<PAGE>
 
                                                                   EXHIBIT 10.27

                                FACILITY LEASE

           THIS FACILITY LEASE is made as of the 29th day of December, 1986, by
and between THE CONNECTICUT NATIONAL BANK, not individually but solely in its
capacity as Trustee ( the "Landlord"), under that certain Trust Agreement dated
as of December 29, 1986 (the "Trust Agreement"), between Merced Associates, a
Maryland general partnership (the "Partnership"), and Connecticut National Bank
(the "Trustee"), and PHYSICS INTERNATIONAL COMPANY, a California corporation
(the "Tenant").

RECITALS

           A. Landlord is the owner of certain real property as hereafter set
forth constituting the Premises as hereafter defined.

           B. Tenant desires to lease the Premises from the Landlord in
accordance with the terms and conditions hereinafter set forth.


WITNESSETH

           NOW, THEREFORE in consideration of the rental hereinafter agreed upon
and the performance of all the conditions and covenants hereinafter set forth on
the part of Tenant to be performed, Landlord does hereby lease unto Tenant, and
the latter does lease from the former the existing structure containing
approximately two hundred forty thousand 240,000 square feet known as 2700
Merced Street in San Leandro, California, together with improvements to the
structure to be constructed in accordance with the provisions of Paragraph 20
below (the existing structure together with the contemplated improvements are
referred to herein as the "Premises"). The lease of the Premises is subject to
the state of Landlord's title existing as of the date of the commencement of the
term hereof, including but not limited to, (i) those matters referred to in the
preliminary title report dated September 30, 1986, Order No. 106576 by Western
Title Insurance Company; (ii) any state of facts which an accurate survey or
physical inspection of the Premises might show; (iii) the Indenture (the "Ground
Lease") of even date herewith by and between Landlord and the Trustees under the
Will and of the Estate of Samuel H. Damon (the "Damon Estate"); and (iv) the
Ground Sublease (the "Ground Sublease") dated of even date herewith between
Landlord and Tenant. This Lease specifically excludes the ground beneath and
around the Premises.

           1. TERM.  The term of this Lease shall be as follows:

              1.1. ORIGINAL TERM. The original term of this Lease shall be for a
period of twenty (20) years commencing on December 30, 1986 and ending on
December 31, 2006.

              1.2  RENEWAL TERM. Tenant shall have the option to extend the
original term of this Lease for two (2) consecutive renewal terms of ten (10)
years each on the same terms and conditions contained herein, except that the
Annual Net Rent (define below) will be as described in Paragraph 3 below. Tenant
shall exercise each such option by providing written notice of its exercise of
such option to Landlord not less than one hundred eighty (180) days prior to the
expiration of the original term or the renewal term then in effect; provided,
however, that the exercise of each such option shall be subject to the
conditions that: (i) Tenant is not in Default under any provisions of this Lease
(including the cross default provision contained in Paragraph 17.9 below) on the
date of exercise of such option or on the date of commencement of the renewal
term; (ii) Tenant shall be and shall have been in possession and occupancy of
the Premises at all times since he effective date of this Lease; and (iii)
Tenant simultaneously exercises its option to renew the Ground Sublease.

              2. ANNUAL NET RENT - ORIGINAL TERM. Tenant covenants and agrees to
pay Landlord during each year of the original term of this Lease net rental (the
"Annual Net Rent") in the amounts and on the dates as set forth on Exhibit A
attached hereto. Unless otherwise provided on Exhibit A, Annual Net Rental shall
be due and payable in arrears on the last day of each June and December in equal
semi-annual installments.
<PAGE>
 
           3. ANNUAL NET RENT - RENEWAL TERM. Annual Net Rent for each renewal
term will be the annual fair market rental value of the Premises during each
renewal term. In the event the Landlord and the Tenant cannot agree upon the
annual fair market rental value of the Premises within ninety (90) days prior to
the expiration of the original term or of any renewal term, as the case may be,
then the Annual Net Rent for such renewal term shall be determined by three
impartial real estate appraisers, one to be appointed by each of the parties
hereto, and Landlord and Tenant shall each promptly name one such appraiser and
give written notice thereof to the other party, and in case either party shall
fail so to do within ten (10) days after appointment of the first appraiser, the
appraiser already appointed shall name a second appraiser, and the two
appraisers thus appointed in either manner shall appoint a third appraiser, and
in case of their failure so to do within ten (10) days after appointment of the
second appraiser, either party may have such third appraiser (who shall in this
case be a member of the American Institute of Real Estate Appraisers of other
similar organization, who maintains an office in the County of Alameada, Contra
Costa, Santa Clara or the city or county of San Francisco) appointed by any
person then sitting as Judge of the Superior Court of the State of California in
and for the County of Alameda and the three appraisers so appointed shall
thereupon proceed to determine the matter in question, and the decision of said
appraisers or a majority of them shall be final, conclusive and binding upon
both parties. The cost of such appraisal other than attorneys' fees shall be
shared equally by the parties hereto. Until determination of such rent by
agreement or appraisal as herein provided, semi-annual installments at the same
rate payable for the preceding year shall be paid on account thereof.

           4. NET LEASE; ADDITIONAL RENT. It is intended by Landlord and Tenant
that this Lease be a net, net, net lease and the Annual Net Rent payable by
Tenant shall be absolutely net to the Landlord. The Tenant agrees to pay
directly any and all costs and expenses in connection with the ownership or
leasing of the Premises. Tenant covenants and agrees to pay to Landlord as
additional rent (the "Additional Rent"), promptly after Landlord's demand, any
such costs and expenses which cannot be paid directly by Tenant, but which are
paid by Landlord. The costs and expenses for which Tenant is responsible shall
include, but not be limited to, the following:

                     4.1. UTILITIES. All costs of water rent and sewer service
charges assessed against the Premises and all costs of electricity, gas,
telephone and other utilities used or consumed in the Premises, together with
all taxes, levies or other charges with respect to any such utilities.

                     4.2. REAL ESTATE TAXES. All real property taxes, water
rents, footage assessments, excise taxes, general and special assessments,
supplemental taxes and other governmental charges and impositions of every kind
to whomsoever assessed and whether now in being or not which may be assessed
upon, or payable for, or in respect of, the Premises or any part thereof for any
period wholly or partly within the term of this Lease, or with respect to the
use, occupancy or possession of the Premises at any time during the term hereof;
provided that any imposition relating to the fiscal period of the imposing
authority falling partly within and partly without the term hereof shall be
apportioned from the beginning or to the end of the term, as the case may be.

                     4.3. PERSONAL PROPERTY TAXES. All taxes or assessments
levied or assessed during the term of this Lease against any leasehold interest
of Tenant or any personal property or trade fixtures of Tenant of any kind owned
by Tenant or placed in, upon or about the Premises by Tenant.

