Document:

Exhibit
10.6

 

2003 EQUITY
INCENTIVE PLAN

OF 

PEREGRINE
SYSTEM, INC.

 

 

TABLE OF CONTENTS

 

	
  1.

  	
  Purpose
  of this Plan

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  Definitions and
  Rules of Interpretation

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  2.1

  	
  Definitions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  2.2

  	
  Rules
  of Interpretation

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  Shares
  Subject to this Plan; Term of this Plan

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  3.1

  	
  Number
  of Award Shares

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  3.2

  	
  Source of Shares

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  3.3

  	
  Term of this Plan

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  Administration

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.1

  	
  General

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.2

  	
  Authority of
  the Board or the Committee

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.3

  	
  Scope of
  Discretion

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  Persons Eligible to
  Receive Awards

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.1

  	
  Eligible
  Individuals

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.2

  	
  Section
  162(m) Limitation

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  Terms and Conditions of
  Options

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.1

  	
  Price

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.2

  	
  Term

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.3

  	
  Vesting

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.4

  	
  Form and Method of Payment

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.5

  	
  Nonassignability of Options

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.6

  	
  Substitute
  Options

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.7

  	
  Repricings

  	
   

  

 

i

 

	
  7.

  	
  Incentive
  Stock Options

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
  Stock Appreciation Rights,
  Stock Awards and Cash Awards

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  8.1

  	
  Stock
  Appreciation Rights

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  8.2

  	
  Stock Awards

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  8.3

  	
  Cash Awards

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
  Exercise of Awards

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.1

  	
  In General

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.2

  	
  Time of Exercise

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.3

  	
  Issuance
  of Award Shares

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.4

  	
  Termination

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
  Certain Transactions
  and Events

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  10.1

  	
  In General

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  10.2

  	
  Changes in Capital
  Structure

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  10.3

  	
  Fundamental
  Transactions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  10.4

  	
  Changes of Control

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  10.5

  	
  Divestiture

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  10.6

  	
  Dissolution

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  10.7

  	
  Cut-Back to Preserve
  Benefits

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
  Automatic Option Grants
  to Non-Employee Directors and Non-Employee Director Fee Option Grants

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  11.1

  	
  Automatic Option Grants to
  Non-Employee Directors

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  11.2

  	
  Director Fee Option Grants

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  11.3

  	
  Certain
  Transactions and Events

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  11.4

  	
  Limited
  Transferability of Options

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  12.

  	
  Withholding
  and Tax Reporting

  	
   

  

 

ii

 

	
   

  	
  12.1

  	
  Tax Withholding Alternatives

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.2

  	
  Reporting of Dispositions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  13.

  	
  Compliance
  with Law

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  13.1

  	
  Compliance with Applicable Law

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  13.2

  	
  Financial
  Information

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  14.

  	
  Amendment
  ox Termination of this Plan or Outstanding Awards

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  14.1

  	
  Amendment and Termination

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  14.2

  	
  Stockholder
  Approval

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  14.3

  	
  Effect

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  15.

  	
  Reserved Rights

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  15.1

  	
  Nonexclusively of this Plan

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  15.2

  	
  Unfunded Plan

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  16.

  	
  Special
  Arrangements Regarding Award Shares

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  16.1

  	
  Escrow of Stock Certificates

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  16.2

  	
  Repurchase Rights

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  17.

  	
  Beneficiaries

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  18.

  	
  Miscellaneous

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  18.1

  	
  Governing Law

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  18.2

  	
  Determination of Value

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  18.3

  	
  Reservation of Shares

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  18.4

  	
  Electronic Communications

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  18.5

  	
  Notices

  	
   

  

 

iii

 

2003 EQUITY INCENTIVE PLAN

OF

PEREGRINE SYSTEM, INC.

 

1.             Purpose of this Plan

 

The
purpose of this Amended and Restated Peregrine Systems, Inc. 1994 Stock Option
Plan, hereinafter renamed and referred to as the 2003 Equity Incentive Plan of
Peregrine Systems, Inc. or the Plan, is to enhance the long-term stockholder
value of Peregrine Systems, Inc. by offering opportunities to eligible
individuals to participate in the growth in value of the equity of Peregrine
Systems, Inc. Notwithstanding anything herein to the contrary, the material
terms of Options granted under this Plan, including, but not limited to, the
exercise price, vesting and time period wherein which such Options may be
exercised, are not intended to differ in any material respects from such
Options granted under the this Plan prior to the Effective Date, except as may
be necessary to comply with the California Corporate Securities Law of 1968, as
amended, which effect is likely to be minimal, if any.

 

2.             Definitions and Rules of
Interpretation

 

2.1           Definitions.  This
Plan uses the following defined terms:

 

(a)           “Administrator”  means
the Board, the Committee, or any officer or employee of the Company to whom the
Board or the Committee delegates authority to administer this Plan.

 

(b)           “Affiliate”  means a “parent” or “subsidiary” (as each
is defined in Section 424 of the Code) of the Company and any other entity that
the Board or Committee designates as an “Affiliate” for purposes of this Plan.

 

(c)           “Applicable Law” means any and all laws of
whatever jurisdiction, within or without the United States, and the rules of
any stock exchange or quotation system on which Shares are listed or quoted,
applicable to the taking or refraining from taking of any action under this
Plan, including the administration of this Plan and the issuance or transfer of
Awards or Award Shares.

 

(d)           “Award”  means
a Stock Award, SAR, Cash Award, or Option granted in accordance with the terms
of this Plan.  

(e)           “Award
Agreement”  means
the document evidencing the grant of an Award.

 

(f)            “Award Shares”  means Shares covered by an outstanding Award or purchased
under an Award.

 

(g)           “Awardee”  means:
(i) a person to whom an Award has been granted, including a holder of a
Substitute Award, (ii) a person to whom an Award has been transferred in
accordance with all applicable requirements of Sections 6.5, 7(h), and 17.

 

2

 

(h)           “Bankruptcy Court”  means the court of competent jurisdiction that approves the
Plan of Reorganization.

 

(i)            “Board”  means
the Board of Directors of the Company.

 

(j)            “Business Day”  means any day, other than a Saturday, a Sunday or a “legal
holiday” as defined in Rule 9006(a) of the Federal Rules of Bankruptcy
Procedure promulgated pursuant to § 28 U.S.C. § 2075.

 

(k)           “Cash Award”means the right to receive cash as described in Section 8.3.

 

(1)           “Change in Control”  means any transaction or event that the Board specifies as
a Change in Control under Section 10.4.

 

(m)          “Code”  means
the Internal Revenue Code of 1986.

 

(n)           “Committee”means a committee composed of Company Directors appointed in
accordance with the Company’s charter documents and Section 4.

 

(o)           “Company” means Peregrine Systems, Inc., a
Delaware corporation.

 

(p)           “Company Director” means a Member of the
Board.

 

(q)           “Confirmation Date”  means the date on which the clerk of the Bankruptcy Court
enters a Confirmation Order on the docket of such court.

 

(r)            “Confirmation Order”  means the order entered by the Bankruptcy
Court approving the Plan of Reorganization.

 

(s)           “Consultant”means an individual who, or an employee of any entity that, provides
bona fide services to the Company or an Affiliate, but who is not an Employee
and who is compensated for such services.

 

(t)            “Director”means a member of the Board of Directors of the Company or an
Affiliate.

 

(u)           “Divestiture”means any transaction or event that the Board specifies as a
Divestiture under Section 10.5.

 

(v)           “Domestic Relations Order”  means a “domestic relations order” as
defined in, and otherwise meeting the requirements of Section 414(p) of the
Code, except that reference to a “plan” in that definition shall be to this
Plan.

 

(w)          “Effective Date”  means the date upon which this Amended and Restated
Peregrine Systems, Inc. 1994 Stock Option Plan (renamed the 2003 Equity
Incentive Plan of Peregrine Systems, Inc.) shall become effective, which date
shall be the 10th Business Day after the Confirmation Date, provided, however,
that certain stockholders of the Company have approved this Plan (the “Class 11
Stockholders”) pursuant to the terms of the Plan of Reorganization.

 

3

 

(x)            “Employee”means a regular employee of the Company or an Affiliate, including
an officer or Director, who is treated as an employee in the personnel records
of the Company or an Affiliate, but not individuals who are classified by the
Company or an Affiliate as: (i) leased from or otherwise employed by a third
party, (ii) independent contractors, or (iii) intermittent or temporary
workers.  The Company’s or an
Affiliate’s classification of an individual as an “Employee” (or as not an
“Employee”) for purposes of this Plan shall not be altered retroactively even
if that classification is changed retroactively for another purpose as a result
of an audit, litigation or otherwise. 
An Awardee shall not cease to be an Employee due to transfers between
locations of the Company, or between the Company and an Affiliate, or to any
successor to the Company or an Affiliate that assumes the Awardee’s Options
under Section 10.  Neither service as a
Director nor receipt of a director’s fee shall be sufficient to make a Director
an “Employee.”

 

(y)           “Exchange Act”  means the Securities Exchange Act of 1934.

 

(z)            “Executive” means, if the Company has any
class of any equity, security registered under Section 12 of the Exchange Act,
an individual who is subject to Section 16 of the Exchange Act or who is a
“covered employee” under Section 162(m) of the Code, in either case because of
the individual’s relationship with the Company or an Affiliate.  If the Company does not have any class of
any equity security registered under Section 12 of the Exchange Act,
“Executive” means any (i) Director, (ii) officer elected or appointed by the
Board, or (iii) beneficial owner of more than 10% of any class of the Company’s
equity securities.

 

(aa)         “Expiration Date”  means, with respect to an Award, the date stated in the
Award Agreement as the expiration date of the Award or, if no such date is
stated in the Award Agreement, then the last day of the maximum exercise period
for the Award, disregarding the effect of an Awardee’s Termination or any other
event that would shorten that period.

 

(bb)         “Fair Market Value”  means the value of Shares as determined under Section 18.2.

 

(cc)         “Fundamental Transaction” means any
transaction or event described in Section 10.3.

 

(dd)         “Grant Date”means the date the Administrator approves the grant of an
Award.  However, if the Administrator
specifies that an Award’s Grant Date is a future date or the date on which a
condition is satisfied, the Grant Date for such Award is that future date or
the date that the condition is satisfied.

 

(ee)         “Incentive Stock Option”  means an Option intended to qualify as an
incentive stock option under Section 422 of the Code and designated as an
Incentive Stock Option in the Award Agreement for that Option.

 

(ff)           “Nonstatutory Option”  means any Option other than an Incentive
Stock Option.

 

(gg)         “Non-Employee Director” means any person who
is a member of the Board but is not an Employee of the Company or any Affiliate
of the Company and has not

 

4

 

been an Employee of the Company or any Affiliate of the Company at any
time during the preceding twelve months. 
Service as a Director does not in itself constitute employment for purposes
of this definition.

 

(hh)         “Objectively Determinable Performance Condition”  shall mean a performance condition (i)
that is established (A) at the time an Award is granted or (B) no later than
the earlier of (1) 90 days after the beginning of the period of service to
which it relates, or (2) before the elapse of 25% of the period of service to
which it relates, (ii) that is uncertain of achievement at the time it is
established, and (iii) the achievement of which is determinable by a third
party with knowledge of the relevant facts. 
Examples of measures that may be used in Objectively Determinable
Performance Conditions include net order dollars, net profit dollars, net
profit growth, net revenue dollars, revenue growth, individual performance,
earnings per share, return on assets, return on equity, and other financial
objectives, objective customer satisfaction indicators and efficiency measures,
each with respect to the Company and/or an Affiliate or individual business
unit.

 

(ii)           “Officer”  means
an officer of the Company as defined in Rule 16a-l adopted under the Exchange
Act.

 

(jj)           “Option”  means
a right to purchase Shares of the Company granted under this Plan.

 

(kk)         “Option Price”  means the price payable under an Option for Shares, not
including any amount payable in respect of withholding or other taxes.

 

(ll)           “Option Shares”  means Shares covered by an outstanding Option or purchased
under an Option.

 

(mm)       “Plan”  means
this Amended and Restated Peregrine Systems, Inc. 1994 Stock Option Plan, hereinafter
renamed and referred to as the 2003 Equity Incentive Plan of Peregrine Systems,
Inc.

 

(nn)         “Plan of Reorganization”  means the Plan of Reorganization of
Peregrine Systems Inc. and Peregrine Remedy, Inc., for which the Bankruptcy
Court enters a Confirmation Order.

 

(oo)         “Purchase Price”  means the price payable under a Stock Award for Shares, not
including any amount payable in respect of withholding or other taxes.

 

(pp)         “Reorganization Adjustment Percentage”  means the number of Shares referred to in
Section 5.2 multiplied by a fraction, of which (i) the numerator is 15,000,000
and (ii) the denominator is the total number of Shares issued prior to the
Effective Date, or such number of Shares otherwise deemed appropriate by the
Committee, with the advice of the Company’s counsel, to ensure that the
Reorganization Adjustment Percentage complies with applicable tax and
securities laws.

 

(qq)         “Rule 16b-3” means Rule 16b-3 adopted under
Section 16(b) of the Exchange Act.

 

5

 

(rr)           “SAR”
or “Stock
Appreciation Right” means a right to receive cash based on a
change in the Fair Market Value of a specific number of Shares pursuant to an
Award Agreement, as described in Section 8.1.

 

(ss)         “Securities
Act” means the Securities Act of 1933.

 

(tt)           “Share”  means a share of the common stock of the
Company or other securities substituted for the common stock under Section 10.

 

(uu)         “Stock
Award” means an offer by the Company to sell shares subject to
certain restrictions pursuant to the Award Agreement as described in Section
8.2.

 

(vv)         “Substitute
Award” means a Substitute Option, Substitute SAR or Substitute
Stock Award granted in accordance with the terms of this Plan.

 

(ww)       “Substitute
Option” means an Option granted in substitution for, or upon the
conversion of, an option granted by another entity to purchase equity
securities in the granting entity.

 

(xx)          “Substitute
SAR” means a SAR granted in substitution for, or upon the
conversion of, a stock appreciation right granted by another entity with
respect to equity securities in the granting entity.

 

(yy)         “Substitute
Stock Award” means a Stock Award granted in substitution for, or
upon the conversion of, a stock award granted by another entity to purchase
equity securities in the granting entity.

 

(zz)          “Termination”
means that the Awardee has ceased to be, with or without any
cause or reason, an Employee, Director or Consultant.  However, unless so determined by the Administrator, or otherwise
provided in this Plan, “Termination” shall not include a change in status from
an Employee, Consultant or Director to another such status.  An event that causes an Affiliate to cease
being an Affiliate shall be treated as the “Termination” of that Affiliate’s
Employees, Directors, and Consultants.

