which would at that time be due
under this Lease then known to Landlord. Subject to the provisions of this Article, such
Leasehold Mortgagee shall thereupon have the right to obtain a new lease in accordance with
subsections (i) through (iii) below; provided, however, and notwithstanding the foregoing to the
contrary, if, at the time of an Event of Default arising under Article XIV below, this Lease would
otherwise terminate by reason of a rejection of this Lease by Tenant or Tenant's trustee in
bankruptcy, and Landlord shall also be in bankruptcy or a petition in bankruptcy shall have been
filed by or against Landlord, then simultaneously with the rejection of this Lease by Tenant, such 
easehold Mortgagee shall become the new tenant under this Lease such that this Lease shall
neither terminate nor lapse by reason of the change of tenants; and provided further, however, 
hat in the event such Leasehold Mortgagee shall so become the new tenant hereunder, such
Leasehold Mortgagee shall, within ten (10) days after so becoming the new tenant, have the right
to terminate this Lease, in which event, such Leasehold Mortgagee shall have no liability to
Landlord except for liability accruing during such tenancy.

                                (i)    Upon the written request of the Leasehold Mortgagee within thirty
(30) days after service of the notice of termination, Landlord shall enter into a new lease
of the Property and the Improvements with such Leasehold Mortgagee, or its designee.

                                (ii)    Such new lease shall be effective as of the date of termination of
this Lease and shall be for the remainder of the Term, at the rent and upon the terms,
covenants and conditions contained in this Lease. Upon the execution of such new lease,
and subject to this Section, the Leasehold Mortgagee shall pay any and all sums which
would, at the time of the execution thereof, be due under this Lease but for such
termination and shall pay all expenses (including, without limitation, reasonable
attorneys' fees, court costs and disbursements) incurred by Landlord in connection with
such default and termination, the recovery of possession of the Property and the
preparation, execution and delivery of such new lease; provided, however, that with
respect to any default which cannot be cured by such Leasehold Mortgagee until it
obtains possession, such Leasehold Mortgagee shall have a reasonable time after it
obtains possession to cure such default.

                                (iii)    If before the execution of such new lease, Landlord has
encumbered its fee interest in the Property with a deed of trust and the terms of the deed
of trust do not obligate the beneficiary thereof to not disturb the quiet possession of the
Leasehold Mortgagee who is the tenant under such new lease, then Landlord shall obtain
from such beneficiary a nondisturbance agreement pursuant to which such beneficiary
agrees not to disturb such Leasehold Mortgagee's quiet possession of the Property so
long as such Leasehold Mortgagee is not in default under the new lease.

                        (e)        Any payment to be made or action to be taken by a Leasehold Mortgagee
hereunder as a prerequisite to keeping this Lease in effect shall be deemed properly to have been
made or taken by the Leasehold Mortgagee if such payment is made.

                        (f)        Landlord and Tenant shall each give the Leasehold Mortgagee notice of
any condemnation proceedings affecting the Property or any Improvements thereon. The
Leasehold Mortgagee shall have the right to intervene and be made a party to any such
condemnation proceedings; and Landlord and Tenant hereby agree that the Leasehold Mortgagee
may be made such a party or intervenor.

                        (g)        No Leasehold Mortgagee, nor any owner of the leasehold estate hereunder
whose interest shall have been acquired by, through or under any Leasehold Mortgage or shall
have been derived immediately from any holder thereof, shall become personally liable under the
provisions of this Lease, unless and until such time as the Leasehold Mortgagee or such owner
becomes the owner of such leasehold estate and then only for as long as it remains the owner
thereof. Upon any permitted assignment of this Lease by a Leasehold Mortgagee or any owner
of the leasehold estate hereunder whose interest shall have been acquired by, through or under
any Leasehold Mortgage or shall have been derived immediately from any holder thereof, the
assignor shall be relieved of any further liability which may accrue hereunder from and after the
date of such assignment, provided that the assignee shall execute and deliver to Landlord a
recordable instrument of assumption wherein such assignee shall assume the rights and
obligations of Tenant and agree to perform and observe all provisions of this Lease as they are
applicable to Tenant.

                        (h)        The rights granted herein to Leasehold Mortgagees shall be enforceable by
them. In the event any action or proceeding is brought to enforce or interpret the provisions
hereof or to seek damages or performance or to declare the rights of the parties hereto or of any
such Leasehold Mortgagee, the prevailing party (including such Leasehold Mortgagee, if
prevailing) shall be entitled to recover its costs and expenses (including reasonable attorneys'
fees) incurred therein.

                        (i)        At such time as a Leasehold Mortgage shall be satisfied, the Leasehold
Mortgagee shall cooperate with Tenant in providing to Tenant and/or Landlord all
documentation necessary to release any and all liens with respect thereto.

             13.3        Cooperation for Leasehold Mortgagee. Landlord and Tenant shall cooperate by
including in this Lease by suitable amendment from time to time any provision which may
reasonably be requested by any proposed Leasehold Mortgagee for the purpose of implementing
the mortgagee protection provisions contained in this Lease and allowing such Leasehold
Mortgagee reasonable means to protect and preserve the lien of the Leasehold Mortgage on the
occurrence of a default under this Lease. Landlord and Tenant each agree to execute and deliver
(and to acknowledge, if necessary, for recording purposes) any agreement necessary to effect any
such amendment; provided, however, that any such amendment shall not in any way affect the
Term or any payments due under this Lease nor otherwise in any other material respect adversely
affect any rights of Landlord under this Lease.

XIV.    DEFAULT AND REMEDIES.

            14.1        Events of Default. Subject to Section 14.2 below, the following events (each, an
"Event of Default") shall constitute a default by Tenant under this Lease:

                        (a)        The failure to pay any rent or any other sum payable by Tenant to
Landlord on any date upon which the same is due; or

                        (b)        The failure to keep or perform any of the provisions of this Lease which
are to be kept or performed by Tenant.

             14.2        Notice of Tenant's Default. Tenant shall not be considered in default under this
Lease unless the default is non-curable, or in the event of a curable default, unless (i) Landlord
shall give notice specifying the default to Tenant, and (ii) Tenant has failed to cure within the
applicable cure period. Tenant shall have, after the date of receipt of a notice of default, ten (10)
days to cure any Event of Default under Section 14.1(a) and thirty (30) days to cure any Event of
Default under Section 14.1(b); provided, however, that Tenant shall not be in default under this
Lease with respect to any Event of Default under Section 14.1(b) if the default is of a nature
which is not reasonably curable within the applicable cure period and Tenant has undertaken
action to cure within such period and diligently proceeds with such action to cure. In the event
Tenant is determined to be in default under this Lease, Landlord may either terminate this Lease
and/or pursue damages and/or any other remedy available to Landlord by reason of such default
(rights of termination and all other remedies and damages being cumulative and not exclusive).

            14.3        Landlord's Remedies.

                        (a)        In the event of any default by Tenant and expiration of all applicable cure
periods therefor hereunder, in addition to any other remedies available to Landlord at law or in
equity, Landlord shall have the option to terminate this Lease and all rights of Tenant hereunder.
If Landlord elects to so terminate this Lease, then Landlord may recover from Tenant:

                                (i)    the worth at the time of award of any unpaid rent which had been
earned at the time of such termination; plus

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

                                (iii)    the worth at the time of award of the amount by which the unpaid
rent of the balance for the Term after the time of award exceeds the amount of such rental
loss that Tenant proves could be reasonably avoided.

The "worth at the time of award" of the amounts referred to in clauses (i) and (ii) above shall be 
omputed by allowing interest at the rate of ten percent (10%) per year. The worth at the time of
award of the amount referred to in clause (iii) 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 one percent (1%).

                        (b)        In addition to all other rights of Landlord pursuant to this Lease, at law or
in equity, Landlord shall have all rights set forth in California Civil Code Section 1951.4 (which
provides a lessor may continue the lease in effect after a lessee's breach and abandonment and
recover rent as it becomes due if lessee has right to sublet or assign, subject only to reasonable
limitations).

                        (c)        All rights, options and remedies of Landlord contained in this Lease shall
be construed and held to be cumulative, and no one of them shall be exclusive of the other.
Landlord shall have the right to pursue any one or all of such remedies or any other remedy or
relief which may be provided by law, whether or not stated in this Lease.

                        (d)        Termination of this Lease shall not relieve Tenant from the obligation to
pay any sum due to Landlord or from any claim for damages against Tenant.

             14.4        No Waiver. A party's failure or delay in giving notice of default shall not
constitute a waiver of any obligation, requirement or covenant required to be performed by the
other party hereunder. Except as otherwise expressly provided in this Lease, any failures or
delays by either party in asserting any rights and remedies as to any default shall not operate as a
waiver of any default or of any such rights or remedies. Delays by either party in asserting any
of its rights and remedies shall not deprive either party of the right to institute and maintain any
actions or proceedings which it may deem necessary to protect, assert or enforce any such rights
or remedies.

            14.5        Landlord's Default. Landlord shall not be deemed to be in default in the
performance of any obligation required to be performed by it hereunder unless and until it has
failed to perform such obligation within thirty (30) days after receipt of written notice by Tenant
to Landlord specifying the nature of such default; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required for its performance,
then Landlord shall not be deemed to be in default if it shall commence its performance within
such thirty (30) day period and thereafter shall diligently prosecute the same to completion.

XV.     SURRENDER AND REMOVAL.

            15.1        Surrender. Upon the expiration of the Term or earlier termination of this Lease
pursuant to the provisions hereof, except in the case of Tenant's acquisition of the Property as set
forth in the Option Agreement, it shall be lawful for Landlord to re-enter and repossess the
Property and the Improvements thereon without process of law. Upon such expiration or
termination, Tenant shall execute and deliver to Landlord, at least five (5) business days prior to
such expiration or termination, a quitclaim deed in recordable form quitclaiming all Tenant's
right, title and interest in the Property and the Improvements thereon.

            15.2        Tenant's Personal Property. Landlord may cause any of Tenant's personal
property that is not removed from the Property upon expiration of the Term or earlier termination
of this Lease to be removed from the Property and stored at Tenant's expense.

XVI.    LANDLORD'S Right of Entry and Inspection.

            Tenant shall permit Landlord or Landlord's agents, representatives or employees to enter
upon the Property and any Improvements thereon between the hours of 9:00 a.m. and 5:00 p.m.
on business days (as defined below) after prior notice for the purposes of inspecting the same, or
determining whether agreements in this Lease are being complied with.

XVII.   GENERAL PROVISIONS.

            17.1        Notices. Any notice, demand, consent, approval, request or other communication,
required or permitted to be given hereunder, shall be in writing and shall be deemed to have been
delivered (i) on the day personally delivered, (ii) upon receipt if sent by overnight courier, (iii)
on the second business day following its mailing by registered or certified mail (return receipt
requested), postage prepaid, by deposit in the United States mail, or (iv) on the day received (if
received by 5:00 p.m. local time at the place of receipt on a business day (i.e., any day other than
a Saturday or Sunday or California state, Illinois state or federal holiday) and if not so received
then on the next business day) if sent by facsimile and then only if also sent to the recipient
within forty-eight (48) hours pursuant to this Section 17.1, to the parties at the addresses set forth
below:


If to Tenant:            Ace Hardware Corporation
                              2200 Kensington Court
                              Oak Brook, IL 60253
                              Attn: Rich Sauck, Corporate Property Manager
                              Facsimile: (630) 571-2186

                                        - - and -

                              Ace Hardware Corporation
                              2200 Kensington Court
                              Oak Brook, IL 60253
                              Attn: General Counsel
                              Facsimile: (630) 990-6856

with a copy to:        McDermott, Will & Emery
                              18191 Von Karman Avenue, Suite 500
                              Irvine, CA 92612
                              Attn: Thomas K. Brown, Esq.
                              Facsimile: (949) 851-9348


if to Landlord:         Reynen & Bardis (KMS Placer), L.P.
                              7401 Galilee Road, Suite 100
                              Roseville, CA 95678
                              Attn: Tom Manz or Steve Pease
                              Facsimile: (916) 773-5090

with a copy to:        Wagner, Kirkman, Blaine & Youmans
                              1792 Tribute Road, Suite 450
                              Sacramento, CA 95815
                              Attn: Belan Kirk Wagner, Esq.
                              Facsimile: (916) 920-8608


Either party may, by notice given as aforesaid, designate a different address or addresses for
notices to be given to it. Notice of change of address shall be given by written notice in the
manner detailed in this Section 17.1. Rejection or other refusal to accept or the inability to
deliver because of changed address of which no notice was given shall be deemed to constitute
receipt of the notice, demand, request or communication sent.

            17.2        Broker's Commission. Upon the Close of Escrow (as defined in the Option
Agreement), Landlord shall pay a real estate brokerage commission to the Brokers (as defined in
the Option Agreement). Such commission paid to the Brokers by Landlord shall be on account
of the terms of the Option Agreement only and no commission shall be due or payable to the
Brokers on account of this Lease. Landlord shall indemnify and hold Tenant free and harmless
from such commission obligation. If any additional claims for brokers' or finders' fees for the
consummation of this Lease arise, then Tenant shall indemnify, save harmless and defend
Landlord from and against such claims if they shall be based upon any statement or
representation or agreement by Tenant, and Landlord shall indemnify, save harmless and defend
Tenant if such claims shall be based upon any statement, representation or agreement made by
Landlord.

            17.3        Attorneys' Fees and Court Costs. In the event of the bringing of any action or
suit by a party hereto against another party hereunder by reason of any breach of any of the
covenants or agreements or any inaccuracies in any of the representations and warranties on the
part of the other party arising out of this Lease, then in that event, the prevailing party in such
action or dispute, whether by final judgment or out of court settlement, shall be entitled to have
and recover of and from the other party all costs and expenses of suit, including reasonable
attorneys' fees.

            17.4        Assignment. During the term of the Option Agreement, Landlord may not
assign, transfer or convey its rights or obligations under this Lease without the prior written
consent of Tenant, and then only if Landlord's assignee assumes in writing all of Landlord's
obligations hereunder and under the Option Agreement. Any assignment by Landlord shall
relieve Landlord of its obligations hereunder occurring upon the later of (i) the effective date of
such assignment or (ii) the closing of the transaction contemplated by the Option Agreement or
the termination of the Option Agreement, whichever first occurs. Tenant, without being relieved
from liability hereunder, shall have the right to assign its rights and obligations hereunder.

            17.5        Survival. Except as otherwise limited by the provisions of this Lease , the
covenants, representations and warranties of both Landlord and Tenant set forth in this Lease
shall survive the expiration of the Term or earlier termination of this Lease.

            17.6        Further Assurances. Landlord and Tenant shall execute such instruments and
documents and to undertake diligently such actions as may be required in order to consummate
the Lease transaction contemplated herein.

            17.7        Time of Essence. Time is of the essence with respect to the performance of each
of the covenants and agreements contained in this Lease.

            17.8        Counterparts. This Lease may be executed in multiple counterparts, each of
which shall be deemed an original, but all of which, together, shall constitute one and the same
instrument.

            17.9        Captions; Recitals. Any captions to, or headings of, the sections or subsections
of this Lease are solely for the convenience of the parties hereto, are not a part of this Lease, and
shall not be used for the interpretation or determination of the validity of this Lease or any
provision hereof. All Recitals set forth above are hereby incorporated in the terms and
conditions of this Lease.

            17.10      No Obligations to Third Parties. Except as otherwise expressly provided
herein, the execution and delivery of this Lease shall not be deemed to confer any rights upon,
nor obligate any of the parties thereto, to any person or entity other than the parties hereto.

            17.11      Exhibits. The Exhibits attached hereto are hereby incorporated herein by this
reference.

            17.12      Amendment of this Lease. The terms of this Lease may not be modified or
amended except by an instrument in writing executed by each of the parties hereto.

            17.13      Waiver. The waiver or failure to enforce any provision of this Lease shall not
operate as a waiver of any future breach of any such provision or any other provision hereof. All
waivers of the provisions of this Lease must be in writing executed by each of the parties hereto.

            17.14      Applicable Law. This interpretation and enforcement of this Lease shall be
governed by and construed in accordance with the laws of the State of California.

            17.15      Fees and Other Expenses. Except as otherwise provided herein, each of the
parties shall pay its own fees and expenses in connection with this Lease.

            17.16      Entire Agreement. With the exception of the Option Agreement and documents
referenced therein, this Lease contains the entire agreement between the parties relative to the
subject matter hereof. This Lease supersedes any prior agreements, negotiations and
communications, oral or written, and contains the entire agreement between Landlord and Tenant
as to the subject matter hereof. No subsequent agreement, representation, or promise made by
either party hereto, or by or to an employee, officer, agent or representative of either party shall
be of any effect unless it is in writing and executed by the party to be bound thereby.

            17.17      Successors and Assigns. Subject to the terms and provisions of this Lease, this
Lease shall be binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and assigns.

            17.18      Time Period Computation. All periods of time referred to in this Lease shall
include all Saturdays, Sundays and California state or national holidays; provided that if the last
date to perform any act or give any notice with respect to this Lease shall fall on a Saturday,
Sunday or California state or national holiday, such act or notice shall be timely performed or
given on the next succeeding day which is not a Saturday, Sunday or California state or Federal
holiday. Notwithstanding the foregoing, "business day" means any calendar day other than
Saturday, Sunday or California state, Illinois state or federal holiday.

                      Unless the context otherwise requires, all periods terminating on a given day,
period of days or date shall terminate at 5:00 p.m. Pacific Time on that day or date and
references to "days" shall refer to calendar days.

            17.19      Cooperation in Drafting. Both Landlord and Tenant have cooperated in the
drafting and preparation of this Lease. Therefore, in any construction to be made of this Lease,
such construction shall not be construed against any party.

            17.20      Severability. If any provision of this Lease is determined by a court of
competent jurisdiction to be invalid or unenforceable, the remainder of this Lease shall
nonetheless remain in full force and effect.

            17.21      Waiver of Jury Trial. Landlord and Tenant hereby waive
any right to trial by jury in any action, claim, or lawsuit filed in
connection with this Lease.

            17.22      Relationship of the Parties. Nothing contained in this Lease and no acts of
Landlord or Tenant shall be deemed or construed to create the relationship of principal and
agent, or of partnership, or of joint venture, or of any association between Landlord and Tenant
other than that of a landlord and tenant.

            17.23      Interpretation and Definitions. The language in all parts of this Lease shall in
all cases be simply construed according to its fair meaning and not strictly for or against
Landlord or Tenant. The neuter gender includes the feminine and masculine; and the word
"person" includes a corporation, partnership, association or any other entity. When the context
so requires, the singular number includes the plural and vice versa.

            17.24      Memorandum. Landlord and Tenant shall execute and Tenant shall deliver to
the County Recorder of Placer County for recordation on or after the Commencement Date a
Memorandum of Lease in the form of Exhibit E attached hereto. Tenant shall be responsible for
all costs associated with the recordation of the Memorandum of Lease.

            17.25      Representation of Authority. The undersigned personally represent that they
have full authority to act on behalf of and bind Landlord and Tenant, respectively.

            17.26      Estoppel Certificates. Landlord and Tenant shall each execute, acknowledge
and deliver to the other, promptly upon request, a certificate certifying (i) that this Lease is
unmodified and in full force and effect (or, if there have been modifications, that the Lease is in
full force and effect, as modified, and stating the modifications); (ii) the dates, if any, to which
all rentals have been paid; (iii) that no notice has been given to Tenant of any default which has
not been cured and, to the certifying party's best knowledge, no default exists (or, if there has
been notice or such default exists, describing the same); and (iv) such other information as the
requesting party shall reasonably request. No certificate from Landlord or Tenant pertaining to
such matters shall modify the rights of Landlord or Tenant under this Lease in any manner
adverse to Landlord or Tenant. Certificates delivered as described above may be relied upon by
any prospective transferee of an interest under this Lease or fee interest in the Property.

            17.27      Consents. Whenever consent or approval of a party is required under this Lease,
such party shall not unreasonably withhold the same.


[SIGNATURES ON THE ATTACHED SIGNATURE PAGE]

IN WITNESS WHEREOF, Landlord and Tenant have executed his Lease as of the date
first written above.


LANDLORD:                                                TENANT:

REYNEN & BARDIS (KMS PLACER),        ACE HARDWARE CORPORATION,
L.P., a California limited partnership                  a Delaware corporation

By: R&B HOMES, LLC,                                 By:                      /s/                          
        A California Limited Liability Company     Name: David F. Hodnik
                                                                        Title: President/Chief Executive Officer
By:                      /s/                          
        JOHN D. REYNEN
Its:   Managing Member

By:                      /s/                          
        CHRISTO D. BARDIS
Its:    Managing Member


EXHIBIT "A"

LEGAL DESCRIPTION OF PREMISES


[Attached]


EXHIBIT "B"

LIST OF EXISTING LEASES

1.        Lease, dated as of June 30, 2000, by and between Landlord, as successor-in-interest to
Townsend Rocklin, LLC, a Delaware limited liability company, and Tenant, as amended by that
First Amendment of Agreement to Lease, dated September 18, 2000, by and between Landlord
and Tenant, as amended by that Second Amendment of Agreement to Lease, dated as of
December 7, 2001, by and between Landlord and Tenant, for approximately 75,000 rentable
square feet of space within the 619,688 square foot office/warehouse building on the Property
(the "ACE Lease").

2.        Lease, dated as of September 28, 2001, by and between Landlord and Pacific Gas and
Electric Company, a California corporation, as Tenant ("PG&E"), as amended by that First
Amendment to Lease, dated as of September 28, 2001, by and between Landlord and PG&E, for
17,507 rentable square feet of office space within the 619,688 square foot office/warehouse
building on the Property (the "PG&E Lease").

3.        Lease, dated as of April 30, 1999, by and between Landlord, as successor-in-interest to
TN Investment Fund Limited Partnership, a Maryland limited partnership, and Hewlett-Packard
Company, a California corporation, as Tenant ("H-P"), as amended by that First Amendment to
Lease, dated as of March 29, 2001, by and between Landlord and H-P, for 241,675 rentable
square feet of office space within the 619,688 square foot office/warehouse building on the
Property including a freestanding storage shed containing 8,053 rentable square feet on the
Property (the "H-P Lease").

4.        License Agreement, dated as of June 1, 2002, by and between Landlord and Advantage
Logistics, Inc., a California corporation, for a license to enter (i) a portion (the northwest corner)
of the Building consisting of approximately 45,000 rentable square feet and (ii) a portion of the
Land consisting of approximately 12,500 rentable square feet of paved yard, including the
adjacent yard dock canopy. The License Agreement commenced on June 15, 2002, the initial
term expired on August 31, 2002, and the current term is a month-to month tenancy which
automatically renews on a month-to-month basis (the "Advantage Logistics Lease").

5.        License Agreement, dated as of August 14, 2001, by and between Landlord and
California Distribution Centers - MacLaughlin Draying Company Inc., a California corporation,
for a license to enter a portion (the northwest corner) of the Building initially consisting of
approximately 25,000 rentable square feet, as may be expanded pursuant to the terms of the
License Agreement. The License Agreement commenced on August 14, 2001 and the current
term is a month-to month tenancy which automatically renews on a month-to-month basis
(the "California Distribution Lease").


EXHIBIT "C"

FORM OF LEASE ASSIGNMENT & ASSUMPTION AGREEMENT

                 THIS LEASE ASSIGNMENT AND ASSUMPTION AGREEMENT (the
"Assignment") is made this _____ day of ________ 2003, by and between Reynen & Bardis
(KMS Placer), L.P., a California limited partnership ("Assignor"), and Ace Hardware
Corporation, a Delaware corporation ("Assignee").

RECITALS:

                A.        Assignor and Assignee have entered into that certain Ground Lease dated
January __, 2003 (the "Lease") and that certain Option Agreement and Joint Escrow Instructions
dated as of the same date (the "Option Agreement"), for the lease of certain real property and the
grant of option rights therein, as more fully described in the Lease and the Option Agreement,
including all of Assignor's interest in and to certain real property leases.

                B.        This Assignment is being made pursuant to the terms of the Lease and the
Option Agreement for the purpose of assigning to Assignee all of Assignor's rights, title and
interest in and to those certain real property leases (the "Real Property Leases") set forth in
Schedule 1 attached hereto.

                NOW, THEREFORE, for valuable consideration, the receipt of which is hereby
acknowledged, Assignor and Assignee agree as follows:

SECTION 1.    ASSIGNMENT AND ASSUMPTION

          Effective as of 12:01 a.m. Pacific Time, ____________, 2003 ("Closing Date"), Assignor
does hereby assign, transfer, convey and deliver to Assignee, and Assignee does hereby acquire
and assume, all of Assignor's obligations, right, title and interest in and to the Real Property
Leases.

SECTION 2.    INDEMNIFICATION

            Subject to the provisions of the Lease and the Option Agreement, Assignor shall
indemnify, defend, and hold Assignee harmless from any liabilities, losses, costs, demands,
damages, claims, suits, judgments or expenses (including, without limitation, attorneys' fees and
costs) incurred by Assignee arising out of or connected with the Real Property Leases that arose
or accrued prior to the Closing Date.