                     4.4. FEES, CHARGES AND EXPENSES. Any and all fees, charges
and expenses of every kind and nature which Tenant shall incur or Landlord shall
pay or become obligated to pay because of or in connection with owning,
operating, leasing, managing and maintaining of the Premises including, without
limitation, the following: (i) all supplies and materials used, and labor
charges incurred, in the operation, maintenance, decoration, repairing and
cleaning of the Premises; (ii) the cost of all equipment purchased or rented
which is utilized in the performance of Landlord's obligations hereunder, and
the cost to maintenance and operation of any such equipment; (iii) the cost of
all management, maintenance and service agreements for the Premises and the
equipment therein, including, without limitation, alarm service, security
service, window cleaning, and elevator maintenance; (iv) accounting costs,
including the cost of audits by certified public accountants, and legal and
engineering fees and expenses incurred in connection with the operation and
management of the Premises; (v) wages, salaries, commissions, and related
expenses of all on-site and off-site agents of employees engaged in the
operation, maintenance and security in the Premises; (vi) the cost of all
<PAGE>
 
reasonable and necessary insurance coverage for the Premises; (vii) the cost of
repairs, replacements and general maintenance to the Premises, structural or 
non-structural, including without limitation the mechanical, electrical and 
heating ventilating and air-conditioning equipment and/or systems; (vii) any and
all exterior landscaping; (ix) cost of removal of trash, rubbish, garbage and
other refuse from the Premises as well as removal of ice and snow from the
sidewalks on or adjacent to the Premises; and (x) every other expense which
would be considered as an expense of maintaining, operating, leasing, insuring,
managing or repairing the Premises.

                     4.5. FEES AND EXPENSES OF THE TRUSTEE. All fees and
expenses paid or payable to the Trustee by the Partnership (including, without
limitation, all costs and expenses relating to indemnification of the Trustee)
which are related to any of the transactions or matters referred to in any of
the Operative Documents (defined below), but excluding, however, any such fees
or expenses incurred as a result of the wrong doing or gross negligence of the
Partnership.

                     4.6 INTERPRETATION. Nothing contained in this Paragraph 4
shall be construed to impose any duty or obligation upon Landlord to provide any
service or benefit referred to this Paragraph. Landlord is under no duty or
obligation to provide any service or benefit other than as expressly required by
the terms of this Lease.

           5. PAYMENT OF RENTAL. Tenant covenants and agrees to pay the rental
herein reserved and each installment thereof promptly when and as due. All
rentals shall be paid to Landlord at the address specified in Paragraph 30
hereof, or at such other place or to such appointee of Landlord, as Landlord may
from time to time designate in writing. All monies to be paid by Tenant to
Landlord hereunder, whether or not designated as rent shall be deemed to be
Additional Rent and shall be collectible as rent upon Landlord's demand.

           6. DEFAULT CHARGES. In the event Tenant fails to pay Landlord when
due any rental payment or other charge or sum due hereunder, Landlord may at its
option charge Tenant a late charge equal to eighteen percent (18%) per annum (or
such lesser amount as may be permitted by law) of the payment or other charge or
sum for the period the payment or other charge or sum is overdue, which late
charge shall be collectible and shall be payable by Tenant to Landlord upon
demand.

           7. ADVANCEMENTS. If Tenant should fail to perform any of the
obligations imposed upon it under this Lease, Landlord may, but shall not be
obligated to, make advances to perform the same on behalf of Tenant and all sums
so advanced shall immediately upon demand become due and payable under this
Lease. Tenant will repay on demand all sums so advanced on Tenant's behalf, plus
any expenses or costs incurred by Landlord, including reasonable attorneys'
fees, with interest thereon at the rate of eighteen percent (18%) per annum (or
such lesser amount as may be permitted by law), accruing from the date of
demand.

           8. USE. Tenant covenants and agrees to use and occupy the Premises
solely for industrial and mercantile purposes. Tenant agrees to comply with all
applicable zoning, use and other laws and regulations, and provide and install
at its own expense any additional equipment or alterations required to comply
with all such laws and regulations as required from time to time.

           9. COMPLIANCE WITH LAWS. Tenant covenants and agrees that it will, at
its own expense, observe, comply with and execute all laws, orders, rules,
directions, requirements and regulations of any and all governmental
departments, bodies, bureaus, agencies and officers, and all rules, directions,
requirements and recommendations of the local board of fire underwriters and the
fire insurance rating organizations having jurisdiction over the area in which
the Premises are situated, or other bodies or agencies now or hereafter
exercising similar functions in the area in which the Premises are situated, in
any way pertaining to the Premises or the use and occupancy thereof. In the
event Tenant shall fail or neglect to comply with any of the aforesaid laws,
orders, rules, directions, requirements or recommendations, Landlord or its
agents may enter the Premises and take all such action and do all such work in
or to the Premises as may be necessary in order to cause compliance with such
laws, orders, rules, directions, requirements or recommendations.

           10. REPRESENTATIONS AND WARRANTIES OF TENANT. Tenant represents and
warrants that: (a) Tenant is a corporation duly organized and validly existing
in good standing under the laws of the state of its incorporation. (b) The
execution, delivery and performance of this Lease and all related instruments
and 
<PAGE>
 
documents: (i) have been duly authorized by all necessary corporate action
on the part of Tenant; (ii) do not require the approval of any stockholder,
trustee or holder of any obligations of Tenant except such as have been duly
obtained; and (iii) do not and will not contravene any law, governmental rule,
regulation or order now binding on Tenant, or the charter or by-laws of Tenant,
or contravene the provisions of, or constitute a default under, or result in the
creation of any lien or encumbrance upon the property of Tenant under any
indenture, mortgage, contract or other agreement to which Tenant is a party or
by which it or its property is bound; provided, however, Tenant makes no such
warranty or representation as to any state or federal securities laws. (c) This
Lease and all related instruments and documents, when entered into, will
constitute legal, valid and binding obligations of Tenant enforceable against
Tenant in accordance with the terms thereof, except as such enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium or other laws
or equitable principals relating to or limiting creditors rights generally, and
except that the remedy of specific performance or injunctive relief is subject
to the discretion of the court before which any proceeding may be brought. (d)
Tenant is not in default under any material obligation for the payment of
borrowed money, for the deferred purchase price of property or for the payment
of any rent under any lease agreement which, either individually or in the
aggregate, would materially adversely affect the financial condition of Tenant
or the ability of Tenant to perform its obligations hereunder. (e) All of the
information contained in schedules now or hereafter attached hereto as Exhibit B
is true and correct. (f) All of the representations and warranties made by
Tenant in the Purchase and Assignment Agreement of even date herewith (the
"Purchase and Assignment Agreement") between Landlord and Tenant were true and
correct when made.