 

2.2           Rules of Interpretation.  Any reference to a “Section,”
without more, is to a Section of this Plan. 
Captions and titles are used for convenience in this Plan and shall not,
by themselves, determine the meaning of this Plan.  Except when otherwise indicated by the context, the singular
includes the plural and vice versa.  Any
reference to a statute is also a reference to the applicable rules and
regulations adopted under that statute. 
Any reference to a statute, rule or regulation, or to a section of a
statute, rule or regulation, is a reference to that statute, rule, regulation,
or section as amended from time to time, both before and after the Effective
Date of this Plan and including any successor provisions.

 

3.             Shares Subject to this Plan; Term of this
Plan

 

3.1           Number of Award Shares.  Subject
to adjustment under Section 10, the maximum number of Shares that may be issued
under this Plan after the Effective Date is 2,650,000 which shall not be
increased or decreased by such number of Shares forfeited prior to the
Effective Date.  The maximum number of
Shares referred to in the preceding sentence shall be (i) decreased by such
number of Shares subject to outstanding grants under

 

6

 

 

this Plan on the Effective Date (adjusted to
take into account the decrease in the number of Shares as a result of the Plan
of Reorganization), provided, however, that the grant of such awards was made
on or after July 8, 2002, but before the Effective Date and (ii) increased by
any Shares referred to in Subsection 3.1(i) that are subsequently forfeited or
repurchased by the Company or that expire or become unexercisable for any
reason.  The maximum number of Shares shall
be cumulatively increased on January 1 of each year, beginning January 1, 2005
and each January 1 thereafter for 10 years, by a number of Shares equal to the
least of (a) 4% of the number of Shares issued and outstanding on the
immediately preceding December 31, (b) 267,000 Shares, and (c) a number of
Shares set by the Board.  When an Award
is granted, the maximum number of Shares that may be issued under this Plan
shall be reduced by the number of Shares covered by that Award.  However, if an Award later terminates or
expires without having been exercised in full, the maximum number of shares
that may be issued under this Plan shall be increased by the number of Shares
that were covered by, but not purchased under, that Award.  By contrast, the repurchase of Shares by the
Company shall not increase the maximum number of Shares that may be issued
under this Plan.

 

3.2           Source of Shares.  Award
Shares may be: (a) Shares that have never been issued, (b) Shares that have
been issued but are no longer outstanding, or (c) Shares that are outstanding
and are acquired to discharge the Company’s obligation to deliver Award Shares.

 

3.3           Term
of this Plan

 

(a)           This Plan shall be effective on, and
Awards may be granted under this Plan after, the date it has been both adopted
by the Board and approved by the Company’s stockholders.

 

(b)           Subject to the provisions of Section
14, Awards may be granted under this Plan for a period often years from the
date on which the stockholders approve this Plan (or such earlier date as may
be required by Applicable Law).

 

4.             Administration

 

4.1           General

 

(a)           The Board shall have ultimate responsibility for
administering this Plan.  The Board may
delegate certain of its responsibilities to a Committee, which shall consist of
at least two members of the Board.  The
Board or the Committee may further delegate its responsibilities to any
Employee of the Company or any Affiliate. 
Where this Plan specifies that an action is to be taken or a
determination made by the Board, only the Board may take that action or make
that determination.  Where this Plan
specifies that an action is to be taken or a determination made by the
Committee, only the Committee may take that action or make that
determination.  Where this Plan
references the “Administrator,” the action may be taken or determination made
by the Board, the Committee, or other Administrator.  However, only the Board or the Committee may approve grants of
Awards to Executives, and an Administrator other than the Board or the
Committee may grant Awards only within guidelines established by the Board or
Committee.  Moreover, all actions and
determinations by any Administrator are subject to the provisions of this Plan.

 

7

 

(b)           So long as the Company has registered an outstanding a
class of equity securities under Section 12 of the Exchange Act, the Committee
shall consist of Company Directors who are “Non-Employee Directors” as defined
in Rule 16b-3 and, after the expiration of any transition period permitted by
Treasury Regulations Section 1.162 27(h)(3), who are “outside directors” as
defined in Section 162(m) of the Code.

 

4.2           Authority of the Board or the Committee.  Subject
to the other provisions of this Plan, the Board or the Committee shall have the
authority to:

 

(a)           grant Awards, including Substitute Awards;

 

(b)           determine the Fair Market Value of Shares;

 

(c)           determine the Option Price and the Purchase Price of
Awards;

 

(d)           select the Awardees;

 

(e)           determine the times Awards are granted;

 

(f)            determine the number of Shares subject to each Award;

 

(g)           determine the methods of payment that may be used to
purchase Award Shares;

 

(h)           determine the methods of payment that may be used to
satisfy withholding tax obligations;

 

(i)            determine the other terms of each Award, including but not
limited to the time or times at which Awards may be exercised, whether and
under what conditions an Award is assignable, and whether an Option is a
Nonstatutory Option or an Incentive Stock Option;

 

(j)            modify or amend any Award;

 

(k)           authorize any person to sign any Award Agreement or other
document related to this Plan on behalf of the Company;

 

(1)           determine the form of any Award Agreement or other
document related to this Plan, and whether that document, including signatures,
may be in electronic form;

 

(m)          interpret this Plan and any Award Agreement or document
related to this Plan;

 

(n)           correct any defect, remedy any omission, or reconcile any
inconsistency in this Plan, any Award Agreement or any other document related
to this Plan;

 

(o)           adopt, amend, and revoke rules and regulations under this
Plan, including rules and regulations relating to sub-plans and Plan addenda;

 

8

 

(p)           adopt, amend, and revoke special rules and procedures
which may be inconsistent with the terms of this Plan, set forth (if the
Administrator so chooses) in sub-plans regarding (for example) the operation
and administration of this Plan and the terms of Awards, if and to the extent
necessary or useful to accommodate non-U.S. 
Applicable Laws and practices as they apply to Awards and Award Shares
held by, or granted or issued to, persons working or resident outside of the
United States or employed by Affiliates incorporated outside the United States;

 

(q)           determine whether a transaction or event should be treated
as a Change in Control, a Divestiture or neither;

 

(r)            determine the effect of a Fundamental Transaction and, if
the Board determines that a transaction or event should be treated as a Change
in Control or a Divestiture, then the effect of that Change in Control or
Divestiture; and

 

(s)           make all other determinations the Administrator deems
necessary or advisable for the administration of this Plan.

 

4.3           Scope of Discretion.  Subject
to the provisions of this Section 4.3, on all matters for which this Plan
confers the authority, right or power on the Board, the Committee, or other
Administrator to make decisions, that body may make those decisions in its sole
and absolute discretion.  Those
decisions will be final, binding and conclusive.  In making its decisions, the Board, Committee or other
Administrator need not treat all persons eligible to receive Awards, all
Awardees, all Awards or all Award Shares the same way.  Notwithstanding anything herein to the
contrary, and except as provided in Section 14.3, the discretion of the Board,
Committee or other Administrator is subject to the specific provisions and
specific limitations of this Plan, as well as all rights conferred on specific
Awardees by Award Agreements and other agreements.

 

5.             Persons Eligible to Receive Awards

 

5.1           Eligible Individuals.  Awards (including Substitute
Awards) may be granted to, and only to, Employees, Directors and Consultants,
including to prospective Employees, Directors and Consultants conditioned on
the beginning of their service for the Company or an Affiliate.  However, Incentive Stock Options may only be
granted to Employees, as provided in Section 7(g).

 

5.2           Section 162(m) Limitation.  Subject to the provisions of this
Section 5.2, for so long as the Company is a “publicly held corporation” within
the meaning of Section 162(m) of the Code: (i) no Employee may be granted one
or more Options within any fiscal year of the Company under this Plan to
purchase more than 900,000 Shares under Options, as adjusted by the
Reorganization Adjustment Percentage on the Effective Date, and subject to
further adjustment pursuant to Section 10, (ii) Options may be granted to an
Executive only by the Committee (and, notwithstanding anything to the contrary
in Section 4.1(a), not by the Board). 
If an Option is cancelled without being exercised or if the Option Price
of an Option is reduced, that cancelled or repriced Option shall continue to be
counted against the limit on Options that may be granted to any individual
under this Section 5.2.

 

9

 

6.             Terms and Conditions of Options

 

The following rules apply to all Options:

 

6.1           Price.  No
Option, whether or not intended as “qualified incentive based compensation” within
the meaning of Section 162(m) of the Code, may have an Option Price less than
100% of the Fair Market Value of the Shares on the Grant Date.  If an Option is granted to a person who, at
the Grant Date, owns more than 10% of the voting power of the Company or any
corporate Affiliate, that Option shall have an Option Price equal to or greater
than 110% of the Fair Market Value of the Shares on the Grant Date.  Notwithstanding anything herein to the
contrary, Options may be granted with an Option Price of less than 100% of the
Fair Market Value on the Grant Date pursuant to a Fundamental Transaction,
Change in Control or other corporate transaction.  In no event will the Option Price of any Option be less than the
par value of the Shares issuable under the Option if that is required by
Applicable Law.  The Option Price of an
Incentive Stock Option shall be subject to Section 7(f).

 

6.2           Term.  No
Option shall be exercisable after its Expiration Date.  No Option may have an Expiration Date that
is more than ten years after its Grant Date. 
Additional provisions regarding the term of Incentive Stock Options are
provided in Sections 7(a) and 7(e).

 

6.3           Vesting.  Options
shall be exercisable: (a) on the Grant Date, or (b) in accordance with a
schedule related to the Grant Date, the date the Optionee’s directorship,
employment or consultancy begins, or a different date specified in the Option
Agreement.  Notwithstanding the
foregoing, to the extent required by Applicable Law, Options shall be
exercisable at the rate of at least 20% per year over 5 years from the date the
option is granted, subject to reasonable conditions such as continued
employment.  Additional provisions
regarding the vesting of Incentive Stock Options are provided in Section
7(c).  No Option granted to an
individual who is subject to the overtime pay provisions of the Fair Labor
Standards Act may be exercised before the expiration of six months after the
Grant Date.

 

6.4           Form and Method of Payment

 

(a)           The Administrator shall determine the acceptable form and
method of payment for exercising an Option.

 

(b)           Acceptable forms of payment for all Option Shares are
cash, check or wire transfer, denominated in U.S. dollars except as specified
by the Administrator for non-U.S. Employees or non-U.S. sub-plans.

 

(c)           In addition, the Administrator may permit payment to be
made by any of the following methods:

 

(i)              other Shares, or
the designation of other Shares, which (A) are “mature” shares for purposes of
avoiding variable accounting treatment under generally accepted accounting
principles (generally mature shares are those that have been owned by the
Optionee for more than six months on the date of surrender), and (B) have a
Fair Market

 

10

 

Value on the date of surrender equal to the
Option Price of the Shares as to which the Option is being exercised;

 

(ii)           provided that a public market exists for the Shares,
consideration received by the Company under a procedure under which a licensed
broker-dealer advances funds on behalf of an Optionee or sells Option Shares on
behalf of an Optionee (a “Cashless
Exercise Procedure”),  provided that if the Company extends or
arranges for the extension of credit to an Optionee under any Cashless Exercise
Procedure, no Officer or Director may participate in that Cashless Exercise
Procedure;

 

(iii)          cancellation of any debt owed by the Company or any
Affiliate to the Optionee by the Company including without limitation waiver of
compensation due or accrued for services previously rendered to the Company;
and

 

(iv)          any combination of the methods of payment permitted by any
paragraph of this Section 6.4.

 

(d)           The Administrator may also permit any other form or method
of payment for Option Shares permitted by Applicable Law.

 

6.5           Nonassignability of Options.  Except
as determined by the Administrator, no Option shall be assignable or otherwise
transferable by the Optionee except by will or by the laws of descent and
distribution.  However, Options may be
transferred and exercised in accordance with a Domestic Relations Order and may
be exercised by a guardian or conservator appointed to act for the
Optionee.  Incentive Stock Options may
only be assigned in compliance with Section 7(h).

 

6.6           Substitute Options.  The Board may cause the Company
to grant Substitute Options in connection with the acquisition by the Company
or an Affiliate of equity securities of any entity (including by merger, tender
offer, or other similar transaction) or of all or a portion of the assets of
any entity.  Any such substitution shall
be effective on the effective date of the acquisition.  Substitute Options may be Nonstatutory
Options or Incentive Stock Options. 
Unless and to the extent specified otherwise by the Board, Substitute
Options shall have the same terms and conditions as the options they replace,
except that (subject to the provisions of Section 10) Substitute Options shall
be Options to purchase Shares rather than equity securities of the granting
entity and shall have an Option Price determined by the Board.

 

6.7           Repricings.  Other
than in accordance with Section 10, Options may not be repriced without
stockholder approval if the effect of the repricing would be to reduce the
effective Option Price of the Options.

 

7.             Incentive Stock Options

 

The following rules apply only to Incentive Stock Options and only to
the extent these rules are more restrictive than the rules that would otherwise
apply under this Plan.  With the consent
of the Optionee, or where this Plan provides that an action may be taken
notwithstanding any other provision of this Plan, the Administrator may deviate
from the requirements of this Section, notwithstanding that any Incentive Stock
Option modified by the Administrator will thereafter be treated as a
Nonstatutory Option.

 

11

 

(a)           The Expiration Date of an Incentive Stock Option shall not
be later than ten years from its Grant Date, with the result that no Incentive
Stock Option may be exercised after the expiration of ten years from its Grant
Date.

 

(b)           No Incentive Stock Option may be granted more than ten
years from the date this Plan was approved by the Board.

 

(c)           Options intended to be incentive stock options under
Section 422 of the Code that are granted to any single Optionee under all
incentive stock option plans of the Company and its Affiliates, including
incentive stock options granted under this Plan, may not vest at a rate of more
than $100,000 in Fair Market Value of stock (measured on the grant dates of the
options) during any calendar year.  For
this purpose, an option vests with respect to a given share of stock the first
time its holder may purchase that share, notwithstanding any right of the
Company to repurchase that share. 
Unless the administrator of that option plan specifies otherwise in the
related agreement governing the option, this vesting limitation shall be
applied by, to the extent necessary to satisfy this $100,000 rule, treating
certain stock options that were intended to be incentive stock options under
Section 422 of the Code as Nonstatutory Options.  The stock options or portions of stock options to be reclassified
as Nonstatutory Options are those with the highest option prices, whether
granted under this Plan or any other equity compensation plan of the Company or
any Affiliate that permits that treatment. 
This Section 7(c) shall not cause an Incentive Stock Option to vest
before its original vesting date or cause an Incentive Stock Option that has
already vested to cease to be vested.

 

(d)           In order for an Inceptive Stock Option to be exercised for
any form of payment other than those described in Section 6.4(b), that right
must be stated at the time of grant in the Option Agreement relating to that
Incentive Stock Option.

 

(e)           Any Incentive Stock Option granted to a Ten Percent
Stockholder, must have an Expiration Date that is not later than five years
from its Grant Date, with the result that no such Option may be exercised after
the expiration of five years from the Grant Date.  A “Ten Percent
Stockholder” is any person who, directly or by attribution under
Section 424(d) of the Code, owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company or of any
Affiliate on the Grant Date.