            Subject to the provisions of the Lease and the Option Agreement, Assignee shall
indemnify, defend, and hold Assignor harmless from any liabilities, losses, costs, demands,
damages, claims, suits, judgments or expenses (including, without limitation, attorneys' fees and
costs) incurred by Assignor arising out of or connected with the Real Property Leases that arise
or accrue on or subsequent to the Closing Date.

SECTION 3.    BINDING AGREEMENT

            This Assignment shall be binding upon and inure to the benefit of the successors,
assigns, personal representatives, heirs and legatees of the respective parties hereto.

            This Assignment is delivered in furtherance of the undertakings and agreements
of Assignor and Assignee under the Agreement. Nothing herein modifies the duties or
obligations of Assignor and Assignee under the Agreement.

SECTION 4.    GOVERNING LAW

            This Assignment shall be governed by, interpreted under, and construed in
accordance with the laws of the State of California.

SECTION 5.    MISCELLANEOUS

            This Assignment may be executed in multiple counterparts, each of which shall
be deemed an original, but all of which, together, shall constitute one and the same instrument.

            In the event of the bringing of any action or suit by a party hereto against another party
hereunder by reason of any breach of any of the covenants or agreements or any inaccuracies in
any of the representations and warranties on the part of the other party arising out of this
Assignment, then in that event, the prevailing party in such action or dispute, whether by final
judgment or out of court settlement, shall be entitled to have and recover of and from the other
party all costs and expenses of suit, including reasonable attorneys' fees.

IN WITNESS WHEREOF, the Assignor and Assignee have signed this Lease
Assignment and Assumption Agreement on the date first above written.


ASSIGNOR:                                                  ASSIGNEE:

REYNEN & BARDIS (KMS PLACER),        ACE HARDWARE CORPORATION,
L.P., a California limited partnership                  a Delaware corporation

By:                                                                   By:                                                          
Name:                                                              Name:                                                     
Title:                                                                 Title:                                                        


By:                                                          
Name:                                                     
Title:                                                        


SCHEDULE 1

REAL PROPERTY LEASES

1.            Lease, dated as of June 30, 2000, by and between Landlord, as successor-in-interest to
Townsend Rocklin, LLC, a Delaware limited liability company, and Tenant, as amended by that
First Amendment of Agreement to Lease, dated September 18, 2000, by and between Landlord
and Tenant, as amended by that Second Amendment of Agreement to Lease, dated as of
December 7, 2001, by and between Landlord and Tenant, for approximately 75,000 rentable
square feet of space within the 619,688 square foot office/warehouse building on the Property
(the "ACE Lease").

2.            Lease, dated as of September 28, 2001, by and between Landlord and Pacific Gas and
Electric Company, a California corporation, as Tenant ("PG&E"), as amended by that First
Amendment to Lease, dated as of September 28, 2001, by and between Landlord and PG&E, for
17,507 rentable square feet of office space within the 619,688 square foot office/warehouse
building on the Property (the "PG&E Lease").

3.            Lease, dated as of April 30, 1999, by and between Landlord, as successor-in-interest to
TN Investment Fund Limited Partnership, a Maryland limited partnership, and Hewlett-Packard
Company, a California corporation, as Tenant ("H-P"), as amended by that First Amendment to
Lease, dated as of March 29, 2001, by and between Landlord and H-P, for 241,675 rentable
square feet of office space within the 619,688 square foot office/warehouse building on the
Property including a freestanding storage shed containing 8,053 rentable square feet on the
Property (the "H-P Lease").

4.            License Agreement, dated as of June 1, 2002, by and between Landlord and Advantage
Logistics, Inc., a California corporation, for a license to enter (i) a portion (the northwest corner)
of the Building consisting of approximately 45,000 rentable square feet and (ii) a portion of the
Land consisting of approximately 12,500 rentable square feet of paved yard, including the
adjacent yard dock canopy. The License Agreement commenced on June 15, 2002, the initial
term expired on August 31, 2002, and the current term is a month-to month tenancy which
automatically renews on a month-to-month basis (the "Advantage Logistics Lease").

5. License Agreement, dated as of August 14, 2001, by and between Landlord and California
Distribution Centers - MacLaughlin Draying Company Inc., a California corporation, for a license
to enter a portion (the northwest corner) of the Building initially consisting of approximately
25,000 rentable square feet, as may be expanded pursuant to the terms of the License Agreement.
The License Agreement commenced on August 14, 2001 and the current term is a month-to-month
tenancy which automatically renews on a month-to-month basis (the "California Distribution Lease").


EXHIBIT "D"

BASE RENT

Exhibit "D"

1.        Introduction. Tenant and Landlord acknowledge that Base Rent shall initially be as set
forth in Paragraph 3 below with additional payments pursuant to Paragraph 4 below and, upon
the occurrence of the Break Date (as defined below), as set forth in Section 5 below.

2.        Defined Terms. For purposes of this Exhibit D and the Lease, the following terms shall
have the following meanings:

            (i)        "Ace Lease Rent" shall mean the Ace Lease Square Foot Rent plus the
"Additional Rent" (as defined in the Ace Lease) and any other expenses required to be paid by
Tenant as tenant pursuant to the Ace Lease for the portion of the Existing Improvements which is
subject to the Ace Lease. The Ace Lease shall remain in effect for purposes of determining
Tenant's Base Rent obligation for the period prior to the Break Date.

            (ii)        "Ace Lease Square Foot Rent" shall mean Three and 71/100 Dollars per rentable
square foot per year (0.309 cents per rentable square foot per month) for the portion of the of the
Existing Improvements which is subject to the Ace Lease.

            (iii)        "Adjustment Date" shall mean the first day of the thirty-first (31st) calendar
month following the calendar month in which the Break Date occurs and the first (1st) day of
each successive 31st month thereafter. By way of example if the Break Date occurs on
September 10, 2003, the initial Adjustment Date shall be March 1, 2006, the second Adjustment
Date shall be September 1, 2008, the third Adjustment Date shall be March 1, 2011, etc.

            (iv)        "Approved Condition of Title" shall have the meaning attributed to such term in
the Option Agreement.

            (v)        "Base CPI" means the most recently published CPI prior to the Break Date.

            (vi)        "Break Date" shall mean September 10, 2003. Notwithstanding the foregoing, if
Tenant has timely exercised its option to acquire the Property pursuant to the Option Agreement
and the Close of Escrow has not occurred on or before September 10, 2003 as a result of the
failure or inability of Landlord to deliver fee title to the Property to Tenant in the Approved
Condition of Title, then the Break Date shall be on such later date that Landlord has delivered fee
title to the Property to Tenant in the Approved Condition of Title; provided, however, if the
Close of Escrow does not occur on such later date due to Tenant's default under the Option
Agreement, then the Break Date shall be the date on which the Close of Escrow would have
occurred absent Tenant's default. Landlord's delivery of fee title to the Property in the
Approved Condition of Title shall be evidenced by the irrevocable commitment of the Title
Company to issue the Title Policy.

            (vii)        "Close of Escrow" shall have the meaning attributed to such term in the Option
Agreement.

            (viii)        "CPI" means the Consumer Price Index for Urban Wage Earners and Clerical
Workers, All Items (1982-84=100) for San Francisco-Oakland-San Jose. In the event that
compilation and/or publication of the CPI shall be transferred to any other governmental
department or bureau or agency or shall be discontinued, then the index most nearly the same as
the CPI shall be substituted in its place. If Landlord and Tenant cannot agree on such alternative
index, then the matter shall be submitted for decision to the American Arbitration Association in
accordance with the then rules of the American Arbitration Association and the decision of the
arbitrators shall be binding upon Landlord and Tenant. Cost of any such arbitration shall be paid
equally by Landlord and Tenant.

            (ix)        "H-P Lease Surrendered Square Footage" means the square footage of the H-P
Lease space the possession of which has been delivered by the H-P to Tenant.

            (x)        "Title Company" shall have the meaning attributed to such term in the Option
Agreement.

            (xi)        "Title Policy" shall have the meaning attributed to such term in the Option
Agreement.

            Any other terms beginning with an initial capital letter and not otherwise defined in this
Exhibit D shall have the meaning attributable to such term in the Lease.

3.        Base Rent Prior to Break Date. For the period from the Commencement Date through the
day immediately preceding the Break Date, Tenant shall pay as monthly Base Rent the
following:

            (i)        The monthly Ace Lease Rent, plus

            (ii)        The monthly Ace Lease Square Foot Rent multiplied by the H-P Lease
Surrendered Square Footage, plus

            (iii)        The monthly Ace Lease Square Foot Rent multiplied by the square footage of any
other space within the Existing Improvements (such other space does not include the space
subject to the Ace Lease and the H-P Surrendered Square Footage) which Tenant occupies and is
using for its distribution or related activities at the Property. Tenant shall not be obligated to pay
Ace Lease Square Foot Rent for any such other space during any time that Tenant is refurbishing
such space and is not otherwise using such space for distribution or related activities, plus

            (iv)        The "Additional Rent" (as defined in the Ace Lease) multiplied by the square
footage of any other space within the Existing Improvements (such other space does not include
the space subject to the Ace Lease, the Advantage Logistics Lease space, the California
Distribution Lease space, and the H-P Surrendered Square Footage) which Tenant occupies and
is using for its distribution or related activities at the Property. Tenant shall not be obligated to
pay "Additional Rent" for any such other space during any time that Tenant is refurbishing such
space and is not otherwise using such space for distribution or related activities, plus

            (v)        From and after delivery to Tenant of possession of the Advantage Logistics Lease
space and prior to the Break Date, an amount equal to Two Thousand Seventy Dollars
($2,070.00) which is $0.046 multiplied by the rentable square feet of the Advantage Logistics
Lease space (45,000 square feet), which amount Landlord and Tenant acknowledge includes the
pro rata share of the real property taxes and assessments to be paid for such premises, plus

            (vi)        From and after delivery to Tenant of possession of the California Distribution
Lease space and prior to the Break Date, an amount equal to One Thousand One Hundred Fifty
Dollars ($1,150.00) which is $0.046 multiplied by the rentable square feet of the California
Distribution space (25,000 square feet), which amount Landlord and Tenant acknowledge
includes the pro rata share of the real property taxes and assessments to be paid for such
premises plus

            (vii)        The difference between H-P's Tenant's Proportionate Share of Operating
Expenses (both as defined in the H-P Lease) prior to delivery of the H-P Surrendered Square
Footage to Tenant and H-P's Tenant's Proportionate Share of Operating Expenses subsequent to
delivery of the H-P Surrendered Square Footage to Tenant. Landlord shall provide to Tenant at
least ten (10) days written notice of the amount due from Tenant to Landlord on account of the
foregoing along with reasonable backup information.

4.        Expenses and Other Matters Relating to the Existing Leases. Prior to the Break Date
Landlord shall continue to be responsible as the landlord under the PG&E Lease, the H-P Lease,
the Advantage Logistics Lease and the California Distribution Lease and shall perform all duties
and obligations and receive such benefits as are set forth therein, including, but not limited to,
collection of rent, receipt of reimbursements, and payment of expenses and liabilities. So long as
KMS is acting as Tenant's construction manager, Landlord shall be responsible for any claims
made by the tenants under the PG&E Lease, Advantage Logistics Lease and California
Distribution Lease that the construction by Tenant of the Tenant Improvements interferes with
the use of their respective premises and/or destroys their respective right to the quiet enjoyment
thereof. The responsibility under the H-P Lease for any claims made by H-P that construction by
Tenant of the Tenant Improvements interferes with the use of the H-P Lease premises and/or H-
P's right of quiet enjoyment thereof shall be addressed in the written agreement among Landlord,
Tenant and H-P as contemplated below in this Paragraph 4. Ace shall reasonably conduct its
construction activities at the Property in a manner to minimize as much as possible any
interference with the use of their respective premises and quiet enjoyment thereof by other
tenants at the Property.

            Prior to the Break Date, Landlord and Tenant shall cooperate so that the cost of electricity
used within the Advantage Logistics Lease space, California Distribution Lease space and H.P.
Lease Surrendered Square Footage after delivery to Tenant is charged to Tenant. Such
cooperation may include electronic metering or carve-out of electrical circuits so that Tenant's
usage of electricity in such spaces can be accurately determined.

            It shall be Landlord's sole responsibility and cost to terminate, and obtain possession of
the space subject to, the Advantage Logistics Lease and the California Distribution Lease and
deliver possession of such space to Tenant no later than March 1, 2003 or, in the event of a
holdover, as soon thereafter as possible. Such responsibility shall include the obligation to pay
any expenses incident to such termination.

            Landlord and Tenant agree to cooperate in negotiations with H-P in an effort to reduce
the square footage of the space subject to the H-P Lease. Any modifications to the H-P Lease as
a result of such negotiations shall be set forth in a written agreement signed by Landlord, Tenant
and H-P. Any sums payable to H-P in consideration of the modification of the H-P Lease shall
be paid by Tenant, including without limiting the foregoing, any costs incurred in connection
with the relocation of H-P and/or the reconstruction of H-P's tenant improvements.

            Prior to the Break Date, (i) subject to clause (ii) below, Landlord shall cause to be paid all
real property taxes and assessments allocable to the Property, and (ii) Tenant shall pay any
supplemental taxes and/or assessments attributable to construction of the Tenant Improvements.
With respect to any real property taxes and/or assessments for which Tenant is responsible,
Landlord shall deliver such bills to Tenant as soon as possible after received but no later than the
date which is five (5) business days prior to the last date on which such taxes may be paid
without incurring penalties.

5.        Base Rent From and After Break Date. From and after the Break Date and continuing
through the expiration of the Term (as the Term may be extended by Tenant's exercise of its
option rights pursuant to Section 2.2 of the Lease), Base Rent shall initially equal Two Million
Five Hundred Thousand Dollars ($2,500,000) per year payable in twelve (12) equal increments
of Two Hundred Ten Thousand Dollars ($210,000) per month.

            Such annual Base Rent for the period after the Break Date shall be adjusted effective as
of each Adjustment Date.

            The annual Base Rent effective as of each Adjustment Date shall be determined by
multiplying the initial annual Base Rent of Two Million Five Hundred Thousand Dollars
($2,500,000) by a fraction the denominator of which shall be the Base CPI and the numerator of
which is the most recently published CPI prior to the Adjustment Date in question. Landlord
shall provide the calculations of the adjustment in the annual Base Rent and monthly Base Rent
along with reasonable backup information relating thereto to Tenant as soon as possible. If 
Tenant has not received the calculation of the adjusted annual Base Rent at least fifteen (15) days
prior to the Adjustment Date, Tenant shall continue to pay monthly Base Rent in the amount in
effect immediately prior to such Adjustment Date. In such event and within fifteen (15) days
after receipt of Landlord's calculation for the adjustment in Base Rent and any reasonable
backup information, Tenant shall pay the difference between the adjusted monthly Base Rent and
the monthly Base Rent paid to Landlord for those months which should have been previously
adjusted.


EXHIBIT "E"

FORM OF MEMORANDUM OF LEASE

RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:

McDermott, Will & Emery
18191 Von Karman Avenue, Suite 500
Newport Beach, California 92612
Attn: Thomas K. Brown, Esq.


(SPACE ABOVE THIS LINE FOR RECORDER'S USE ONLY)


MEMORANDUM OF LEASE


                This Memorandum of Lease ("Memorandum") is made as of January ___, 2003
between Reynen & Bardis (KMS Placer), L.P., a California limited partnership ("Landlord"),
and Ace Hardware Corporation, a Delaware corporation ("Tenant"), who agree as follows:

                1.        Landlord hereby leases to Tenant and Tenant hereby hires from Landlord
that certain real property located at 3301 Industrial Avenue, situated in the County of Placer,
State of California, as more particularly described in Exhibit A attached hereto ("Property"), (ii)
together with two (2) buildings located thereon, containing approximately 619,688 square feet
and 8,000 square feet, respectively, associated parking areas and other improvements located
thereon, for a term of twenty (20) years commencing on January 15, 2003 and expiring on
January 14, 2023, unless sooner terminated or extended, on the terms, conditions and provisions
of the Lease. Such terms, conditions and provisions of the Lease are incorporated into this
Memorandum by this reference.

                2.        Tenant has the right, subject to the terms and conditions of the Lease, to
extend the Lease term for three (3) periods of ten (10) years each.

                3.        Landlord hereby acknowledges its duty to cooperate fully with Tenant's
(i) construction at the Property and (ii) efforts with respect to easements, dedications and
Governmental Approvals (as defined in the Lease). In furtherance of such duty, Landlord
designates Thomas Manz as its agent with authority to bind Landlord and execute any and all
documents required of Landlord pursuant to the Lease.

                4.        This Memorandum is prepared for the purposes of recordation and in no
way modifies or otherwise affects the terms, conditions and provisions of the Lease.

                5.        This Memorandum may be executed in counterparts, which when taken
together shall constitute one and the same instrument.


LANDLORD:                                                TENANT:

REYNEN & BARDIS (KMS PLACER),        ACE HARDWARE CORPORATION,
L.P., a California limited partnership                  a Delaware corporation

By:                                                                   By:                                                          
Name:                                                              Name:                                                     
Title:                                                                 Title:                                                        


By:                                                          
Name:                                                     
Title:                                                        


STATE OF CALIFORNIA            )
                                                       ) ss
COUNTY OF _____________     )


        On ______________, 200_, before me, _________________, a Notary Public in and for
said State, personally appeared __________________________, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged that he/she/they executed the same in
his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the
person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.


WITNESS my hand and official seal.


___________________________________

Signature


STATE OF CALIFORNIA            )
                                                       ) ss
COUNTY OF _____________     )


            On ______________, 200_, before me, _________________, a Notary Public in and for
said State, personally appeared __________________________, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged that he/she/they executed the same in
his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the
person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.


WITNESS my hand and official seal.


___________________________________

Signature


EXHIBIT "A" TO MEMORANDUM

EX-10

                                                          L E A S E

            THIS LEASE, made and entered into this 7th day of February, 2002 by and between
550 HARVARD LTD., an Ohio Limited Liability Company, hereinafter called "Lessor," and
ACE HARDWARE CORPORATION, a corporation organized under the laws of the State of
Delaware, hereinafter called "Lessee."

                                                 W I T N E S S E T H:
                                                        ARTICLE I
                                              DEMISED PREMISES

                That said Lessor, in consideration of the rents, covenants and conditions hereinafter
named to be paid, performed and kept by the said Lessee, and in consideration of the fulfillment
of each and all of the said covenants and conditions by said Lessee at the time and in the manner
herein specified, does hereby rent and lease unto the said Lessee, the premises and property,
hereinafter called "Demised Premises," as described herein. Said Demised Premises is the
building and yard area having a street address of 550 Harvard Ave., Cuyahoga Heights, Ohio:

            The truck terminal facility consisting of the forty-eight (48) dock doors and
            terminal area (i.e., twenty-four (24) cross docks which measure approximately
            11 feet on center x approximately 62 feet deep each) and two bays of office
            space consisting of approximately 1,320 square feet, having a street address of
            550 Harvard Ave., Cuyahoga Heights, Ohio, together with a yard area consisting
            of approximately 4 usable acres and including the right of ingress thereto and
            egress therefrom along and within the driveways and access roads all as shown
            on the plot plan marked Exhibit "A" attached hereto and made a part hereof.

Said right to use the driveways as shown on Exhibit A shall be exclusive as to Lessee, its agents,
employees, licensees and invitees.

                                                             ARTICLE II
                                                                TERM

            TO HAVE AND TO HOLD THE SAME with all the privileges and appurtenances
pertaining thereto for the full term of fifteen (15) years, commencing the first day of the calendar
month following the completion of the improvements to the Demised Premises (hereinafter
called "commencement date") as hereinafter provided in Section 7 OCCUPANCY.

                                                             ARTICLE III
                                COVENANTS ON BEHALF OF THE LESSEE

            l.  Base Rent.  Lessee covenants and agrees that it will pay to Lessor at 6200 Rockside
Woods Boulevard, Independence, Ohio 44l3l, or to such payee at such address as Lessor may
from time to time designate by written notice to Lessee, an annual Base Rent all as set forth in
the "Schedule of Base Rents" provided hereinbelow; and shall be payable in equal monthly
installments on the first day of each and every month during the term hereof:

                          Schedule of Base Rents
Lease Year                 Monthly Rent               Annual Rent

        1                            11,100                        133,200
        2                            11,433                        137,196
        3                            11,776                        141,312
        4                            12,129                        145,548
        5                            12,493                        149,916
        6                            12,868                        154,416
        7                            13,254                        159,048
        8                            13,652                        163,824
        9                            14,061                        168,732
        10                          14,483                        173,796
        11                          14,917                        179,004
        12                          15,365                        184,380
        13                          15,826                        189,912
        14                          16,301                        195,612
        15                          16,790                        201,480

            2.  Rentable Area and Lessee's Pro Rata Share.  The entire truck terminal building for
purposes of arriving at Lessee's proportionate rentable area shall be deemed to be forty-eight (48)
dock doors and associated office/dispatch areas which is all the space in the building rentable to
Lessee. The percentage of Lessee's proportionate share of said building is agreed upon as being
100%.

            3.  Common Areas.  Lessee and Lessee's agents, employees and invitees shall have the
exclusive right to use the common areas associated with the building, including the unassigned
parking spaces, access drives and driveways to the Building as shown on Exhibit "A".

            4.  Real Estate Taxes and Insurance.  During the term of this Lease, Lessee shall pay in
addition to the base rent its pro rata share of real estate taxes and assessments as herein defined
for each year of the term hereof. In addition, during the term of this Lease, Lessee shall pay as
additional rent its pro rata share of an all risk property insurance policy on the Building and
Premises as herein defined and required by the terms of Article V, Section 9 of the Lease; and
as required by the terms of Article V, Section 8 of the Lease, pay for its own general liability
insurance.

            During any part of the term hereof which shall be less than a full calendar year, taxes,
assessments and insurance set forth hereinabove shall be prorated on the basis of a calendar
year between the parties to the end that Lessee shall pay only that amount attributable to the
portion of the calendar year occurring within the term of this Lease.

            The aforesaid sum to be paid by Lessee under this section shall be estimated by Lessor
at or prior to commencement of each lease year. During the first lease year, Lessee shall pay to
Lessor the amount of $673.58 each month on the first day of each month, which is Lessee's
initial share of the projected Real Estate Taxes and Insurance as computed on Exhibit "B"
attached hereto and made a part hereof. Lessor shall notify Lessee of such estimate and Lessee
shall pay said estimate in equal monthly installments, each in advance, on the first day of each
and every calendar month together with Lessee's Base Rent throughout the initial lease year. At
the end of the lease year and when Lessor has calculated Lessee's pro rata share of taxes,
assessments and insurance, Lessor shall notify Lessee of such amount. Any deficiency in the
payment by Lessee shall be paid by Lessee to Lessor upon receipt of the notice. Any surplus
amount paid by Lessee during the preceding lease year shall be applied against the next monthly
installment(s) of real estate taxes and insurance due.

            The term "real estate taxes" shall be deemed to mean taxes and assessments, special or
otherwise, levied upon or with respect to the Building and the land upon which it is located,
imposed by Federal, state or local governments, but shall not include income, franchise, capital
stock, estate or inheritance taxes.

            The term "insurance" shall be deemed to mean an all risk insurance policy on all
buildings and all improvements presently existing or hereafter erected on the Demised Premises
in an amount equal to the replacement cost thereof.

            Any such deficiency or surplus which occurs in the last year of the term of this Lease
shall be determined by Lessor, and notice of such determination given to the Lessee within thirty
(30) days after the end of the calendar year in which such deficiency or surplus occurs. In the
event a surplus is determined to exist, Lessor shall deliver payment thereof to Lessee with said
notice; in the event of a deficit, Lessee shall remit payment to Lessor upon receipt of said notice.

            5.  Lease Year Defined:  The term "lease year" whenever used in Article III, Section
4 of this lease for purposes of calculating Lessee's share of taxes and insurance shall mean:

(a) With respect to the first lease year the period from the date lease commences through
December 31, 2002, inclusive and

(b) With respect to each subsequent lease year, the twelve (12) full consecutive calendar months
commencing on the first day of January and ending on and including the next following last day of
each December.

            6.  Construction.  Except as provided herein, Lessor agrees at its sole expense to
complete the modifications and installation of tenant improvements to the truck terminal facility,
offices and yard area in a good and workmanlike manner all in accordance with the Scope of
Work set forth in Exhibit "C", which has been attached hereto and made a part hereof.
Notwithstanding the foregoing, Lessee agrees to pay to Landlord the sum of Thirty Thousand
and 00/100 Dollars ($30,000.00) which sum represents Lessee's share of tenant improvement
costs outlined in Exhibit "C" and which sum shall be due and payable to Lessor immediately
following Lessor's completion of said work and submission of its invoice therefor.

            Lessor shall deliver possession of the Demised Premises to Lessee in "broom-clean"
condition and warrants that when possession is delivered to Lessee, the structure, heating, air
conditioning, lighting, electrical, plumbing, sanitary treatment facility and other systems and
fixtures as well as the dock doors and levelers serving the Demised Premises and those items
required to be performed by the Scope of Work set forth in Exhibit "C" will be in good condition
and working order. Lessor hereby consents to an assignment to Lessee of all warranties existing
or accruing for any labor and materials used on or in said premises.