           11. ASSIGNMENT AND SUBLETTING. Tenant shall have the right, upon
sixty (60) days prior written notice to Landlord, to assign this Lease and to
sublet the Premises, for a period not to exceed the original term of this Lease,
provided, however, at the time of any such assignment or subletting (1) Tenant
is not in Default hereof; and (2) Tenant simultaneously assigns the Ground
Sublease or subleases the property let thereunder, as the case may be, to the
same person or entity as is assigned this Lease or sublet these Premises.
Notwithstanding any such assignment or subletting Tenant shall not be relieved
of any liability under this Lease. Additionally, no party other than Tenant may
exercise the renewal options set forth in Paragraph 1.2 above unless Olin
Corporation ("Guarantor") provides Landlord with a Guaranty Agreement
satisfactory to Landlord, guarantying payment and performance of such parties'
obligations to Landlord during any renewal term.

           12. INSURANCE. Tenant shall during the entire term of this Lease, and
any extensions and renewals thereof, obtain and maintain at its sole cost and
expense, and keep in full force and effect, with Tenant, Landlord and all
mortgagees, holders of deeds of trust or assignees of Landlord named as insureds
thereon, as their respective interests may appear, the following insurance
coverages:

                     12.1 CASUALTY INSURANCE. Tenant will insure the Premises
against loss by earthquake (if such insurance is commercially available at
reasonably economical premiums determined by Tenant in good faith) theft,
fire,casualty and extended coverage under insurance policies which shall be
written in forms, amounts and by companies satisfactory to the Landlord,
provided, however, that the amount of such insurance shall not be les than the
full insurable value of the Premises (and in all events not less than the amount
necessary to avoid co-insurance restrictions) as the same may increase but not
decrease from time to time. All insurance proceeds shall be payable to Landlord
or Landord's designee.

                     12.2 LIABILITY INSURANCE. Tenant shall obtain and maintain
in full force and effect public liability and property damage insurance in such
amounts, with such insurance companies, and upon policy forms acceptable to and
approved by Landlord, but in any event in an amount of not less than Ten Million
Dollars ($10,000,000.00) per occurance; provided however, that Tenant may self-
insure not more that Eight Million Dollars ($8,000,000.00) of such required
coverage for so long as Guarantor's tangible net worth is not less than Three
Hundred Million Dollars ($300,000,000.00). As used herein, "tangible net worth"
shall mean the sum of the par or stated value of all outstanding capital stock,
additional paid in capital, surplus and undivided profits, less any amounts
attributable to good will, patents, copyrights, mailing lists, catalogs,
trademarks, bond discount and underwriting expenses, organizational expenses and
other intangibles, all as determined in accordance with generally accepted
accounting principles consistently applied.
<PAGE>
 
           13. INDEMNIFICATION. Landlord shall not be liable to Tenant for any
loss or damage to Tenant or to any other person or the property of Tenant or of
any other person unless such loss or damage shall be caused by or result from
the willful misconduct or gross negligence of Landlord. Tenant shall defend and
does hereby agree to indemnify and save harmless Landlord and the Partnership,
and their successors or assigns, from all expenses, claims and demands of every
kind, that may be brought against it, them or any of them for or no account of
any damage, loss or injury to persons or property in or about the Premises or
the land on which the Premises are situated, or on account of any damage, loss
or injury resulting from or claimed to result from the presence on the Premises
of any hazardous chemical, toxic waste or radioactive material, or arising from
or out of Tenant's use or occupancy thereof, or occasioned wholly or in part by
any act or omission of Tenant, its agents, servants, contractors, employees or
invitees, and from any and all costs and expenses, counsel fees, and other
charges which may be imposed upon Landlord and/or the Partnership, and their
successors and assigns, or which it or they may be obligated to incur in
consequence thereof (including, without limitation, indemnification of the
Trustee pursuant to Sections 5.03 and 7.01 of the Trust Agreement).

           14. ALTERATIONS. Tenant shall not make any alterations to the
Premises, the total cost of which for any one project exceeds Fifty Thousand
Dollars ($50,000.00), without the prior written consent of Landlord, which shall
not be unreasonably withheld. If Tenant shall desire to make such alterations,
plans for the same shall first be submitted to and approved by Landlord, and all
work and installations shall be performed by Tenant at its own expense in
accordance with approved plans. Tenant agrees that all such work shall be done
in a good and workmanlike manner, the structural integrity of the Premises shall
not be impaired, and that no liens shall attach to the Premises by reason
thereof. Tenant agrees to obtain at Tenant's expense, all permits required for
such alterations. If requested by Landlord, Tenant shall, prior to commencing
construction, deposit with Landlord a completion bond in at least the estimated
cost of the proposed alteration in such form and with such surety as is
satisfactory to Landlord. Landlord may also make approval contingent upon
compliance with such other reasonable conditions as Landlord may stipulate.

           15. OWNERSHIP OF ALTERATIONS. Unless Landlord shall elect that all or
part or any alteration made by Tenant to the Premises shall remain on the
Premises after the termination of this Lease, the Premises shall be restored to
their original condition by Tenant before the expiration of this Lease at
Tenant's sole expense. Upon such election by Landlord, any such alterations,
improvements, betterments or mechanical equipment, including but not limited to,
heating and air conditioning systems, shall become the property of Landlord as
soon as they are affixed to the Premises, and all right, title and interest
thereof of Tenant shall immediately cease, unless otherwise agreed to in writing
by Landlord. Landlord shall have the sole right to collect any insurance for any
damage of any kind to any of the improvements placed upon the Premises by
Tenant. Tenant shall promptly pay any franchise, minor privilege or other tax or
assessment resulting directly or indirectly from any alterations or improvements
made by Tenant to the Premises. Tenant shall repair promptly, at its own
expense, any damage to the Premises caused by bringing into the Premises any
property for Tenant's use, or by the installation or removal of such property,
regardless of fault or by whom such damage shall be caused.

           16. REPAIRS AND MAINTENANCE. The Premises hereby leased are leased to
Tenant "AS IS." Landlord shall be under no liability, nor (except as provided in
Paragraph 20 below) have any obligation to do any work or make any repairs in or
to the Premises, and any work which may be necessary to outfit the Premises for
Tenant's occupancy or for the operation of Tenant's business therein is the sole
responsibility of Tenant and shall be performed by Tenant at its own cost and
expense. Tenant acknowledges that it has fully inspected the Premises prior to
the execution of this Lease, and Tenant further acknowledges that Landlord has
made no warranties or representations with respect to the condition or state of
repairs of the Premises. Tenant will, during the term of this Lease, keep the
Premises and appurtenances (including window, doors, plumbing, heating and
electrical facilities and installations) in good order and repair and will make
all necessary repairs to the exterior walls and roof of the Premises. Tenant
shall also maintain any driveways and parking areas designated for its exclusive
use. Tenant will, at the expiration of the term of this Lease, or at the sooner
termination thereof by forfeiture or otherwise, deliver the Premises in good
order and condition, reasonable wear and tear excepted. In the event Tenant
shall not proceed promptly and diligently to make any repairs or perform any
obligation imposed upon it within forty-eight (48) hours after receiving written
notice from Landlord to make such repairs of perform such obligation, then and
in such event, Landlord may, at its option, enter the Premises and do and
<PAGE>
 
perform the things specified in said notice, without liability on the part of
Landlord for any loss or damage resulting from any such action by Landlord and
Tenant agrees to pay promptly upon demand any cost or expense incurred by
Landlord in taking such action.