 

(f)            The Option Price of an Incentive Stock Option shall never
be less than the Fair Market Value of the Shares at the Grant Date.  The Option Price for the Shares covered by
an Incentive Stock Option granted to a Ten Percent Stockholder shall never be
less than 110% of the Fair Market Value of the Shares at the Grant Date.

 

(g)           Incentive Stock Options may be granted only to
Employees.  If an Optionee changes
status from an Employee to a Consultant, that Optionee’s Incentive Stock
Options become Nonstatutory Options if not exercised within the time period
described in Section 7(i) (determined by treating the change in status as a
Termination solely for the purposes of this Section 7(g)).

 

(h)            No rights under an Incentive Stock Option may be
transferred by the Optionee, other than by will or the laws of descent and
distribution.  During the life of the

 

12

 

Optionee, an Incentive Stock Option may be
exercised only by the Optionee.  The
Company’s compliance with a Domestic Relations Order, or the exercise of an
Incentive Stock Option by a guardian or conservator appointed to act for the
Optionee, shall not violate this Section 7(h).

 

(i)            An Incentive Stock Option shall be treated as a
Nonstatutory Option if it remains exercisable after, and is not exercised
within, the three month period beginning with the Optionee’s Termination for
any reason other than the Optionee’s death or disability (as defined in Section
22(e) of the Code).   In the case of
Termination due to death, an Incentive Stock Option shall continue to be
treated as an Incentive Stock Option if it remains exercisable after, and is
not exercised within, the three month period after the Optionee’s Termination
provided it is exercised before the Expiration Date.  In the case of Termination due to disability, an Incentive Stock
Option shall be treated as a Nonstatutory Option if it remains exercisable
after, and is not exercised within, one year after the Optionee’s Termination.

 

(j)             An Incentive Stock Option may only be modified by the
Board.

 

8.             Stock
Appreciation Rights, Stock
Awards and Cash Awards 

 

8.1           Stock Appreciation Rights

 

The following rules apply to SARs:

 

(a)           General.  SARs may be granted either
alone, in addition to, or in tandem with other Awards granted under this
Plan.  The Administrator may grant SARs
to eligible participants subject to terms and conditions not inconsistent with
this Plan and determined by the Administrator. 
The specific terms and conditions applicable to the Awardee shall be
provided for in the Award Agreement. 
SARs shall be exercisable, in whole or in part, at such tunes as the
Administrator shall specify in the Award Agreement.

 

(b)           Exercise
of SARs.  Upon the
exercise of an SAR, in whole or in part, an Awardee shall be entitled to a
payment in an amount equal to the excess of the Fair Market Value of a fixed
number of Shares covered by the exercised portion of the SAR on the date of
exercise, over the Fair Market Value of the Shares covered by the exercised
portion of the SAR on the Grant Date. 
The amount due to the Awardee upon the exercise of a SAR shall be paid
in cash or Shares over the period or periods specified in the Award
Agreement.  An Award Agreement may place
limits on the amount that may be paid over any specified period or periods upon
the exercise of a SAR, on an aggregate basis or as to any Awardee.  A SAR shall be considered exercised when the
Company receives written notice of exercise in accordance with the terms of the
Award Agreement from the person entitled to exercise the SAR.  If a SAR has been granted in tandem with an
Option, upon the exercise of the SAR, the number of shares that may be
purchased pursuant to the Option shall be reduced by the number of shares with
respect to which the SAR is exercised.

 

(c)           Nonassignability of SARs.  Except as determined by the Administrator, no SAR shall be assignable or
otherwise transferable by the Awardee except by will or by the laws of descent
and distribution.  Notwithstanding
anything herein to the 

 

13

 

contrary,
SARs may be transferred and exercised in accordance with a Domestic Relations
Order.

 

(d)           Substitute
SARs.  The Board may
cause the Company to grant Substitute SARs in connection with the acquisition
by the Company or an Affiliate of equity securities of any entity (including by
merger) or all or a portion of the assets of any entity.  Any such substitution shall be effective on
the effective date of the acquisition. 
Unless and to the extent specified otherwise by the Board, Substitute
SARs shall have the same terms and conditions as the options they replace,
except that (subject to the provisions of Section 10) Substitute SARs shall be
exercisable with respect to the Fair Market Value of Shares rather than equity
securities of the granting entity and shall be on terms that, as determined by
the Board in its sole and absolute discretion, properly reflects the
substitution.

 

8.2           Stock
Awards

 

The following rules apply to all Stock Awards:

 

(a)           General.  The specific terms and
conditions of a Stock Award applicable to the Awardee shall be provided for in
the Award Agreement.  The Award
Agreement shall state the number of Shares that the Awardee shall be entitled
to receive or purchase, the terms and conditions on which the Shares shall
vest, the price to be paid and, if applicable, the time within which the
Awardee must accept such offer.  The
offer shall be accepted by execution of the Award Agreement.  The Administrator may require that all
Shares subject to a right of repurchase or risk of forfeiture be held in escrow
until such repurchase right or risk of forfeiture lapses.

 

(b)           Right
of Repurchase.  If so
provided in the Award Agreement, Award Shares acquired pursuant to a Stock
Award may be subject to repurchase by the Company or an Affiliate if not vested
in accordance with the Award Agreement.

 

(c)           Form
of Payment.  The
Administrator shall determine the acceptable form and method of payment for
exercising a Stock Award.  Acceptable
forms of payment for all Award Shares are cash, check or wire transfer,
denominated in U.S.  dollars except as
specified by the Administrator for non-U.S. 
Employees or non-U.S. subplans. 
In addition, the Administrator may permit payment to be made by any of
the methods permitted with respect to the exercise of Options pursuant to
Section 6.4.

 

(d)           Nonassignability
of Stock Awards.  Except
as determined by the Administrator, no Stock Award shall be assignable or
otherwise transferable by the Awardee except by will or by the laws of descent
and distribution.  Notwithstanding
anything to the contrary herein, Stock Awards may be transferred and exercised
in accordance with a Domestic Relations Order.

 

(e)           Substitute
Stock Award.  The Board
may cause the Company to grant Substitute Stock Awards in connection with the
acquisition by the Company or an Affiliate of equity securities of any entity
(including by merger) or all or a portion of the assets of any entity.  Unless and to the extent specified otherwise
by the Board, Substitute Stock Awards shall have the same terms and conditions
as the stock awards they replace, except that (subject to the provisions of
Section 10) Substitute Stock Awards shall be Stock Awards to

 

14

 

purchase Shares rather than equity securities
of the granting entity and shall have a Purchase Price that, as determined by
the Board in its sole and absolute discretion, properly reflects the
substitution.  Any such Substituted
Stock Award shall be effective on the effective date of the acquisition.

 

8.3           Cash
Awards

 

The following rules apply to all Cash Awards:

 

Cash Awards may be granted either alone, in addition to, or in tandem
with other Awards granted under this Plan. 
After the Administrator determines that it will offer a Cash Award, it
shall advise the Awardee, by means of an Award Agreement, of the terms,
conditions and restrictions related to the Cash Award.

 

9.             Exercise of Awards

 

9.1           In
General.  An Award shall be exercisable in
accordance with this Plan and the Award Agreement under which it is granted.

 

9.2           Time
of Exercise.  Options and Stock Awards shall be
considered exercised when the Company receives: (a) written notice of exercise
from the person entitled to exercise the Option or Stock Award, (b) full
payment, or provision for payment, in a form and method approved by the
Administrator, for the Shares for which the Option or Stock Award is being
exercised, and (c) with respect to Nonstatutory Options, payment, or provision
for payment, in a form approved by the Administrator, of all applicable
withholding taxes due upon exercise.  An
Award may not be exercised for a fraction of a Share.  SARs shall be considered exercised when the Company receives
written notice of the exercise from the person entitled to exercise the SAR.

 

9.3           Issuance of Award Shares.  The Company shall issue Award
Shares in the name of the person properly exercising the Award.  If the Awardee is that person and so
requests, the Award Shares shall be issued in the name of the Awardee and the
Awardee’s spouse.  The Company shall
endeavor to issue Award Shares promptly after an Award is exercised or after
the Grant Date of a Stock Award, as applicable.  Until Award Shares are actually issued, as evidenced by the
appropriate entry on the stock register of the Company or its transfer agent,
the Awardee will not have the rights of a stockholder with respect to those
Award Shares, even though the Awardee has completed all the steps necessary to
exercise the Award.  No adjustment shall
be made for any dividend, distribution, or other right for which the record
date precedes the date the Award Shares are issued, except as provided in
Section 10.

 

9.4           Termination

 

(a)           In General.  Except
as provided in an Award Agreement or in writing by the Board or Committee,
including in an Award Agreement, and as otherwise provided in Sections 9.4(b),
(c), (d) and (e) after an Awardee’s Termination, the Awardee’s Awards shall be
exercisable to the extent (but only to the extent) they are vested on the date
of that Termination and only during the three months after the Termination, but
in no event after the Expiration Date. 
To the extent the Awardee does not exercise an Award within the time
specified for exercise, the Award shall automatically terminate.

 

15

 

(b)           Leaves
of Absence.  Unless
otherwise provided in the Award Agreement, no Award may be exercised more than
three months after the beginning of a leave of absence, other than a personal
or medical leave approved by an authorized representative of the Company with
employment guaranteed upon return. 
Awards shall not continue to vest during a leave of absence, unless
otherwise determined by the Administrator with respect to an approved personal
or medical leave with employment guaranteed upon return.

 

(c)           Death
or Disability.  Unless
otherwise provided by the Board or Committee, if an Awardee’s Termination is
due to disability (as determined by the Administrator with respect to all
Awards other than Incentive Stock Options and as defined by Section 22(e) of
the Code with respect to Incentive Stock Options), all Awards of that Awardee
to the extent exercisable at the date of that Termination may be exercised for
six months after that Termination, but in no event after the Expiration
Date.  In the case of Termination due to
disability, if a guardian or conservator has been appointed to act for the
Awardee and been granted this authority as part of that appointment, that
guardian or conservator may exercise the Award on behalf of the Awardee.  Unless otherwise provided by the Board or
Committee, if an Awardee’s Termination is due to death, all Awards of that
Awardee to the extent exercisable at the date of that Termination may be
exercised for one year after that Termination, but in no event after the
Expiration Date.  In the case of
Termination due to death, an Award may be exercised as provided in Section
17.  Death or disability occurring after
an Awardee’s Termination shall not cause the Termination to be treated as
having occurred due to death or disability. 
To the extent an Award is not so exercised within the time specified for
its exercise, the Award shall automatically terminate.

 

(d)           Divestiture.  If an Awardee’s Termination
is due to a Divestiture, the Board may take any one or more of the actions
described in Section 10.3 or 10.4 with respect to the Awardee’s Awards.

 

(e)           Termination
for Cause.  In the
discretion of the Board or Committee, which may be exercised on the date of
grant, or at a date later in time, if an Awardee’s Termination is due to Cause,
all of the Awardee’s Awards, other than options, shall automatically terminate
and cease to be exercisable at the time of Termination and the Board or
Committee may rescind any and all exercises of Awards, other than Options, by
the Awardee that occurred after the first event constituting Cause.  “Cause” means employment related dishonesty,
fraud, misconduct or disclosure or misuse of confidential information, or other
employment related conduct that is likely to cause significant injury to the
Company, an Affiliate, or any of their respective employees, officers or
directors (including, without limitation, commission of a felony or similar
offense), in each case as determined by the Board or Committee.  “Cause” shall not require that a civil
judgment or criminal conviction have been entered against or guilty plea shall
have been made by the Awardee regarding any of the matters referred to in the
previous sentence.  Accordingly, the
Board or Committee shall be entitled to determine “Cause” based on the Board or
Committee’s good faith belief.  If the
Awardee is criminally charged with a felony or similar offense, that shall be a
sufficient, but not a necessary, basis for such a belief.

 

(f)            Board
or Committee Discretion.  Notwithstanding
the provisions of Section 9.4(a)-(e), the Board or Committee shall have
complete discretion, exercisable either at the time an Award is granted at any
time while the Award remains outstanding, to:

 

16

 

(i)            extend the period of time for which the Award is to
remain exercisable, following the Awardee’s Termination, from the limited
exercise period otherwise in effect for that Award to such greater period of
time as the Board or Committee shall deem appropriate, but in no event beyond
the Expiration Date; and/or

 

(ii)           permit the Award to be exercised, during the applicable
post-Termination exercise period, not only with respect to the number of vested
Shares for which such Award may be exercisable at the time of the Awardee’s
Termination but also with respect to one or more additional installments in
which the Awardee would have vested had the Awardee not been subject to
Termination.

 

(g)           Consulting
or Employment Relationship.  Nothing
in this Plan or in any Award Agreement, and no Award or the fact that Award
Shares remain subject to repurchase rights, shall: (A) interfere with or limit
the right of the Company or any Affiliate to terminate the employment or
consultancy of any Awardee at any time, whether with or without cause or
reason, and with or without the payment of severance or any other compensation
or payment, or (B) interfere with the application of any provision in any of
the Company’s or any Affiliate’s charter documents or Applicable Law relating
to the election, appointment, term of office, or removal of a Director.

 

10.          Certain
Transactions and Events

 

10.1         In General.  Except
as provided in this Section 10, no change in the capital structure of the
Company, merger, sale or other disposition of assets or a subsidiary, change in
control, issuance by the Company of shares of any class of securities or
securities convertible into shares of any class of securities, exchange or
conversion of securities, or other transaction or event shall require or be the
occasion for any adjustments of the type described in this Section 10.  Additional provisions with respect to the
foregoing transactions are set forth in Section 143.

 

10.2         Changes in Capital Structure.  In the event of any
stock split, reverse stock split, recapitalization, combination or
reclassification of stock, stock dividend, spin-off, or similar change to the
capital structure of the Company (not including a Fundamental Transaction or
Change in Control), the Board shall make whatever adjustments it concludes are
appropriate to: (a) the number and type of Awards that may be granted under
this Plan, (b) the number and type of Options that may be granted to any
individual under this Plan, (c) the terms of any SAR, (d) the Purchase Price of
any Stock Award, (e) the Option Price and number and class of securities
issuable under each outstanding Option, (f) the repurchase price of any
securities substituted for Award Shares that are subject to repurchase rights,
and (g) the Objectively Determinable Performance Conditions, if
applicable.  The specific adjustments
shall be determined by the Board. 
Unless the Board specifies otherwise, any securities issuable as a
result of any such adjustment shall be rounded down to the next lower whole
security.  The Board need not adopt the
same rules for each Award or each Awardee.