            7.  Occupancy.  Prior to occupying premises, Lessor and Lessee shall execute an
agreement acknowledging date Lessee is to occupy the demised premises and setting forth the
date the Lease is to commence which shall establish the "commencement date" as set forth under
the conditions stated in Article II, TERM. This agreement shall be attached to the Lease
agreement as Exhibit "D". The commencement date shall in no event commence later than thirty
(30) days following completion of the improvements set forth in Article III, section 6,
CONSTRUCTION.

            At Lessee's cost, a video tape of the Demised Premises shall be taken at the
commencement of the Lease Term, copies of which will be held by Lessee and by Lessor. With
reasonable advance notice, Lessee will notify Lessor as to when the videotape is to be made, and
Lessor may be in attendance at that time. This videotape will be used to document any
deficiencies in the condition of the Demised Premises and its Improvements as of Lessee's
occupancy, and will be used in addition to a written description or list of such deficiencies as
reasonably agreed upon between Lessor and Lessee. Subject to the terms of Article V, Section 5,
it is understood by Lessor that Lessee shall have no responsibility or liability with respect to
repair or replacement of any such deficiency that existed as of Lessee's occupancy of the
Demised Premises, unless the same shall have been repaired or replaced by Lessor during the
Term hereof and/or such deficiency was caused by the acts of Lessee.

            Lessee shall not be liable for rental payments until such time as Lessee accepts possession
of the demised premises in writing after completion of construction in the manner herein specified.
No delay in commencement of or completion of such construction of said building and
improvements, labor troubles, strikes, walk-outs, wars, government regulations or other causes
beyond the contemplation of the parties hereto and not herein specified, shall be the basis of a
claim of lack of diligence on the part of the Lessor or be made the basis of any claim for a liability
of Lessor to Lessee.

            Lessee will pay rent on a prorata basis for the part of the month in which possession is taken.

            8.  Tax Adjustment.  Lessee shall have the right to join with Lessor to contest any real
estate tax increase levied against the Demised Premises with any taxing authority responsible for
said increase.

                                                             ARTICLE IV
                                                      OTHER CHARGES

In addition to the rentals provided, Lessee covenants and agrees to pay:

            1.  All excise taxes, license fees and fees for permits and other privileges to third party
authorities, if any, entitled to same which may arise from its use and operation of the Demised
Premises or the conduct of any business therein; and to the Lessor a reimbursement for Lessee's
prorata share of any fees or charges in connection with the Lessor's maintenance and operation
of any sewer, waste water treatment plant, device, structure or appliance whatsoever appurtenant
to and used in connection with the Demised Premises. During the first lease year, Lessee shall pay
to Lessor the amount of $133.33 per month on the first day of each month which amount
represents Lessee's initial share of the aforesaid costs as set forth on Exhibit "B", attached hereto
and made a part hereof. Lessee shall at all times save the Lessor harmless from any liability therefor.

            2.  Promptly when due and payable, all charges for light, heat, gas, fuel, power and water
furnished to or upon any part of the Demised Premises, and shall, at all times, save the Lessor
harmless from any charges, expense or liability arising therefrom or in connection therewith.
Separate meters shall be installed whenever possible to reflect Lessee's consumption or use of all
such utilities or services, but in the event that such meters are not installed, the charges attributable
to and payable by Lessee shall be based on a reasonable estimate of Lessee's use thereof. At the
time of vacating the Demised Premises, Lessee shall obtain final meter readings of all utility meters
in Lessee's name and promptly pay all final utility charges upon receipt of invoices from the utility
companies.

            3.     Although the furnishing and payment for all utilities, such as light, heat, gas, fuel,
power and water furnished are Lessee's responsibility, as set forth in paragraph "2" hereinabove,
it is further understood and agreed that Lessor does not warrant that any of the hereinabove
mentioned services shall be free from interruptions caused by repairs, renewals, improvements,
alterations, strikes, lock-outs, labor disputes, accidents or inability of either the Lessee or the
Lessor to procure such services or to obtain fuel or supplies. Any such interruptions of the above
services shall never be deemed an eviction or disturbance of the Lessee's use of the demised
premises or any part thereof, or render the Lessor liable to the Lessee for damages or entitle the
Lessee to a diminution or abatement of the rent, or relieve the Lessee from performance of the
Lessee's obligations under this Lease. Lessor, however, shall promptly cooperate with Lessee to
take the necessary steps to terminate such interruptions and provide such services as expeditiously
as possible under the circumstances.

                                                               ARTICLE V
                                                USE AND MAINTENANCE

            l.  Use of Premises.  Lessee shall use the Demised Premises exclusively for a truck
terminal and associated office purposes and for such other purposes as are incidental to the
conduct of Lessee's business. Lessee further covenants that it will at all times use the Demised
Premises in a safe, careful, proper and prudent manner, and that it will not violate any lawful
statutes, ordinances, rules, orders, regulations and requirements of the federal, state, county and
city governments and any and all of their departments and bureaus and of The Board of Fire
Underwriters, affecting the Demised Premises and the use thereof, specifically including all
environmental laws, rules, statutes and ordinances affecting the building and real property in and
upon which the Demised Premises are located, and the walks and driveways adjoining the same
and that it will not suffer or permit any unlawful use of, or any unlawful occupation, trade or
business to be conducted in or upon the Demised Premises. Lessee shall not conduct any activity
in the Demised Premises which may prove to be a nuisance from noise, smoke, dust or odors or
involve danger from fire or explosion or be a threat to health or safety.

            2.  Repairs of Premises.  Lessee, at its own cost and expense, shall keep said Demised
Premises free and clear of rubbish and in good repair replacing all broken glass with glass of the
same size and quality as that broken, and will, without injury to the yard areas and all driveways
and access drives, parking areas, roof, gutter and downspouts, remove the snow and ice from the
same whenever necessary. Lessee, at Lessee's expense, shall make all repairs and replacements to
the plumbing, heating, air conditioning, lighting systems, and Lessor, at Lessee's expense, shall make
all necessary repairs to the sanitary treatment facilities. Lessee shall employ a qualified heating and
air conditioning contractor to periodically service the heating and air conditioning equipment and to
change furnace filters on a periodic basis in accordance with factory recommendations. Throughout
the term of this Lease, Lessee agrees to maintain a service contract at its own expense for all of
the heating, ventilating and air conditioning equipment located on or within the Demised Premises
with a qualified heating and air conditioning contractor who shall be reasonably recommended by
Lessor, and pursuant hereto, shall provide Lessor with copies of all such service contracts, which
contracts shall include maintenance/repair specifications approved by Lessor. Lessee, at its own
cost and expense, shall provide for its own trash and rubbish removal. Lessor hereby consents to
assignment to Lessee of all warranties existing or accruing, if any, for labor and materials used on
or in said Demised Premises. The Lessee, at its own cost and expense, shall assume the
maintenance of the parking areas and roads on the property, and remove snow and ice from any
driveways. The Lessor shall maintain the structural parts of the building (including exterior walls and
foundation) and the roof, except for repairs required to be made due to negligence of Lessee
which shall be paid for by Lessee. Lessee agrees not to place any equipment or materials of any
kind on the roof of the building and shall not go upon or permit anyone whatsoever including its
employees, agents or contractors to go upon the roof, stand or walk on the roof without the prior
written approval of Lessor.

            3.  Remodeling.  The Lessee may, at its cost and expense, do any work of remodeling
and alteration on the Demised Premises, provided that the Lessee shall first secure the written
consent of the Lessor before undertaking such work, and if Lessor shall so require, give security
satisfactory to the Lessor assuring the completion of such work free of liens or the possibility
thereof within such time as may be agreed upon between Lessor and Lessee.

            If Lessee makes any improvements or remodels the Demised Premises, such improvements
or remodeling shall become a part of the freehold upon termination of this Lease unless Lessee
removes such improvements or remodeling prior to expiration of the Lease. If Lessee does remove
such improvements or remodeling, it shall restore the Demised Premises to substantially the same
condition in which the Demised Premises were prior to the making of such improvements or
remodeling, reasonable wear and tear excepted.

            4.  Failure to Repair.  Lessee will permit the Lessor and its agents to enter the Demised
Premises at all reasonable times to examine the condition thereof. In the event, upon the inspection
of the Demised Premises, the Lessor determines that the Lessee has failed to make any non-
structural repairs required of Lessee by the terms of this Lease and gives notice of such failure to
the Lessee and the Lessee thereupon fails and neglects, within a reasonable time thereafter, to
make any such necessary and reasonable repairs, Lessor, in addition to its other remedies, may
cause such necessary and reasonable repairs to be made at the expense of the Lessee. Such
payments made by the Lessor are hereby agreed and declared to be so much additional rent and
shall be due and payable with the next installment of rent due thereafter under this Lease.

            5.  Surrender of Premises.  Lessee will deliver up and surrender to the Lessor possession
of the Demised Premises upon the expiration of this Lease or its termination in any way, in as
good condition and repair as the same shall be at the commencement of said term (loss by any
casualty not caused by Lessee, fire, defaults inherent in construction, ordinary wear and decay and
any repairs which Lessor is made responsible for by this Lease, only excepted) and deliver the
keys at the office of the Lessor or Lessor's agent.

            At the termination of this Lease and upon vacating the Demised Premises, Lessee shall
have the right to remove any and all trade fixtures belonging to Lessee providing Lessee shall be
responsible for any damages caused to the Demised Premises by the removal of said trade fixtures
and shall immediately remit to Lessor the cost of repairing said damage.

            6.  Access to Premises.  With reasonable advance notice under the circumstances,
Lessor or its agents shall have free access to the Demised Premises at reasonable times during the
last six (6) months of the term of this Lease for the purpose of exhibiting said Demised Premises
and putting up the usual notice "For Rent" or "For Sale" signs, which notice shall not be removed,
obliterated or hidden by Lessee.

            7.  Liability for Damage.  Lessor shall not be liable for any damage occasioned by or from
plumbing, gas, water, steam, or other pipes, sewage or the bursting, leaking or running of any
cistern, tank, washstand, water closet or the waste pipe in, above, upon or about the Demised
Premises, nor for damage occasioned by water, snow or ice being upon or coming through the
roof, skylight, trapdoor or otherwise, unless occasioned by the negligence of the Lessor, its agents,
servants or employees.

            8.  Liability Insurance.  At all times during the term of this Lease, Lessee shall, at Lessee's
own expense, keep in full force and effect public liability insurance in companies acceptable to
Lessor, naming both Lessor and Lessee as insured parties, with minimum limits of Two Million
Dollars ($2,000,000.00) combined single limit bodily injury and property damage. Lessee shall
deposit such policy or policies of insurance, or certificates thereof with Lessor. Lessee shall name
Lessor as an additional named insured on said policies.

            All liability insurance and the renewals or replacements thereof required shall be placed
with responsible insurance companies selected by Lessee, approved by Lessor and authorized to
do business in the State of Ohio.

            Thirty (30) days prior to the expiration or cancellation of any such policies of insurance
required hereof, Lessee shall deposit with Lessor a copy of or a certificate evidencing a new
policy to replace the policy so expiring. If Lessee shall at any time neglect to keep in force such
policies, Lessor may at its election procure or renew such insurance and the amount so paid by
Lessor, including reasonable expenses, shall be payable by Lessee to Lessor on the next rental
payment date. Any memorandum certificate of insurance furnished on behalf of Lessee shall
stipulate that in the event of non renewal or cancellation of any such policy or policies, thirty (30)
days prior written notice of such renewal or cancellation will be given to Lessor.

            Lessee shall defend and save harmless Lessor from and against any and all loss, cost,
damage, or expense, including attorneys' fees, of any nature whatsoever arising out of or connected
with the use or occupancy of the Demised Premises by Lessee, the materials or things maintained,
kept or sold by Lessee, its agents, employees and contractors, in or on the Demised Premises, the
approaches thereto and the common areas thereof, or arising or alleged to have arisen out of the
acts or omissions of Lessee's officers, agents, employees and contractors.

            Lessee will indemnify and save Lessor harmless from any and all claims, actions, damages,
liability and expense in connection with injury or death to persons or damage to property occurring
in, on or about the Demised Premises and adjacent sidewalks, loading platforms and other areas,
occasioned wholly or in part by any act or omission of Lessee, Lessee's agents, contractors,
customers or employees.

            9.  Fire and Extended Coverage Insurance.  Lessor shall obtain and maintain during the
term of this Lease, an all risk insurance policy on all buildings and all improvements hereafter erected
on the demised premises in an amount equal to the full replacement value thereof, naming Lessor
specifically as sole named insured, except if requested by Lessor, with a loss payable endorsement
to Lessor's Mortgagee as its interest may appear, the prorated cost of which shall be included in
Real Estate Taxes and Insurance referred to in Article III, section 4.

            Lessor shall annually on each anniversary of this Lease, review the amount of insurance
coverage on all buildings and improvements on the demised premises. In the event the cost of
replacement as evidenced by the cost of construction published in the most current issue of The
Marshall Stevens Guide has shown an increase, Lessor may increase the amount of insurance
coverage in an amount equaling the percentage of increase as indicated.

            All insurance and the renewals or replacement thereof, required to be maintained, shall be
placed with responsible insurance companies, selected by Lessor, and authorized to do business
in the State of Ohio.

            Lessee shall, at its own expense, keep in full force and effect adequate insurance against
fire and such other risks as are from time to time included in extended coverage and vandalism
insurance policies insuring (1) Lessee's chattels located on or within the Demised Premises and (2)
alterations, decorations and improvements (whether or not constituting a part of the Demised 
remises) made by Lessee. Lessee shall furnish, if so requested, Lessor a certificate evidencing
such coverage within thirty (30) days after written request therefor by Lessor.

            10.  Waiver of Subrogation.  Lessor and Lessee hereby release each other from any and
all liability or responsibility to the other, or anyone claiming through or under them by way of
subrogation or otherwise, for any loss or damage to property caused by fire or other casualty
included in extended coverage, even if such fire and casualty shall have been caused by negligence
of the other party, or anyone for whom such party may be responsible; provided, however, that
this release shall apply only to the extent of the insurance proceeds realized and only with respect
to such loss or damage occurring during the time the releasor's policies shall contain a clause or
endorsement to the effect that such release shall not impair such coverage or prejudice the right
of the releasor to recover thereunder. Lessor and Lessee each agree that each of their respective
policies for such coverage will include such a clause or endorsement so long as the same shall be
obtainable without extra cost, or if extra cost shall be charged therefor, provided the other party
shall pay such extra cost. If extra cost shall be chargeable therefor, each party, at its election may
pay the same, but shall not be obligated to do so if such party provides notice to the other of the
amount of the extra cost.

            11.  Signs.  No sign or signs shall be placed or erected upon the roof of said building, and
all signs placed upon the outside elevations of said building, including the method of affixing, shall
be first approved by the Lessor in writing.

                                                             ARTICLE VI
                              COVENANTS ON BEHALF OF THE LESSOR

            l.  Title of Lessor.  Lessor hereby warrants that at the date of the delivery of this Lease it
has a good right, full power and lawful authority to make this Lease, and that said property is free
and clear of all encumbrances, of all persons claiming by, through or under it, except current taxes
and assessments and except restrictions and conditions of record, if any, which, however, shall
not prohibit Lessee's operations, and the zoning ordinances of Cuyahoga Heights, Ohio, which
shall not prohibit Lessee's operations.

            2.  Quiet Enjoyment.  Lessor covenants that the Lessee, upon paying the rent and
performing the covenants hereof on its part to be performed, shall and may peaceably and quietly
have, hold and enjoy the Demised Premises, together with the appurtenances, privileges and rights
thereunto appertaining or belonging, throughout the term hereof as to all persons claiming by,
through or under it.

                                                             ARTICLE VII
                                            MISCELLANEOUS COVENANTS

            l.  Assignment of Lease.  Lessee covenants and agrees that it will not assign this Lease or
sublet the Demised Premises or any part thereof, without first securing the written consent of the
Lessor thereto, which consent shall not be unreasonably withheld. Such consent shall not be
withheld, (a) if at the time of such assignment or subletting, Lessee shall not have been, nor be in
default of the performance or observance of any of the Lessee's covenants and agreements
hereunder, and (b) if the assignee or sublessee shall expressly assume all of the covenants and
obligations of the Lessee under this Lease by written instrument, and if the business to be carried
on by the assignee or sublessee is free from nuisance and similar to the use the building is being
used for at the time of assignment or subletting, and (c) if such assignee or sublessee is a reasonably
financially responsible person, firm or corporation and one of good character and reputation and
(d) if a duplicate executed copy of such instrument of assignment or sublease shall be delivered to
the Lessor promptly after its execution by the parties thereto. Notwithstanding any assignment or
sublease made with the consent of Lessor, Lessee shall not be discharged of any obligation or
liability under this Lease. Nothing herein shall be construed to require the written consent of the
Lessor to the assignment or transfer of this Lease, whether by operation of law or otherwise, to
any successor in interest, whether through merger, acquisition or purchase of all or substantially all
of the business of Lessee for which the Demised Premises are utilized.

            In the event Lessee receives Lessor's consent to an assignment or sublease the demised
premises or any portion thereof and the rent received from sublessee exceeds the rent set forth in
this Lease Agreement, said increase in rent shall be considered as additional rent due and payable
to the Lessor and the sum of the increase shall be remitted to Lessor upon receipt of same from
sublessee.

            2.  Notices.  All such notices which may be proper or necessary to be served hereunder,
shall be effectually served if sent by certified mail, postage prepaid, return receipt requested or by
a nationally recognized courier service that provides a receipt and guarantees next-day delivery.
All such notices addressed to the Lessor shall be sent to 6200 Rockside Woods Boulevard,
Independence, Ohio 44l3l, or to such other place as the Lessor shall, by written notice to the
Lessee, hereafter designate for the purpose; and all notices to the Lessee shall be sent to the
Demised Premises, with a copy to Ace Hardware Corporation, 2200 Kensington Court, Oak
Brook, Illinois 60523-2100, Attn: Corporate Property Manager, or to such other place as the
Lessee shall, by written notice to the Lessor, hereafter designate for such purpose. All payments
of rent or other sum required to be paid by Lessee to Lessor, and all statements or other information
required to be furnished by Lessee to Lessor shall be payable at or forwarded to the address of the
Lessor for purposes of notice, as herein provided.

            3.  Waiver of Defaults.  It is hereby understood and agreed that a waiver by the Lessor of
any one or more defaults on the part of the Lessee hereunder shall not be construed to operate as
a waiver of any future default which may be made by Lessee or its assigns, either in the same
covenant and condition or any other covenants and conditions in this Lease.

            4.  Damage or Destruction of Premises.  If, at any time during the term hereof, the building
and improvements on the Demised Premises shall be damaged or destroyed by fire or other
casualty, Lessor shall repair the same with all reasonable speed, subject to delays beyond Lessor's
reasonable control, provided, however, that if such damage or destruction shall represent more
than fifty percent (50%) of the value of said building and improvements, then either party shall
have the right and option to terminate this Lease by giving to the other party written notice of such
election within ten (l0) days after the happening of such damage or destruction. During the period
of such damage or destruction, Lessee shall be entitled to an abatement in rent in proportion to the
part of the building and improvements that remains unfit for occupancy and any rent theretofore
paid in advance shall be prorated in proportion to the time during the month that said Demised
Premises were so damaged or destroyed.

            Should neither the Lessor nor the Lessee elect to terminate this Lease in accordance with
the foregoing, then, and in that event, Lessor agrees to rebuild and replace such partly destroyed
property as soon as the same can reasonably be done and if Lessor shall fail to repair or restore the
same to substantially the same condition in which they were immediately prior to the happening of
such damage or destruction within one hundred eighty (180) days after the happening of such
damage or destruction, then Lessee shall have the right and option to terminate this Lease by giving
to Lessor written notice of such election ten (l0) days after the expiration of said one hundred eighty
(180) day period. During such period of such damage or destruction, Lessee shall be entitled to an
abatement in rent in proportion to the part of the building and improvements that remains unfit for
occupancy, and any rent theretofore paid in advance shall be prorated in proportion to the time
during the month that said Demised Premises were so damaged or destroyed.

            5.  Eminent Domain.  It is understood and agreed that if the Demised Premises or any part
thereof, or right therein, shall be taken by condemnation or appropriation proceeding, or by any
right of eminent domain, or by any compromise and/or settlement prior to or during such pending
proceedings, the Lessee shall not be entitled to participate in any award of damages or compensation
for the taking of such premises or right, and the Lessor shall receive the entire amount thereby
becoming available without deducting the amount of the value of any estate or interest of the Lessee;
and said Lessor shall not be accountable to, or obligated to pay the Lessee any part thereof.
However, in the event the space or area occupied by said Lessee is substantially reduced as a result
of any of the foregoing, and the business conducted by the Lessee substantially diminishes as a result
thereof, then this Lease and all obligations arising thereunder shall become void after possession of
such property has been taken for public use. Notwithstanding, nothing contained herein shall be
deemed to prevent the Lessee from filing its own separate and distinct claim against the condemning
authority.

            6.  Subordination of Lease.  Lessee covenants that this Lease shall not be a lien against the
Demised Premises or any part thereof, in respect to any mortgages which may now or hereafter be
a lien against said Demised Premises, and that the recording of such mortgage or mortgages shall
have preference and precedence and be superior and prior in lien to this Lease, irrespective of the
date of recording of said Lease and said mortgage or mortgages. Lessee agrees to execute,
acknowledge and deliver any such instrument, without cost, which may be deemed necessary or
desirable to further effect the subordination of this Lease to any such mortgage or mortgages; and
failure to execute such instrument within fifteen (l5) days after requested of same shall entitle the
Lessor to act as attorney-in-fact for Lessee in the execution of any such instrument. In the event of
such subordination of this Lease, Lessor agrees to require the mortgagee to give prompt notice to
the Lessee of any default by the Lessor in the performance of its obligations under said mortgage.

            7.  Holdover.  Should the Lessee remain in possession of said Demised Premises after the
date of the expiration of this Lease, with or without the consent of Lessor, then, unless a new
agreement in writing shall have been entered into between the parties hereto, the Lessee shall be a
Lessee from month to month, and such tenancy shall be otherwise subject to all the covenants and
conditions of this Lease, except that the rent shall be at 150% the monthly rent set forth in Article
III of this Lease. If the Demised Premises are not surrendered at the end of the Lease term,
Lessee shall indemnify and hold harmless the Lessor against any actual or direct damage or
liability resulting therefrom, including actual or direct damages incurred by any succeeding lessee
founded upon such delay.

            8.  Abandonment.  In case the Demised Premises shall be deserted or vacated and remain
deserted or vacated for a period of ten (l0) days, Lessor shall have the right to enter the same as
agent of the Lessee either by force or otherwise, without being liable to any prosecution therefor,
and to re-let the same as the agent of Lessee and to receive the rent of the Demised Premises and
to apply the same to the payment of the rent due under this Lease, holding the Lessee liable for any
deficiency.

            Further, in the event the Demised Premises are vandalized during the period it has been
deserted or vacated by Lessee, it shall be Lessee's responsibility to immediately pay to Lessor the
cost of repairing said vandalism. In the event the Demised Premises are damaged or destroyed by
fire or any casualty during the period it has been deserted or vacated by Lessee, Lessee hereby
waives its right and option to terminate this Lease as further provided for in Article VII,
subparagraph 4.

                                                             ARTICLE VIII
                                                               DEFAULTS

            l.  Remedies of Lessor.  In the event that the rent or any other amount of money herein
agreed to be paid by the Lessee shall remain unpaid for a period of ten (l0) days after the same
becomes due, or in the event the Lessee shall at any time be in default in the observance or
performance of any of the other covenants, agreements, terms, provisions and conditions assumed
or imposed on it hereunder for a period of fifteen (l5) days after notice to Lessee of such default,
then the Lessor shall be entitled, at its election, to exercise concurrently or successively, any one
or more of the following rights and remedies:

                a.  To pay any sum required to be paid by Lessee under the terms of this Lease to other
than the Lessor and to perform any obligation required to be performed by the Lessee under the
terms of this Lease for the account of the Lessee and the amount paid by Lessor with interest
thereon at the rate of one and one-half percent (l-l/2%) per month and all expenses connected
therewith shall be repaid by the Lessee to the Lessor on demand. For this purpose, any receipt of
the party to whom said payment shall have been made, shall be conclusive evidence against the
Lessee that the amount of such payment was made.

                b.  To charge Lessee interest at the rate of one and one-half percent (l-l/2%) per month
on rent remaining unpaid for a period in excess of ten (l0) days after it is due.

                c.  To enjoin any breach or threatened breach by the Lessee of any covenant, agreement,
term, provision and condition thereof.

                d.  To bring suit for the collection of the rents or other amounts which may be in default,
and to have a receiver appointed to receive and collect all rents and amounts due without entering
into possession or terminating or avoiding this Lease.

                e.  To re-enter the Demised Premises, by summary proceedings or otherwise, and take
possession thereof without thereby terminating this Lease, and thereupon the Lessor may expel all
persons and remove all property therefrom either peaceably or by force, without becoming liable to
prosecution therefor, and re-let the Demised Premises, making reasonable efforts therefor, for such
period and upon such terms according to the Lessor's sole discretion and receive the rent therefrom,
applying the same first to the payment of the reasonable expenses of such re-entry and the cost of
such re-letting and then to the payment of the rent accruing hereunder, the balance, if any, to be paid
to the Lessee, who, whether or not the Demised Premises are re-let, shall remain liable for any
deficiency which may be recovered by the Lessor, periodically, upon the successive days upon
which the fixed rent hereunder is payable.