           17. DEFAULT. Any of the following events shall constitute a default
(a "Default") by Tenant:

                     17.1. PAYMENT. If the rent (Annual Net Rent, or Additional
Rent) shall not be paid when and as due and shall be in arrears, in whole or in
part for a period of five (5) days after written notice from Landlord; or

                     17.2 PERFORMANCE If Tenant shall have failed to perform any
other term, condition, or covenant of this Lease on its part to be performed for
a period of thirty (30) days after written notice of such failure from Landlord
provided, however, if such failure cannot reasonably be remedied within thirty
(30) days then Tenant shall not be in default hereunder if Tenant commences cure
within thirty (30) days after notice and thereafter diligently and continuously
pursues cure; or

                     17.3. ABANDONMENT. If the Premises are vacant, unoccupied
or deserted for a continuous period of sixty (60) days or more at any time
during the term of this Lease; or

                     17.4. INVOLUNTARY BANKRUPTCY. The entry of a decree or
order for relief by a court having jurisdiction against or with respect to
Tenant in an involuntary case under the federal bankruptcy laws or any state
insolvency or similar laws ordering the liquidation of Tenant or reorganization
of Tenant or of Tenant's business and affairs, or the appointment of a receiver,
liquidator, assignee, custodian, trustee, or similar official for Tenant or any
of Tenant's property, including but not limited to the Premises, and the failure
to have such decree, order or appointment discharged or dismissed within a
period of ninety (90) days from the date of entry; or

                     17.5. VOLUNTARY BANKRUPTCY. The commencement by Tenant of a
voluntary case under the Federal bankruptcy laws or any state insolvency or
similar laws or the consent by Tenant to the appointment or taking possession by
a receiver, liquidator, assignee, trustee, custodian or similar official for
Tenant or any of Tenant's property, including but not limited to the Premises,
or the making by Tenant of an assignment for the benefit of, creditors, or the
failure by Tenant generally to pay Tenant's debts as and when they become due;

                     17.6. SALE OR ENCUMBRANCE. If Tenant's leasehold interest
under this Lease is sold under execution, attachment or decree of court to
satisfy any debt of Tenant, or if any lien (including a mechanic's lien) is
filed against Tenant's leasehold interest and is not discharged within ten (10)
days thereafter.

                     17.7. FAILURE TO MAINTAIN INSURANCE. If the Tenant fails to
maintain continuously in force the insurance coverage required by Paragraph 12
above, in strict conformity with the requirements of that Paragraph.

                     17.8. BREACH OF WARRANTY OR REPRESENTATION. If any warranty
or representation made by Tenant herein shall have been materially false or
misleading when made provided; however, that in the event that any of the
warranties or representations contained in Paragraph 10(e) shall have been
materially false or misleading when made, Landlord's sole remedy shall be
pursuant to Paragraph 38 below.

                     17.9. CROSS DEFAULT. If the Tenant or Guarantor is in
default under the terms of any document, paper or agreement with Landlord or to
which Landlord is a party, including but not limited to the following documents
executed of even date herewith: the Purchase and Ground Lease Agreement among
the Damon Estate, Landlord and Tenant; the Purchase and Assignment Agreement;
the Agreement of Guaranty Nos. 1 and 2 between Guarantor and Landlord; and the
Ground Sublease (together with the Ground Lease collectively referred to as the
"Operative Documents:).
<PAGE>
 
           18. REMEDIES UPON DEFAULT. In the event of the occurrence of any
Default as defined in Paragraph 17 hereof, Landlord, in addition to any and all
legal and equitable remedies it may have, shall have the following remedies:

                     18.1. DISTRAIN. To distrain for any rent or additional rent
in default.

                     18.2. TERMINATION; POSSESSION OF PREMISES. At any time
after Default, without notice, to declare this Lease terminated and enter the
Premises with or without legal process; and in such event Landlord shall have
the benefit of all provisions of law now or hereafter in force respecting the
speedy recovery of possession from Tenant's holding over or proceedings in
forciable entry and detainer, and Tenant waives any and all provisions for
notice under such laws.

                     18.3. DAMAGES. Notwithstanding such reentry and/or
termination, Tenant shall immediately be liable to Landlord for the sum of the
following: (i) all rent (whether Annual Net Rent or Additional Rent) then in
arrears; (ii) all other liabilities of Tenant and damages sustained by Landlord
as a result of Tenant's Default, including but not limited to, the reasonable
costs of reletting the Premises and any broker's commissions payable as a result
thereof; (iii) all of Landlord's costs and expenses (including reasonable
counsel fees) in connection with such Default and recovery of possession; (iv)
the difference between the rent reserved under this Lease (Net Annual Rent and
Additional Rent) for the balance of the term and the fair rental value of the
Premises for the balance of the term to be determined as of the date of reentry;
or at Landlord's option in lieu thereof, Tenant shall pay the amount of the rent
(Net Annual Rent or Additional Rent) reserved under this Lease at the times
herein stipulated for payment of such rent for the balance of the term, less any
amount received by Landlord during such period from others to whom the Premises
may be rented on such terms and conditions and at such rentals as Landlord, in
its sole discretion, shall deem proper; and (v) any other damages recoverable by
law. In the event Landlord brings any action against Tenant to enforce
compliance by Tenant with any covenant or condition of this Lease, including the
covenant to pay rent (Net Annual Rent and Additional Rent), and it is judicially
determined that Tenant has defaulted in performing or complying with any such
covenant or condition, then and in such event, Tenant shall pay to Landlord all
costs and expenses incurred by Landlord in bringing and prosecuting such action
against Tenant, including a reasonable attorney's fee.

                     18.4. LIQUIDATED DAMAGES. In the event Landlord elects to
sell the Premises then, in lieu of Landlord's damages as set forth in Paragraph
18.3 above, Landlord shall be entitled to liquidated damages as follows:
Landlord may require Tenant to pay the Stipulated Loss Value determined as
specified below (the "Stipulated Loss Value") plus an amount equal to all rent
(whether Annual Net Rent or Additional Rent) apportioned through the date upon
which the Stipulated Loss Value is paid and all of Landlord's costs and expenses
(including reasonable attorney's fees) incurred by reason of Tenant's default.
The Stipulated Loss Value shall be calculated as the product of (a) the Total
Project Costs (defined to be the sum of all unreimbursed expenditures or
obligations made or obligations or incurred by Landlord, the Partnership or
Maryland National Leasing Corporation ("MNLC") in connection with the
acquisition, financing, improvement, ownership or leasing of the Premises, all
personal property or fixtures therein or thereon and the real property subject
to the Ground Lease) and (b) the applicable percentage factor set forth on the
Schedule of Stipulated Loss Values on Exhibit "C" attached hereto. The
Stipulated Loss Value shall be payable on and determined as of the next
scheduled rent payment date after the date upon which Landlord gives written
notice of its election to require payment thereof. Upon payment of the
liquidated damages this Lease shall terminate.