 

10.3         Fundamental Transactions.  Except for grants to Non-Employee
Directors pursuant to Section 11.1 herein, if the Company merges with another
entity in a transaction in which the Company is not the surviving entity or if,
as a result of any other transaction or event, other securities are substituted
for the Shares or Shares may no longer be issued

 

17

 

pursuant to Awards (each a “Fundamental Transaction”), then,
notwithstanding any other provision of this Plan, the Board shall do one or
more of the following contingent on the closing or completion of the
Fundamental Transaction: (a) arrange for the substitution, in exchange for
Awards, of options to purchase equity securities other than Shares (including,
if appropriate, equity securities of an entity other than the Company) (an
“assumption” of Awards) on such terms and conditions as the Board determines are
appropriate, (b) accelerate the vesting and termination of outstanding Awards,
in whole or in part, so that Awards can be exercised before or otherwise in
connection with the closing or completion of the Fundamental Transaction or
event but then terminate, (c) cancel or arrange for the cancellation of Awards
in exchange for cash payments to Awardees, and (d) either arrange for any
restrictions in favor of the Company with respect to Award Shares to apply to
the securities issued in substitution for Shares or terminate such restrictions
on Award Shares.  The Board need not
adopt the same rules for each Award or each Awardee.

 

10.4         Changes
of Control.  The Board may also, but need not,
specify that other transactions or events constitute a “Change in Control”.  The
Board may do that either before or after the transaction or event occurs.  Examples of transactions or events that the
Board may treat as Changes of Control are: (a) the Company or an Affiliate is a
party to a merger, consolidation, amalgamation, or other transaction in which
the beneficial stockholders of the Company, immediately before the transaction,
beneficially own securities representing 50% or less of the total combined
voting power or value of the Company immediately after the transaction, (b) any
person or entity, including a “group” as contemplated by Section 13(d)(3) of
the Exchange Act, acquires securities holding 30% or more of the total combined
voting power or value of the Company, or (c) as a result of or in connection
with a contested election of Company Directors, the persons who were Company
Directors immediately before the election cease to constitute a majority of the
Board.  In connection with a Change in
Control, notwithstanding any other provision of this Plan, the Board may, but
need not, take any one or more of the actions described in Section 10.3.  In addition, the Board may extend the date
for the exercise of Awards (but not beyond their original Expiration Date).  The Board need not adopt the same rules for
each Award or each Awardee.

 

10.5         Divestiture.  If
the Company or an Affiliate sells or otherwise transfers equity securities of
an Affiliate to a person or entity other than the Company or an Affiliate, or
leases, exchanges or transfers all or any portion of its assets to such a
person or entity, then the Board may specify that such transaction or event
constitutes a “Divestiture”.  In connection with a
Divestiture, notwithstanding any other provision of this Plan, the Board may,
but need not, take one or more of the actions described in Section 10.3 or 10.4
with respect to Awards or Award Shares held by, for example, Employees,
Directors or Consultants for whom that transaction or event results in a
Termination.  The Board need not adopt
the same rules for each Award or each Awardee.

 

10.6         Dissolution.  If
the Company adopts a plan of dissolution, the Board may cause Awards to be
fully vested and exercisable (but not after their Expiration Date) before the
dissolution is completed but contingent on its completion and may cause the
Company’s repurchase rights on Award Shares to lapse upon completion of the
dissolution.  The Board need not adopt
the same rules for each Award or each Awardee. 
Notwithstanding anything herein to the contrary, in the event of a
dissolution of the Company, to the extent not

 

18

 

exercised before the earlier of the
completion of the dissolution or their Expiration Date, Awards shall terminate
immediately prior to the dissolution.

 

10.7        Cut-Back to Preserve Benefits.  If
the Administrator determines that the net after tax amount to be realized by
any Awardee, taking into account any accelerated vesting, termination of
repurchase rights, or cash payments to that Awardee in connection with any
transaction or event set forth in this Section 10 would be greater if one or
more of those steps were not taken or payments were not made with respect to
that Awardee’s Awards or Award Shares, then, at the election of the Awardee, to
such extent, one or more of those steps shall not be taken and payments shall
not be made.

 

11.          Automatic Option Grants to Non-Employee
Directors and Non-Employee Director Fee Option Grants

 

11.1         Automatic Option Grants to Non-Employee Directors

 

(a)           Grant
Dates.  Option grants to
Non-Employee Directors shall be made on the dates specified below:

 

(i)            Each Non-Employee Director who is then serving as a
member of the Board on the Effective Date (the “Current Directors”) and each
Non-Employee Director who is first elected or appointed to the Board at any
time after the Effective Date, shall automatically be granted, on the Effective
Date or the date of such initial election or appointment, respectively, a
Nonstatutory Option to purchase an amount of Shares to be determined by the
Board (the “Initial
Grant”).

 

(ii)           Commencing in 2004, on the date of each annual
stockholders meeting, each individual who is to continue to serve as a
Non-Employee Director shall automatically be granted a Nonstatutory Option to
purchase an amount of Shares determined by the Board (the “Annual Grant”), provided,
however, that such individual has served as a Non-Employee Director for, at
least six (6) months.

 

(b)           Exercise Price.

 

(i)            The Option Price shall be equal to
one hundred percent (100%) of the Fair Market Value of the Shares on the Option
grant date.

 

(ii)           The Option Price shall be payable in
one or more of the alternative forms authorized pursuant to Section 6.4.  Except to the extent the sale and remittance
procedure specified thereunder is utilized, payment of the Option Price must be
made on the date of exercise.

 

(c)           Option
Term.  Each option shall
have a term of ten (10) years measured from the Option grant date.

 

(d)           Exercise and Vesting of Options.  Except as otherwise
determined by the whole Board, the Shares underlying each Option granted
pursuant to Section 11.1 shall vest and be exercisable as set forth below.

 

19

 

(i)            Initial
Grant.  The Shares
underlying each Option issued pursuant to the Initial Grant shall vest and be
exercisable as to 4.1666% of the Shares at the end of each full succeeding
month from the date of grant, rounded down to the nearest whole Share, for so
long as the Non-Employee Director continuously remains a Director of, or a Consultant
to, the Company.

 

(ii)           Annual
Grant.  The Shares
underlying each Option issued pursuant to the Annual Grant shall vest and be
exercisable as to 8.3333% of the Shares at the end of each full succeeding
month from the date of grant, rounded down to the nearest whole Share, for so
long as the Non-Employee Director continuously remains a Director of, or a
Consultant to, the Company.

 

(e)           Termination
of Board Service.  The
following provisions shall govern the exercise of any Options held by the
Awardee at the time the Awardee ceases to serve as a Non-Employee Director:

 

(i)            In General.  Except
as otherwise provided in Section 11.3, after cessation of service as a Director
(the “Cessation Date”), the
Awardee’s Options shall be exercisable to the extent (but only to the extent)
they are vested on the Cessation Date and only during the three months after
such Cessation Date, but in no event after the Expiration Date.  To the extent the Awardee does not exercise
an Option within the time specified for exercise, the Award shall automatically
terminate.

 

(ii)           Death
or Disability.  If an Awardee’s cessation of
service on the Board is due to death or disability (as determined by the
Board), all Options of that Awardee, to the extent exercisable upon such
Cessation Date, may be exercised for one year after the Cessation Date, but in
no event after the Expiration Date.  In
the case of a cessation of service due to death, an Option may be exercised as
provided in Section 17.  In the case of
a cessation of service due to disability, if a guardian or conservator has been
appointed to act for the Awardee and been granted this authority as part of
that appointment, that guardian or conservator may exercise the Option on
behalf of the Awardee.  Death or
disability occurring after an Awardee’s cessation of service shall not cause
the cessation of service to be treated as having occurred due to death or
disability.  To the extent an Option is
not so exercised within the time specified for its exercise, the Option shall
automatically terminate.

 

11.2         Director Fee Option Grants

 

(a)           Option
Grants.  The Board shall
have the sole and exclusive authority to determine the calendar year or years
for which the Director fee option grant program (the “Director Fee Option Program”) is
to be in effect.  For each such calendar
year the program is in effect, each Non-Employee Director may elect to apply
all or any portion of the annual retainer fee otherwise payable in cash, for
his or her service on the Board for that year, to the acquisition of a special
Option grant under this Director Fee Option Program.  Such election must be filed with the Company’s Chief Financial
Officer prior to first day of the calendar year for which the annual retainer
fee which is the subject of that election is otherwise payable.  Each Non-Employee Director who files such a
timely election shall automatically be granted an Option under this Director
Fee Option Program on the first trading day in

 

20

 

January in the calendar year for which the
annual retainer fee which is the subject of that election would otherwise be
payable in cash.

 

(b)           Option
Terms.  Each Option shall
be a Nonstatutory Option governed by the terms and conditions specified below.

 

(i)            Exercise
Price.

 

A.            The Purchase Price shall be thirty three and one third
percent (33-1/3%) of the Fair Market Value per Share on the Option grant date.

 

B.            The Purchase Price shall become immediately due upon
exercise of the Option and shall be payable in one or more of the alternative
forms authorized pursuant to Section 6.4 of this Plan.  Except to the extent the sale and remittance
procedure specified thereunder is utilized, payment of the Purchase Price must
be made on the date that the Option is exercised.

 

(ii)           Number
of Option Shares.  The
number of Shares subject to the Option shall be determined pursuant to the
following formula (rounded down to the nearest whole number):

 

X = A ÷ (B x 66-2/3%), where 

 

“X” is the number of Option
Shares,

 

“A” is the portion of the
annual retainer fee subject to the Non-Employee Director’s election, and

 

“B” is the Fair Market Value
of a Share on the option grant date.

 

(iii)          Exercise
and Term of Options.  The
Option shall become exercisable in a series of twelve (12) equal monthly
installments upon the Awardee’s completion of each month of Board service over
the twelve (12) month period measured from the grant date.  Each Option shall have a maximum term often
(10) years measured from the Option grant date.

 

(iv)          Termination
of Board Service.  Should
the Awardee cease Board
service for any treason (other than death or permanent disability) while
holding one or more Options under this Director Fee Option Program, then each
such Option shall remain exercisable, for any or all of the Shares for which
the Option is exercisable at the time of such cessation of Board service, until
the earlier of (x) the expiration of the ten (10) year Option term or (y) the
expiration of the three (3) year period measured from the date of such cessation
of Board service.  However, each Option
held by the Awardee under this Director Fee Option Program at the time of his
or her cessation of Board service shall immediately terminate and cease to
remain outstanding with respect to any and all Shares for which the Option is
not otherwise at that time exercisable.

 

(v)           Death
or Permanent Disability.  Should
the Awardee’s service as a Board member cease by reason of death or permanent
disability, then each

 

21

 

Option held by such Awardee under this
Director Fee Option Program shall immediately become exercisable for all the
Shares at the time subject to that Option, and the Option may be exercised for
any or all of those Shares as fully vested Shares until the earlier of (x) the
expiration of the ten (10) year option term or (y) the expiration of the three
(3) year period measured from the date of such cessation of Board service.

 

Should the Awardee die after cessation of his or her Board service but
while holding one or more Options under this Director Fee Option Program, then
each such Option may be exercised, for any or all of the shares for which the
Option is exercisable at the time of the Awardee’s cessation of Board service
(less any Shares subsequently purchased by the Awardee prior to death), by the
personal representative of the Awardee’s estate or by the person or persons to
whom the Option is transferred pursuant to the Awardee’s will or in accordance
with the laws of descent and distribution or by the designated beneficiary or
beneficiaries of such option.  Such
right of exercise shall lapse, and the Option shall terminate, upon the earlier
of (xx) the expiration of the ten (10) year Option term or (yy) the three (3)
year period measured from the date of the Awardee’s cessation of Board service.

 

11.3         Certain Transactions and Events

 

(a)           In the event of a Fundamental Transaction while the
Awardee remains a Non-Employee Director, the Shares at the time subject to each
outstanding Option held by such Awardee pursuant to Section 11, but not
otherwise vested, shall automatically vest in full so that each such Option
shall, immediately prior to the effective date of the Fundamental Transaction,
become exercisable for all the Shares as fully vested Shares and may be
exercised for any or all of those vested Shares.  Immediately following the consummation of the Fundamental
Transaction, each Option shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or Affiliate thereof).

 

(b)           In the event of a Change in Control while the Awardee
remains a Non-Employee Director, the Shares at the time subject to each
outstanding Option held by such Awardee pursuant to Section 11, but not
otherwise vested, shall automatically vest in full so that each such Option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the Shares as fully vested Shares and may be exercised for
any or all of those vested Shares.  Each
such Option shall remain exercisable for such fully vested Shares until the
expiration or sooner termination of the Option term in connection with a Change
in Control.

 

(c)           Each Option which is assumed in connection with a
Fundamental Transaction shall be appropriately adjusted, immediately after such
Fundamental Transaction, to apply to the number and class of securities which
would have been issuable to the Awardee in consummation of such Fundamental
Transaction had the Option been exercised immediately prior to such Fundamental
Transaction.  Appropriate adjustments
shall also be made to the Option Price payable per share under each outstanding
Option, provided the aggregate Option Price payable for such securities shall
remain the same.  To the extent the
actual holders of the Company’s outstanding Common Stock receive cash
consideration for their Common Stock in consummation of the Fundamental
Transaction, the successor corporation may, in connection with the assumption
of the outstanding Options granted pursuant to Section 11, substitute one or
more shares of its own common

 

22

 

stock with a fair market value equivalent to
the cash consideration paid per share of Common Stock in such Fundamental
Transaction.

 

(d)           The grant of Options pursuant to Section 11 shall in no
way affect the right of the Company to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.

 

(e)           The remaining terms of each Option granted pursuant to
Section 11 shall, as applicable, be the same as terms in effect for Awards
granted under this Plan. 
Notwithstanding the foregoing, the provisions of Section 9.4 and Section
10 shall not apply to Options granted pursuant to Section 11.

 

11.4         Limited Transferability of Options.  Each Option granted pursuant to
Section 11 may be assigned in whole or in part during the Awardee’s lifetime to
one or more members of the Awardee’s family or to a trust established
exclusively for one or more such family members or to an entity in which the
Awardee is majority owner or to the Awardee’s former spouse, to the extent such
assignment is in connection with the Awardee’s estate or financial plan or
pursuant to a Domestic Relations Order. 
The assigned portion may only be exercised by the person or persons who
acquire a proprietary interest in the Option pursuant to the assignment.  The terms applicable to the assigned portion
shall be the same as those in effect for the Option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Administrator may deem appropriate. 
The Awardee may also designate one or more persons as the beneficiary or
beneficiaries of his or her outstanding Options under Section 11, and those
Options shall, in accordance with such designation, automatically be
transferred to such beneficiary or beneficiaries upon the Awardee’s death while
holding those Options.  Such beneficiary
or beneficiaries shall take the transferred Options subject to all the terms
and conditions of the applicable Award Agreement evidencing each such
transferred Option, including (without limitation) the limited time period
during which the Option may be exercised following the Awardee’s death.

 

12.          Withholding and Tax Reporting

 

12.1         Tax Withholding Alternatives

 

(a)           General.  Whenever
Award Shares are issued or become free of restrictions, the Company may require
the Awardee to remit to the Company an amount sufficient to satisfy any
applicable tax withholding requirement, whether the related tax is imposed on
the Awardee or the Company.  The Company
shall have no obligation to deliver Award Shares or release Award Shares from
an escrow or permit a transfer of Award Shares until the Awardee has satisfied
those tax withholding obligations. 
Whenever payment in satisfaction of Awards is made in cash, the payment
will be reduced by an amount sufficient to satisfy all tax withholding
requirements.