            It is agreed that the commencement and prosecution of any action by the Lessor in forcible
entry and detainer, ejectment or otherwise, or the appointment of a receiver or any execution of
any decree obtained in any action to recover possession of the Demised Premises or any re-entry,
shall not be construed as an election to terminate this Lease unless this Lease be expressly
terminated, and any such re-entry or entry by the Lessor, whether had or taken under summary
proceedings or otherwise, shall not be deemed to have absolved or discharged the Lessee from
any of its obligations and liabilities for the remainder of the term of this Lease.

                f.  To terminate this Lease, re-enter the Demised Premises and property and take
possession thereof, wholly discharged from this Lease.

            In the event the Lessor shall elect to terminate this Lease, as aforesaid, all rights and
obligations of the Lessee shall cease and terminate except that the Lessor shall have and retain full
right to sue for and collect all rents and other amounts for the payment of which the Lessee shall
then be in default, including damages to the Lessor by reason of such breach, which shall have
accrued up to the time of Lessor's re-entry and Lessee shall surrender and deliver up to the
Lessor the Demised Premises together with all improvements and additions thereto, and upon any
default by the Lessee in so doing, the Lessor shall have the right to recover possession by summary
proceedings or otherwise, and to obtain and receive any other ancillary relief in such action and
again to have and enjoy said Demised Premises fully and completely as if this Lease had never
been made.

            2.  Right to Terminate.  Lessee further agrees that if at any time the leasehold estate
created hereby shall be taken in execution or seized by other process of law, or if the Lessee shall
be declared bankrupt or insolvent, or if any receiver be appointed for the business and property of
the Lessee, and said receivership is not dissolved within thirty (30) days, or if any assignment be
made for the benefit of creditors, or any petition or application for the reorganization of the Lessee
be filed, thereupon on the occurrence of any such event the Lessor with or without exercising any
right of re-entry or taking other action shall have the right and option to forthwith terminate this Lease.

            3.  Remedies Cumulative.  The rights and remedies granted Lessor herein, and any other
rights and remedies which the Lessor may have, either at law or in equity, are cumulative and not
exclusive of the other, and the fact that the Lessor may have brought suit and recovered judgment
for rent or other sums or for damages, or that the Lessor may have re-entered without termination
shall not impair Lessor's right thereafter to terminate this Lease nor Lessor's right to exercise any
other remedy or remedies herein granted or available to it at law or in equity. Failure to exercise any
right or remedy, whether expressly granted herein or available to Lessor at law or in equity, upon
default by the Lessee, shall not be construed as a waiver of the right to exercise the same upon any
succeeding default.

                                                                 ARTICLE IX
                                                         GOVERNING LAW

            This Lease is to be performed in the State of Ohio and shall be construed and enforced in
accordance with the State of Ohio.

                                                               ARTICLE X
                                             AUTHORITY TO SIGN LEASE

            If Lessee be a corporation or partnership (general or limited), each person(s) signing this
Lease as an officer or partner represents to Lessor that such person(s) is authorized to execute this
Lease without the necessity of obtaining any other signatures of any other officer or partner, that the
execution of this Lease has been authorized by the board of directors of said corporation or by the
general partners of the partnership, as the case may be, and that this Lease is fully binding on the
Lessee.

                                                              ARTICLE XI
                                                           DEFINITIONS

            When used in this Lease, unless otherwise distinctly expressed or manifestly incompatible
with the intent thereof, the term "Lessor" shall be construed to include the successors and assigns of
the Lessor and the agreements herein shall be binding upon and inure to their benefit, and the term
"Lessee" shall be construed to include the successors and assigns of the Lessee and the agreement
herein shall be binding upon and inure to their benefit.

            The captions of this Lease are for convenience only and do not in any way limit or amplify
the terms and provisions of this Lease.

                                                             ARTICLE XII
                                                                BROKER

            Lessee represents and warrants to Lessor, and Lessor represents and warrants to Lessee,
that, other than CB Richard Ellis, Inc. ("Broker"), no broker negotiated or was instrumental in
negotiating or consummating this Lease. Lessor agrees to pay all fees and commissions, if any,
which may become due to Broker by reason of this Lease. Lessor and Lessee each agree to
indemnify and hold the other harmless from all damages, liability, and expense, including, without
limitation, expenses and reasonable attorneys' fees, arising from any claims or demands of any
broker or finder for any commission or fee alleged to be due based upon the conduct or action of
said indemnifying party.

                                                            ARTICLE XIII
                                       RIGHT OF EARLY CANCELLATION

            Lessee shall have the right to terminate this Lease anytime after the seventh year following
the Commencement Date upon the following terms and conditions:

            (a)  Lessee shall provide Lessor with at least six (6) full calendar months prior written
notice, in the manner provided for in this Lease for the sending of notices, of its intent to vacate the
demised premises and cancel this Lease.

            (b)  The Lease is in full force and effect and Lessee is not in default in the performance of
its obligations hereunder at the time of exercising this right to an early cancellation; and Lessee has
duly and punctually observed and performed all of the substantive provisions, agreements, covenants,
and conditions required of the Lessee under this Lease throughout the term hereof.

            (c)  Upon any subletting or assignment of this Lease, except to a successor in interest
permitted without the written consent of the Lessor in accordance with Article VII, Section 1, this
right to an early cancellation of the Lease shall automatically terminate and shall be void and of no
legal effect whatsoever.

            (d)  At least thirty (30) days prior to the effective date of the Lease cancellation, Lessee
shall pay to Lessor a cancellation fee in the amount that is set forth for the newly scheduled termination
date on the Landlord's Tenant Improvement and Real Estate Commission Amortization Schedule
which is attached hereto as Exhibit "E" and made a part hereof.

            In accordance with such early termination, Lessee shall vacate the Demised Premises as
provided herein. Notwithstanding, Lessee shall also be responsible for the payment of rent, electricity,
all utilities and other charges set forth in the Lease Agreement up to and including the later of the
Early Termination date or the date Lessee actually vacates the space.

            IN WITNESS WHEREOF, the Lessor and the Lessee have hereunto set their hands in
triplicate hereof the day and year first above written.

IN THE PRESENCE OF:                            550 HARVARD LTD.


                                                                    By: ____________________________
                                                                            Neil D. Viny

___________________________


                                                                    ACE HARDWARE CORPORATION


                                                                    By: ____________________________
                                                                            David F. Hodnik
                                                                            President and CEO
___________________________



STATE OF OHIO                       )
                                                    )SS:
COUNTY OF CUYAHOGA      )

            BEFORE ME, the subscriber, a Notary Public in and for said County and State, personally
appeared the above-named Neil D. Viny of 550 HARVARD LTD., who acknowledged that he did
hereunto subscribe his name to the foregoing instrument, and that the same is his free act and deed
and the free act and deed of said company.

            IN TESTIMONY WHEREOF, I hereunto set my hand and official seal, at Independence,
Ohio, this 7th day of February, 2002.

                                                                                                __________________________
                                                                                                    Notary Public


STATE OF ILLINOIS                )
                                                    )SS:
COUNTY OF DUPAGE             )

BEFORE ME, the subscriber, a Notary Public in and for said County and State, personally
appeared the above-named David F. Hodnik, known to me to be the President and CEO of ACE
HARDWARE CORPORATION, and acknowledged that he as such officer did hereunto subscribe
the corporate name of said Company, and that the same is his free act and deed and the free act
and deed of said Company.

            IN TESTIMONY WHEREOF, I hereunto set my hand and official seal, at Oak Brook,
Illinois, this 22nd day of January, 2002.

                                                                                                __________________________
                                                                                                    Notary Public


                                                    Ace Hardware Company
                                                            Truck Terminal
                                                        550 Harvard Avenue
                                                        Cuyahoga Hts., Ohio

            As to Article III, Sections 4 and 5 Projected Schedule of Real Estate Taxes and
Insurance Expenses For Calendar Year 2002

Insurance                                                                          $ 522

Real estate taxes                                                              $7,561

Total Insurance and Real Estate Taxes                 $8,083.00

Total annual allocable expenses @ 100% share    $8,083.00

Total annual allocable real estate taxes and
insurance divided by 12 months=                                    $673.58/month



            As to Article IV, Section 1 Projected Schedule of Lessee's Share of Use,
Maintenance and Operation Costs for the Sewer and Waste Water Treatment Plant
For Calendar Year 2002

Maintenance                                                                    $1,200.00
Permit Fee                                                                            400.00

Total Maintenance & Fees                                           $1,600.00

Total annual allocable expenses @ 100% share         $1,600.00

Total annual allocable expenses
divided by 12 months                                                            $133.33/month


                                                                EXHIBIT "B"

Scope of work for Ace Hardware
550 Harvard Avenue, Cleveland Ohio

General Conditions
            Provide supervision, layout, tools and equipment Progress and final cleanup Job site dumpsters

Site Work
            Removal of approx. 650 lf of existing fence located in front of building Clearing of grub over entire site Clean up of debris on site Minor grading of site Install new 6' high fence ( 9 gauge wire ) without barbed wire to replace existing (approx. 800lf) Install new 50' automatic sliding gate recessed 70' from road. Final design TBD Provide asphalt parking for approximately 10 cars Excavation of dolly pads
            Remove damaged roofing and eave material
            Removal of existing headers Removal of existing siding to accommodate 10' doors Removal of existing siding Remove angle iron at various dock doors

Concrete
            Dolly pads in front of 36 dock doors 15' wide x 8" thick Dolly pad 450' x 6' wide x 8" thick Concrete to be saw cut and cured Repair existing concrete steps Repair significant cracks in dock floor slab

Metals
            Replace hand rails at stairs

Rough Carpentry
            Install 4' base cabinet, counter, and sink for coffee station

Doors and Windows
            Replace 6 - 3' 5" x 4' windows with new insulated glass units Remove 36 existing overhead doors Install 36 new 9' 2" x 10' manual insulated overhead doors
        Install two new 2' 8" x 6' 8" metal man doors

Finishes
            Replace damaged ceiling tile Clean grid and remainder of tile Paint all interior walls Paint doors and frames Strip and wax all VCT ( two colors of VCT exist in office) Pressure wash dock area ( ceilings and floors ) Prep overhangs and paint steel in front of 36 dock doors Paint nine interior columns safety yellow Paint bollards next to 36 doors safety yellow Paint two exterior handrails safety yellow Paint exposed exterior steel around 36 dock doors Acid wash exterior brick Apply sealer to concrete floor between 18 cross docks

Equipment
            Furnish and install 18 - 20,000 lbs. dock edge leveler to match existing Minor maintenance to existing levelers as needed

Metal Finishes
            Install new jambs and headers for 36 doors Install new siding and trim around 36 doors Replace roof and eave material where needed

Mechanical
            Service existing HVAC system Add 1 return air grill Replace existing egg crate Install new sink in coffee bar

Electrical
   Warehouse (interior) Remove 28 existing fixtures Install 18 - 400 watt low bay fixtures Install single receptacle for 120 volt compressor on a single 20-amp circuit Locations of receptacles to be every third door Rework electric over doors for door replacement Add one new Phoenix dual dock light $1,000 allowance for relamping and repairs to existing dock lights Install 1 - 20amp 240 volt receptacle for shrink wrap machine Location of receptacle is middle of warehouse

            Warehouse (exterior)
            Install (12) 250-watt wall packs at dock area on 24 hour timer Install 2" PVC conduit to gate for keypad installation

            Office
   Relamp all fixtures $600 allowance to replace ballasts    GFI receptacle by coffee bar Check all exit and emergency lighting Add receptacle for 220 volt copier Check panel circuits    EXHIBIT "D"
                                                LEASE TERM AGREEMENT

            THIS AGREEMENT, made this day           of April, 2002, by and between 550
HARVARD LTD. (an Ohio Limited Liability Company), hereinafter called "Lessor," and ACE
HARDWARE CORPORATION, hereinafter called "Lessee," a corporation organized under the
laws of the State of Delaware.

                                                           W I T N E S S E T H

            WHEREAS, by Lease Agreement entered into the 7th day of February, 2002, Lessor
demised and leased unto Lessee certain Demised Premises in the aforementioned Lease
Agreement and having a street address of 550 Harvard Ave., Cuyahoga Hts., Ohio, for a full term,
unless terminated sooner as provided therein, of fifteen (15) years, commencing on the first day of the
calendar month following the completion of the improvements to the demised premises as set forth
in Article III, Sections 6 & 7, entitled "Construction" and "Occupancy", respectively, of the hereinabove
referred to Lease Agreement, and

            WHEREAS, Lessee shall enter into occupancy of the demised premises on or about the 1st
day of May, 2002, and

            WHEREAS, Lessor and Lessee do hereby agree as follows:

            l.  The full fifteen (15) year term of the Lease shall commence on the 1st day of May, 2002
("Commencement Date"), and shall terminate on the 30th day of April, 2017, unless sooner
terminated by the terms and conditions of Article XIII (entitled "Right of Early Cancellation") or by
other terms set forth in the Lease or extended as the same may be provided in the referred to Lease
Agreement.

            2.  The payment of rent referred to in the Lease Agreement shall commence on May 1, 2002,
the date the Lessee takes occupancy of the Demised Premises.

            3.  Except as herein provided, the Lease shall continue in full force and effect.

            4.  This Agreement shall be binding on the parties hereto, their heirs, executors, successors
and assigns.

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

IN THE PRESENCE OF:                                 550 HARVARD LTD.


                                                                          By:                                                  
                                                                                Neil D. Viny

                                              


                                                                         ACE HARDWARE CORPORATION


                                                                           By: ___________________________
                                                                                 David F. Hodnik
                                                                                 President and CEO
                                                 


STATE OF OHIO                          )
                                                       ) SS:
COUNTY OF CUYAHOGA         )

        BEFORE ME, the subscriber, a Notary Public in and for said County and State, personally
appeared the above-named Neil D. Viny of 550 HARVARD LTD., who acknowledged that he
did hereunto subscribe his name to the foregoing instrument, and that the same is his free act and
deed.
        IN TESTIMONY WHEREOF, I hereunto set my hand and official seal at Independence,
Ohio, this 29th day of April, 2002.

                                                                                        __________________________
                                                                                            Notary Public


STATE OF ILLINOIS            )
                                                ) SS:
COUNTY OF DU PAGE        )

        BEFORE ME, the subscriber, a Notary Public in and for said County and State, personally
appeared the above-named David F. Hodnik of said ACE HARDWARE CORPORATION,
and acknowledged that he as such officer did hereunto subscribe the corporate name of said
Company, and that the same is his free act and deed and the free act and deed of said Company.
        IN TESTIMONY WHEREOF, I hereunto set my hand and official seal at Oak Brook,
Illinois, this 22nd day of January, 2002.

                                                                                        ___________________________
                                                                                            Notary Public


Exhibit "E"

                                    Amortization Schedule of Landlord's Costs For
                              Tenant Improvements and Real Estate Commissions
                                                    For Truck Terminal Facility
                                    550 Harvard Avenue, Cuyahoga Heights, Ohio

I.    Lessor's Total Tenant Improvement Costs and Real Estate Commissions = $337,297
      Less Lessee's Contribution per Article III, Section 6 of Lease                       (30,000)
II.   Lessor's Total Costs to be amortized @ 10% over 15 year Term                $307,297
The following schedule represents the unamortized balance of the above costs for each month
following the 7 ^th year of the Lease Term which sum (i.e. Cancellation Fee) would be payable
by Lessee to Lessor in the event Lessee exercises its right of Early Cancellation as provided by
the terms of Article XIII of the Lease:

As of the                                    Unamortized Balance
  end of                                                Payable
Month No.                                   (Cancellation Fee)
    84                                                $217,621.56
    85                                                  216,132.84
    86                                                  214,631.72
    87                                                  213,118.09
    88                                                  211,591.84
    89                                                  210,052.88
    90                                                  208,501.09
    91                                                  206,936.37
    92                                                  205,358.61
    93                                                  203,767.70
    94                                                  202,163.53
    95                                                  200,546.00
    96                                                  198,914.99
    97                                                  197,270.38
    98                                                  195,612.07
    99                                                  193,939.94
    100                                                192,253.88
    101                                                190,553.77
    102                                                188,839.49
    103                                                187,110.92
    104                                                185,367.95
    105                                                183,610.45
    106                                                181,838.31
    107                                                180,051.40
    108                                                178,249.60
    109                                                176,432.78
    110                                                174,600.82
    111                                                172,753.60
    112                                                170,890.98
    113                                                169,012.84
    114                                                167,119.05
    115                                                165,209.48
    116                                                163,284.00
    117                                                161,342.47
    118                                                159,384.76
    119                                                157,410.74
    120                                                155,420.27
    121                                                153,413.21
    122                                                151,389.42
    123                                                149,348.77
    124                                                147,291.11
    125                                                145,216.31
    126                                                143,124.22
    127                                                141,014.69
    128                                                138,887.58
    129                                                136,742.75
    130                                                134,580.04
    131                                                132,399.31
    132                                                130,200.41
    133                                                127,983.18
    134                                                125,747.48
    135                                                123,493.15
    136                                                121,220.03
    137                                                118,927.97
    138                                                116,616.81
    139                                                114,286.39
    140                                                111,936.55
    141                                                109,567.12
    142                                                107,177.95
    143                                                104,768.87
    144                                                102,339.71
    145                                                  99,890.31
    146                                                  97,420.50
    147                                                  94,930.11
    148                                                  92,418.96
    149                                                  89,886.89
    150                                                  87,333.72
    151                                                  84,759.27
    152                                                  82,163.37
    153                                                  79,545.83
    154                                                  76,906.48
    155                                                  74,245.14
    156                                                  71,561.62
    157                                                  68,855.74
    158                                                  66,127.31
    159                                                  63,376.14
    160                                                  60,602.04
    161                                                  57,804.83
    162                                                  54,984.31
    163                                               52,140.28
    164                                               49,272.55
    165                                               46,380.92
    166                                               43,465.20
    167                                               40,525.18
    168                                               37,560.66
    169                                               34,571.44
    170                                               31,557.31
    171                                               28,518.06
    172                                               25,453.48
    173                                               22,363.36
    174                                               19,247.49
    175                                               16,105.66
    176                                               12,937.64
    177                                                 9,743.22
    178                                                 6,522.18
    179                                                 3,274.30
    180                                                        0.00

EX-10

                                               OPTION AGREEMENT

                                     AND JOINT ESCROW INSTRUCTIONS

                                                            by and between

                                   REYNEN & BARDIS (KMS PLACER), L.P.,
                                               a California limited partnership

                                                                ("Seller")

                                                                     and

                                          ACE HARDWARE CORPORATION,
                                                      a Delaware corporation

                                                                ("Buyer")

                                                        Property located in

                                                  Placer County, California

                                                    Dated January 13, 2003

ARTICLE 1    OPTION; COVENANTS DURING OPTION PERIOD; PRELIMINARY
            CLOSING
            1.1    Grant of Option
            1.2    Term of Option
            1.3    Exercise of Option; Sale of Property
            1.4    Failure to Exercise Option
            1.5    Deposit with Escrow
            1.6    Restrictions on Transfer by Seller
            1.7    Existing Loan
                    1.7.1    Loan
                    1.7.2    Request for Notice of Default
                    1.7.3    Credit Against Purchase Price
                    1.7.4    Non-Disturbance
                    1.7.5    Use of Option Consideration to Cure Loan Default
            1.8    Restrictions During Option Period
            1.9    Preliminary Closing
            1.10  CUP Substantial Compliance Letter
ARTICLE 2    PURCHASE AND SALE; PROPERTY
            2.1    Sale to Buyer
            2.2    Property
ARTICLE 3    PURCHASE PRICE
ARTICLE 4    PAYMENT OF PURCHASE PRICE
            4.1    Option Consideration
            4.2    Buyer's Deposit of Balance of Purchase Price
ARTICLE 5    ESCROW
            5.1    Opening of Escrow
            5.2    Close of Escrow
            5.3    Failure to Close on Closing Date
ARTICLE 6    CONDITION OF TITLE
            6.1    Approved Condition of Title
            6.2    New Title Matters
ARTICLE 7    TITLE POLICY
ARTICLE 8    CONDITIONS TO CLOSE ESCROW
            8.1    Conditions to Buyer's Obligations Which Must be Satisfied or Waived
                     Prior to Expiration of the Contingency Period
                    8.1.1    Approval of Title
                    8.1.2    Review and Approval of Documents and Materials
                    8.1.3    Approval of Inspections and Studies
                    8.1.4    Commitment to Issue Title Policy
                    8.1.5    Hazardous Materials
                    8.1.6    Natural Hazard Disclosure Statement
                    8.1.7    Special Tax Disclosures
                    8.1.8    No Moratorium
            8.2    Conditions to Buyer's Obligations Which Must be Satisfied or Waived
                     Prior to Close of Escrow
                    8.2.1    Performance of Seller's Obligations
                    8.2.2    Truth of Seller's Representations
                    8.2.3    No Alteration of Approved Condition of Title or Leases
                    8.2.4    Truthfulness of Representations at Closing
                    8.2.5    Title Policy
            8.3    Conditions to Seller's Obligations
                    8.3.1    Performance of Buyer's Obligations
                    8.3.2    Truth of Buyer's Representations
ARTICLE 9    DEPOSITS BY SELLER INTO ESCROW
            9.1    Deposits by Seller into Escrow
ARTICLE 10    DEPOSITS BY BUYER INTO ESCROW
            10.1    Deposits by Buyer into Escrow
ARTICLE 11    COSTS AND EXPENSES
ARTICLE 12    PRORATIONS
ARTICLE 13    DISBURSEMENTS AND OTHER ACTIONS BY ESCROW HOLDER
            13.1    Prorations
            13.2    Recording
            13.3    Funds
            13.4    Title Policy
            13.5    Original Documents
            13.6    Copies of Documents
ARTICLE 14    SELLER'S DISCLAIMER,  REPRESENTATIONS AND
            WARRANTIES
            14.1    DISCLAIMER
            14.2    Representations and Warranties in General
                    14.2.1    Knowledge Representations
                    14.2.2    Effect of Documents and Materials
                    14.2.3    Interpretation and Effect of Disclosures
                    14.2.4    Restatement
            14.3    Representations and Warranties by Seller
                    14.3.1    Authority
                    14.3.2    No Grants
                    14.3.3    Hazardous Materials
                    14.3.4    No Default
                    14.3.5    No Violation
                    14.3.6    No Claims
                    14.3.7    No Condemnation
                    14.3.8    No Third Party Consents
                    14.3.9    Existing Leases
                    14.3.10  Documents and Materials
                    14.3.11  No Attachments
ARTICLE 15    BUYER'S REPRESENTATIONS AND WARRANTIES
            15.1    Representations and Warranties in General
            15.2    Representations and Warranties by Buyer
                    15.2.1    Authority
                    15.2.2    Feasibility Period
                    15.2.3    Reliance on Own Investigation
                    15.2.4    No Attachments
ARTICLE 16    DISCOVERY OF INACCURACY IN WARRANTIES AND
            REPRESENTATIONS
            16.1    Notice
            16.2    Right to Terminate
ARTICLE 17    INDEMNITY; EXCULPATION
            17.1    Buyer's Indemnity
            17.2    Seller's Indemnity
            17.3    Exculpation
            17.4    Release
ARTICLE 18 TERMINATION OF AGREEMENT
            18.1    Termination Prior to Expiration of Contingency Period
            18.2    Liquidated Damages
            18.3    Default by Seller
ARTICLE 19    DAMAGE OR CONDEMNATION BEFORE CLOSING
ARTICLE 20    NOTICES
ARTICLE 21    BROKERS
ARTICLE 22    LEGAL FEES
ARTICLE 23    ASSIGNMENT
ARTICLE 24    INFORMATION REPORT
ARTICLE 25    MISCELLANEOUS
            25.1    Survival of Covenants
            25.2    Further Assurances
            25.3    Time of Essence
            25.4    Counterparts
            25.5    Captions; Recitals
            25.6    No Obligations to Third Parties
            25.7    Exhibits
            25.8    Amendment of this Agreement
            25.9    Waiver
            25.10  Applicable Law
            25.11  Fees and Other Expenses
            25.12  Entire Agreement
            25.13  Successors and Assigns
            25.14  Time Period Computation
            25.15  Cooperation in Drafting
            25.16  Severability
            25.17  Waiver of Jury Trial
            25.18  No Merger
            25.19  Possession
ARTICLE 26    RETURN OF DOCUMENTS AND FUNDS UPON TERMINATION
            26.1    Return of Seller's Funds and Documents
            26.2    Return of Buyer's Funds and Documents
            26.3    No Effect on Rights of Parties
            26.4    Payment of Termination Fee
ARTICLE 27    EXCHANGE
ARTICLE 28    GENERAL REFERENCE FOR DISPUTE RESOLUTION

TABLE OF EXHIBITS

Exhibit A-As Is Certificate
Exhibit B-Memorandum of Option
Exhibit C-Memorandum of Lease
Exhibit D-Estoppel Certificate
Exhibit E-Land Legal Description
Exhibit F-Visual Map
Exhibit G-Grant Deed
Exhibit H-Special Tax Disclosure
Exhibit I-Bill of Sale
Exhibit J-Assignment of Contracts
Exhibit K-Assignment of Existing Leases
Exhibit L-General Assignment
Exhibit M-Seller's Certificate


DEFINED TERMS

"Approved Condition of Title" is defined in Article 6.