                     At such time as Landlord closes on a sale of the Premises,
Landlord shall repay to Tenant so much of the amount Landlord received from
Tenant on account of the Stipulated Loss Value, pursuant to this Paragraph 18.4
, as is equal to the net proceeds of sale of the Premises less any costs or
expenses (including reasonable attorneys fees) Landlord incurred in connection
with reacquiring possession of, holding and selling the Premises. Landlord shall
use good faith efforts to maximize the net profit upon the sale to the Premises.

           19. DAMAGE OR DESTRUCTION. If during the Lease term the Premises are
damaged or destroyed by fire or other casualty, Tenant shall promptly cause such
damage to be repaired or the Premises to be rebuilt. The Premises shall be
repaired or rebuilt to its condition immediately prior to the casualty. To the
extent insurance proceeds on account of such damage are made available to
Landlord and are free from the superior 
<PAGE>
 
claim of any mortgagee or holder of any deed of trust, Landlord shall, provided
the tenant is not in Default hereof, make such insurance proceeds available to
Tenant, as reimbursement for Tenant';s expenses in connection with the repair or
rebuilding. To the extent such proceeds are insufficient to pay for the repairs
or rebuilding required of Tenant pursuant to this Paragraph 19, Tenant shall
supply any and all additional funds necessary to complete the required work.
There shall be no abatement of rent whether or not such fire or other casualty
makes any portion or all of the Premises untenantable. In the event such fire or
other casualty damages or destroys any of Tenant's leasehold improvements,
alterations, betterments, fixtures or equipment, Tenant shall cause the same to
be repaired or restored at Tenant's sole cost and expense.

           20. IMPROVEMENTS TO PREMISES. Landlord shall improve the Premises by
the construction of an approximately fifteen thousand (15,000) square foot
building. Tenant shall cause the construction of the building, as construction
manager for Landlord, in strict conformity with the terms and provisions of the
Purchase and Assignment Agreement. The building to be constructed shall at all
times be deemed to be part of the Premises and shall be subject to all terms and
conditions of this Lease. The building shall at all times be the property of
Landlord subject to the Tenant's rights under this Lease.

           21. RIGHT OF ENTRY. Landlord and its agents, servants, employees,
including any builder or contractor employed by Landlord, shall have the
absolute and unconditional right, license and permission, at any and all
reasonable times, to enter and inspect the Premises or any part thereof, and at
the option of Landlord, to make such reasonable repairs and/or changes in the
Premises as Landlord may deem necessary or proper and/or to enforce and carry
out any provision of this Lease.

           22. EXPIRATION OF TERM. It is agreed that the term of this Lease
shall expire and terminate at the end of the original term hereof or at the end
of any renewal term, as the case may be, without the necessity of any notice by
or to any of the parties hereto, unless otherwise provided herein. If Tenant
fails to vacate the Premises when required, Tenant shall hold the Premises as a
tenant from month to month, subject to all the other terms and conditions of
this Lease, but shall pay rent at an amount equal to double the Annual Net Rent
in effect just prior to such expiration or termination. Landlord shall, upon
such expiration or termination of this Lease, be entitled to the benefit of all
laws relating to the speedy recovery of possession of lands and tenements held
over by tenants that may be now in force or may hereafter be enacted.

           23.       CONDEMNATION.

                     23.1 TAKING OF A MATERIAL PART. If during the term of this
Lease all or any material part or the Premises shall be taken by or under power
of eminent domain then, at Landlord's option, either (1) this Lease shall
terminate as of, and the rent (Annual Net Rent and Additional Rent) shall be
apportioned to and abate from and after, the next rent payment date following
the date of taking and the Tenant shall pay to the Landlord, on such date the
Stipulated Loss Value together with rent (Annual Net Rent and Additional Rent)
accrued until and including such date plus any other monies due Landlord and any
monies paid by Landlord on account of pursuing the condemnation proceeding
(including reasonable attorney's fees). After payment of the Stipulated Loss
Value and the other monies referred to in this Paragraph 23, Tenant shall be
entitled to receive any award from the condemning authority up to the amount of
the Stipulated Loss Value payment, and Landlord shall use reasonable efforts to
maximize any condemnation award; or (2) this Lease shall terminate and the rent
(Annual Net Rent and Additional Rent) shall be apportioned to and abate from and
after the date title vests in the condemning authority, and Tenant shall have no
right to participate in any award of damages for such taking and hereby assigns
all of its right, title and interest therein to Landlord.

                     23.2 TAKING OF LESS THAN MATERIAL PART. In the event less
than a material part of the Premises is taken, Landlord shall receive any
condemnation award and Tenant shall, at its expense, promptly make such repairs
and improvements as shall be necessary to make the remainder of the Premises
adequate to permit Tenant to carry on its business to substantially the same
extent and with substantially the same efficiency as before the taking. Landlord
shall make available to Tenent such condemnation proceeds as are available to
Landlord and free from the superior claim of any mortgagee or holder of any deed
of trust, to defray the cost of reconstruction or repair actually incurred by
Tenant. In no event shall Landlord be required to expend 
<PAGE>
 
an amount in excess of the award received by Landlord for such taking. In no
event shall there be any abatement of the rent hereunder (Annual Net Rent and
Additional Rent).

                     23.3 DEFINITIONS. For purposes of this Paragraph "taking"
shall include a negotiated sale or lease or transfer of possession of the
Premises to a condemning authority under bona fide threat of condemnation for
public use. For purposes of this Paragraph, "a material part of the Premises"
shall mean such part that the remainder thereof is, in Landlord's sole
discretion, rendered inadequate to be attractive to prospective tenants and
support a rental stream sufficient to provide Landlord with its required after
tax return.

                     23.4 TENANT'S PARTICIPATION IN AWARD. Nothing herein shall
be deemed to prevent Tenant from claiming and receiving from the condemning
authority if legally payable, compensation for the taking of Tenant's own
tangible property and such amount as may be payable by statute or ordinance
toward Tenant's damages for Tenant's loss of business and relocation expenses.

           24. SUBORDINATION. This Lease shall be subject and subordinate to the
lien of any ground leases, mortgages and/or deeds of trust now or hereafter
placed or imposed upon the Premises,unless the ground lessor, the mortgagee of
such mortgage or the holder of such deed of trust elects to have Tenant's
interest hereunder superior to he interest of the ground lessor, mortgagee of
such mortgage or the holder of such deed of trust. This subordination provision
shall be self-operative and no further instrument of subordination shall be
required. Tenant agrees to execute any documents which are required to effect
such subordination. Tenant further hereby constitutes and appoints Landlord as
tenant's attorney-in-fact to execute any such instrument for and on behalf of
Tenant. Upon Tenant's written request, Landlord will use reasonable efforts to
obtain from the holders of any mortgage or deed of Trust a non-disturbance
agreement, which would provide that in the event of any foreclosure sale
Tenant's possession of the Premises shall not be disturbed provided Tenant is
not in Default of this Lease.