 

(b)           Method of Payment. 
The Awardee shall pay any required withholding
using the forms of consideration described in Section 6.4(b), except that, in
the discretion of the Administrator, the Company may also permit the Awardee to
use any of the forms of payment described in Section 6.4(c).  The Administrator, in its sole discretion,
may

 

23

 

also permit Award Shares to be withheld to
pay required withholding.  If the
Administrator permits Award Shares to be withheld, the Fair Market Value of the
Award Shares withheld, as determined as of the date of withholding, shall not
exceed the amount determined by the applicable minimum statutory withholding
rates.

 

12.2         Reporting of Dispositions.  Any holder of Option Shares
acquired under an Incentive Stock Option shall promptly notify the
Administrator, following such procedures as the Administrator may require, of
the sale or other disposition of any of those Option Shares if the disposition
occurs during: (a) the longer of two years after the Grant Date of the
Incentive Stock Option and one year after the date the Incentive Stock Option
was exercised, or (b) such other period as the Administrator has established.

 

13.          Compliance with Law

 

13.1         Compliance
with Applicable Law.  The grant of Awards and the
issuance and subsequent transfer of Award Shares shall be subject to compliance
with all Applicable Law, including all applicable securities laws.  Awards may not be exercised, and Award Shares
may not be transferred, in violation of Applicable Law.  Thus, for example, Awards may not be
exercised unless: (a) a registration statement under the Securities Act is then
in effect with respect to the related Award Shares, or (b) in the opinion of legal
counsel to the Company, those Award Shares may be issued in accordance with an
applicable exemption from the registration requirements of the Securities Act
and any other applicable securities laws. 
The failure or inability of the Company to obtain from any regulatory
body the authority considered by the Company’s legal counsel to be necessary or
useful for the lawful issuance of any Award Shares or their subsequent transfer
shall relieve the Company of any liability for failing to issue those Award
Shares or permitting their transfer.  As
a condition to the exercise of any Award or the transfer of any Award Shares,
the Company may require the Awardee to satisfy any requirements or
qualifications that may be necessary or appropriate to comply with or evidence
compliance with any Applicable Law.

 

13.2         Financial Information.  The Company shall furnish its
annual financial statements to each Awardee during the period the Awardee holds
any Option Stock Award or Award.  Those
statements shall include a balance sheet and income statement, and shall be
delivered as soon as is practical after the end of the Company’s fiscal
year.  This section does not apply to
Awardees who are key Employees and whose duties afford them access to those
financial statements.

 

14.          Amendment ox Termination of this Plan or Outstanding Awards

 

14.1         Amendment and Termination.  The Board may at any time amend,
suspend, or terminate this Plan.

 

14.2         Stockholder Approval.  The Company shall obtain the
approval of the Company’s stockholders for any amendment to this Plan if stockholder
approval is necessary or desirable to comply with any Applicable Law or with
the requirements applicable to the grant of Awards intended to be Incentive
Stock Options.  The Board may also, but
need not, require that the Company’s stockholders approve any other amendments
to this Plan.

 

24

 

14.3         Effect.  No
amendment, suspension, or termination of this Plan, and no modification of any
Award even in the absence of an amendment, suspension, or termination of this
Plan, shall impair any existing contractual rights of any Awardee unless the
affected Awardee consents to the amendment, suspension, termination, or
modification.  Notwithstanding anything
herein to the contrary, no such consent shall be required if the Board
determines, in its sole and absolute discretion, that the amendment,
suspension, termination, or modification: (a) is required or advisable in order
for the Company, this Plan or the Award to satisfy Applicable Law, to meet the
requirements of any accounting standard or to avoid any adverse accounting
treatment, or (b) in connection with any transaction or event described in
Section 10, is in the best interests of the Company or its stockholders.  The Board may, but need not, take the tax or
accounting consequences to affected Awardees into consideration in acting under
the preceding sentence.  Those decisions
shall be final, binding and conclusive. 
Termination of this Plan shall not affect the Administrator’s ability to
exercise the powers granted to it under this Plan with respect to Awards
granted before the termination of Award Shares issued under such Awards even if
those Award Shares are issued after the termination.

 

15.          Reserved Rights

 

15.1         Nonexclusivity of this Plan.  This Plan shall not limit the power of the Company or
any Affiliate to adopt other incentive arrangements including, for example, the
grant or issuance of stock options, stock, or other equity based rights under
other plans.

 

15.2         Unfunded
Plan.  This Plan shall be unfunded.  Although bookkeeping accounts may be
established with respect to Awardees, any such accounts will be used merely as
a convenience.  The Company shall not be
required to segregate any assets on account of this Plan, the grant of Awards,
or the issuance of Award Shares.  The
Company and the Administrator shall not be deemed to be a trustee of stock or
cash to be awarded under this Plan.  Any
obligations of the Company to any Awardee shall be based solely upon contracts
entered into under this Plan, such as Award Agreements.  No such obligations shall be deemed to be
secured by any pledge or other encumbrance on any assets of the Company.  Neither the Company nor the Administrator
shall be required to give any security or bond for the performance of any such
obligations.

 

16.          Special Arrangements Regarding Award Shares

 

16.1         Escrow of Stock Certificates.  To enforce any restrictions on Award Shares, the
Administrator may require their holder to deposit the certificates representing
Award Shares, with stock powers or other transfer instruments approved by the
Administrator endorsed in blank, with the Company or an agent of the Company to
hold in escrow until the restrictions have lapsed or terminated.  The Administrator may also cause a legend or
legends referencing the restrictions to be placed on the certificates.

 

16.2         Repurchase
Rights

 

(a)           General.  If
a Stock Award is subject to vesting conditions, the Company shall have the
right, during the 90 days after the Awardee’s Termination, to repurchase any or
all of the Award Shares that were unvested as of the date of that
Termination.  The repurchase price shall
be determined by the Administrator in accordance

 

25

 

with this Section 16.2 which shall be either
(i) the Purchase Price for the Award Shares (minus the amount of any cash
dividends paid or payable with respect to the Award Shares for which the record
date precedes the repurchase) or (ii) the lower of (A) the Purchase Price for
the Shares or (B) the Fair Market Value of those Award Shares as of the date of
the Termination.  The repurchase price
shall be paid in cash.  The Company may
assign this right of repurchase.

 

(b)           Procedure.  The Company or its assignee
may choose to give the Awardee a written notice of exercise of its repurchase
rights under this Section 16.2. 
However, the Company’s failure to give such a notice shall not affect
its rights to repurchase Award Shares.  The
Company must, however, tender the repurchase price during the period specified
in this Section 16.2 for exercising its repurchase rights in order to exercise
such rights.

 

17.          Beneficiaries

 

An Awardee may file a written designation of one or more beneficiaries
who are to receive the Awardee’s rights under the Awardee’s Awards after the
Awardee’s death.  An Awardee may change
such a designation at any time by written notice.  If an Awardee designates a beneficiary, the beneficiary may
exercise the Awardee’s Awards after the Awardee’s death.  If an Awardee dies when the Awardee has no
living beneficiary designated under this Plan, the Company shall allow the
executor or administrator of the Awardee’s estate to exercise the Award or, if
there is none, the person entitled to exercise the Option under the Awardee’s
will or the laws of descent and distribution. 
In any case, no Award may be exercised after its Expiration Date.

 

18.          Miscellaneous

 

18.1         Governing
Law.  This Plan, the Award Agreements and all other
agreements entered into under this Plan, and all actions taken under this Plan
or in connection with Awards or Award Shares, shall be governed by the laws of
the State of Delaware.

 

18.2         Determination
of Value.

 

Fair Market Value shall be determined as follows:

 

(a)           Listed Stock. 
If the Shares are traded on any established stock
exchange or quoted on a national market system, Fair Market Value shall be the
closing sales price for the Shares as quoted on that stock exchange or system
for the date the value is to be determined (the “Value Date”)  as reported in The Wall Street Journal or
a similar publication.  If no sales are
reported as having occurred on the Value Date, Fair Market Value shall be that
closing sales price for the last preceding trading day on which sales of Shares
are reported as having occurred.  If no
sales are reported as having occurred during the five trading days before the
Value Date, Fair Market Value shall be the closing bid for Shares on the Value
Date.  If Shares are listed on multiple
exchanges or systems, Fair Market Value shall be based on sales or bid prices
on the primary exchange or system on which Shares are traded or quoted.

 

(b)           Stock Quoted by Securities Dealer.  If Shares are
regularly quoted by a recognized securities dealer but selling prices are not
reported on any established stock

 

26

 

exchange or quoted on a national market
system, Fair Market Value shall be the mean between the high bid and low asked
prices on the Value Date.  If no prices
are quoted for the Value Date, Fair Market Value shall be the mean between the
high bid and low asked prices on the last preceding trading day on which any
bid and asked prices were quoted.

 

(c)           No
Established Market.  If
Shares are not traded on any established stock exchange or quoted on a national
market system and are not quoted by a recognized securities dealer, the
Administrator (following guidelines established by the Board or Committee) will
determine Fair Market Value in good faith. 
The Administrator will consider the following factors, and any others it
considers significant, in determining Fair Market Value: (i) the price at which
other securities of the Company have been issued to purchasers other than
Employees, Directors, or Consultants, (ii) the Company’s stockholder’s equity,
prospective earning power, dividend paying capacity, and non-operating assets,
if any, and (iii) any other relevant factors, including the economic outlook
for the Company and the Company’s industry, the Company’s position in that
industry, the Company’s goodwill and other intellectual property, and the
values of securities of other businesses in the same industry.  Notwithstanding anything in Section 18 to
the contrary, in the event that the Shares are not traded on any established stock
exchange or quoted on a national market system and are not quoted by a
recognized securities dealer after the Effective Date, the Administrator shall
take into account the valuation of the Company by the Bankruptcy Court in
making a determination as to the Fair Market Value of the Shares.

 

18.3         Reservation of Shares. 
During the term of this Plan, the Company shall at all times
reserve and keep available such number of Shares as are still issuable under
this Plan.

 

18.4        Electronic Communications.  Any Award Agreement, notice of
exercise of an Award, or other document required or permitted by this Plan may
be delivered in writing or, to the extent determined by the Administrator,
electronically.  Signatures may also be
electronic if permitted by the Administrator.

 

18.5        Notices.  Unless the Administrator
specifies otherwise, any notice to the Company under any Option Agreement or
with respect to any Awards or Award Shares shall be in writing (or, if so
authorized by Section 18.4, communicated electronically), shall be addressed to
the Secretary of the Company, and shall only be effective when received by the
Secretary of the Company.

 

Adopted by the Board on:

 

Approved by the stockholders on:

 

Effective date of this Plan:

 

27

 

[PEREGRINE SYSTEMS, INC.  LETTERHEAD]

 

	
   

  	
  Re:

  	
  Grant of
  [Incentive][Nonstatutory] Stock Option

  
	
   

  	
   

  
	
   

  	
  Option Shares:

  	
   

  	
  Grant Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Price per share:

  	
   

  	
  Vesting Base Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Fully-Vested Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Option control no.:

  	
   

  	
  Expiration Date:

  
					

 

Dear <PR_GIVEN_NAME>:

 

I am pleased to confirm that the Company has granted you an option to
purchase shares of our common stock under the Peregrine Systems, Inc.  2003 Equity Incentive Plan (the
“Plan”).  To accept your stock option,
please sign the enclosed copy of this letter agreement, have your spouse sign
the spousal consent, and return them to {department name, mail-stop} {in the
envelope provided}.

 

General terms

 

Your Option is intended to be [an incentive][a nonstatutory]
option.  The basic terms of your Option
grant are identified in the information block at the top of this letter
agreement, but other important terms and conditions are described in this
letter agreement and in the Plan.  We
encourage you to carefully review the Plan, a copy of which is [enclosed]
[available on request from our {Stock Administrator} {Human Resources
Department}][and on the intranet
at                     ].  Capitalized words in this letter agreement
which are not defined in this letter agreement are defined in the Plan.  This letter agreement constitutes the Award
Agreement called for in the Plan.

 

Purchase and payment

 

Subject to the Plan, [your option vests (becomes exercisable) [to the
extent of 25% of the Option Shares one year after the Vesting Base Date (or, if
no Vesting Base Date is specified, the Grant Date), and then] in cumulative
monthly increments of [2.0833]% of the Option Shares, calculated to the closest
whole Share on each monthly anniversary of the Vesting Base Date, so that all
Shares will become purchasable on the Fully-Vested Date shown above.

 

Notwithstanding anything to the contrary in this letter agreement, if
you have a Company-initiated Termination without Cause within 12 months after
the occurrence of a Change in Control, one half of the portion of this Option
which would otherwise be unvested as of the date of your Termination under the
provisions set forth above shall become vested as of the date of your
Termination.  Furthermore,
notwithstanding anything to the contrary in this letter agreement, upon the
occurrence of a Change in Control, the Company’s Board of Directors may, in its
discretion, take any or all of the steps set forth in Section 10.4 of the Plan,
provided that the vesting of this Option shall be no less favorable to you than
the vesting set forth in the preceding sentence.  Notwithstanding anything to the

 

 

contrary in this letter agreement, in the
event of a Fundamental Transaction, the Company’s Board of Directors may, in
its discretion, take any or all of the steps set forth in Section 10.4 of the
Plan.

 

If you decide to purchase Shares under this Option, you will be
required to submit a completed exercise agreement on a form approved by the
Company, together with payment for the Option Shares.  You may pay for the Option Shares (plus any associated withholding
taxes) using cash, a check, a wire transfer or any other form of payment listed
in Section 6.4(c) of the Plan and permitted by the Administrator at the time
you wish to exercise.  Shares available
under this Option must be purchased, if at all, no later than the Expiration
Date.

 

[Specify
any other special provisions, such as acceleration of vesting.]

 

Acceleration of Vesting

 

Notwithstanding anything to the contrary in this letter agreement, in
the event of a Change in Control or Fundamental Transaction, the Company’s
Board of Directors may, in its discretion, take any or all of the steps set
forth in Sections 10.3 or 10.4 of the Plan.

 

Your Termination

 

In the event of your Termination for any reason other than death or
disability (as defined in the Plan), this Option shall cease to be exercisable
three months following your Termination date. 
In the event of your Termination on account of disability, this Option
shall cease to be exercisable six months following your Termination date.  In the event of your Termination on account
of death, this Option shall cease to be exercisable 12 months following your
Termination date.  In no event, however,
may this Option be exercisable past the Expiration Date or for the Option
Shares that were not yet vested as of your Termination date.