"Appurtenances" is defined in Section 2.2.ii.

"Assignment of Contracts" is defined in Article 9(iii).

"Assignment of Existing Leases" is defined in Section 9.1(iv).

"Benefited Party" is defined in Section 16.2.

"Bill of Sale" is defined in Section 9.1(ii).

"Buyer" shall mean Ace Hardware Corporation, a Delaware corporation.

"Buyer Indemnified Parties" is defined in Section 17.2.

"Claims" is defined in Section 17.1.

"Close of Escrow" is defined in Section 5.2.

"Closely-held corporation" shall mean any corporation not listed on the New York, American or Pacific stock exchanges.

"Closing Date" is defined in Section 5.5.

"Code" is defined in Section 6.1(ii).

"Contingency Period" is defined in Section 8.1.

"Contingency Period Conditions Waiver" is defined in Section 1.9(i).

"Continuing Duties" is defined in Section 18.1.

"CUP" is defined in Section 1.10.

"CUP Substantial Compliance Letter" is defined in Section 1.10.

"Deed of Trust" is defined in Section 1.7.1.

"Documents and Materials" is defined in Section 8.1.2.

"Environmental Law" is defined in Section 8.1.2(ix).

"Environmental Report" is defined in Section 8.1.2(ix).

"Escrow" is defined in Section 1.5.

"Estoppel Certificate" is shown on Exhibit D.

"Exchange" is defined in Article 27.

"Exercise Notice" is defined in Section 1.3.

"Existing Leases" is defined in Recital B.

"General Assignment" is defined in Section 9.1(vi).

"Governmental Notices" is defined in Section 8.1.2(ii).

"Grant Deed" shall mean the form conveying the Property to Buyer, recorded in the Official Records of Placer County, California.

"Hazardous Materials" is defined in Section 8.1.2(ix).

"Improvements" is defined in Section 2.2(iv).

"Information Report" is defined in Article 24.

"Increased Coverage Endorsement" is defined in Section 1.9(x).

"Intangible Property" is defined in Section 2.2(iii).

"Land" is defined in Section 2.2(iii).

"Lease" is defined in Recital C.

"Leasehold Policy" is defined in Section 1.9(x).

"Lender" is defined in Section 1.7.1.

"Loan" is defined in Section 1.7.1.

"Memorandum of Ground Lease" is defined in Section 1.9 (v).

"Memorandum of Option is defined in Section 1.9 (iv) and is shown on Exhibit B.

"Nondisturbance Agreement" is defined in Section 1.7.4.

"Option" is defined in Section 1.1.

"Option Consideration" is defined in Section 1.9(iii).

"Option Exercise Period" is defined in Section 1.3.

"Option Termination Date" is defined in Section 1.2.

"Preliminary Closing" is defined in Section 1.9.

"Property" is defined in Recital A and further defined in Section 2.2.

"Purchase Price" is defined in Article 3.

"Representing Party" is defined in Section 16.2.

"Sale" is defined in Section 1.6.

"Seller" shall mean Reynen & Bardis (KMS Placer), L.P., a California limited partnership.

"Seller Indemnified Parties" is defined in Section 17.1.

"Seller Nonrecourse Party, Seller Nonrecourse Parties" are defined in Section 17.3.

"Seller's Certificate" is defined in Section 9.1.(v).

"Termination Demand" is defined in Section 5.3.

"Title Company" is defined in Article 7.

"Title Documents" is defined in Section 8.1.1.

"Title Policy" is defined in Article 7.

"Title Report" is defined in Section 8.1.1(i).

"Visual Map" shall mean the cross-hatched area attached as Exhibit F.



OPTION AGREEMENT AND JOINT ESCROW INSTRUCTIONS


TO:                                                        Escrow No.__________________________
Placer Title Company                             Escrow Officer:    Sue Weaver
1512 Eureka Road, #120                       Telephone:    (916) 782-3711
Roseville, CA 95661                              Title Order No._______________________
Attention: Sue Weaver                            Title Officer:    Kevin Kormylo
                                                              Telephone:    (916) 624-8141


This Option Agreement and Joint Escrow Instructions (this "Agreement") is entered into as of January 13, 2003, by and between REYNEN & BARDIS (KMS PLACER), L.P., a California limited partnership ("Seller"), and ACE HARDWARE CORPORATION, a Delaware corporation ("Buyer"), agree as follows.


RECITALS

        A.    Seller is the owner of that certain real property located in the County of Placer, State of California, consisting of certain improvements and land as more specifically described below (and defined below as the "Property").

        B.    As of the date hereof, Seller leases portions of the Property to Pacific Gas & Electric Company, to Hewlett-Packard Company and to Buyer on long term leases, and to other tenants on month-to-month or short term leases (collectively, and as further described below, the "Existing Leases").

        C.    Seller and Buyer acknowledge that: (i) Seller and Buyer desire to execute a long-term ground lease (the "Lease") as of the Preliminary Closing (as defined below); (ii) as a concession to Buyer, Seller agreed to grant to Buyer an option to purchase the Property provided that Buyer will cooperate with Seller in consummating an exchange since Seller does not desire to convert Seller's investment to cash but rather desires to maintain its investment in real property; (iii) Buyer desires to develop the Property for use as a distribution center for its products and such other uses as Buyer may desire; (iv) Buyer desires to commence construction of additional buildings and related improvements on the Property by February 15, 2003; and (v) in order to accommodate Buyer's desire to acquire the Property and commence construction while simultaneously allowing Seller to complete an exchange, Seller and Buyer agreed that, if Buyer exerci ses the Option (as defined below), the Close of Escrow (as defined below) will occur on September 10, 2003 after written notice by Buyer to Seller given anytime after July 31, 2003 and on or before August 29, 2003.

        NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, Seller and Buyer agree as follows:


AGREEMENT

ARTICLE 1    OPTION; COVENANTS DURING OPTION PERIOD; PRELIMINARY CLOSING

        1.1    Grant of Option. Upon the terms and conditions set forth herein, Seller hereby grants to Buyer an exclusive option to purchase the Property ("Option").

        1.2    Term of Option. The term of the Option shall commence on the date of this Agreement (as set forth in the introductory paragraph hereof), and shall expire at 5:00 p.m. Pacific Time on August 29, 2003 ("Option Termination Date"), unless previously exercised or cancelled pursuant to the terms of this Agreement.

        1.3    Exercise of Option; Sale of Property. Except as provided in Section 1.5, if Buyer elects to exercise the Option, Buyer shall do so by delivering written notice ("Exercise Notice") to Seller and to Escrow Holder (as defined below) of its election to so exercise at any time from and after July 1, 2003 and on or before August 29, 2003 (the "Option Exercise Period"). Upon exercise of the Option by Buyer, Seller shall sell and convey to Buyer, and Buyer shall purchase from Seller, the Property on the terms and conditions contained herein.

        1.4    Failure to Exercise Option. If, after closing pursuant to the Preliminary Closing, Buyer fails to exercise the Option prior to expiration of the Option Exercise Period, the Option shall automatically terminate and the provisions of Section 18.2 below shall apply.

        1.5    Deposit with Escrow. The terms and conditions of the Option granted hereunder and Seller's sale of the Property to Buyer, and the instructions to Escrow Holder with regard to the escrow (the "Escrow") created pursuant hereto are as set forth in this Agreement. Within five (5) business days of the execution of this Agreement, Seller and Buyer shall deliver a fully executed original counterpart of this Agreement and a fully executed and notarized original of the Memorandum of Option (as defined below) to Escrow Holder.

        1.6    Restrictions on Transfer by Seller. During the term of the Option (and if exercised, until the Close of Escrow), in no event shall Seller directly or indirectly, voluntarily or by operation of law, sell, exchange, convey, transfer, contract to sell, dispose of, or further encumber the Property or any part thereof or any interest therein, or be divested of title to the Property or any part thereof or interest therein (individually or collectively, as the context may require, a "sale") without obtaining the prior written consent of Buyer, which consent may be given or withheld in Buyer's sole discretion. For purposes of this Section, the term "sale" shall include, without limitation, if Seller or a general partner or a member of Seller is a partnership, limited liability company, joint venture, trust or closely-held corporation, the issuance, sale, conveyance, transfer, disposition or encumbering of more than fifty pe rcent (50%) of any class of the currently issued and outstanding capital stock of Seller or of a general partner or member of Seller or of the beneficial interest of such partnership, limited liability company, joint venture or trust, or a change of any general partner or any member or any joint venture, either voluntarily, involuntarily or otherwise. For purposes of this Section, the term "closely-held corporation" shall mean any corporation not listed on any of the New York, American or Pacific stock exchanges. The transfer by any partner or member of Seller or by any direct or indirect interest holder in any partner or member of Seller, to the extent the transfer consists solely of an inter vivos gift or testamentary transfer to any spouse, parent, sibling, in-law, child or grandchild of such partner, member or interest holder, or to a trust for the benefit of such partner, member or interest holder, or such spouse, parent, sibling, in-law, child or grandchild of such partner, member or interest holder, shall not be deemed a "sale" for purposes of this Section. At Buyer's option, any sale of the Property or any part thereof in violation of this Section shall be deemed null and void. The restrictions set forth in this Section shall survive the exercise by Buyer of the Optio n and shall continue to the Close of Escrow, but shall terminate if Buyer does not timely exercise the Option.

        1.7    Existing Loan.

                1.7.1    Loan. Seller informs Buyer that as of the date of this Agreement, the Property is encumbered by a Deed of Trust (the "Deed of Trust") dated August 19, 2001 executed by Seller for the benefit of Western Sierra National Bank ("Lender"), recorded as Document No. 2002-0100927 in the Official Records of Placer County, California and securing certain financing by Lender to Seller in the original principal amount of Twelve Million Seven Hundred Eighty Thousand Dollars ($12,780,000) (the "Loan"). Any documents or instruments evidencing or securing the Loan are referred to herein as the "Loan Documents." Seller and Buyer acknowledge that Seller shall be required to pay off the Loan in full and remove all Loan Documents from title to the Property at the Close of Escrow.

                1.7.2    Request for Notice of Default. Seller and Buyer agree that Buyer may record in Placer County, California, one or more Requests for Notice of Default with respect to the Loan. Seller agrees that Buyer may cure any monetary default under the Loan on behalf of Seller. Additionally, Seller agrees to notify Buyer of any notice of default or other notice received by Seller from Lender with respect to any default in connection with the Loan.

                1.7.3    Credit Against Purchase Price. In addition to any other rights or remedies Buyer may have at law, in equity or pursuant to any other agreement (including, the Nondisturbance Agreement (as defined below)), any sums paid by Buyer to Lender to cure any default under the Loan may, at Buyer's election, be credited against the Purchase Price at the Close of Escrow.

                1.7.4    Non-Disturbance. As a condition for the benefit of Buyer which must be satisfied during the Contingency Period (as defined below), Lender, Seller and Buyer shall execute and acknowledge a separate nondisturbance agreement ("Nondisturbance Agreement") for the benefit of Buyer, in such form and containing such provisions as reasonably acceptable to Buyer, including a provision that provides if the interest of Seller in the Property is transferred by reason of any foreclosure of the Deed of Trust or by deed in lieu or in aid thereof, Lender or any such transferee of the Property shall be bound to Buyer, and Buyer shall be bound to Lender or such transferee, under all of the terms, covenants and conditions of this Agreement and the Lease for the balance of the term of this Agreement and the term of the Lease, respectively, with the same force and effect as if Lender or such transferee were the original seller under this Agreement and the original lessor under the Lease.

                1.7.5    Use of Option Consideration to Cure Loan Default. Buyer may, at its sole option, elect to use all or any part of the Option Consideration from time to time to cure any default under the Loan which it is entitled to cure pursuant to the Nondisturbance Agreement, upon presentation by Buyer to Escrow Holder of a copy of the notice of such default sent by Lender and a certificate executed by Buyer stating its intent to use the amount stated in such certificate to cure the default, provided that Buyer may use the Option Consideration only to the extent reasonably necessary to cure the default then existing under the Loan. Buyer shall have no obligation to restore any amounts of the Option Consideration so used to Escrow.

        1.8    Restrictions During Option Period. During the term of this Option, and continuing until the Close of Escrow if the Option is exercised by Buyer, Seller shall not intentionally take any action with respect to the Property that interferes with or in any way affects the permitting, development or construction by Buyer of improvements on the Property.

        1.9    Preliminary Closing. Seller and Buyer intend to conduct a "Preliminary Closing" on January 15, 2003, pursuant to which the following shall occur:

                (i)    Within the Contingency Period, Buyer shall waive the conditions set forth in Section 8.1 by delivering a written notice to Escrow Holder and Seller (the "Contingency Period Conditions Waiver").

                (ii)    Buyer shall also deliver a fully executed "As Is Certificate" attached as Exhibit A to Escrow Holder.

                (iii)    Buyer shall deposit One Million Dollars ($1,000,000) in consideration of the grant of the Option ("Option Consideration") plus its share of the Preliminary Closing costs with Escrow Holder. Upon consummation of the Preliminary Closing, the Option Consideration shall be nonrefundable except as otherwise provided in Section 1.10 and Section 4.1.

                (iv)    Buyer and Seller shall execute and acknowledge a memorandum of the Option in the form of Exhibit B hereto ("Memorandum of Option") and deposit it with Escrow Holder.

                (v)    Buyer and Seller shall each execute counterparts of the Lease, and deposit it with Escrow Holder.

                (vi)    Buyer and Seller shall each execute and acknowledge a memorandum of the Lease in the form attached hereto as Exhibit C (the "Memorandum of Ground Lease") and deposit it with Escrow Holder;

                (vii)    Buyer shall execute a counterpart of the Development Management Agreement (the "Development Management Agreement") to be entered into between Buyer and KMS Development, LLC, an affiliate of Seller ("KMS Development"), and Seller shall cause KMS Development to execute a counterpart, in the form approved by Buyer, Seller and KMS Development and shall deposit it with Escrow Holder;

                (viii)    Buyer and Seller shall each execute and acknowledge counterparts of the Nondisturbance Agreement, and deposit them with Escrow Holder, and Seller shall arrange for the deposit with Escrow of an executed and acknowledged counterpart of the Nondisturbance Agreement by Lender.

                (ix)    Seller shall deliver to Buyer an estoppel certificate from Seller with respect to each of the Existing Leases and an estoppel certificate from each tenant under the Existing Leases which estoppel certificates shall be in the form of Exhibit D hereto ("Estoppel Certificate").

                (x)    Title Company shall have irrevocably committed to issue its leasehold policy of title insurance (the "Leasehold Policy") ensuring Buyer's leasehold interest under the Lease and option rights under this Agreement. The Leasehold Policy shall insure Buyer's interest in the Property as optionee in the amount of Twenty-One Million Dollars ($21,000,000) and as lessee under the Lease, with exceptions as delineated in Sections 6.1(i), (ii), (iv), (v) and (vi), and shall contain an endorsement permitting Buyer to increase the amount of coverage from time to time by the amounts expended by Buyer on the construction of additional buildings and improvements on the Property but not to exceed a total coverage amount of Forty Million Dollars ($40,000,000) ("Increased Coverage Endorsement"). Buyer shall pay the cost of the Leasehold Policy and any costs attributable to the Increased Coverage Endorsement.

                (xi)    Escrow Holder shall close the Preliminary Closing on January 15, 2003, by recording the Memorandum of Option, the Memorandum of Lease and the Nondisturbance Agreement in the Official Records of Placer County, delivering the Leasehold Policy to Buyer, delivering the As Is Certificate to Seller, delivering the counterparts of the Lease and the Development Management Agreement executed by the other to Seller and Buyer, and depositing the Option Consideration in an interest-bearing account as provided in Section 4.1.

                If the Preliminary Closing is not closed on January 15, 2003 or if Buyer fails to timely deliver the Contingency Period Conditions Waiver, As Is Certificate or the Option Consideration, then this Agreement shall automatically terminate and neither party shall have any further rights, duties or obligations hereunder except as provided in Section 18.1.

                If Seller is unable to deliver the Estoppel Certificates from each tenant under the Existing Leases by January 15, 2003, after using reasonable efforts to do so, Buyer's sole option shall be to waive the condition for the delivery of the Estoppel Certificates from the tenants or elect to terminate this Agreement and the Lease. If Buyer elects to waive the delivery of the Estoppel Certificates, Buyer and Seller shall continue to use reasonable efforts to obtain the Estoppel Certificates from the tenants until the Closing.

        1.10    CUP Substantial Compliance Letter. Seller and Buyer acknowledge that Buyer is concerned about the conformity of its contemplated construction of additional buildings and improvements on the Property with the existing Conditional Use Permit issued by the County of Placer for the Property (the "CUP"). Seller is working with the County of Placer to obtain a letter from the County of Placer to Buyer (and if desired by Seller, to Seller), in content reasonably acceptable to Buyer, confirming the substantial compliance of Buyer's contemplated construction with the CUP (the "CUP Substantial Compliance Letter"). Notwithstanding the consummation of the Preliminary Closing or any other provision to the contrary in this Agreement or in the Lease or the Development Management Agreement, Seller and Buyer agree that if the CUP Substantial Compliance Letter is not issued by the City and delivered to Buyer on or before February 1 4, 2003, Buyer at its sole option may elect to terminate this Agreement by written notice to Seller and to Escrow Holder on or before February 21, 2003. Upon Buyer's timely issuance of such written notice to Seller, (i) this Agreement shall automatically terminate and neither party shall have any further rights or obligations hereunder, (ii) the Option Consideration shall be promptly returned to Buyer, together with all accrued interest thereon, and (iii) the Ground Lease and the Development Management Agreement shall be automatically terminated and of no further force or effect. In such event, Buyer shall be responsible for the payment of any title insurance premiums charged by the Title Company for the Leasehold Policy.

ARTICLE 2    PURCHASE AND SALE; PROPERTY

        2.1    Sale to Buyer. Subject to the delivery or deemed delivery of the Exercise Notice, Seller agrees to sell the Property to Buyer, and Buyer agrees to purchase the Property from Seller, upon the terms and conditions herein set forth.

        2.2    Property. As used herein, the "Property" shall mean:

                (i)    That certain real property (the "Land") consisting of approximately 82+ gross acres of land more particularly described in Exhibit E attached hereto (and depicted as the cross-hatched area on the Visual Map attached hereto as Exhibit F (the "Visual Map"));

                (ii)    All rights, privileges, easements, tenements, hereditaments, rights of way and appurtenances which belong to or appertain to the Land and/or are owned by Seller, including, without limitation, rights to all minerals, oil, gas and other hydrocarbon substances on and under the Land and rights and water stock, if any, relating to the Land (collectively, the "Appurtenances"); and

                (iii)    All intangible property owned or held by Seller in connection with the Land or the use thereof, including, without limitation, the right to use any trade name now used in connection with the Land (including, without limitation, the name "Placer Sierra Business Park") and all permits, maps, surveys, plans, leases, licenses, franchises, rental contracts and agreements (collectively, the "Intangible Property"); and

                (iv)    The Land is improved with an approximately 627,000 square foot building and related improvements (the "Improvements").

                The Land, the Appurtenances, the Intangible Property and the Improvements are collectively referred to herein as the "Property."

ARTICLE 3    PURCHASE PRICE

        The total purchase price (the "Purchase Price") for the Property shall be Twenty-One Million Dollars ($21,000,000).

ARTICLE 4    PAYMENT OF PURCHASE PRICE

        4.1    Option Consideration. The Option Consideration shall be invested by Escrow Holder in an interest bearing account acceptable to Buyer with all interest accruing thereon paid to Buyer on demand or, at Buyer's election, credited to the Purchase Price upon the Close of Escrow (as defined below). Subject to Sections 1.9, 1.10 and 18.1 hereof, the Option Consideration shall be applied to the Purchase Price upon the Close of Escrow and shall be nonrefundable to Buyer when made unless the consummation of the transaction contemplated hereby fails to occur by reason of the nonsatisfaction of a condition to the Close of Escrow for Buyer's benefit or by reason of a default by Seller in any of its obligations hereunder, in which event the Option Consideration, together with all interest accrued thereon, shall be returned to Buyer.

        4.2    Buyer's Deposit of Balance of Purchase Price. Prior to the Close of Escrow, Buyer shall deposit, or cause to be deposited with Escrow Holder, the amount of the Purchase Price by wire transfer, cashier's check or other immediately available funds, less the sum of the Option Consideration, including any accrued interest thereon, plus or minus Escrow Holder's estimate of Buyer's share of closing costs, prorations and other charges payable by or chargeable to Buyer pursuant to this Agreement.

ARTICLE 5    ESCROW

        5.1    Opening of Escrow. For purposes of this Agreement, the Escrow shall be deemed opened the date Escrow Holder shall have received an executed counterpart of this Agreement from both Buyer and Seller. In addition, Buyer and Seller shall execute, deliver and be bound by any reasonable or customary supplemental escrow instructions of Escrow Holder or other instruments as may reasonably be required by Escrow Holder in order to consummate the transaction contemplated by this Agreement. Any such supplemental instructions shall not conflict with, amend or supersede any portions of this Agreement. If there is any inconsistency between such supplemental instructions and this Agreement, this Agreement shall control.

        5.2    Close of Escrow. For purposes of this Agreement, the "Close of Escrow" shall be defined as the date that the Grant Deed, the form of which is attached hereto as Exhibit G (the "Grant Deed") conveying the Property to Buyer, is recorded in the Official Records of Placer County, California. If Buyer delivers the Exercise Notice to Seller, Escrow shall close on September 10, 2003 ("Closing Date").

        5.3    Failure to Close on Closing Date. If the Escrow is not in a condition to be closed on the Closing Date without the fault of Seller or Buyer, Escrow Holder shall close the Escrow as soon thereafter as is possible, unless Escrow Holder has received written demand to terminate the Escrow (a "Termination Demand") from a party who is not in default in the performance of any of its obligations hereunder. In the event of a termination pursuant to this Section 5.3, Section 18.2 or 18.3 below, as the case may be, shall apply.

ARTICLE 6    CONDITION OF TITLE

        6.1    Approved Condition of Title. It shall be a condition to the Close of Escrow and a covenant of Seller that title to the Property be conveyed to Buyer by Seller by the Grant Deed in a condition of title (the "Approved Condition of Title"), subject only to the following exceptions:

                (i)    A lien to secure payment of real estate taxes, bonds and assessments, not delinquent;

                (ii)    The lien of supplemental taxes assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code (the "Code"), but only to the extent that such supplemental taxes are attributable to the transaction contemplated by this Agreement. Buyer shall be responsible for any supplemental taxes assessed pursuant to the Code to the extent that such taxes relate to new construction occurring after the Preliminary Closing and before the Close of Escrow. Seller shall be responsible for, and hereby indemnifies Buyer and the Property against, any supplemental taxes assessed, whether prior to or following the Preliminary Closing and/or the Close of Escrow, as a result of (a) events occurring prior to the Preliminary Closing or (b) events which occur from or after the Preliminary Closing and prior to the Close of Escrow, which events constitute a "Change of Ownership" (as such term is defined by California Revenue and Taxation Code Section 6 2 et seq.) due to actions by Seller or Seller's members and/or principals (except for and excluding the Option and the Lease);

                (iii)    Matters affecting the Approved Condition of Title created by Buyer, or approved by Buyer, which approval shall not be unreasonably withheld, including without limitation those dedications and easements, if any, required to facilitate Buyer's construction and development of the Property;

                (iv)    Nonmonetary exceptions which are disclosed by the Title Report (as defined below) and approved or deemed approved by Buyer in accordance with Section 8.1.1 hereof. Seller shall be obligated to remove at or before the Close of Escrow, the Deed of Trust, any other deeds of trust, mortgages, or other monetary liens or encumbrances disclosed by the Title Report (except for bonds and assessments and any monetary liens or encumbrances created by or on behalf of Buyer in connection with Buyer's construction and development of the Property);

                (v)    The exceptions shown on the standard printed CLTA title policy form; and

                (vi)    The Existing Leases.

        Seller's indemnification of the Title Company (as defined below) to induce it to insure any otherwise unpermitted exception to title shall not be allowed except with the prior written consent of Buyer after full disclosure to Buyer of the nature and substance of such exception and indemnity.