           25. CERTIFICATIONS. Tenant shall, without charge and from time to
time, within Ten (10) days following the written request of the Landlord,
execute, acknowledge and deliver a written certificate affirming, that to the
best knowledge, information and belief of the Tenant:

                     (a) This Lease is unmodified and in full force and effect,
or if there have been any modifications, that the Lease is in full force and
effect as modified and stating the modifications.

                     (b) Whether or not there then exists any set-offs or
defenses against the enforcement of any of the agreements, terms, covenants or
conditions of this Lease and any modifications thereto upon the part of the
Landlord (as applicable) to be performed or complied with, and if so specifying
the same.

                     (c) The date, if any, to which the Annual Net Rent,
Additional Rent and any other charges payable hereunder has been paid in
advance.

                     (d) The amount of the Total Project Costs through a certain
date are as set forth on Landlord's certificate.

                     (e) Any such other matters and facts as are reasonably
requested by Landlord.

           26. ADVERTISE FOR RENT OR SALE. During the last one hundred eighty
(180) days of the final term of this Lease (being that term following which no
renewal term exists or has been exercised by the Tenant), the Landlord may
maintain "to rent" or "for sale" signs at reasonable locations upon the exterior
of the Premises and may exhibit the Premises to any prospective tenants and
purchasers following reasonable advance notice to tenant.

           27. ATTORNMENT. If Landlord assigns this Lease or the rents hereunder
to a creditor as security for a debt, Tenant shall, after notice of such
assignment and upon demand by Landlord or the assignee, pay all sums thereafter
becoming due Landlord hereunder to such assignee. Tenant shall also, upon
receipt of such notice, have all policies of insurance required hereunder
endorsed so as to protect the assignee's interest as it may 
<PAGE>
 
appear and shall deliver such policies, or certificates thereof to the assignee.
In the event the Premises are sold at any foreclosure sale or sales, by virtue
of any judicial proceedings or otherwise, this Lease shall continue in full
force and effect and Tenant agrees, upon request, to attorn to and acknowledge
the foreclosure purchaser or purchasers as such sale as the Landlord hereunder.

           28. NON-WAIVER OF FUTURE ENFORCEMENT. The receipt of rent by Landlord
with knowledge of any breach of this Lease by Tenant, or of any default on the
part of Tenant in the observance or performance of any of the conditions or
covenants of this Lease, shall not be deemed to be waiver of any provisions of
this Lease. No failure on the part of Landlord to enforce any covenant or
provision herein contained nor any waiver of any right hereunder by Landlord,
shall discharge or invalidate such covenant or provision or affect the right of
Landlord to enforce the same in the event of any subsequent default. The receipt
by Landlord of any rent or any sum of money or any other consideration hereunder
paid by Tenant after the termination, in any manner, of the term herein demised,
will not destroy, or in any manner impair the efficacy of any such notice to
termination as may have been given hereunder by Landlord to Tenant prior the the
receipt of any such sum of money or other consideration, unless so agreed to in
writing and signed by Landlord. Neither acceptance of the keys nor any other act
or thing done by Landlord or any agent or employee during the term herein
demised shall be deemed to be and acceptance of surrender of said Premises,
excepting only an agreement in writing signed by Landlord accepting or agreeing
to accept such surrender.

           29. RECORDATION OF LEASE. Tenant agrees that it will, upon Landlord's
request, execute a memorandum of this Lease in a form suitable for recording
under applicable law. The parties shall divide equal all costs of recordation.

           30. NOTICE. Any notice required or permitted by or in connection with
this Lease shall be in writing and made by hand delivery or by over night
delivery service or by certified mail, return receipt requested, postage
prepaid, addressed to the respective parties at the appropriate address set
forth below or to such other address as may be hereafter specified by written
notice by any party, and shall be considered given as of the date of hand
delivery or as of one (1) day after sending overnight delivery service or three
(3) days after the date of mailing, independent of the date of delivery, as the
case may be:

           If to Tenant:                  Physics International Company
                                          2700 Merced Street
                                          P.O. Box 1538
                                          San Leandro, CA  94577
                                          Attn:  J.H. Banister, Jr.

                                          Copy to:

                                          Olin Corporation
                                          120 Long Ridge Road
                                          Stamford, Connecticut  06904
                                          Attn:  Corporate Secretary

           If to Landlord:     The Connecticut National Bank
                                          777 Main Street
                                          Hartford, Connecticut  06115
                                          Attn: Bond and Trustee Administration

                                          Copy to:

                                          Maryland National Leasing Corporation
<PAGE>
 
                                          502 Washington Avenue
                                          Townson, Maryland  21204
                                          Attn:  Vice President-Operations

                                          Copy to:

                                          Olin Financial Services, Inc.
                                          120 Long Ridge Road
                                          P.O. Box 1355
                                          Stamford, Connecticut  06904
                                          Attn: Corporate Secretary

                                          Copy to:

                                          Alan J. Mogol, Esquire
                                          Ober, Kaler, Grimes & Shriver
                                          1600 Maryland National Bank Building
                                          10 Light Street
                                          Baltimore, Maryland  21202

           31. SEVERABILITY. It is agreed that, for the purpose of any suit
brought or based on this Lease, this Lease shall be construed to be a divisible
contract, to the end that successive actions may be maintained thereon as
successive periodic sums shall mature or be due hereunder, and it is further
agreed that failure to include in any suit or action any sum or sums then
matured or due shall not be a bar to the maintenance of any suit or action for
the recovery of said sum of sums so omitted; and Tenant agrees that it will not
in any suit or suits brought or arising under this Lease for a matured sum for
which judgement has not previously been obtained or entered, plead, rely on or
interpose the defenses of RES JUDICATA, former recovery, extinguishment, merger,
election or remedies or other similar defense as a defense to said suit or
suits. If any term, clause or provision of this Lease is declared invalid by a
court of competent jurisdiction, the validity of the remainder of this Lease
shall not be affected thereby but shall remain in full force and effect.

           32. NON-WAIVER. It is understood and agreed that nothing herein shall
be construed to be a waiver of any of the terms, covenants or conditions herein
contained, unless the same shall be in writing, signed by the party to be
charged with such waiver and no waiver of the breach of any covenant herein
shall be construed as a waiver of such covenant or any subsequent breach
thereof. No mention in this Lease of any specific right or remedy shall preclude
Landlord from exercising any other right or from having any other remedy or from
maintaining any action to which it may be otherwise entitled either at law or in
equity.