 

Limitations on Transfer

 

This Option may not be transferred in any manner otherwise than by will
or by the laws of descent or distribution or to a beneficiary designated
pursuant to the Plan, and may be exercised during your lifetime only by
you.  Subject to all of the other terms
and conditions of this letter agreement, following your death, this Option may,
to the extent it is vested and exercisable by you in accordance with its terms on
the date of death, be exercised by your beneficiary or other person entitled to
exercise this Option under the Plan in the event of your death.  Notwithstanding the first sentence of this
paragraph, (i) if this Option is a Nonqualified Stock Option, this Option may
be assigned pursuant to a qualified domestic relations order as defined by the
Code, and exercised by your spouse who obtained such Option pursuant to such
qualified domestic relations order, and (ii) this Option may be assigned, in
connection with the your estate plan, in whole or in part, during your lifetime
to one or more members of your immediate family or to a trust established
exclusively for one or more of such immediate family members.  Rights under the assigned portion may be
exercised by the person or persons who acquire a proprietary interest in such
Option pursuant to the assignment.  The
terms applicable to the assigned portion shall be the same as those in effect
for the Option immediately before such assignment and shall be set forth in

 

2

 

such documents issued to the assignee as the
Administrator deems appropriate.  For
purposes of this paragraph, the term “immediate family” means your spouse,
children, stepchildren, grandchildren and parents.

 

Community Property

 

Without prejudice to the actual rights of the spouses as between each
other, for all purposes of this letter agreement, you shall be treated as agent
and attorney-in-fact for that interest held or claimed by your spouse with
respect to this Option and the parties hereto shall act in all matters as if
you were the sole owner of this Option. 
This appointment is coupled with an interest and is irrevocable.

 

Restrictions on Exercise

 

No Shares will be issued pursuant to the exercise of this Option unless
and until there shall have been full compliance with all applicable
requirements of the Securities Act of 1933, as amended (whether by registration
or satisfaction of exemption conditions), all applicable laws, and all
applicable listing requirements of any national securities exchange or other
market system on which the Shares are then listed.  As a condition to the exercise of this Option, the Company may
require you to make any representation and warranty to the Company as may be
necessary or appropriate, in the judgment of the Administrator, to comply with
any applicable law.  You understand and
acknowledge that, because the Company has recently emerged from a bankruptcy
reorganization, the Company has not filed all reports under Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, that would enable it to be
eligible to file a Registration Statement on Form S-8 relating to this
Option.  Accordingly, you understand and
acknowledge that a considerable period of time may pass before the Company is
eligible to use Form S-8 with respect to this Option, and that the
exercisability of this Option may be deferred for such period.

 

Disqualifying Dispositions of ISO Stock

 

You acknowledge that if the
Option Shares acquired by exercise of an Incentive Stock Option is disposed of
within two years after the Grant Date or within one year after such exercise,
immediately prior to the disposition, you will promptly notify the Company in
writing of the date and terms of the disposition and will provide such other
information regarding the disposition as the Company may reasonably require.

 

Equitable Relief

 

You acknowledge that, in the
event of a threatened or actual breach of any of the provisions of this
agreement, damages alone will be an inadequate remedy, and such breach will
cause the Company great, immediate and irreparable injury and damage.  Accordingly, you agree that the Company
shall be entitled to injunctive and other equitable relief, and that such
relief shall be in addition to, and not in lieu of, any remedies it may have at
law or under this agreement.

 

3

 

Arbitration

 

General.  Any
controversy, dispute, or claim between the parties to this letter agreement,
including any claim arising out of, in connection with, or in relation to the
formation, interpretation, performance or breach of this letter agreement, the
exercise of the Option or the disposition of the Option Shares, shall be
settled exclusively by arbitration, before a single arbitrator, in accordance
with these provisions and the then most applicable rules of the American
Arbitration Association.  Judgment upon
any award rendered by the arbitrator may be entered by any state or federal
court having jurisdiction thereof.  Such
arbitration shall be administered by the American Arbitration Association.  Arbitration shall be the exclusive remedy
for determining any such dispute, regardless of its nature.  Notwithstanding the foregoing, either party
may in an appropriate matter apply to a court for provisional relief, including
a temporary restraining order or a preliminary injunction, on the ground that
the award to which the applicant may be entitled in arbitration may be rendered
ineffectual without provisional relief. 
Unless mutually agreed by the parties otherwise, any arbitration shall
take place in the City of San Diego, California.

 

Selection of Arbitrator.  In the event
the parties are unable to agree upon an arbitrator, the parties shall select a
single arbitrator from a list of nine arbitrators drawn by the parties at
random from the “Independent” (or “Gold Card”) list of retired judges or, at
your option, from a list of nine persons (which shall be retired judges or
corporate or litigation attorneys experienced in stock options and buy-sell
agreements) provided by the office of the American Arbitration Association
having jurisdiction over San Diego, California.  If the parties are unable to agree upon an arbitrator from the
list so drawn, then the parties shall each strike names alternately from the
list, with the first to strike being determined by lot.  After each party has used four strikes, the
remaining name on the list shall be the arbitrator.  If such person is unable to serve for any reason, the parties
shall repeat this process until an arbitrator is selected.

 

Applicability of Arbitration; Remedial Authority.  This agreement
to resolve any disputes by binding arbitration shall extend to claims against
any parent, subsidiary or affiliate of each party, and, when acting within such
capacity, any officer, director, shareholder, employee or agent of each party,
or of any of the above, and shall apply as well to claims arising out of state
and federal statutes and local ordinances as well as to claims arising under
the common law.  In the event of a
dispute subject to this paragraph the parties shall be entitled to reasonable
discovery subject to the discretion of the arbitrator.  The remedial authority of the arbitrator
(which shall include the right to grant injunctive or other equitable relief)
shall be the same as, but no greater than, would be the remedial power of a
court having jurisdiction over the parties and their dispute.  The arbitrator shall, upon an appropriate
motion, dismiss any claim without an evidentiary hearing if the party bringing
the motion establishes that he or it would be entitled to summary judgment if
the matter had been pursued in court litigation.  In the event of a conflict between the applicable rules of the
American Arbitration Association and these procedures, the provisions of these
procedures shall govern.

 

Fees and Costs.  Any filing or
administrative fees shall be borne initially by the party requesting
arbitration.  The Company shall be
responsible for the costs and fees of the arbitration, unless you wish to
contribute (up to 50%) of the costs and fees of the arbitration.  Notwithstanding the foregoing, the
prevailing party in such arbitration, as determined by the arbitrator, and in
any enforcement or other court proceedings, shall be entitled, to the extent

 

4

 

permitted by law, to reimbursement from the
other party for all of the prevailing party’s costs (including but not limited
to the arbitrator’s compensation), expenses, and attorneys’ fees.

 

Award Final and Binding.  The arbitrator
shall render an award and written opinion, and the award shall be final and
binding upon the parties.  If any of
these arbitration provisions, or of this agreement, are determined to be
unlawful or otherwise unenforceable, in whole or in part, such determination
shall not affect the validity of the remainder of this agreement, and this
agreement shall be reformed to the extent necessary to carry out its provisions
to the greatest extent possible and to insure that the resolution of all
conflicts between the parties, including those arising out of statutory claims,
shall be resolved by neutral, binding arbitration.  If a court should find that the arbitration provisions of this
agreement are not absolutely binding, then the parties intend any arbitration
decision and award to be fully admissible in evidence in any subsequent action,
given great weight by any finder of fact, and treated as determinative to the
maximum extent permitted by law.

 

Miscellaneous Provisions

 

Successors and Assigns.  Subject to the
limitations set forth in this letter agreement, the benefits and obligations of
this letter agreement will be binding on the executors, administrators, heirs,
legal representatives, successors, and assigns of the parties.

 

Governing Law.  This letter
agreement shall be governed by, and construed in accordance with, the laws of
the State of Delaware excluding those laws that direct the application of the
laws of another jurisdiction.

 

Costs.  You will repay the Company for all costs and
damages, including incidental and consequential damages and attorney’s fees,
resulting from any transfer of the Option Shares which is not in compliance
with the provisions of this letter agreement.

 

Notices.  All notices
and other communications under this letter agreement shall be in writing.  Unless and until you are notified in writing
to the contrary, all notices, communications, and documents directed to the
Company and related to the agreement, if not delivered by hand or by
telecopier, shall be mailed, addressed to:

 

Peregrine
Systems, Inc.

Attention:
Stock Option Plan

Administrator

3611
Valley Center Drive

San
Diego, CA 92130

 

Communications.  Unless and
until you notify the Company in writing to the contrary, all notices,
communications, and documents intended for you and related to this letter
agreement, if not delivered by hand or by telecopier, shall be mailed to your
last known address as shown on the Company’s books.  Notices and communications shall be mailed by first class mail,
postage prepaid.  All mailings and
deliveries related to this letter agreement shall be deemed received when
actually received, if by hand delivery or telecopier, and three business days
after mailing, if by mail.  The
Administrator may, by

 

5

 

notice to you in the form set forth above,
specify that future notices and communications may be sent electronically in a
manner acceptable to the Administrator.

 

Taxes.  You acknowledge that the Company has made no
warranties or representations to you with respect to the income tax
consequences of the transactions contemplated by this letter agreement,
including the grant or exercise of the Option or the sale of the Option Shares,
and you are not relying on the Company or its representatives for an assessment
of such tax consequences.  You have had
adequate opportunity to consult with your personal tax advisor before
submitting this letter agreement to the Company.

 

6

 

This is not an employment contract.  This letter
agreement is not to be interpreted as a guarantee or contract of continuing
employment.

 

We value your efforts and look forward to your continued contribution.

 

	
   

  	
  Sincerely,

  
	
   

  	
   

  
	
   

  	
  John Mutch 

  
	
   

  	
  CEO

  

 

I accept
this option and agree to the terms of this offer letter agreement and the Plan.

 

	
   

  	
   

  	
   

  	
  , 200  

  
	
  Optionee signature

  	
   

  	
  Date

  	
   

  

 

SPOUSAL
CONSENT

 

By his or her signature below, the spouse of the Optionee agrees to be
bound by all of the terms and conditions of the foregoing letter agreement and
of the Plan.

 

	
   

  	
  OPTIONEE’S SPOUSE

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Print Name

  

 

7

 

[PEREGRINE SYSTEMS, INC. 
LETTERHEAD]

 

	
   

  	
  Re:
      Grant of [Incentive][Nonstatutory] Stock Option

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Option Shares:

  	
   

  	
  Grant Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Price per share:

  	
   

  	
  Vesting Base Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Fully-Vested Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Option control no.:

  	
   

  	
  Expiration Date:

  

 

Dear <PR_GIVEN_NAME>:

 

I am pleased to confirm that
the Company has granted you an option to purchase shares of our common stock
under the Peregrine Systems, Inc.  2003
Equity Incentive Plan (the “Plan”).  To
accept your stock option, please sign the enclosed copy of this letter agreement,
have your spouse sign the spousal consent, and return them to {department name,
mail-stop}{in the envelope provided}.

 

General terms

 

Your Option is intended to
be [an incentive] [a nonstatutory] option. 
The basic terms of your Option grant are identified in the information
block at the top of this letter agreement, but other important terms and
conditions are described in this letter agreement and in the Plan.  We encourage you to carefully review the
Plan, a copy of which is [enclosed] [available on request from our {Stock
Administrator} {Human Resources Department}][and on the intranet
at                ].  Capitalized words in this letter agreement
which are not defined in this letter agreement are defined in the Plan.  This letter agreement constitutes the Award
Agreement called for in the Plan.

 

Purchase and payment

 

Subject to the Plan, [your
option vests (becomes exercisable) [to the extent of 25% of the Option Shares
one year after the Vesting Base Date (or, if no Vesting Base Date is specified,
the Grant Date), and then] in cumulative monthly increments of [2.0833]% of the
Option Shares, calculated to the closest whole Share on each monthly
anniversary of the Vesting Base Date, so that all Shares will become
purchasable on the Fully-Vested Date shown above.

 

If you decide to purchase
Shares under this Option, you will be required to submit a completed exercise
agreement on a form approved by the Company, together with payment for the
Option Shares.  You may pay for the
Option Shares (plus any associated withholding taxes) using cash, a check, a
wire transfer or any other form of payment listed in Section 6.4(c) of the Plan
and permitted by the Administrator at the time you wish to exercise.  Shares available under this Option must be
purchased, if at all, no later than the Expiration Date.

 

 

[Specify
any other special provisions, such as acceleration of vesting.]

 

Acceleration of Vesting

 

Notwithstanding anything to
the contrary in this letter agreement, in the event of a Change in Control or
Fundamental Transaction, the Company’s Board of Directors may, in its discretion,
take any or all of the steps set forth in Sections 10.3 or 10.4 of the Plan.

 

Your Termination

 

In the event of your
Termination for any reason other than death or disability (as defined in the
Plan), this Option shall cease to be exercisable three months following your
Termination date.  In the event of your
Termination on account of disability, this Option shall cease to be exercisable
six months following your Termination date. 
In the event of your Termination on account of death, this Option shall
cease to be exercisable 12 months following your Termination date.  In no event, however, may this Option be
exercisable past the Expiration Date or for the Option Shares that were not yet
vested as of your Termination date.

 

Limitations on Transfer

 

This Option may not be
transferred in any manner otherwise than by will or by the laws of descent or
distribution or to a beneficiary designated pursuant to the Plan, and may be
exercised during your lifetime only by you. 
Subject to all of the other terms and conditions of this letter
agreement, following your death, this Option may, to the extent it is vested
and exercisable by you in accordance with its terms on the date of death, be
exercised by your beneficiary or other person entitled to exercise this Option
under the Plan in the event of your death. 
Notwithstanding the first sentence of this paragraph, if this Option is
a Nonqualified Stock Option, this Option may be assigned pursuant to a
qualified domestic relations order as defined by the Code, and exercised by
your spouse who obtained such Option pursuant to such qualified domestic
relations order.  Rights under the
assigned portion may be exercised by the person or persons who acquire a
proprietary interest in such Option pursuant to the assignment.  The terms applicable to the assigned portion
shall be the same as those in effect for the Option immediately before such
assignment and shall be set forth in such documents issued to the assignee as
the Administrator deems appropriate.

 

Community Property

 

Without
prejudice to the actual rights of the spouses as between each other, for all
purposes of this letter agreement, you shall be treated as agent and
attorney-in-fact for that interest held or claimed by your spouse with respect
to this Option and the parties hereto shall act in all matters as if you were
the sole owner of this Option.  This
appointment is coupled with an interest and is irrevocable.

 

Restrictions on Exercise

 

No
Shares will be issued pursuant to the exercise of this Option unless and until
there shall have been full compliance with all applicable requirements of the
Securities Act of 1933, as amended (whether by registration or satisfaction of
exemption conditions), all

 

2

 

applicable laws, and all applicable listing
requirements of any national securities exchange or other market system on
which the Shares are then listed.  As a
condition to the exercise of this Option, the Company may require you to make
any representation and warranty to the Company as may be necessary or
appropriate, in the judgment of the Administrator, to comply with any
applicable law.  You understand and
acknowledge that, because the Company has recently emerged from a bankruptcy
reorganization, the Company has not filed all reports under Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, that would enable it to be
eligible to file a Registration Statement on Form S-8 relating to this
Option.  Accordingly, you understand and
acknowledge that a considerable period of time may pass before the Company is
eligible to use Form S-8 with respect to this Option, and that the
exercisability of this Option may be deferred for such period.