        6.2    New Title Matters. From and after the Preliminary Closing, Seller will not cause title to the Property to differ from the Approved Condition of Title described in Sections 6.1(i), (ii), (iv), (v) and (vi) without Buyer's consent which shall not be unreasonably withheld. Any other liens, encumbrances, easements, restrictions, conditions, covenants, rights, rights of way or other matters affecting the Approved Condition of Title which may appear of record or be revealed after the date of the Title Report and which are (i) not insured against and (ii) which are not approved by Buyer (which approval will not be unreasonably withheld) must be eliminated or ameliorated to Buyer's satisfaction by Seller before the Close of Escrow as a condition to the Close of Escrow for Buyer's benefit.

ARTICLE 7    TITLE POLICY

        Title shall be evidenced by the irrevocable commitment of Placer Title Company ("Title Company") to issue a CLTA extended coverage owner's form policy of title insurance (the "Title Policy") in the amount of the Purchase Price (or such increased amount as shown in the Leasehold Policy pursuant to the Increased Coverage Endorsement), showing title to the Property vested in Buyer in the Approved Condition of Title.

        If requested by Buyer, the Title Policy may be upgraded to an ALTA policy with such endorsements as Buyer may reasonably request. The Title Company's providing (or not providing) any requested endorsements or ALTA coverage shall not be a condition to Close of Escrow.

ARTICLE 8    CONDITIONS TO CLOSE ESCROW

        8.1    Conditions to Buyer's Obligations Which Must be Satisfied or Waived Prior to Expiration of the Contingency Period. Subject to the delivery of the Exercise Notice, the Close of Escrow and Buyer's obligation to consummate the transaction contemplated by this Agreement are subject to the satisfaction (or Buyer's waiver) of the following conditions for Buyer's benefit on or before the expiration of the period (the "Contingency Period") commencing on the date hereof and expiring on Contingency Period January 15, 2003. Seller and Buyer acknowledge that the expiration of the Contingency Period shall be coincident with the Preliminary Closing.

                8.1.1    Approval of Title. On or before the expiration of the Contingency Period, Buyer shall have approved the legal description of the Land attached hereto as Exhibit E and any matters of title as disclosed by the following documents (the "Title Documents") which have been delivered to Buyer at Seller's sole cost and expense:

                     (i)    the Title Company's preliminary report (Order No. 101-21984) (the "Title Report") dated as of November 26, 2002 with respect to the Property; and

                        (ii)    legible copies of all documents, whether recorded or unrecorded, referred to in any part of the Title Report.

        Notwithstanding anything to the contrary contained in this Section 8.1.1, Buyer hereby objects to all liens evidencing monetary encumbrances (other than liens for non-delinquent property taxes, bonds and special assessments). Seller shall to cause all such liens to be eliminated at Seller's sole cost and expense (including all prepayment penalties and charges) before the Close of Escrow.

                8.1.2    Review and Approval of Documents and Materials. On December 10, 11 and 12, 2002 ("Review Date") Seller made available to Buyer, for inspection by Buyer, all documents and materials in the possession of Seller or its agents or reasonably available to Seller or its agents regarding the Property (the "Documents and Materials"). Buyer has copied, or will copy, any and all of the Documents and Materials which Buyer desires and, on or before the expiration of the Contingency Period, Buyer shall have approved the Documents and Materials. At Buyer's request, Seller shall make the Documents and Materials available for additional review and inspection by Buyer at any time after the date of this Agreement. Upon the Close of Escrow, Seller shall deliver the Documents and Materials to Buyer. The Documents and Materials include, but are not limited to:

                     (i)    Any and all licenses, permits and agreements affecting or relating to the ownership, subdivision, possession or development of the Land in the possession or control or Seller, its agents or representatives.

                        (ii)    Copies of all applications, correspondence, notices, and other written communications (collectively, "Governmental Notices") to or from any governmental entity, department or agency regarding the Property, any portion thereof, or any permit, approval, consent or authorization with respect to the development of the Property which are in the possession or control of Seller, its agents or representatives, if any. Seller shall deliver to Buyer any Governmental Notice received after the Review Date.

                        (iii)    Copies of the most recent survey(s), if any, pertaining to the Property or any portion thereof which are in the possession or control of Seller, its agents or representatives, including a survey acceptable to the Title Company for the issuance of the Title Policy (which shall be obtained by Seller or updated from a prior survey at Seller's sole cost and expense).

                        (iv)    Any and all tentative, parcel and/or final maps, development plans, site plans, building permits, certificates of occupancy, specifications or any other governmentally approved or processed documents relating to the subdivision or development of the Property which are in the possession or control of Seller, its agents or representatives.

                        (v)    Any and all reports, projections, studies or other documents or written information pertaining to the Property which are in the possession or control of Seller, its agents or representatives.

                        (vi)    Any and all property tax statements pertaining to the Property which are in the possession or control of Seller, its agents or representatives.

                        (vii)    Any and all soils reports, engineering data and other data or studies pertaining to the Property or any portion thereof which are in the possession or control or Seller, its agents or representatives.

                        (viii)    Copies of the Existing Leases.

                        (ix)    Any study or report (the "Environmental Report") with respect to the presence and/or possible presence in, on, or about the Property of Hazardous Materials. As used herein, (A) "Hazardous Materials" means any chemical, substance, material, controlled substance, object, condition, waste, living organism or combination thereof which is or may be hazardous to human health or safety or to the environment due to its radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity, carcinogenicity, mutagenicity, phytotoxicity, reproductive toxicity, infectiousness or other harmful or potentially harmful properties or effects, including, without limitation, petroleum and petroleum products, asbestos, radon, polychlorinated biphenyls (PCBs), and all of those chemicals, substances, materials, controlled substances, objects, conditions, wastes, living organisms or combinations thereof which are now or become in the future listed, defined or regulated in any manner by any Environmental Law based upon, directly or indirectly, such properties or effects; and (B) "Environmental Law" means any and all federal, state or local environmental, health and/or safety-related laws, regulations, standards, decisions of the courts, ordinances, rules, codes, orders, decrees, directives, guidelines, permits or permit conditions, currently existing and as amended, enacted, issued or adopted in the future which are or become applicable to the Property. Seller shall cooperate with Buyer in causing any such Environmental Report to be certified in favor of Buyer.

                        (x)    Any improvement plans and any other plans and specifications relating to Improvements, including any and all building department changes, and any landscape, lighting and signage plans.

                        (xi)    Any and all contracts relating to the construction and installation of the Improvements, together with a copy of all warranties and guarantees applicable thereto.

                        (xii)    Any and all subdivision maps and development and/or other agreements with the County of Placer and/or other governmental entities with jurisdiction, which agreements relate to the development and/or improvement of the Property.

                        (xiii)    A copy of the Loan Documents.

                8.1.3    Approval of Inspections and Studies. On or before the expiration of the Contingency Period, Buyer shall have approved the results of any and all inspections, investigations, tests and studies (including, without limitation, investigations with regard to zoning, building codes and other governmental regulations, architectural inspections, engineering tests, economic feasibility studies and soils, seismic and geologic reports) with respect to the Property (including all structural and mechanical systems and leased areas, if any) as Buyer may elect to make or obtain. The failure of Buyer to disapprove such results on or before the expiration of the Contingency Period shall be deemed to constitute Buyer's approval of the results. The cost of any such inspections, tests and studies shall be borne by Buyer. In addition to Buyer's rights of possession under the Lease, during the term of this Agreement, Buyer, its agents, contractors and subcontractors shall have the right t o enter upon those portions of the Property subject to the Existing Leases, at reasonable times during ordinary business hours to make any and all inspections and tests as may be necessary or desirable in Buyer's sole judgment and discretion. Buyer shall use care and consideration in connection with any of its inspections. From and after the execution of this Agreement, Buyer and Buyer's representatives, agents, consultants and designees shall further be entitled to communicate directly with any and all governmental and quasi-governmental bodies and agencies having jurisdiction over the Property in connection with Buyer's proposed purchase, development or operation of the Property. (The exercise by Buyer of any of the preceding or any other act of Buyer shall not negate any representation, warranty or covenant of Seller or modify any of Buyer's rights or Seller's obligations in the event of any breach by Seller of any of Seller's representations, warranties or covenants under this Agreement.) Buyer shall indemnify and hold Seller and the Property harmless from any and all costs, expenses (including reasonable attorneys' fees), liabilities, and damages arising out of or resulting from the actions of Buyer, its agents, contractors and/or subcontractors in connection with such entry and/or activities upon the Property. Buyer's obligation to indemnify Seller pursuant to this Section 8.1.3. shall remain in full force and effect notwithstanding any termination of this Agreement including, without limitation, any termination pursuant to this Section 8.

                8.1.4    Commitment to Issue Title Policy. As contemplated by Section 1.10 above, on or before the expiration of the Contingency Period, the Title Company has irrevocably committed to issue the Option Title Policy insuring Buyer's leasehold interest under the Lease and Buyer's option to acquire fee simple title to the Property is vested in Buyer or its permitted assignee in the Approved Condition of Title.

                8.1.5    Hazardous Materials. On or before expiration of the Contingency Period Buyer shall be satisfied, in its sole and subjective discretion, that (i) the Property is free of Hazardous Materials; and (ii) the presence, handling, use, transport, storage, generation and disposal of Hazardous Materials in, on, or about the Property has been at all times and is in compliance with all applicable federal, state, county and local governmental laws, ordinances, rules, regulations, resolutions, policy statements, permits and the like relating to environmental matters. Buyer, at its sole cost and expense, shall have the right to perform an environmental inspection and audit of the Property which may include, without limitation, Buyer's inspection and testing of the physical condition of the Property in accordance with the provisions of Section 8.1.3. above.

                8.1.6    Natural Hazard Disclosure Statement. Seller has previously delivered to Buyer a natural hazard disclosure report prepared by a reputable third party preparer disclosing whether or not the Property is located within (i) a special flood hazard zone designated by the Federal Emergency Management Agency (Government Code Section 8589.3); (ii) an area of potential flooding shown on an inundation map under Government Code Section 8959.5 (Government Code Section 8959.4); (iii) a very high fire hazard severity zone designated by Government Code Section 51179 (Government Code Section 51183.5); (iv) a wild land area that may contain substantial force fire risks and hazards under Public Resources Code Section 4125 (Public Resources Code Section 4136); (v) an earthquake fault zone under Public Resources Code Section 2622 (Public Resources Code Section 2621.9); or (vi) a seismic hazard zone under Public Resources Code Section 2629 (Public Resources Code Section 2694). Buyer shall review an d approve or disapprove the Natural Hazard Disclosure Statement prior to expiration of the Contingency Period.

                8.1.7    Special Tax Disclosures. Seller has disclosed that the Property may lie within several community facilities districts and several special assessment districts. Buyer acknowledges that Seller will comply with the provisions of California Government Code Section 53341.5 by providing the form of disclosure required by that section within ten (10) days after execution hereof, which will be reviewed and, if acceptable, executed by Buyer prior to expiration of the Contingency Period and delivered to Escrow Holder. A form copy of the special tax disclosure is attached at Exhibit H.

                8.1.8    No Moratorium. Buyer shall satisfy itself during the Contingency Period that there is no reassessment, reclassification, rezoning or other statute, law, judicial or administrative decision, proceeding, ordinance or regulation (including amendments and modifications of any of the foregoing) pending or proposed to be imposed by any governmental or quasi-governmental bodies or agencies having jurisdiction over the Property or any public or private utility having jurisdiction over the Property which would adversely affect, in Buyer's reasonable judgment, the acquisition, development, sale or use of the Property.

        8.2    Conditions to Buyer's Obligations Which Must be Satisfied or Waived Prior to Close of Escrow. For the benefit of Buyer, Close of Escrow shall be conditioned upon the occurrence and/or satisfaction of each of the following conditions (or Buyer's waiver thereof).

                8.2.1    Performance of Seller's Obligations. As of the Close of Escrow, Seller shall have performed all of the obligations required to be performed by Seller under this Agreement.

                8.2.2    Truth of Seller's Representations. All representations and warranties made by Seller to Buyer in this Agreement shall be true and correct as of the date of this Agreement and as of the Close of Escrow.

                8.2.3    No Alteration of Approved Condition of Title or Leases. From and after the date hereof, without the approval of Buyer, Seller shall not have executed nor consented to the execution of any instrument which may result in an alteration of the Approved Condition of Title.

                8.2.4    Truthfulness of Representations at Closing. Except as expressly herein otherwise provided, the representations and warranties of Seller set forth in this Agreement shall be true on and as of the Close of Escrow as if those representations and warranties were made on and as of such time.

                8.2.5    Title Policy. The Title Company shall be irrevocably committed to issue the Title Policy ensuring that fee title to the Property (subject to the exceptions described in Section 6.1) is vested in Buyer.

        8.3    Conditions to Seller's Obligations. For the benefit of Seller, the Close of Escrow shall be conditioned upon the occurrence and/or satisfaction of each of the following conditions (or Seller's waiver thereof).

                8.3.1    Performance of Buyer's Obligations. As of the Close of Escrow, Buyer shall have timely performed all of the obligations required by the terms of this Agreement to be performed by Buyer.

                8.3.2    Truth of Buyer's Representations. All representations and warranties made by Buyer to Seller in this Agreement shall be true and correct as of the Close of Escrow.

ARTICLE 9    DEPOSITS BY SELLER INTO ESCROW

        9.1    Deposits by Seller into Escrow. At least one business day before the Close of Escrow, Seller shall deposit or cause to be deposited with Escrow Holder the following documents and instruments:

                (i)    The Grant Deed, duly executed by Seller, acknowledged and in recordable form, attached hereto as Exhibit G ;

                (ii)    A Bill of Sale conveying the Intangible Property in the form attached hereto as Exhibit I (the "Bill of Sale");

                (iii)    An Assignment of Contracts in the form attached hereto as Exhibit J (the "Assignment of Contracts");

                (iv)    An assignment and assumption of the Existing Leases in the form of Exhibit K ("Assignment of Leases");

                (v)    A General Assignment in the form attached hereto as Exhibit L (the "General Assignment");

                (vi)    A certificate of nonforeign status ("Seller's Certificate"), duly executed by Seller, in the form attached hereto as Exhibit M ; and

                (vii)    An Estoppel Certificate for each of the Existing Leases executed by Seller as of no more than ten (10) days prior to the Closing Date, and, if available from each tenant under the Existing Leases after reasonable efforts by Seller to obtain, an Estoppel Certificate from each tenant dated as of no more than ten (10) days prior to the Closing Date or, if an Estoppel Certificate was provided at the Preliminary Closing by such tenant, written confirmation that the information contained in such prior Estoppel Certificate remains true and correct as of a date no more than ten (10) days prior to the Closing Date (such Estoppel Certificates to be in the form of Exhibit D attached hereto).

ARTICLE 10    DEPOSITS BY BUYER INTO ESCROW

        10.1    Deposits by Buyer into Escrow. Buyer shall deposit or cause to be deposited with Escrow Holder the following documents:

                (i)    The funds which are to be applied towards the payment of the Purchase Price in the amounts and at the times designated in Section 2 above (as reduced by the prorations and credits heretofore or hereinafter provided);

                (ii)    A Preliminary Change in Ownership Report in form and substance acceptable to the county assessor for Placer County, California; and

                (iii)    An Assignment of Existing Leases.

ARTICLE 11    COSTS AND EXPENSES

        The cost and expense of the CLTA Title Policy shall be paid by Seller and the ALTA increment and endorsements (if any) shall be paid by Buyer. Buyer shall receive a credit in the amount of __________________________ Dollars ($_________) on account of __________________. The escrow fee of Escrow Holder shall be shared equally by Seller and Buyer. Seller shall pay all documentary transfer taxes payable in connection with the recordation of the Grant Deed. The amount of such transfer taxes shall not be posted on the Grant Deed, but shall be supplied by separate affidavit. Buyer and Seller shall pay, respectively, Escrow Holder's customary charges to buyers and sellers for document drafting, recording and miscellaneous charges. If, as a result of no fault of Buyer or Seller, Escrow fails to close, Buyer and Seller shall share equally all of Escrow Holder's reasonable fees and charges.

ARTICLE 12    PRORATIONS

        Except as provided in the Lease, real property taxes, special taxes, assessments, utility fees and/or deposits, and personal property taxes with respect to the Property shall be prorated between Seller and Buyer as of the Close of Escrow. Prorations of taxes and assessments with respect to the Property shall be based upon the latest available tax information so that Seller shall be responsible for all such taxes and assessments levied against the Property to and including the day before the Close of Escrow, and Buyer shall be responsible for all taxes and assessments levied against the Property from and after the day before the Close of Escrow. If any errors or omissions are made regarding adjustments and prorations as aforesaid, the parties shall make the appropriate corrections promptly upon the discovery thereof. If any estimations are made at the Close of Escrow regarding adjustments or prorations, the parties shall make the appropriate correction promptly w hen accurate information becomes available. Any corrected adjustment or proration shall be paid in cash to the party entitled thereto.

ARTICLE 13    DISBURSEMENTS AND OTHER ACTIONS BY ESCROW HOLDER

        Upon the Close of Escrow, the Escrow Holder shall promptly undertake all of the actions set forth in this Article 13.

        13.1    Prorations. Prorate all matters described in Section 12 above, based upon the statement delivered into Escrow signed by the parties.

        13.2    Recording. Cause the Grant Deed and any other documents which the parties hereto may mutually direct to be recorded in the Official Records of Placer County, California, in the order requested by the parties. Escrow Holder is instructed not to affix the amount of documentary transfer tax on the face of the Grant Deed, but to supply such amount by separate affidavit.

        13.3    Funds. All funds deposited with Escrow Holder by Buyer toward payment of the Purchase Price shall be disbursed to Seller after first deducting therefrom all items which are, pursuant to this Agreement, chargeable to the account of Seller. All funds deposited with Escrow Holder by Buyer toward payment of such other items as are chargeable to the account of Buyer pursuant to this Agreement shall be disbursed and applied to the payment of such costs and the balance of such funds, if any, shall be disbursed to Buyer.

        13.4    Title Policy. Direct the Title Company to issue the Title Policy to Buyer.

        13.5    Original Documents. Deliver to Buyer the Bill of Sale, the Assignment of Contracts, the General Assignment and Seller's Certificate.

        13.6    Copies of Documents. Deliver to Buyer and Seller, copies of all documents delivered to either party hereto or recorded pursuant to this Agreement.

ARTICLE 14    SELLER'S DISCLAIMER, REPRESENTATIONS AND WARRANTIES

        14.1    DISCLAIMER. BUYER ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR THE LEASE, SELLER HAS NOT MADE ANY REPRESENTATIONS, WARRANTIES, GUARANTIES, PROMISES, STATEMENTS OR ASSURANCES WHATSOEVER, EXPRESS OR IMPLIED, DIRECTLY OR THROUGH ANY EMPLOYEE OR AGENT, AS TO THE CONDITION OF THE PROPERTY OR ANY OTHER MATTER, INCLUDING, BUT NOT LIMITED TO, HAZARDOUS MATERIALS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING IN ANY WAY, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR IN THE LEASE, SELLER EXPRESSLY DISCLAIMS MAKING OR HAVING MADE ANY REPRESENTATIONS OR WARRANTY WITH RESPECT TO THE DOCUMENTS AND MATERIALS FURNISHED BY SELLER. BUYER ACKNOWLEDGES AND AGREES THAT EXCEPT FOR SELLER'S EXPRESS COVENANTS, REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT AND THE LEASE, SELLER SPECIFICALLY DISCLAIMS: (A) ALL MATTERS RELATING TO THE TITLE TOGETHER WITH ALL GOVERNMENTAL AND OTHER LEGAL REQUIREMENTS SU CH AS TAXES, ASSESSMENTS, ZONING, USE PERMIT REQUIREMENTS, BUILDING PERMIT REQUIREMENTS, BUILDING CODES AND OTHER DEVELOPMENT REQUIREMENTS; (B) THE PHYSICAL CONDITION OF THE PROPERTY; (C) ALL OTHER MATTERS OF ANY SIGNIFICANCE AFFECTING THE PROPERTY, WHETHER PHYSICAL IN NATURE OR INTANGIBLE IN NATURE, SUCH AS THE POLITICAL CLIMATE WITH RESPECT TO THE GOVERNMENTAL AGENCIES THAT HAVE JURISDICTION OVER THE PROPERTY, DEVELOPMENT OF THE PROPERTY OR THE OPERATION OF THE PROPERTY; (D) THE EXISTENCE, QUALITY, NATURE, ADEQUACY AND PHYSICAL CONDITION OF UTILITIES SERVING THE PROPERTY; (E) THE ECONOMICS OF THE PRESENT OR FUTURE OWNERSHIP AND/OR OPERATION OF THE PROPERTY; AND (F) THE EXISTENCE OF HAZARDOUS MATERIALS IN, UNDER OR AFFECTING THE PROPERTY; AND, BUYER IS PURCHASING THE PROPERTY "AS IS-WITH ALL DEFECTS" BASED UPON BUYER'S OWN INSPECTION OF THE PROPERTY.

         /s/      /s/       
Buyer's Initials                    Seller's Initials

        14.2    Representations and Warranties in General.

                14.2.1    Knowledge Representations. Warranties or representations of Seller modified by a phrase such as "to the best knowledge" shall mean that the warranty or representation is given to the extent the subject matter is within the actual present knowledge of Thomas Manz and Steven Pease. No knowledge of other persons shall be imputed, and there shall be no implication or duty of inquiry or investigation. Seller represents to Buyer that the persons named in this Section 14.2.1 are the persons within Seller who are most likely to possess substantial information regarding the subject matter of one or more of Seller's representations and warranties.

                14.2.2    Effect of Documents and Materials. Those items which are disclosed by the Documents and Materials and all recorded and/or public documents shall be deemed exceptions to the representations, warranties and covenants of Seller contained in this Agreement. Notwithstanding the foregoing, Seller represents and warrants that to the best knowledge of Seller, the Documents and Materials are true and correct in that the Documents and Materials made available for review by Buyer are all of the Documents and Materials.

                14.2.3    Interpretation and Effect of Disclosures. The disclosures by Seller which are contained in this Agreement, and those disclosures contained in the Documents and Materials, are intended to be interpreted in light of Buyer's experience, and such disclosures to extent in conflict with Seller's representations and warranties contained in this Agreement shall be exceptions to such representations and warranties.

                14.2.4    Restatement. The representations and warranties made by Seller shall be deemed to be restated by Seller immediately prior to Close of Escrow. Except as otherwise provided herein, the representations and warranties, as restated, shall survive the Close of Escrow for a period of twenty-four months (the "Limitation"). No claim or action may be brought for any breach of warranty or representation by Buyer on or after the second anniversary of the Close of Escrow.

        14.3    Representations and Warranties by Seller. Seller acknowledges that the execution of this Agreement by Buyer is made in material reliance by Buyer on each and every one of the representations and warranties made by Seller. Sections 14.3.1, 14.3.2 and 14.3.8 are not subject to the Limitation. Seller hereby represents and warrants to Buyer that:

                14.3.1    Authority. Seller has the right, power and authority to enter into this Agreement and to perform its obligations hereunder, and the person(s) executing this Agreement on behalf of Seller have the right, power and authority to do so. This Agreement constitutes the legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms. This Agreement does not violate any provision of any other agreement or document to which Seller is a party or to which Seller is bound.

                14.3.2    No Grants. Seller has not granted to any party other than Buyer any option, contract or other agreement with respect to a purchase or sale of the Property or any portion thereof or any interest therein. Nothing in this representation shall prohibit Seller from entering into any "backup" or other agreement with respect to the Property which recognizes, and is subordinate to, the prior right of Buyer to purchase and lease the Property in accordance with the terms of this Agreement and the Lease.

                14.3.3    Hazardous Materials. To the best knowledge of Seller, any Hazardous Materials incorporated into the site improvements, have been incorporated into the site in substantial conformance with applicable laws. With the exception of any such site improvement Hazardous Materials, neither Seller nor any agent of Seller has used Hazardous Materials on, from or affecting the Property in any manner which violates federal, state or local laws, ordinances, rules, regulations or policies governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials, and, to the best of Seller's knowledge, except as disclosed to Buyer by Seller in writing, no prior owner, tenant, subtenant, occupant, prior subtenant or prior occupant has used Hazardous Materials on, from or affecting the Property in any manner which violates federal, state or local laws, ordinances, rules, regulations or policies governing the use, storage, treatment , transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials. Seller has not received any notice of any violation of federal, state or local laws, ordinances, rules, regulations or policies governing the use, storage, treatment, transportation, manufacture, handling, production or disposal of Hazardous Materials, and, to the best of Seller's knowledge, except as disclosed to Buyer by Seller in writing, there have been no actions commenced or threatened by any party for noncompliance therewith.

                14.3.4    No Default. Seller is not in default under, and no event has occurred which with the giving of notice or the passage of time, or both, would constitute a default under any contract, transaction, agreement, covenant, condition, restriction, lease, easement, encumbrance or instrument pertaining to the Property.

                14.3.5    No Violation. To the best knowledge of Seller, there is not now, and the closing of the transaction contemplated by this Agreement shall not constitute, any violation of any law, ordinance, rule, regulation or administrative or judicial order affecting the Property.

                14.3.6    No Claims. There is no claim or litigation affecting the Property pending or, to the best of Seller's knowledge, threatened.