           33. SUCCESSORS AND ASSIGNS. Except as otherwise herein provided, this
Lease and the covenants and conditions herein contained shall inure to the
benefit of and be binding upon landlord and Tenant and their respective,
successors and assigns. In the event Landlord's interest under this Lease is
transferred or assigned and written notice thereof is given to Tenant, Landlord,
or any subsequent assignee or transferee of Landlord's interest under this Lease
who gives such notice to Tenant shall automatically be relieved and released
from and after the date of such transfer or conveyance from all liability
hereunder. The liability of Landlord, its successors and assigns, under this
Lease shall at all times be limited solely to Landlord's interest in the land
and improvements comprising the Premises and in the event the owner of
Landlord's interest in this Lease is at any time an individual, partnership,
joint venture or unincorporated association, Tenant agrees that such individual
or the members or partners of such partnership, joint venture or unincorporated
association shall not be personally or individual liable or responsible for the
performance of any of Landlord's obligation hereunder.
<PAGE>
 
           34. CAPTIONS. The captions of the various sections of this Lease are
for convenience only and are not part of the Lease. Such captions shall not be
construed to define or limit any of the provisions of this lease.

           35. FINAL AND ENTIRE AGREEMENT. This Lease contains the final and
entire agreement between the parties hereto, and neither they nor their agents
shall be bound by any terms, conditions or representations not herein written.

           36. PURCHASE AND ASSIGNMENT AGREEMENT AND GROUND SUBLEASE. The
covenants, duties and obligations of Tenant hereunder shall be supplemental to
the covenants, duties and obligations of the Tenant under the Purchase and
Assignment Agreement and Ground Sublease. No provision of this Lease shall ever
be construed to restrict, limit or modify any covenant, duty or obligation of
the Tenant under the Purchase and Assignment Agreement and Ground Sublease. All
of Landlord's rights and remedies hereunder shall be cumulative and supplemental
to Landlord's rights and remedies under the Ground Sublease and the Purchase and
Assignment Agreement. In the event the Landlord's rights under the Ground Lease
are terminated for any reason, then Landlord may elect to terminate this Lease
simultaneously with the termination of Landlord's rights under the Ground Lease.

           37. GOVERNING LAW. The laws of the State of California shall govern
the rights and obligations of the parties to this Lease and the interpretation,
construction and enforceability thereof and any and all issues relating to the
transactions contemplated in this Lease. Tenant consents to the jurisdiction of
the courts of State of Maryland, including the jurisdiction of the United States
District Court for the District of Maryland to the extent a jurisdictional basis
exists, and agrees that venue shall be proper in any county in the State of
Maryland, in the City of Baltimore or in the United States District Court for
the District of Maryland if suit is filed to enforce, interpret or construe this
Lease.

           38.       TAX INDEMNIFICATION.

                     38.1 GENERAL. Tenant's indemnification obligations
hereunder shall not extend to changes in applicable corporate income tax rates.
If by reason of the misrepresentation of or breach by Tenant, of the warranty
and representation set forth in Section 10 (e) hereof, Landlord in computing its
taxable income or liability for tax, shall either lose, or shall not have, or
shall lose the right to claim, or there shall be disallowed or recaptured, for
Federal and/or state income tax purposes, in whole or in part, the benefit of
ACRS Deductions; hereinafter referred to as a "Loss"; then Tenant shall pay
Landlord the Tax Indemnification Payment as additional rent. As used herein,
"ACRS Deductions" shall mean the deductions under the Accelerated Cost Recovery
System with respect to the acquisition cost of any item of the Premises in
accordance with the accelerated method set for the in Section 168 (as in effect
on the date such item of the Premises is first placed in service) of the
Internal Revenue Code of 1986, as now or hereafter amended, for property
assigned to the depreciation categories specified in Exhibit B attached hereto;
and "Tax Indemnification Payment" shall mean such amount as, after consideration
of (i) all taxes required to be paid by Landlord in respect of the receipt
thereof under the laws of any governmental or taxing authority in the United
States, and (ii) the amount of any interest of penalties which may be payable by
Landlord in connection with the Loss or contesting the Loss pursuant to
Paragraph 38.2 hereof, shall be required to cause Landlord's after-tax net
return (the "Net Return") to be equal to, but no greater than, the Net Return
contemplated consistently with current tax laws as of the date of this Lease.

                     Landlord promptly shall notify Tenant in writing of such
Loss and Tenant shall pay to Landlord the Tax Indemnification Payment within
thirty (30) days of such notice unless such loss is contested pursuant to
Paragraph 38.2 hereof. For these purposes, a Loss shall occur upon the earliest
of (i) the happening of any event (such as disposition or change in use of the
Premises, which will cause such Loss; (ii) the payment by Landlord to the
Internal Revenue Service or State taxing authority of the tax increase resulting
from such Loss; (iii) the date on which the Loss is realized by Landlord; or
(iv) the adjustment of the tax return of Landlord to reflect such Loss.

                     The tax indemnification provided in this Section 38 is for
the benefit of the Trustee, the Partnership, Olin Financial Services, Inc.
("OFC") and MNLC. As used in this Section 38, the term "Landlord" 
<PAGE>
 
shall mean and include the Trustee, the Partnership, OFS and MNLC, and the
consolidated Federal taxpayer group of which each is a member (as applicable).

                     38.2 CONTEST. If the Internal Revenue Services makes a
claim against Landlord which, if successful, would require Tenant to make a Tax
Indemnification Payment, Landlord agrees to contest the claim on request of
Tenant subject to the following conditions:

                               (a) Landlord agrees promptly after becoming aware
thereof to notify Tenant of any such claim. Tenant agrees that, in the event it
desires the claim to be contested, it shall request Landlord to contest the
claim within thirty (30) days after such notice from Landlord. Landlord agrees
not to make any payment of any tax which is the subject of the claim before it
gives the notice and during the thirty (30) day period after it gives the
notice.

                               (b) Landlord shall consult with Tenant regarding
the commencement and prosecution of any and all administrative proceedings with
the Internal Revenue Service in contesting the claim. Landlord reserves the
right to decline to pursue administrative proceedings. If administrative
proceedings are not pursued or are not successful, Landlord shall, at the
request of Tenant, contest the claim by either paying the tax claimed and suing
for a refund in the appropriate court or contesting the claim in the United
States Tax Court and, if necessary, bring the appropriate appeals.

                               (c) Prior to taking any such action and prior to
each appeal from any adverse determination, Landlord shall have received from
Tenant an opinion of outside tax counsel of recognized standing, which counsel
is reasonably acceptable to Landlord, to the effect that on the basis of law and
fact a meritorious defense exists to such claim or that there is a meritorious
basis for such refund claim, identifying such defense or basis, as the case may
be. Subject to the foregoing, in no event will Landlord compromise or settle the
claim or cease to contest the claim without the written consent of Tenant
(provided, however, that Landlord may so compromise, settle or cease to contest
if it waives in writing its right to an indemnity for any Loss resulting from
such claim). Tenant agrees to reimburse Landlord for all reasonable costs
incurred by Landlord as a result of contesting the claim and to pay all
reasonable costs and expenses which Landlord may incur in contesting the claim.
These costs and expenses shall include, without limitation, reasonable
attorneys' and accountants' fees and disbursements. If Tenant elects to pay the
tax claimed and sue for a refund, Tenant shall provide Landlord with sufficient
funds (as an interest free loan to pay the tax).