 

Disqualifying Dispositions of ISO Stock

 

You acknowledge that if the
Option Shares acquired by exercise of an Incentive Stock Option is disposed of
within two years after the Grant Date or within one year after such exercise,
immediately prior to the disposition, you will promptly notify the Company in
writing of the date and terms of the disposition and will provide such other
information regarding the disposition as the Company may reasonably require.

 

Equitable
Relief

 

You acknowledge that, in the
event of a threatened or actual breach of any of the provisions of this
agreement, damages alone will be an inadequate remedy, and such breach will
cause the Company great, immediate and irreparable injury and damage.  Accordingly, you agree that the Company
shall be entitled to injunctive and other equitable relief, and that such
relief shall be in addition to, and not in lieu of, any remedies it may have at
law or under this agreement.

 

Arbitration

 

General.  Any controversy, dispute, or claim between
the parties to this letter agreement, including any claim arising out of, in
connection with, or in relation to the formation, interpretation, performance
or breach of this letter agreement, the exercise of the Option or the
disposition of the Option Shares, shall be settled exclusively by arbitration,
before a single arbitrator, in accordance with these provisions and the then
most applicable rules of the American Arbitration Association.  Judgment upon any award rendered by the
arbitrator may be entered by any state or federal court having jurisdiction
thereof.  Such arbitration shall be
administered by the American Arbitration Association.  Arbitration shall be the exclusive remedy for determining any
such dispute, regardless of its nature. 
Notwithstanding the foregoing, either party may in an appropriate matter
apply to a court for provisional relief, including a temporary restraining
order or a preliminary injunction, on the ground that the award to which the
applicant may be entitled in arbitration may be rendered ineffectual without
provisional relief.  Unless mutually
agreed by the parties otherwise, any arbitration shall take place in the City
of San Diego, California.

 

Selection of Arbitrator.  In the event
the parties are unable to agree upon an arbitrator, the parties shall select a
single arbitrator from a list of nine arbitrators drawn by

 

3

 

the parties at random from the “Independent”
(or “Gold Card”) list of retired judges or, at your option, from a list of nine
persons (which shall be retired judges or corporate or litigation attorneys
experienced in stock options and buy-sell agreements) provided by the office of
the American Arbitration Association having jurisdiction over San Diego,
California.  If the parties are unable
to agree upon an arbitrator from the list so drawn, then the parties shall each
strike names alternately from the list, with the first to strike being
determined by lot.  After each party has
used four strikes, the remaining name on the list shall be the arbitrator.  If such person is unable to serve for any
reason, the parties shall repeat this process until an arbitrator is selected.

 

Applicability of Arbitration; Remedial Authority.  This agreement
to resolve any disputes by binding arbitration shall extend to claims against
any parent, subsidiary or affiliate of each party, and, when acting within such
capacity, any officer, director, shareholder, employee or agent of each party,
or of any of the above, and shall apply as well to claims arising out of state
and federal statutes and local ordinances as well as to claims arising under
the common law.  In the event of a
dispute subject to this paragraph the parties shall be entitled to reasonable
discovery subject to the discretion of the arbitrator.  The remedial authority of the arbitrator
(which shall include the right to grant injunctive or other equitable relief)
shall be the same as, but no greater than, would be the remedial power of a
court having jurisdiction over the parties and their dispute.  The arbitrator shall, upon an appropriate
motion, dismiss any claim without an evidentiary hearing if the party bringing
the motion establishes that he or it would be entitled to summary judgment if
the matter had been pursued in court litigation.  In the event of a conflict between the applicable rules of the
American Arbitration Association and these procedures, the provisions of these
procedures shall govern.

 

Fees and Costs.  Any filing or
administrative fees shall be borne initially by the party requesting
arbitration.  The Company shall be
responsible for the costs and fees of the arbitration, unless you wish to
contribute (up to 50%) of the costs and fees of the arbitration.  Notwithstanding the foregoing, the
prevailing party in such arbitration, as determined by the arbitrator, and in
any enforcement or other court proceedings, shall be entitled, to the extent
permitted by law, to reimbursement from the other party for all of the
prevailing party’s costs (including but not limited to the arbitrator’s
compensation), expenses, and attorneys’ fees.

 

Award Final and Binding.  The arbitrator
shall render an award and written opinion, and the award shall be final and
binding upon the parties.  If any of
these arbitration provisions, or of this agreement, are determined to be
unlawful or otherwise unenforceable, in whole or in part, such determination
shall not affect the validity of the remainder of this agreement, and this
agreement shall be reformed to the extent necessary to carry out its provisions
to the greatest extent possible and to insure that the resolution of all
conflicts between the parties, including those arising out of statutory claims,
shall be resolved by neutral, binding arbitration.  If a court should find that the arbitration provisions of this agreement
are not absolutely binding, then the parties intend any arbitration decision
and award to be fully admissible in evidence in any subsequent action, given
great weight by any finder of fact, and treated as determinative to the maximum
extent permitted by law.

 

4

 

Miscellaneous Provisions

 

Successors and Assigns.  Subject to the
limitations set forth in this letter agreement, the benefits and obligations of
this letter agreement will be binding on the executors, administrators, heirs,
legal representatives, successors, and assigns of the parties.

 

Governing Law.  This letter agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware excluding
those laws that direct the application of the laws of another jurisdiction.

 

Costs.  You will repay the Company for all costs and
damages, including incidental and consequential damages and attorney’s fees,
resulting from any transfer of the Option Shares which is not in compliance
with the provisions of this letter agreement.

 

Notices.  All notices and other communications under
this letter agreement shall be in writing. 
Unless and until you are notified in writing to the contrary, all
notices, communications, and documents directed to the Company and related to the
agreement, if not delivered by hand or by telecopier, shall be mailed,
addressed to:

 

Peregrine
Systems, Inc.

Attention:
Stock Option Plan

Administrator

3611
Valley Center Drive

San
Diego, CA 92130

 

Communications.  Unless and
until you notify the Company in writing to the contrary, all notices,
communications, and documents intended for you and related to this letter
agreement, if not delivered by hand or by telecopier, shall be mailed to your
last known address as shown on the Company’s books.  Notices and communications shall be mailed by first class mail,
postage prepaid.  All mailings and
deliveries related to this letter agreement shall be deemed received when
actually received, if by hand delivery or telecopier, and three business days
after mailing, if by mail.  The
Administrator may, by notice to you in the form set forth above, specify that
future notices and communications may be sent electronically in a manner
acceptable to the Administrator.

 

Taxes.  You acknowledge that the Company has made no
warranties or representations to you with respect to the income tax
consequences of the transactions contemplated by this letter agreement,
including the grant or exercise of the Option or the sale of the Option Shares,
and you are not relying on the Company or its representatives for an assessment
of such tax consequences.  You have had
adequate opportunity to consult with your personal tax advisor before
submitting this letter agreement to the Company.

 

5

 

This is not an employment contract.  This letter
agreement is not to be interpreted as a guarantee or contract of continuing
employment.

 

We value your efforts and
look forward to your continued contribution.

 

	
   

  	
  Sincerely,

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  John Mutch 

  
	
   

  	
  CEO

  

 

I accept
this option and agree to the terms of this offer letter agreement and the Plan.

 

	
   

  	
   

  	
                                      

  	
  , 200   

  
	
  Optionee signature

  	
   

  	
  Date

  	
   

  

 

SPOUSAL
CONSENT

 

By
his or her signature below, the spouse of the Optionee agrees to be bound by
all of the terms and conditions of the foregoing letter agreement and of the
Plan.

 

	
   

  	
  OPTIONEE’S SPOUSE

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Print Name

  

 

6

 

Grant of Nonstatutory Stock Option

 

	
   

  	
  Option Shares:

  	
   

  	
  Grant Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Price per Share:

  	
   

  	
  Vesting Base Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Fully Vested Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Option Control No:

  	
   

  	
  Expiration Date:

  

 

Dear:

 

I am pleased to confirm that
the Company has granted you an option to purchase shares of our common stock
under the Peregrine Systems, Inc.  2003
Equity Incentive Plan (the “Plan”).  To
accept your stock option, please sign the enclosed copy of this letter
agreement and return it to {department name, mail-stop} {in the envelope
provided}.

 

General terms

 

It
is intended that your Option will qualify as an “approved option” for UK tax
purposes.  The Company is currently in
discussions with the UK Inland Revenue regarding the tax treatment of your
Option and you will be notified in due course of the outcome of these
discussions.  The basic terms of your
Option grant are identified in the information block at the top of this letter
agreement, but other important terms and conditions are described in this
letter agreement and in the Plan.  For
the purposes of this letter agreement, “Plan” includes the terms of the UK
sub-plan adopted by the Company in order to allow the grant of tax-approved
options to UK employees (the “UK Sub-Plan”). 
We encourage you to carefully review the Plan, a copy of which is
available on the intranet at http://falconnet.peregrine.com/stock_plan_admin/index.cfm?objectID=E752A718-60E3-4892-A72AF8449EA248D2.

 

Capitalized words in this
letter agreement, which are not defined in this letter agreement, are defined
in the Plan.  This letter agreement
constitutes the Award Agreement called for in the Plan.

 

If the terms of this letter
agreement differ from the rules of the Plan and/or the UK legislation governing
approved options, the rules and that legislation will take precedence.

 

Purchase and payment

 

Subject
to the Plan, your option vests (becomes exercisable) to the extent of 25% of
the Option Shares one year after the Vesting Base Date (or, if no Vesting Base
Date is specified, the Grant Date), and then in cumulative monthly increments
of 2.0833% of the Option Shares, calculated to the closest whole Share on each
monthly anniversary of the Vesting Base Date, so that all Shares will become
purchasable on the Fully-Vested Date shown above.  (You should, however, note that you will not obtain favourable
tax treatment

 

 

in the UK on the exercise of your option
unless you have held the option for at least 3 years before exercising it.)

 

Notwithstanding anything to
the contrary in this letter agreement, if a person obtains Control of the
Company in one of the ways specified in clause 10 of the UK-Sub-Plan or a
Fundamental Transaction occurs, the Company’s Board of Directors may, in its
discretion, take any or all of the steps set forth in Section 10.3 or 10.4 of
the Plan, provided that the vesting of this Option shall be no less favorable
to you than the vesting set forth in this letter agreement.

 

If you decide to purchase
Shares under this Option, you will be required to submit a completed exercise
agreement on a form approved by the Company, together with payment for the
Option Shares.  You may pay for the
Option Shares (plus any associated withholding taxes) using cash, a check, a
wire transfer or a promissory note (or any combination of those methods).  Shares available under this Option must be
purchased, if at all, no later than the Expiration Date.

 

Acceleration of Vesting

 

Notwithstanding anything to
the contrary in this letter agreement, in the event that a person obtains
Control of the Company in one of the ways specified in clause 10 of the UK
Sub-Plan or a Fundamental Transaction occurs, the Company’s Board of Directors
may, in its discretion, take any or all of the steps set forth in Sections 10.3
or 10.4 of the Plan.

 

Your Termination

 

In
the event of your Termination for any reason other than death or disability (as
defined in the Plan), this Option shall cease to be exercisable three months
following your Termination date.  In the
event of your Termination on account of disability, this Option shall cease to
be exercisable six months following your Termination date.  In the event of your Termination on account
of death, this Option shall cease to be exercisable 12 months following your
Termination date.  In no event, however,
may this Option be exercisable past the Expiration Date or for the Option
Shares that were not yet vested as of your Termination date.

 

Limitations on Transfer

 

This Option may not be
transferred in any manner, and may be exercised during your lifetime only by
you.  Subject to all of the other terms
and conditions of this letter agreement, following your death, this Option may,
to the extent it is vested and exercisable by you in accordance with its terms
on the date of death, be exercised by your personal representatives.

 

Restrictions on Exercise

 

No
Shares will be issued pursuant to the exercise of this Option unless and until
there shall have been full compliance with all applicable requirements of the
Securities Act of 1933, as amended (whether by registration or satisfaction of
exemption conditions), all applicable laws, and all applicable listing
requirements of any national securities exchange

 

2

 

or other market system on which the Shares
are then listed.  As a condition to the
exercise of this Option, the Company may require you to make any representation
and warranty to the Company as may be necessary or appropriate, in the judgment
of the Administrator, to comply with any applicable law.  You understand and acknowledge that, because
the Company has recently emerged from a bankruptcy reorganization, the Company
has not filed all reports under Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, that would enable it to be eligible to file a
Registration Statement on Form S-8 relating to this Option.  Accordingly, you understand and acknowledge
that a considerable period of time may pass before the Company is eligible to
use Form S-8 with respect to this Option, and that the exercisability of this
Option may be deferred for such period.

 

Equitable Relief

 

You acknowledge that, in the
event of a threatened or actual breach of any of the provisions of this
agreement, damages alone will be an inadequate remedy, and such breach will
cause the Company great, immediate and irreparable injury and damage.  Accordingly, you agree that the Company
shall be entitled to injunctive and other equitable relief, and that such
relief shall be in addition to, and not in lieu of, any remedies it may have at
law or under this agreement.

 

Arbitration

 

General.  Any controversy, dispute, or claim between
the parties to this letter agreement, including any claim arising out of, in
connection with, or in relation to the formation, interpretation, performance
or breach of this letter agreement, the exercise of the Option or the disposition
of the Option Shares, shall be settled exclusively by arbitration, before a
single arbitrator, in accordance with these provisions and the then most
applicable rules of the American Arbitration Association.  Judgment upon any award rendered by the
arbitrator may be entered by any state or federal court having jurisdiction
thereof.  Such arbitration shall be
administered by the American Arbitration Association.  Arbitration shall be the exclusive remedy for determining any
such dispute, regardless of its nature. 
Notwithstanding the foregoing, either party may in an appropriate matter
apply to a court for provisional relief, including a temporary restraining
order or a preliminary injunction, on the ground that the award to which the
applicant may be entitled in arbitration may be rendered ineffectual without
provisional relief.  Unless mutually
agreed by the parties otherwise, any arbitration shall take place in the City
of San Diego, California.

 

Selection of Arbitrator.  In the event
the parties are unable to agree upon an arbitrator, the parties shall select a
single arbitrator from a list of nine arbitrators drawn by the parties at
random from the “Independent” (or “Gold Card”) list of retired judges or, at
your option, from a list of nine persons (which shall be retired judges or
corporate or litigation attorneys experienced in stock options and buy-sell
agreements) provided by the office of the American Arbitration Association
having jurisdiction over San Diego, California.  If the parties are unable to agree upon an arbitrator from the
list so drawn, then the parties shall each strike names alternately from the
list, with the first to strike being determined by lot.  After each party has used four strikes, the
remaining name on the list shall be the arbitrator.  If such person is unable to serve for any reason, the parties
shall repeat this process until an arbitrator is selected.