                14.3.7    No Condemnation. There are no pending or, to the best knowledge of Seller, any threatened (and unresolved) condemnation proceedings affecting the Property, and, to the best knowledge of Seller, no such proceeding is contemplated by any governmental authority. Seller has received no notice of any such proceedings.

                14.3.8    No Third Party Consents. No consents or waivers or by any third party are necessary to permit the consummation by Seller of the transaction contemplated by this Agreement.

                14.3.9    Existing Leases. Except for the Existing Leases, to the best of Seller's knowledge, there are no leases or other agreements affecting or relating to the right of any party with respect to the possession of the Property or any portion thereof.

                14.3.10  Documents and Materials. To the best knowledge of Seller, the Documents and Materials made available to Buyer all of the Documents and Materials in Seller's possession or in the possession of its agents relating to the Property.

                14.3.11  No Attachments. There are no attachments, executions or assignments for the benefit of creditors, or voluntary or involuntary proceedings in bankruptcy or under any other debtor-relief laws pending or, to the best of Seller's knowledge, threatened against Seller.

ARTICLE 15    BUYER'S REPRESENTATIONS AND WARRANTIES

        15.1    Representations and Warranties in General. The representations and warranties made by Buyer shall be deemed to be restated by Buyer immediately prior to the Close of Escrow. Except as otherwise provided herein, the representations and warranties, as restated, shall survive the Close of Escrow.

        15.2    Representations and Warranties by Buyer. Buyer acknowledges that the execution of this Agreement by Seller is made in material reliance by Seller on each and every one of the representations and warranties made by Buyer. Buyer hereby represents and warrants to Seller that:

                15.2.1    Authority. Buyer has the right, power and authority to enter into this Agreement and to perform its obligations hereunder, and the person(s) executing this Agreement on behalf of Buyer have the right, power and authority to do so. This Agreement constitutes the legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms. This Agreement does not violate any provision of any other agreement or document to which Buyer is a party or to which Buyer is bound.

                15.2.2    Feasibility Period. Buyer has been afforded a reasonable period of time to perform such due diligence as Buyer believes is reasonably necessary to make the decision to consummate the transactions described in this Agreement.

                15.2.3    Reliance on Own Investigation. Except for express representations and warranties made by Seller in this Agreement, Buyer is relying and shall rely solely upon its own investigation and inspection of the Property and the improvements thereon and upon the aid and advice of Buyer's independent expert(s) in purchasing the Property, and shall take title to the Property without any warranty, express or implied, by Seller or any employee or agent of Seller.

                15.2.4    No Attachments. There are no attachments, executions or assignments for the benefit of creditors, or voluntary or involuntary proceedings in bankruptcy or under any other debtor-relief laws pending or, to the best of Buyer's knowledge, threatened against Buyer.

ARTICLE 16    DISCOVERY OF INACCURACY IN WARRANTIES AND REPRESENTATIONS

        16.1    Notice. If, after the date of this Agreement and prior to the Close of Escrow, either party discovers any inaccuracy in any representation or warranty under this Agreement, whether made by that party, the discovering party shall promptly notify the other party in a written notice: setting forth the particular representation or warranty which is inaccurate, and the nature of the inaccuracy discovered.

        16.2    Right to Terminate. If the inaccuracy is material, then the party (the "Benefited Party") shall have the option to terminate this Agreement within ten (10) calendar days of learning of such inaccuracy by giving notice to the other party (the "Representing Party"). The Representing Party shall either: (i) agree to cure the misrepresentation before Close of Escrow; or (ii) refuse to do so, within five (5) calendar days after delivery of the original notice to the Benefited Party. If the Representing Party agrees to cure the misrepresentation, then this Agreement shall continue in full force and effect. If the Representing Party refuses to do so or fails to respond, then this Agreement shall terminate at the election of the Benefited Party which election shall be made in writing and delivered to the Representing Party within twenty (20) days after delivery of the original notice. Failure of the Benefited Party to te rminate this Agreement within such twenty (20) day period shall be deemed a waiver of the right to terminate. Except in the case of an intentional misrepresentation, the Benefited Party's sole remedy shall be to terminate this Agreement, and if the Benefited Party does terminate this Agreement, the Option Consideration with interest shall be returned to Buyer and the parties shall have no further obligation to each other. In the case of an intentional misrepresentation, the Benefited Party shall have the foregoing described remedy and any other remedy available at law and in equity including the right to proceed in accordance with the terms of this Agreement and, in addition, seek any damages incurred due to such intentional misrepresentation.

ARTICLE 17    INDEMNITY; EXCULPATION

        17.1    Buyer's Indemnity. Buyer hereby agrees to indemnify, defend and hold Seller, its successors and assigns, partners, shareholders, officers, directors and/or employees (collectively, "Seller Indemnified Parties"), harmless from and against any and all obligations, liabilities, claims, liens, encumbrances, losses, damages, costs and expenses, including, without limitation, attorneys' fees, whether direct, contingent or consequential (collectively, "Claims"), incurred or suffered by, or asserted or awarded against any one or more of the Seller Indemnified Parties relating to or arising from any one or more of the following: (i) the activities of Buyer, its agents, employees or contractors on the Property subsequent to its purchase by Buyer; (ii) any breach of any covenant, representation or warranty of Buyer contained in this Agreement; or (iii) the violation by Buyer, its agents, employees or contractors of any federal, state or local law, ordinance or regulation, occurring or allegedly occurring with respect to the Property during Buyer's ownership subsequent to the Close of Escrow.

        17.2    Seller's Indemnity. Seller hereby agrees to indemnify, defend and hold Buyer, its successors and assigns, partners, shareholders, officers, directors and/or employees (collectively, "Buyer Indemnified Parties") harmless from and against any and all Claims incurred or suffered by, or asserted or awarded against any one or more of the Buyer Indemnified Parties relating to or arising from any one or more of the following: (i) any breach of any covenant, representation or warranty of Seller contained in this Agreement; or (ii) the violation of any federal, state or local law, ordinance or regulation, occurring or allegedly occurring with respect to the Property during Seller's ownership prior to the Close of Escrow.

        17.3    Exculpation. Notwithstanding anything to the contrary contained herein, no member of Seller, nor any direct or indirect partner, shareholder, manager officer, director, trustee or employee in or of any of them (each, a "Seller Nonrecourse Party," collectively, the "Seller Nonrecourse Parties"), shall be personally liable in any manner or to any extent under or in connection with this Agreement, and neither Buyer nor any successor, assignee, partner, officer, director or employee of Buyer shall have any recourse to any assets of a Seller Nonrecourse Party other than such party's interest in Seller to satisfy any liability, judgment or claim that may be obtained or made against any such Seller Nonrecourse Party under this Agreement or in conjunction with the Property. The limitation of liability provided in this subsection is in addition to, and not in limitation of, any limitation on liability applicable to a Seller Nonrecourse Party provided by law or by this Agreement or any other contract, agreement or instrument. Buyer agrees that it shall look solely to the assets of Seller for the enforcement of any claims arising hereunder or related hereto. The terms of this subsection are a material consideration and inducement to Seller to enter into this Agreement, and but for the inclusion of such provision in this Agreement, Seller would not enter into this Agreement.

        17.4    RELEASE. EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION 17.4, BUYER, ON ITS OWN BEHALF AND ON BEHALF OF THE BUYER INDEMNIFIED PARTIES, DOES HEREBY FULLY AND FOREVER WAIVE, RELEASE AND DISCHARGE SELLER AND THE SELLER INDEMNIFIED PARTIES FROM ANY AND ALL CLAIMS OF ANY NATURE OR SORT, KNOWN OR UNKNOWN, PAST, PRESENT AND FUTURE, WHICH BUYER MAY HAVE WHICH ARISE OUT OF OR RELATE IN ANY WAY TO ANY LIABILITY OR RESPONSIBILITY FOR THE PROPERTY, INCLUDING, WITHOUT LIMITATION, ANY INVESTIGATION, CLEAN-UP OR REMEDIATION OF ANY TOXIC OR HAZARDOUS MATERIALS, ON, IN, UNDER OR ABOUT THE PROPERTY. THIS RELEASE SHALL NOT APPLY TO ANY CLAIMS TO THE EXTENT: (I) THE SAME WAS CAUSED BY SELLER, OR ITS EMPLOYEES, AGENTS OR CONTRACTORS; (II) THAT SELLER HAS BREACHED ITS REPRESENTATIONS AND WARRANTIES OR COVENANTS IN THIS AGREEMENT; OR (III) SELLER HAS OTHERWISE AGREED IN THIS AGREEMENT AND THE EXHIBITS ATTACHED HERETO. BUYER AGREES THAT THIS RELEASE IS FULLY EFFECTIVE REGARDLESS OF ANY PRESENT LACK OF KNOWLEDGE ON THE PART OF ANY PARTY AS TO ANY POSSIBLE CLAIM OR ANY FACTS OR CIRCUMSTANCES PERTAINING TO THIS MATTER. BUYER EXPRESSLY WAIVES THE BENEFITS AND PROVISIONS OF SECTION 1542 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA, AND ANY SIMILAR LAW OF ANY STATE OR TERRITORY OF THE UNITED STATES OR OTHER JURISDICTION. CIVIL CODE SECTION 1542 PROVIDES AS FOLLOWS:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

            /s/            
Signature of Buyer

ARTICLE 18    TERMINATION OF AGREEMENT

        18.1    Termination Prior to Expiration of Contingency Period. If Buyer fails to effectuate the Preliminary Closing for any reason, then this Agreement shall be terminated and neither Seller nor Buyer shall have any further rights or duties hereunder except for the following which are herein referred to as the "Continuing Duties":

                (i)    Buyer's indemnity obligations under Section 17;

                (ii)    Buyer shall return all Documents and Materials received and other things received from Seller;

                (iii)    Seller and Buyer shall execute and record, if necessary, any and all documents reasonably required to terminate the Option;

                (iv)    Seller and Title Company shall return to Buyer any monies deposited by Buyer; and

                (v)    All escrow cancellation fees shall be paid equally by Seller and Buyer.

        18.2    Liquidated Damages. IF, AFTER BUYER'S EXERCISE OF THE OPTION, BUYER COMMITS A MATERIAL DEFAULT UNDER THIS AGREEMENT AND THE CLOSE OF ESCROW FAILS TO OCCUR BY REASON OF SUCH DEFAULT, THEN IN ANY SUCH EVENT, ESCROW HOLDER MAY BE INSTRUCTED BY SELLER TO CANCEL THE ESCROW, AND SELLER SHALL THEREUPON BE RELEASED FROM ITS OBLIGATIONS HEREUNDER. BASED UPON THE CIRCUMSTANCES NOW EXISTING, KNOWN AND UNKNOWN, IT WOULD BE IMPRACTICAL OR EXTREMELY DIFFICULT TO ESTABLISH SELLER'S DAMAGES BY REASON OF BUYER'S DEFAULT. ACCORDINGLY, IN ADDITION TO SELLER'S RIGHT TO THE OPTION CONSIDERATION PURSUANT TO SECTION 1.9(iii) ABOVE, SELLER SHALL RETAIN THE OPTION CONSIDERATION AS LIQUIDATED DAMAGES AND RECEIVE THE BENEFIT OF THE OTHER ITEMS DEFINED IN THIS SECTION 18.2. IF THE ESCROW AND THIS AGREEMENT ARE TERMINATED AS SET FORTH IN THIS SECTION, THE LEASE AND THE DEVELOPMENT MANAGEMENT AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT AND BUYER SHALL S TILL BE OBLIGATED UNDER THE TERMS OF THE LEASE AND THE DEVELOPMENT MANAGEMENT AGREEMENT. SELLER AND BUYER ACKNOWLEDGE THAT THE APPLICABLE FOREGOING AMOUNT OF LIQUIDATED DAMAGES IS REASONABLE AS LIQUIDATED DAMAGES AND SHALL BE SELLER'S SOLE AND EXCLUSIVE REMEDY IN LIEU OF ANY OTHER RELIEF, RIGHT OR REMEDY, AT LAW OR IN EQUITY, TO WHICH SELLER MIGHT OTHERWISE BE ENTITLED BY REASON OF BUYER'S DEFAULT. NOTWITHSTANDING THE FOREGOING, THE PROVISIONS OF SECTIONS 18.1(i), (ii), (iii), (iv) (WITH RESPECT TO ANY FUNDS OF BUYER HELD BY ESCROW HOLDER IN EXCESS OF THE OPTION CONSIDERATION) AND (v) SHALL APPLY. WITHOUT LIMITING THE FOREGOING PROVISIONS OF THIS PARAGRAPH, SELLER WAIVES ANY AND ALL RIGHTS WHICH SELLER OTHERWISE WOULD HAVE HAD UNDER CALIFORNIA CIVIL CODE SECTION 3389 TO SPECIFICALLY ENFORCE THIS AGREEMENT. SELLER AND BUYER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS SECTION 18.2 AND BY THEIR INITIALS IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS.

                Seller's Initials:       /s/                                  Buyer's Initials:       /s/      

        18.3    Default by Seller. If the Preliminary Closing fails to close as a result of default by Seller, then Buyer's exclusive remedies shall be (i) to terminate this Agreement in which event the Option Consideration shall be returned to Buyer and neither Seller nor Buyer shall have any further rights or duties hereunder except for the Continuing Duties or (ii) to seek to cause Seller to specifically perform its obligations hereunder. If Escrow fails to close as a result of default by Seller, then Buyer's exclusive remedies shall be (i) to terminate this Agreement in which event the Option Consideration shall be returned to Buyer and neither Buyer nor Seller shall have any further rights or duties hereunder or (ii) Buyer may seek to cause Seller to specifically perform its obligations hereunder.

ARTICLE 19    DAMAGE OR CONDEMNATION BEFORE CLOSING

        Seller shall promptly notify Buyer of any casualty to the Property or any condemnation proceeding commenced before the Close of Escrow. In any such event, the rights and obligations of Seller and Buyer under this Option Agreement shall be as set forth in Section 10.3 of the Lease and in Article XI of the Lease (which provisions are incorporated herein by this reference and which references to the Lease shall be deemed to refer to this Agreement). If Buyer elects to terminate this Agreement if so permitted under such provisions, in addition to any other sums due Buyer by Seller, Buyer shall also be entitled to the return of the Option Consideration, and Escrow Holder shall promptly return such funds to Buyer upon receipt of such termination notice.

ARTICLE 20    NOTICES

        Any notice, demand, consent, approval, request or other communication, required or permitted to be given hereunder, shall be in writing and shall be deemed to have been delivered (i) on the day personally delivered, (ii) upon receipt if sent by overnight courier, (iii) on the second business day following its mailing by registered or certified mail (return receipt requested), postage prepaid, by deposit in the United States mail, or (iv) on the day received (if received by 5:00 p.m. local time on a business day [i.e., any day other than a Saturday or Sunday or California state or federal holiday] and if not so received then on the next business day) if sent by facsimile and then only if also sent to the recipient within forty-eight (48) hours pursuant to subparts (i), (ii) or (iii) of this Section 20, to the parties at the addresses set forth below:

        if to Buyer:                                    Ace Hardware Corporation
                                                            2200 Kensington Court
                                                            Oak Brook, IL 60253
                                                            Attn: Rich Sauck, Corporate Property Manager
                                                            Facsimile: (630) 571-2186

                                                            - - and -

                                                            Ace Hardware Corporation
                                                            2200 Kensington Court
                                                            Oak Brook, IL 60253
                                                            Attn: General Counsel
                                                            Facsimile: (630) 990-6856

        with a copy to:                              McDermott, Will & Emery
                                                            18191 Von Karman Avenue, Suite 500
                                                            Irvine, CA 92612
                                                            Attn: Thomas K. Brown, Esq.
                                                            Facsimile: (949) 851-9348

        if to Seller:                                    Reynen & Bardis (KMS Placer), L.P.
                                                            7401 Galilee Road, Suite 100
                                                            Roseville, CA 95678
                                                            Attn: Tom Manz or Steve Pease
                                                            Facsimile: (916) 773-5090

        with a copy to:                              Wagner, Kirkman, Blaine & Youmans
                                                            1792 Tribute Road, Suite 450
                                                            Sacramento, CA 95815
                                                            Attn: Belan Kirk Wagner, Esq.
                                                            Facsimile: (916) 920-8608

        Either party may, by notice given as aforesaid, designate a different address or addresses for notices to be given to it. Notice of change of address shall be given by written notice in the manner detailed in this Section 20. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to constitute receipt of the notice, demand, request or communication sent.

ARTICLE 21    BROKERS

        Upon the Close of Escrow, Seller shall pay a real estate brokerage commission of Three Hundred Thousand Dollars ($300,000) to Todd Sanfilippo and CB Richard Ellis and a real estate brokerage commission of Five Hundred Thousand Dollars ($500,000) to David L. Leatherby, Jr. and Colliers International (collectively, "Brokers") with respect to this transaction in accordance with Seller's separate agreement with such Brokers. Seller shall indemnify and hold Buyer free and harmless from such commission obligation. If any additional claims for brokers' or finders' fees for the consummation of this Agreement arise, then Buyer shall indemnify, save harmless and defend Seller from and against such claims if they shall be based upon any statement or representation or agreement by Buyer, and Seller shall indemnify, save harmless and defend Buyer if such claims shall be based upon any statement, representation or agreement made by Seller. Buyer and Seller acknowledge their understanding that David Lind of CB Richard Ellis Chicago is sharing in the commission payable to David L. Leatherby Jr. and Colliers International pursuant to a separate agreement between to CB Richard Ellis Chicago and Colliers International. Neither Seller nor Buyer shall have any responsibility with respect to such separate agreement between CB Richard Ellis Chicago and Colliers International. Buyer acknowledges that some of the members and/or principals of Seller are licensed real estate brokers.

ARTICLE 22    LEGAL FEES

        In the event of the bringing of any action or suit by a party hereto against another party hereunder by reason of any breach of any of the covenants or agreements or any inaccuracies in any of the representations and warranties on the part of the other party arising out of this Agreement, then in that event, the prevailing party in such action or dispute, whether by final judgment or out of court settlement, shall be entitled to have and recover of and from the other party all costs and expenses of suit, including actual attorneys' fees.

ARTICLE 23    ASSIGNMENT

        Neither Seller nor Buyer may assign, transfer or convey its rights or obligations under this Agreement without the prior written consent of the other, which consent may be granted or withheld in the other's sole discretion. No assignment shall release the assigning party from any liability under this Agreement.

ARTICLE 24    INFORMATION REPORT

        Seller and Buyer shall cooperate with Escrow Holder and with each other in completing the report (the "Information Report") and/or other information required to be delivered to the Internal Revenue Service pursuant to Internal Revenue Code Section 6045(e) regarding the real estate sales transaction contemplated by this Agreement, including, without limitation, Internal Revenue Service Form 1099-B, as such may be hereinafter modified or amended by the Internal Revenue Service, or as may be required pursuant to any regulations now or hereinafter promulgated by the Treasury Department with respect thereto. Seller and Buyer, their respective employees and attorneys, and Escrow Holder and its employees, may disclose to the Internal Revenue Service, whether pursuant to the Information Report or otherwise, any information regarding this Agreement or the transactions contemplated herein as such party reasonably deems to be required to be disclosed to the Internal Revenue Service by such party pursuant to Internal Revenue Code Section 6045(e). Neither Seller nor Buyer shall seek to hold the other party liable for the disclosure to the Internal Revenue Service of any such information.

ARTICLE 25    MISCELLANEOUS

        25.1    Survival of Covenants. Except as otherwise limited by the provisions of this Agreement, the covenants, representations and warranties of both Buyer and Seller set forth in this Agreement shall survive the recordation of the Grant Deed and the Close of Escrow.

        25.2    Further Assurances. Buyer and Seller shall execute such instruments and documents and to undertake diligently such actions as may be required in order to consummate the purchase and sale herein contemplated and shall use their best efforts to accomplish the Close of Escrow in accordance with the provisions hereof.

        25.3    Time of Essence. Time is of the essence of each and every term, condition, obligation and provision hereof.

        25.4    Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one and the same instrument.

        25.5    Captions; Recitals. Any captions to, or headings of, the sections or subsections of this Agreement are solely for the convenience of the parties hereto, are not a part of this Agreement, and shall not be used for the interpretation or determination of the validity of this Agreement or any provision hereof. All Recitals set forth above are hereby incorporated in the terms and conditions of this Agreement.

        25.6    No Obligations to Third Parties. Except as to the Escrow Holder as otherwise expressly provided herein, the execution and delivery of this Agreement shall not be deemed to confer any rights upon, nor obligate any of the parties thereto, any person or entity (including without limitation the Brokers) other than the parties hereto.

        25.7    Exhibits. The exhibits attached hereto are hereby incorporated herein by this reference.

        25.8    Amendment of this Agreement. The terms of this Agreement may not be modified or amended except by an instrument in writing executed by each of the parties hereto.

        25.9    Waiver. The waiver or failure to enforce any provision of this Agreement shall not operate as a waiver of any future breach of any such provision or any other provision hereof.

        25.10  Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California.

        25.11  Fees and Other Expenses. Except as otherwise provided herein, each of the parties shall pay its own fees and expenses in connection with this Agreement.

        25.12  Entire Agreement. This Agreement supersedes any prior agreements, negotiations and communications, oral or written, and contains the entire agreement between Buyer and Seller as to the subject matter hereof. No subsequent agreement, representation, or promise made by either party hereto, or by or to an employee, officer, agent or representative of either party shall be of any effect unless it is in writing and executed by the party to be bound thereby.

        25.13  Successors and Assigns. Subject to the terms of Section 23 above, this Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the parties hereto.

        25.14  Time Period Computation. All periods of time referred to in this Agreement shall include all Saturdays, Sundays and California state or national holidays; provided that if the last date to perform any act or give any notice with respect to this Agreement shall fall on a Saturday, Sunday or California state or national holiday, such act or notice shall be timely performed or given on the next succeeding day which is not a Saturday, Sunday or California state or national holiday.

        25.15  Cooperation in Drafting. Both Seller and Buyer have cooperated in the drafting and preparation of this Agreement. Therefore, in any construction to be made of this Agreement, such construction shall not be construed against any party.

        25.16  Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Agreement shall nonetheless remain in full force and effect.

        25.17  WAIVER OF JURY TRIAL. BUYER AND SELLER HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, CLAIM, OR LAWSUIT FILED IN CONNECTION WITH THIS AGREEMENT.

        25.18  No Merger. All warranties, representations, covenants and other obligations contained in this Agreement shall survive recordation and delivery of the Grant Deed.

        25.19  Possession. Subject to the Existing Leases, possession of the Property shall be transferred to Buyer at the Close of Escrow.

ARTICLE 26    RETURN OF DOCUMENTS AND FUNDS UPON TERMINATION

        26.1    Return of Seller's Funds and Documents. Except as otherwise expressly provided herein, if the Escrow is terminated for any reason (other than the default of Seller), within fifteen (15) calendar days after such termination, (i) Buyer shall deliver to Seller all funds, documents and materials, if any, previously delivered to Buyer by Seller, and (ii) Escrow Holder shall deliver to Seller all funds, documents and materials deposited by Seller and then in Escrow Holder's possession.

        26.2    Return of Buyer's Funds and Documents. Except as otherwise expressly provided herein, if the Escrow is terminated for any reason (other than the default of Buyer), within fifteen (15) calendar days after such termination, (i) Seller shall deliver to Buyer all funds, documents and materials, if any, previously delivered by Buyer to Seller, and shall pay to Buyer such other amounts, if any, as may required by the terms of this Agreement, and (ii) Escrow Holder shall deliver to Buyer all funds, documents and materials deposited by Buyer and then in Escrow Holder's possession.

        26.3    No Effect on Rights of Parties. The return of documents as set forth above shall not affect the right of either party to seek such legal or equitable remedies as such party may have with respect to the enforcement of this Agreement.

        26.4    Payment of Termination Fee. Escrow Holder may condition its deliveries hereinabove provided upon payment by the party requesting delivery of a termination fee. Notwithstanding the foregoing, any termination fee shall be paid (or reimbursed) by the defaulting party, or paid one-half (2) by each party if neither party is then in default.