                               (d) If any such claim referred to above shall be
made by the Internal Revenue Service and Tenant shall have requested Landlord to
contest such claim and otherwise has complied with its obligations under this
sub-part, Tenant's liability for indemnification hereunder shall become fixed
upon final determination of the liability of Landlord. At such time, Tenant
shall become obligated for the payment of any indemnification hereunder
resulting from the outcome of such contest. If Tenant has provided funds to
Landlord (as an interest free loan) to pay the tax (pursuant tho the foregoing
paragraph) and Landlord subsequently receives a refund of tax in connection with
such final determination (or would have received a refund had any payment made
from funds provided by Tenant not been applied in payment of a tax liability
determined to be owing by Landlord for which Tenant is not required to make a
Tax Indemnification Payment), such refund or an amount equal to such amount so
applied, together with any interest also received (or which would have been
received ) by Landlord and fairly attributable to such refund of tax or amount
so applied, will be paid over to Tenant, to the extent of Tenant's payment to
Landlord.

           39.       TENANT'S OPTION TO TERMINATE.

                     39.1 EXERCISE. So long as tenant is not in default hereof,
then in the event Tenant in good faith determines that it is uneconomic for
Tenant to continue leasing the Premises, Tenant may terminate this Lease
effective upon any date on which the next installment of Annual Net Rent is due
after December 31, 1988 (the "Tenant's Termination Date"), provided (i) Tenant
gives Landlord and least one hundred eighty (180) days' prior written notice,
and (ii) Tenant pays Landlord the Stipulated Loss Value calculated as of the
Termination Date (or the alternative amount required pursuant to Paragraph 39.2
hereof), plus all rent (Annual Net Rent and Additional Rent) due as of that date
and any other monies then owed Landlord by Tenant. Landlord may (at its
<PAGE>
 
 sole discretion) elect to sell the Premises to a third party or to determine
the fair market value of the Premises and notify Tenant thereof in writing.

                     39.2 ADJUSTMENT FOR FAIR MARKET VALUE. If Landlord elects
to determine the fair market value of the Premises and notify Tenant thereof in
writing and (a) if Tenant accepts Landlord's determination of fair market value,
on the Tenant's Termination Date, Tenant shall pay Landlord the amount (if any)
by which the Stipulated Loss Value exceeds the agreed fair market value, or (b)
if Tenant does not accept Landlord's determination of fair market value, on the
Tenant's Termination Date, Landlord shall convey to Tenant all right, title and
interest of Landlord in and to the Premises by grant deed upon receipt by
Landlord from Tenant of all sums due pursuant to Paragraph 39.1 hereof.

                     39.3 SUBSEQUENT SALE. If Landlord does not elect to
determine the fair market value and Landlord sells the Premises within two (2)
years after the Tenant's Termination Date, then at such time as Landlord closes
on a sale of the Premises, Landlord shall apply the net proceeds of sale of the
Premises (less any costs or expenses, including reasonable attorneys' fees,
incurred by Landlord in connection with reacquiring possession, holding and
selling the Premises) to reimburse Tenant for the amount paid by Tenant to
Landlord as Stipulated Loss Value under Paragraph 39.1, solely to the extent of
such Stipulated Loss Value actually received by Landlord from Tenant. Landlord
shall use its good faith efforts to maximize the net proceeds upon any sale of
the Premises.

           40.       LANDLORD'S OPTION TO TERMINATE.

                     40.1 EXERCISE. In the event there shall be any change in
the ownership of the capital stock or voting power of Guarantor and as a result
thereof any one or more of Guarantor's senior lenders shall call any senior loan
indebtedness, then Landlord may, upon thirty (30) days' prior written notice,
terminate this Lease and cause Tenant to pay to Landlord the Stipulated Loss
Value (or the alternative amount required pursuant to Paragraph 40.2 hereof),
determined and payable as of the date upon which the next installment of Annual
Net Rent is due, plus all rent (Annual Net Rent and Additional Rent) prorated
through the date of termination (the "Landlord's Termination Date") and any
other monies then due Landlord from Tenant. Notwithstanding the payment of the
Stipulated Loss Value, Tenant shall be permitted to remain in possession of the
Premises for up to one hundred fifty (150) days from Landlord's notice, subject
to all the terms and conditions of this Lease but Tenant shall continue to pay
Annual Net Rent in the amount last due prior to Landlord's notice. Landlord may
(at its sole discretion) elect to sell the Premises to a third party or to
determine the fair market value of the Premises and notify Tenant thereof in
writing.

                     40.2 ADJUSTMENT FOR FAIR MARKET VALUE. If Landlord elects
to determine the fair market value of the Premises and notify Tenant thereof in
writing and (a) if Tenant accepts Landlord's determination of fair market value,
on the Landlord's Termination Date, Tenant shall pay Landlord the amount (if
any) by which the Stipulated Loss Value exceeds the agreed fair market value, or
(b) if tenant does not accept Landlord's determination of fair market value, on
the Landlord's Termination Date, Landlord shall convey to Tenant all right,
title and interest of Landlord in and to the Premises by grant deed upon receipt
by Landlord from Tenant of all sums due pursuant to Paragraph 40.1 hereof.

                     40.3 SUBSEQUENT SALE. If Landlord does not elect to
determine the fair market value and Landlord sells the Premises within two (2)
years after the Landlord's Termination Date, then at such time as Landlord
closes on a sale of the Premises, landlord shall apply the net proceeds of sale
of the Premises (less any costs or expenses, including reasonable attorneys'
fees, incurred by Landlord in connection with reacquiring possession, holding
and selling the Premises) to reimburse Tenant for the amount paid by Tenant to
Landlord as Stipulated Loss Value under Paragraph 40.1, solely to the extent of
such Stipulated Loss Value actually received by landlord from Tenant. Landlord
shall use its good faith efforts to maximize the net proceeds upon any sale of
the Premises.

           41. QUIET ENJOYMENT. Landlord covenants that, upon the payment of the
rent (Annual Net Rent and Additional Rent) herein, Tenant shall have and hold
the Premises, free from any interference from the
<PAGE>
 
Landlord, but subject to the terms of this Lease, of any mortgage, deed of
trust, or other security instrument now existing or hereafter placed on the
Premises or any portion thereof.

           42. SURVIVAL OF OBLIGATIONS. All of Tenant's duties and obligations
which accrue during the term of this Lease shall survive the expiration of
earlier termination of this Lease.

           IN WITNESS WHEREOF, the parties hereto have executed this Lease under
seal as of the day and year above written with the specific intention that this
Lease constitute and instrument under seal.

WITNESS/ATTEST                          LANDLORD:
                                        THE CONNECTICUT NATIONAL BANK, not
                                        individually but solely in its capacity
                                        as Trustee

                                   By:                          (SEAL)

                                         TENANT:
                                         PHYSICS INTERNATIONAL COMPANY

                                   By:                           (SEAL)