ARTICLE 27    EXCHANGE

        Buyer acknowledges that Seller may desire to engage in a tax-deferred exchange ("Exchange") pursuant to Section 1031 of the Internal Revenue Code. To effect this Exchange, and notwithstanding anything to the contrary in this Agreement, Seller may assign its rights in, and delegate its duties under, this Agreement, as well as transfer the Property, to any exchange accommodator which Seller shall determine. As an accommodation to Seller, Buyer agrees to cooperate with Buyer in connection with the Exchange, including the execution of documents therefor, provided the following terms and conditions are satisfied:

                (i)    There shall be no liability to Buyer and Buyer shall have no obligation to take title to any property in connection with the Exchange;

                (ii)    Buyer shall in no way be obligated to pay any escrow costs, brokerage commissions, title charges, survey costs, recording costs or other charges incurred with respect to any exchange property and/or the Exchange, and Seller shall reimburse Buyer for any professional fees, including actual attorneys' fees, which Buyer may incur with respect thereto;

                (iii)    If, for any reason, the Close of Escrow does not occur, Buyer shall have no responsibility or liability to any third party involved in the exchange transaction;

                (iv)    Buyer will not be required to make any representations or warranties nor assume any obligations, nor spend any sum or incur any personal liability whatsoever in connection with the Exchange;

                (v)    Any such exchange transaction shall not delay the Close of Escrow; and

                (vi)    Any sums due Buyer in the event the Close of Escrow does not occur by reason of a Seller default or a failure of a condition for Buyer's benefit, including return of the Option Consideration, shall be the obligation of Seller notwithstanding any delegation of duties hereunder to an exchange accommodator, and Seller shall remain personally liable therefor.
ARTICLE 28    GENERAL REFERENCE FOR DISPUTE RESOLUTION
        ANY CONTROVERSY, CLAIM, ACTION OR DISPUTE ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE HEARD BY A REFERENCE PURSUANT TO THE PROVISIONS OF CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 638 THROUGH 645.1, INCLUSIVE, ACCORDING TO THE FOLLOWING PROCEDURES:

                (i)    THE PARTIES SHALL AGREE UPON A SINGLE REFEREE WHO SHALL THEN TRY ALL ISSUES, WHETHER OF FACT OR LAW, AND REPORT A FINDING AND JUDGMENT THEREON. IF THE PARTIES ARE UNABLE TO AGREE UPON A REFEREE WITHIN TEN (10) DAYS OF A WRITTEN REQUEST TO DO SO BY ANY PARTY, THEN ANY PARTY MAY THEREAFTER SEEK TO HAVE A REFEREE APPOINTED PURSUANT TO CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 638 AND 640;

                (ii)    THE PARTIES AGREE THAT THE REFEREE SHALL HAVE THE POWER TO DECIDE ALL ISSUES OF FACT AND LAW AND REPORT HIS/HER DECISION THEREON, AND TO ISSUE ALL LEGAL AND EQUITABLE RELIEF APPROPRIATE UNDER THE CIRCUMSTANCES OF THE CONTROVERSY BEFORE HIM/HER; PROVIDED, HOWEVER, THAT TO THE EXTENT THE REFEREE IS UNABLE TO ISSUE AND/OR ENFORCE ANY SUCH LEGAL AND EQUITABLE RELIEF, EITHER PARTY MAY PETITION THE COURT TO ISSUE AND/OR ENFORCE SUCH RELIEF ON THE BASIS OF THE REFEREE'S DECISION;

                (iii)    THE CALIFORNIA EVIDENCE CODE RULES OF EVIDENCE AND PROCEDURE RELATING TO THE CONDUCT OF THE HEARING, EXAMINATION OF WITNESSES AND PRESENTATION OF EVIDENCE SHALL APPLY;

                (iv)    ANY PARTY DESIRING A STENOGRAPHIC RECORD OF THE HEARING MAY SECURE A COURT REPORTER TO ATTEND THE HEARING; PROVIDED, THE REQUESTING PARTY NOTIFIES THE OTHER PARTIES OF THE REQUEST AND PAYS FOR THE COSTS INCURRED BY THE COURT REPORTER;

                (v)    THE REFEREE SHALL ISSUE A WRITTEN STATEMENT OF DECISION WHICH SHALL BE REPORTED TO THE COURT IN ACCORDANCE WITH CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 643 AND MAILED PROMPTLY TO THE PARTIES;

                (vi)    JUDGMENT MAY BE ENTERED ON THE DECISION OF THE REFEREE IN ACCORDANCE WITH CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 644, AND THE DECISION MAY BE EXCEPTED TO, CHALLENGED AND APPEALED ACCORDING TO LAW;

                (vii)    THE PARTIES SHALL PROMPTLY AND DILIGENTLY COOPERATE WITH ONE ANOTHER AND THE REFEREE, AND SHALL PERFORM SUCH ACTS AS MAY BE NECESSARY TO OBTAIN A PROMPT AND EXPEDITIOUS RESOLUTION OF THE DISPUTE OR CONTROVERSY IN ACCORDANCE WITH THE TERMS HEREOF; AND

                (viii)    THE COST OF SUCH PROCEEDING, INCLUDING BUT NOT LIMITED TO THE REFEREE'S FEES, SHALL INITIALLY BE BORNE EQUALLY BY THE PARTIES TO THE DISPUTE OR CONTROVERSY. HOWEVER, THE PREVAILING PARTY IN SUCH PROCEEDING SHALL BE ENTITLED, IN ADDITION TO ALL OTHER COSTS, TO RECOVER ITS CONTRIBUTION FOR THE COST OF THE REFERENCE AND ITS REASONABLE ATTORNEYS' FEES AS ITEMS OF RECOVERABLE COSTS.

          /s/        /s/        
Buyer's Initials                                       Seller's Initials

This Agreement is executed and effective as of the day and year first above written.

BUYER:

ACE HARDWARE CORPORATION,
a Delaware corporation

By:       /s/         
David F. Hodnik
Its: President/Chief Executive Officer

SELLER:

REYNEN & BARDIS (KMS PLACER), L.P.,
a California limited partnership

By:R&B HOMES, LLC
A California Limited Liability Company
Its: General Partner

By:       /s/         
JOHN D. REYNEN
Its: Managing Member

By:       /s/         
CHRISTO D. BARDIS
Its: Managing Member

CONSENT OF ESCROW HOLDER

            Placer Title Company hereby acknowledges that on January 13, 2003, it received a fully executed counterpart of the foregoing Option Agreement and Joint Escrow Instructions and the Option Consideration and that the Escrow was opened on such date. Escrow Holder agrees to act as Escrow Holder thereunder and to be bound by and perform the terms thereof as such terms apply to Escrow Holder.

PLACER TITLE COMPANY

By:       /s/         
Its: Commercial Escrow Officer

EXHIBIT A

"AS IS" CERTIFICATE

        Ace Hardware Corporation, a Delaware corporation ("Buyer"), and Reynen & Bardis (KMS Placer),
L.P., a California limited partnership ("Seller"), have entered into this "As Is" Certificate ("Certificate") as of
the latest date set forth after the signatures below with respect to the following facts:

        A.    Buyer and Seller entered into that certain "Option Agreement" dated for reference purposes January 13,
2003 ("Option Agreement") with regard to the Property as defined therein.

        B.    As additional consideration to Seller, Buyer has agreed to purchase the Property in its present condition "AS-IS, WHERE IS, WITH ALL FAULTS" on the terms and conditions set forth in the Option Agreement.

NOW, THEREFORE, Buyer and Seller agree as follows:

1.   Terms. All capitalized terms shall have the meanings set forth in the Option Agreement.

2.   Inspection. Buyer acknowledges that, prior to Close of Escrow, it or its agents or contractors shall have thoroughly inspected the Property and observed the physical characteristics and condition of the Property and otherwise investigated that the status of the Property, including without limitation, the matters set forth below.

3.    Acknowledgements by Buyer. Buyer further acknowledges that, except as may be specifically set forth in the Option Agreement, neither Seller nor any of Seller's employees, agents, brokers or representatives have made any representations, warranties or agreements by or on behalf of Seller as to any matters concerning the Property upon which Buyer has relied, including, without limitation, (i) the habitability, merchantability, or fitness, suitability, value or adequacy of the Property for any particular use; (ii) the compliance of the Property or operations on the Property with any applicable codes, laws, statutes, ordinances, regulations, rules, covenants, conditions or restrictions of any governmental or quasi-governmental entity or of any other person or entity; (iii) the suitability of the topography; (iv) the availability of water rights or utilities; (v) the present and future zoning, subdivision and any and all other land use matters; (vi) the condition of the soil, subsoil, or groundwater (including, without limitation, the presence or absence of Hazardous Substances, materials or wastes therein, thereon or on adjacent or neighboring properties); (vii) the purpose(s) to which the Property is suited; (viii) drainage or flooding; (ix) access to public roads or proposed routes of roads or extensions thereof; (x) the quality, nature, adequacy and physical condition of the Property and any improvements located thereon, including, without limitation, the structural elements, foundation, roof, appurtenances, electrical, mechanical, plumbing, sewage and utility systems, facilities and appliances; and (xi) the condition of title to the Property; (xii) the leases, service contracts, and other agreements affecting the Property.

4.    As Is, Where Is, With All Faults. Buyer acknowledges and agrees that the Property is to be purchased, conveyed and accepted by Buyer in its present condition, "AS IS, WHERE IS, WITH ALL FAULTS" and that no present or latent defect in the condition of the Property whether or not known or discovered, shall give rise to any claim or cause of action against Seller.  Any documents furnished to Buyer by Seller relating to the Property including, without limitation, maps, surveys, studies, pro formas, reports and other information shall be deemed furnished as a courtesy to Buyer but without warranty from Seller except as may be specifically set forth in this Agreement.

5.    Buyer's Knowledge and Investigation. Except as provided in the Option Agreement, Buyer has investigated and has knowledge of operative or proposed governmental laws and regulations including land use laws and regulations to which the Property may be subject and shall acquire the Property upon the basis of its review and determination of the applicability and effect of such laws and regulations.  Buyer has neither received nor relied upon any representations concerning such laws and regulations from Seller, Seller's employees, agents or any other person acting on or in behalf of Seller.


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the latest date set forth next to the signatures below.

                                                                                   "Ace"
Dated:                                                                      ACE HARDWARE CORPORATION,
                                                                                   a Delaware Corporation


By: __________________________________
Name:________________________________
Its:___________________________________


Dated:  ________________                                         "Seller"
                                                                                     REYNEN & BARDIS (KMS PLACER), L.P.,
                                                                                     a California limited partnership
By: __________________________________
Name:________________________________
Its:___________________________________
By: __________________________________
Name:________________________________
Its:___________________________________


EXHIBIT B

MEMORANDUM OF OPTION

[Attached]

RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:

McDermott, Will & Emery
18191 Von Karman Avenue, Suite 500
Irvine, CA 92612-0187
Attn: Thomas K. Brown, Esq.


(SPACE ABOVE THIS LINE FOR RECORDER'S USE ONLY.)


MEMORANDUM OF OPTION

        This Memorandum of Option ("Memorandum") is dated for reference purposes only January ____, 2002 and is made between Reynen & Bardis (KMS Placer), L.P., a California limited partnership ("Seller"), and Ace Hardware Corporation, a Delaware corporation ("Buyer"), who agree as follows:

1.        Seller hereby grants to Buyer an option to purchase the real property described in Exhibit "A" attached hereto and incorporated herein (the "Property"), which option may be exercised by Buyer by written notice to Seller commencing on the date hereof but no later than August 29, 2003, on the terms and conditions set forth in the Option Agreement and Joint Escrow Instructions ("Option Agreement"), between the parties, which Option Agreement is dated of even date herewith and which provisions are incorporated into this Memorandum by this reference.

2.        This Memorandum of Option is prepared for the purposes of recordation and in no way modifies or otherwise affects the terms, conditions and provisions of the Option Agreement. If any inconsistency exists between this Memorandum and the Option Agreement, the terms, covenants and conditions of the Option Agreement shall prevail and control.

3.        If the option granted hereby is not exercised by the date set forth in Paragraph 1 above, the option as set forth therein shall be of no further force or effect.


[SIGNATURES ON THE ATTACHED SIGNATURE PAGE]


Signature Page to Memorandum of Option

                    BUYER:
                    ACE HARDWARE CORPORATION,
                    a Delaware corporation

                    By:
                    Print Name:
                    Print Title:                     SELLER:
                    Reynen & Bardis (KMS Placer), L.P.,
                    a California limited partnership

                    By:
                    Print Name:
                    Print Title:

                    By:
                    Print Name:
                    Print Title:


EXHIBIT "A" TO MEMORANDUM OF OPTION

Legal Description of Property


[ATTACHED]


STATE OF CALIFORNIA                )
                                                           ) ss
COUNTY OF _______________     )


On ______________, 2003, before me, _______________________________, a Notary Public in and for said State, personally appeared _______________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the persons acted, executed the instrument.

WITNESS my hand and official seal.


___________________________________

Signature


STATE OF CALIFORNIA                )
                                                           ) ss
COUNTY OF _______________     )


On ______________, 2003, before me, _______________________________, a Notary Public in and for said State, personally appeared _______________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the persons acted, executed the instrument.

WITNESS my hand and official seal.


___________________________________

Signature


STATE OF CALIFORNIA                )
                                                           ) ss
COUNTY OF _______________     )


On ______________, 2003, before me, _______________________________, a Notary Public in and for said State, personally appeared _______________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the persons acted, executed the instrument.

WITNESS my hand and official seal.


___________________________________

Signature


EXHIBIT C

MEMORANDUM OF LEASE

[Attached]

FORM OF MEMORANDUM OF LEASE

RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:

McDermott, Will & Emery
18191 Von Karman Avenue, Suite 500
Newport Beach, California 92612
Attn: Thomas K. Brown, Esq.


(SPACE ABOVE THIS LINE FOR RECORDER'S USE ONLY)


MEMORANDUM OF LEASE

        This Memorandum of Lease ("Memorandum") is made as of January ___, 2003 between Reynen & Bardis (KMS Placer), L.P., a California limited partnership ("Landlord"), and Ace Hardware Corporation, a Delaware corporation ("Tenant"), who agree as follows:

1.        Landlord hereby leases to Tenant and Tenant hereby hires from Landlord that certain real property located at 3301 Industrial Avenue, situated in the County of Placer, State of California, as more particularly described in Exhibit A attached hereto, (ii) together with two (2) buildings located thereon, containing approximately 619,688 square feet of space and 8,000 square feet of space, respectively, associated parking areas and other improvements located thereon, for a term of twenty (20) years commencing on January 15, 2003 and expiring on January 14, 2023, unless sooner terminated or extended, on the terms, conditions and provisions of the Lease. Such terms, conditions and provisions of the Lease are incorporated into this Memorandum by this reference.

2.        Landlord hereby acknowledges its duty to cooperate fully with Tenant's (i) construction at the Property and (ii) efforts with respect to easements, dedications and Governmental Approvals (as defined in the Lease). In furtherance of such duty, Landlord designates Thomas Manz as its agent with authority to bind Landlord and execute any and all documents required of Landlord pursuant to the Lease.

3.        This Memorandum is prepared for the purposes of recordation and in no way modifies or otherwise affects the terms, conditions and provisions of the Lease.

4.        This Memorandum may be executed in counterparts, which when taken together shall constitute one and the same instrument.


LANDLORD:                                                TENANT:

REYNEN & BARDIS (KMS PLACER),        ACE HARDWARE CORPORATION,
L.P., a California limited partnership                  a Delaware corporation


By:                                                                    By:
Name:                                                               Name:
Title:                                                                  Title:


By:
Name:
Title:


EXHIBIT D

ESTOPPEL CERTIFICATE

[Attached]

- - Form of Landlord's [Seller's] Certificate

- - Form of Tenant's Certificate


SELLER'S ESTOPPEL CERTIFICATE

        This Seller's Estoppel Certificate ("Certificate") is made as of the ___ day of January, 2003, by REYNEN & BARDIS (KMS PLACER), L.P., a California limited partnership ("Seller"), in favor of ACE HARDWARE CORPORATION, a Delaware corporation ("Buyer"), with respect to that certain Lease, dated as of _________________, as amended ("Lease"), by and between Seller and ____________________, a ________________ ("Tenant"), for the certain premises more fully described in the Lease ("Premises") with reference to the following facts:

R E C I T A L :

        A.        Seller and Buyer entered into that certain Option Agreement and Joint Escrow Instructions ("Agreement"), dated as of January __, 2003, pursuant to which Seller granted the Buyer an exclusive Option to purchase the "Property" (as defined in the Agreement).

        B.        Pursuant to Section 1.10 of the Agreement, Seller is obligated to deliver its own Certificate for this Lease if Seller was unable to obtain an "Estoppel Certificate" from the Tenant with respect to the Premises prior to the closing of the transaction contemplated by the Agreement.

        NOW, THEREFORE, Seller hereby certifies to Buyer as follows:

        1.        The commencement date under the Lease was ______________;

        2.        The term of the Lease will expire on __________________;

        3.        Tenant has deposited with Seller a Security Deposit of $_____________;

        4.        Rent has been paid up to the date of _______________, and no rents or charges have been paid in advance, except for the following rents or charges which have been paid to the date specified: $____________________ paid to _____________, 20__; $____________________ paid to _____________, 20__;

        5.        The current monthly rent (including any and all adjustments pursuant to the terms of the Lease) is ____________________ Dollars ($____________________);

        6.        The Lease (including all Exhibits and Amendments) is in full force and effect and, to Seller's actual knowledge (as such term is defined in the Agreement), the Lease has not been assigned, modified, supplemented or amended in any way, except as follows:


        7.        The Lease, as affected by those changes set forth in Paragraph 7 above, is attached hereto at Exhibit "A" and represents the entire agreement between the parties;

        8.        There are no uncured defaults by Seller under the Lease, and Seller is not aware, without any investigation or inquiry of any kind or nature whatsoever, of any events or conditions which, with the passage of time or the giving of notice, or both, would constitute a default by Seller under the Lease, except as follows:


        9.        At the date hereof, and, to Seller's actual knowledge, there are no existing defenses or offsets which the Tenant has against the enforcement of the Lease by Seller;

        10.        To Seller's actual knowledge, Tenant has waived any and all rights of first refusal to lease all or any portion of the Premises and/or the real property or land of which the Premises are a part that it may have;

        11.        Tenant acknowledges that it has waived any right to extend the term of the Lease that it may have; and

        12.        All conditions of the Lease to be performed by Seller and necessary to the enforceability of the Lease have been satisfied.


        IN WITNESS WHEREOF, Seller has executed this Certificate as of the date first set forth above.

        REYNEN & BARDIS (KMS PLACER), L.P., a California limited partnership

                                            By: _______________________________
                                            Its: _______________________________

                                            By: _______________________________
                                            Its: _______________________________


EXHIBIT A

[Attach Lease]

TENANT'S ESTOPPEL CERTIFICATE

        This Tenant's Estoppel Certificate dated ___________________, 2003 ("Certificate") is provided by the undersigned "Tenant" pursuant to that certain Lease (the "Lease") dated as of ____________________, by and between Tenant and Reynen & Bardis (KMS Placer), L.P., a California limited partnership ("Landlord"), with respect to the premises located at 3301 Industrial Avenue, Rocklin, California, as more fully described in the Lease ("Premises"). Tenant hereby certifies as follows:

        1.        The commencement date under the Lease was _________________;

        2.        The term of the Lease will expire on __________________;

        3.        Tenant has deposited with Landlord a Security Deposit of $______________;

        4.        Rent has been paid up to the date of ___________________, and no rents or charges have been paid in advance, except for the following rents or charges which have been paid to the date specified: $___________ paid to _________, 20__; $__________ paid to _____________, 20__;

        5.        The current monthly rent (including any and all adjustments pursuant to the terms of the Lease) is Dollars ($_________);

        6.        The Lease (including all Exhibits and Amendments) is in full force and effect and has not been assigned, modified, supplemented or amended in any way, except as follows:

        7.        The Lease, as affected by those changes set forth in Paragraph 6 above, is attached hereto at Exhibit "A" and represents the entire agreement between the parties as to the Premises;

        8.        There are no uncured defaults by Landlord under the Lease, and Tenant knows of no events or conditions which, with the passage of time or notice, or both, would constitute a default by Landlord under the Lease, except as follows:


        9.        At the date hereof, there are no existing defenses or offsets which the undersigned has against the enforcement of the Lease by Landlord;

        10.        Tenant acknowledges that it has waived any and all right of first refusal to lease all or any portion of the Premises and/or the real property or land of which the Premises are a part that it may have;

        11.        Tenant acknowledges that it has waived any right to extend the term of the Lease that it may have;

        12.        All conditions of the Lease to be performed by Landlord and necessary to the enforceability of the Lease have been satisfied; and

        13.        Tenant certifies that the above is true and correct and acknowledges and agrees that this Certificate and the statements contained herein may be relied on by any purchaser of the Property.

        EXECUTED this _______ day of January, 2003.

        "TENANT"_____________________________,
        a ____________________

        By:
        Print Name:
        Print Title:


EXHIBIT A

[Attach Lease]


EXHIBIT E

LAND LEGAL DESCRIPTION


EXHIBIT F

VISUAL MAP


EXHIBIT G

GRANT DEED


EXHIBIT H

SPECIAL TAX DISCLOSURE


EXHIBIT I

BILL OF SALE


EXHIBIT J

ASSIGNMENT OF CONTRACTS


EXHIBIT K

ASSIGNMENT OF EXISTING LEASES


EXHIBIT L

GENERAL ASSIGNMENT


EXHIBIT M

SELLER'S CERTIFICATE

EX-21

EXHIBIT 21

ACE HARDWARE CORPORATIONLIST OF SUBSIDIARIES

                                                                   STATE/COUNTRY                      NAME UNDER WHICH
            SUBSIDIARY                       OF INCORPORATION      SUBSIDIARY DOES BUSINESS
Ace Insurance Agency, Inc.                                  Illinois                              Ace Insurance Agency, Inc.

Loss Prevention Services, Inc.                              Illinois                              Loss Prevention Services, Inc.

National Hardlines Supply, Inc.                             Illinois                              National Hardlines Supply, Inc.

Ace Hardware de Mexico, S.A. de C.V.              Mexico                            Ace Hardware de Mexico, S.A. de C.V.

Ace Hardware Foundation                                    Illinois                             Ace Hardware Foundation

New Age Insurance Ltd.                                       Bermuda                         New Age Insurance Ltd.

Ace Hardware International, Inc.                           Barbados                        Ace Hardware International, Inc.

Ace Corporate Stores, Inc.                                   Illinois                              Ace Corporate Stores, Inc.

3070070 Nova Scotia Company (1)                     Nova Scotia                    3070070 Nova Scotia Company

(1)  All outstanding shares of this subsidiary were sold on February 13, 2003.

EX-23

                                                                                            AUDITORS' CONSENT


The Board of Directors
Ace Hardware Corporation:



We consent to the use of our report included herein.




KPMG LLP

Chicago, Illinois
March 24, 2003

EX-24

Exhibit 24

                                ACE HARDWARE CORPORATION: POWER OF ATTORNEY

            KNOW ALL MEN BY THESE PRESENTS that each of the undersigned directors of ACE

HARDWARE CORPORATION, a Delaware corporation, hereby constitutes and appoints DAVID F.

HODNIK AND RITA D. KAHLE, and each of them, his true and lawful attorneys-in-fact and agents,

each with full power to act without the other, with full power of substitution, for him and in his name,

place and stead, in any and all capacities, to sign the Annual Report on Form 10-K, and any and all

amendments thereto, and to file the same with all exhibits thereto, and other documents in connection

therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents full

power and authority to do and perform each and every act and thing requisite and necessary to be done in

and about the premises, as fully to all intents and purposes as he might or could do in person, hereby

ratifying and confirming all that said attorneys and agents, or either of them, or their substitutes, may

lawfully do or cause to be done by virtue hereof.

            IN WITNESS WHEREOF, each of the undersigned has set his or her hand and seal as of this

24th day of March, 2003.



         RICHARD F. BAALMANN, JR.                                             HOWARD J. JUNG              
                Richard F. Baalmann, Jr.                                                        Howard J. Jung


                  ERIC R. BIBENS II                                                       RICHARD A. KARP              
                    Eric R. Bibens II                                                                Richard A. Karp


                  JAMES T. GLENN                                                    JEFFREY M. SCHULEIN          
                     James T. Glenn                                                              Jeffrey M. Schulein


                   DANIEL L. GUST                                                       RICHARD W. STINE              
                      Daniel L. Gust                                                                Richard W. Stine


                D. WILLIAM HAGAN                                                    DAVID S. ZIEGLER                
                    D. William Hagan                                                               David S. Ziegler

EX-99

                                                                                                                        Exhibit 99.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Ace Hardware Corporation (the "Company") on
Form 10-K for the year ended December 28, 2002 as filed with the Securities and
Exchange Commission on the date hereof ("the Report"), the undersigned President and
Chief Executive Officer of the Company hereby certifies, pursuant to 18 U.S.C. §1350, as
adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that:

1)  the Report fully complies with the requirements of Section 13 (a) or 15 (d) of the
     Securities Exchange Act of 1934, and

2)  the information contained in the Report fairly presents, in all material respects,
     the financial condition and results of operations of the Company as of and for the
     periods covered in the Report.




    Date: March 24, 2003                                     DAVID F. HODNIK               
                                                                                David F. Hodnik
                                                                 President and Chief Executive Officer

EX-99

                                                                                                                        Exhibit 99.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Ace Hardware Corporation (the "Company") on
Form 10-K for the year ended December 28, 2002 as filed with the Securities and
Exchange Commission on the date hereof ("the Report"), the undersigned Executive Vice
President (Principal Financial Officer) of the Company hereby certifies, pursuant to 18
U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that:

1)  the Report fully complies with the requirements of Section 13 (a) or 15 (d) of the
     Securities Exchange Act of 1934, and

2)  the information contained in the Report fairly presents, in all material respects,
     the financial condition and results of operations of the Company as of and for the
     periods covered in the Report.




    Date: March 24, 2003                                      RITA D. KAHLE                   
                                                                                Rita D. Kahle
                                                                        Executive Vice President
                                                                      (Principal Financial Officer)