 

3

 

Applicability of Arbitration; Remedial Authority.  This agreement
to resolve any disputes by binding arbitration shall extend to claims against
any parent, subsidiary or affiliate of each party, and, when acting within such
capacity, any officer, director, shareholder, employee or agent of each party,
or of any of the above, and shall apply as well to claims arising out of state
and federal statutes and local ordinances as well as to claims arising under
the common law.  In the event of a
dispute subject to this paragraph the parties shall be entitled to reasonable
discovery subject to the discretion of the arbitrator.  The remedial authority of the arbitrator
(which shall include the right to grant injunctive or other equitable relief)
shall be the same as, but no greater than, would be the remedial power of a
court having jurisdiction over the parties and their dispute.  The arbitrator shall, upon an appropriate
motion, dismiss any claim without an evidentiary hearing if the party bringing
the motion establishes that he or it would be entitled to summary judgment if
the matter had been pursued in court litigation.  In the event of a conflict between the applicable rules of the
American Arbitration Association and these procedures, the provisions of these
procedures shall govern.

 

Fees and Costs.  Any filing or
administrative fees shall be borne initially by the party requesting
arbitration.  The Company shall be
responsible for the costs and fees of the arbitration, unless you wish to
contribute (up to 50%) of the costs and fees of the arbitration.  Notwithstanding the foregoing, the
prevailing party in such arbitration, as determined by the arbitrator, and in
any enforcement or other court proceedings, shall be entitled, to the extent
permitted by law, to reimbursement from the other party for all of the
prevailing party’s costs (including but not limited to the arbitrator’s
compensation), expenses, and attorneys’ fees.

 

Award Final and Binding.  The arbitrator
shall render an award and written opinion, and the award shall be final and
binding upon the parties.  If any of
these arbitration provisions, or of this agreement, are determined to be
unlawful or otherwise unenforceable, in whole or in part, such determination
shall not affect the validity of the remainder of this agreement, and this
agreement shall be reformed to the extent necessary to carry out its provisions
to the greatest extent possible and to insure that the resolution of all
conflicts between the parties, including those arising out of statutory claims,
shall be resolved by neutral, binding arbitration.  If a court should find that the arbitration provisions of this
agreement are not absolutely binding, then the parties intend any arbitration
decision and award to be fully admissible in evidence in any subsequent action,
given great weight by any finder of fact, and treated as determinative to the
maximum extent permitted by law.

 

Miscellaneous Provisions

 

Successors and Assigns.  Subject to the
limitations set forth in this letter agreement, the benefits and obligations of
this letter agreement will be binding on the executors, administrators, heirs,
legal representatives, successors, and assigns of the parties.

 

Governing Law.  This letter agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware excluding
those laws that direct the application of the laws of another jurisdiction.

 

4

 

Costs.  You will repay the Company for all costs and
damages, including incidental and consequential damages and attorney’s fees,
resulting from any transfer of the Option Shares which is not in compliance
with the provisions of this letter agreement.

 

Notices.  All notices and other communications under
this letter agreement shall be in writing. 
Unless and until you are notified in writing to the contrary, all
notices, communications, and documents directed to the Company and related to
the agreement, if not delivered by hand or by telecopier, shall be mailed,
addressed to:

 

Peregrine
Systems, Inc.

Attention:
Stock Option Plan

Administrator

3611
Valley Center Drive

San
Diego, CA 92130

 

Communications.  Unless and
until you notify the Company in writing to the contrary, all notices,
communications, and documents intended for you and related to this letter
agreement, if not delivered by hand or by telecopier, shall be mailed to your
last known address as shown on the Company’s books.  Notices and communications shall be mailed by first class mail,
postage prepaid.  All mailings and
deliveries related to this letter agreement shall be deemed received when
actually received, if by hand delivery or telecopier, and three business days
after mailing, if by mail.  The
Administrator may, by notice to you in the form set forth above, specify that
future notices and communications may be sent electronically in a manner
acceptable to the Administrator.

 

Taxes.  You acknowledge that the Company has made no
warranties or representations to you with respect to the income tax
consequences of the transactions contemplated by this letter agreement,
including the grant or exercise of the Option or the sale of the Option Shares,
and you are not relying on the Company or its representatives for an assessment
of such tax consequences.  You have had
adequate opportunity to consult with your personal tax advisor before submitting
this letter agreement to the Company.

 

This is not an employment contract.  This letter
agreement is not to be interpreted as a guarantee or contract of continuing
employment.

 

We value your efforts and
look forward to your continued contribution.

 

	
   

  	
  Sincerely,

  
	
   

  	
   

  
	
   

  	
  /s/ John Mutch

  	
   

  
	
   

  	
  John Mutch

  
	
   

  	
  CEO

  

 

I accept
this option and agree to the terms of this offer letter agreement and the Plan.

 

	
   

  	
   

  	
                                      

  	
  , 200   

  
	
  Optionee signature

  	
   

  	
  Date

  	
   

  

 

5

 

Grant of Nonstatutory Stock Option

 

	
   

  	
  Option Shares:

  	
   

  	
  Grant Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Price per Share:

  	
   

  	
  Vesting Base Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Fully Vested Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Option Control No:

  	
   

  	
  Expiration Date:

  

 

Dear:

 

I am pleased to confirm that
the Company has granted you an option to purchase shares of our common stock
under the Peregrine Systems, Inc.  2003
Equity Incentive Plan (the “Plan”).  To
accept your stock option, please sign the enclosed copy of this letter
agreement and return it to {department name, mail-stop} {in the envelope
provided}.

 

General terms

 

It is intended that your
Option will qualify as an “approved option” for UK tax purposes.  The Company is currently in discussions with
the UK Inland Revenue regarding the tax treatment of your Option and you will
be notified in due course of the outcome of these discussions.  The basic terms of your Option grant are
identified in the information block at the top of this letter agreement, but
other important terms and conditions are described in this letter agreement and
in the Plan.  For the purposes of this
letter agreement, “Plan” includes the terms of the UK sub-plan adopted by the
Company in order to allow the grant of tax-approved options to UK employees
(the “UK Sub-Plan”).  We encourage you
to carefully review the Plan, a copy of which is available on the intranet at
http://falconnet.peregrine.com/stockjplan_admin/index.cfm?obiectID=E752A718-60E3-4892-A72AF8449EA248D2.

 

Capitalized words in this
letter agreement, which are not defined in this letter agreement, are defined
in the Plan.  This letter agreement
constitutes the Award Agreement called for in the Plan.

 

If the terms of this letter
agreement differ from the rules of the Plan and/or the UK legislation governing
approved options, the rules and that legislation will take precedence.

 

Purchase and payment

 

Subject to the Plan, your
option vests (becomes exercisable) to the extent of 25% of the Option Shares
one year after the Vesting Base Date (or, if no Vesting Base Date is specified,
the Grant Date), and then in cumulative monthly increments of 2.0833% of the
Option Shares, calculated to the closest whole Share on each monthly
anniversary of the Vesting Base Date, so that all Shares will become
purchasable on the Fully-Vested Date shown above.  (You should, however, note that you will not obtain favourable
tax treatment

 

 

in the UK on the exercise of your option
unless you have held the option for at least 3 years before exercising it.)

 

Notwithstanding anything to
the contrary in this letter agreement, if you have a Company-initiated
Termination without Cause within twelve (12) months after the occurrence of a
Change in Control, one half of the portion of this Option which would otherwise
be unvested as of the date of your Termination under the provisions set forth
above shall become vested as of the date of your Termination.  If a person obtains Control of the Company
in one of the ways specified in clause 10 of the UK-Sub-Plan or a Fundamental
Transaction occurs, the Company’s Board of Directors may, in its discretion,
take any or all of the steps set forth in Section 10.3 or 10.4 of the Plan,
provided that the vesting of this Option shall be no less favorable to you than
the vesting set forth in this letter agreement.

 

If you decide to purchase Shares
under this Option, you will be required to submit a completed exercise
agreement on a form approved by the Company, together with payment for the
Option Shares.  You may pay for the
Option Shares (plus any associated withholding taxes) using cash, a check, a
wire transfer or a promissory note (or any combination of those methods).  Shares available under this Option must be
purchased, if at all, no later than the Expiration Date.

 

Acceleration of Vesting

 

Notwithstanding anything to
the contrary in this letter agreement, in the event that a person obtains
Control of the Company in one of the ways specified in clause 10 of the UK
Sub-Plan or a Fundamental Transaction occurs, the Company’s Board of Directors
may, in its discretion, take any or all of the steps set forth in Sections 10.3
or 10.4 of the Plan.

 

Your Termination

 

In the event of your
Termination for any reason other than death or disability (as defined in the
Plan), this Option shall cease to be exercisable three months following your
Termination date.  In the event of your
Termination on account of disability, this Option shall cease to be exercisable
six months following your Termination date. 
In the event of your Termination on account of death, this Option shall
cease to be exercisable 12 months following your Termination date.  In no event, however, may this Option be
exercisable past the Expiration Date or for the Option Shares that were not yet
vested as of your Termination date.

 

Limitations on Transfer

 

This Option may not be
transferred in any manner, and may be exercised during your lifetime only by
you.  Subject to all of the other terms
and conditions of this letter agreement, following your death, this Option may,
to the extent it is vested and exercisable by you in accordance with its terms
on the date of death, be exercised by your personal representatives.

 

2

 

Restrictions on Exercise

 

No Shares will be issued
pursuant to the exercise of this Option unless and until there shall have been
full compliance with all applicable requirements of the Securities Act of 1933,
as amended (whether by registration or satisfaction of exemption conditions),
all applicable laws, and all applicable listing requirements of any national
securities exchange or other market system on which the Shares are then
listed.  As a condition to the exercise
of this Option, the Company may require you to make any representation and
warranty to the Company as may be necessary or appropriate, in the judgment of the
Administrator, to comply with any applicable law.  You understand and acknowledge that, because the Company has
recently emerged from a bankruptcy reorganization, the Company has not filed
all reports under Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, that would enable it to be eligible to file a Registration
Statement on Form S-8 relating to this Option. 
Accordingly, you understand and acknowledge that a considerable period
of time may pass before the Company is eligible to use Form S-8 with respect to
this Option, and that the exercisability of this Option may be deferred for
such period.

 

Equitable Relief

 

You acknowledge that, in the
event of a threatened or actual breach of any of the provisions of this
agreement, damages alone will be an inadequate remedy, and such breach will
cause the Company great, immediate and irreparable injury and damage.  Accordingly, you agree that the Company
shall be entitled to injunctive and other equitable relief, and that such
relief shall be in addition to, and not in lieu of, any remedies it may have at
law or under this agreement.

 

Arbitration

 

General.  Any controversy, dispute, or claim between
the parties to this letter agreement, including any claim arising out of, in
connection with, or in relation to the formation, interpretation, performance
or breach of this letter agreement, the exercise of the Option or the
disposition of the Option Shares, shall be settled exclusively by arbitration,
before a single arbitrator, in accordance with these provisions and the then
most applicable rules of the American Arbitration Association.  Judgment upon any award rendered by the
arbitrator may be entered by any state or federal court having jurisdiction thereof.  Such arbitration shall be administered by
the American Arbitration Association. 
Arbitration shall be the exclusive remedy for determining any such
dispute, regardless of its nature. 
Notwithstanding the foregoing, either party may in an appropriate matter
apply to a court for provisional relief, including a temporary restraining
order or a preliminary injunction, on the ground that the award to which the
applicant may be entitled in arbitration may be rendered ineffectual without
provisional relief.  Unless mutually
agreed by the parties otherwise, any arbitration shall take place in the City
of San Diego, California.

 

Selection of Arbitrator.  In the event
the parties are unable to agree upon an arbitrator, the parties shall select a
single arbitrator from a list of nine arbitrators drawn by the parties at
random from the “Independent” (or “Gold Card”) list of retired judges or, at
your option, from a list of nine persons (which shall be retired judges or
corporate or litigation attorneys experienced in stock options and buy-sell
agreements) provided by the office of the American Arbitration Association
having jurisdiction over San Diego, California.  If the parties are unable to agree upon an arbitrator from the
list so drawn, then

 

3

 

the parties shall each strike names
alternately from the list, with the first to strike being determined by
lot.  After each party has used four
strikes, the remaining name on the list shall be the arbitrator.  If such person is unable to serve for any
reason, the parties shall repeat this process until an arbitrator is selected.

 

Applicability of Arbitration; Remedial Authority.  This agreement
to resolve any disputes by binding arbitration shall extend to claims against
any parent, subsidiary or affiliate of each party, and, when acting within such
capacity, any officer, director, shareholder, employee or agent of each party,
or of any of the above, and shall apply as well to claims arising out of state
and federal statutes and local ordinances as well as to claims arising under
the common law.  In the event of a
dispute subject to this paragraph the parties shall be entitled to reasonable
discovery subject to the discretion of the arbitrator.  The remedial authority of the arbitrator
(which shall include the right to grant injunctive or other equitable relief)
shall be the same as, but no greater than, would be the remedial power of a
court having jurisdiction over the parties and their dispute.  The arbitrator shall, upon an appropriate
motion, dismiss any claim without an evidentiary hearing if the party bringing
the motion establishes that he or it would be entitled to summary judgment if
the matter had been pursued in court litigation.  In the event of a conflict between the applicable rules of the
American Arbitration Association and these procedures, the provisions of these
procedures shall govern.

 

Fees and Costs.  Any filing or
administrative fees shall be borne initially by the party requesting
arbitration.  The Company shall be
responsible for the costs and fees of the arbitration, unless you wish to
contribute (up to 50%) of the costs and fees of the arbitration.  Notwithstanding the foregoing, the
prevailing party in such arbitration, as determined by the arbitrator, and in
any enforcement or other court proceedings, shall be entitled, to the extent
permitted by law, to reimbursement from the other party for all of the
prevailing party’s costs (including but not limited to the arbitrator’s
compensation), expenses, and attorneys’ fees.

 

Award Final and Binding.  The arbitrator
shall render an award and written opinion, and the award shall be final and
binding upon the parties.  If any of
these arbitration provisions, or of this agreement, are determined to be
unlawful or otherwise unenforceable, in whole or in part, such determination
shall not affect the validity of the remainder of this agreement, and this
agreement shall be reformed to the extent necessary to carry out its provisions
to the greatest extent possible and to insure that the resolution of all
conflicts between the parties, including those arising out of statutory claims,
shall be resolved by neutral, binding arbitration.  If a court should find that the arbitration provisions of this
agreement are not absolutely binding, then the parties intend any arbitration
decision and award to be fully admissible in evidence in any subsequent action,
given great weight by any finder of fact, and treated as determinative to the
maximum extent permitted by law.

 

Miscellaneous Provisions

 

Successors and Assigns.  Subject to the
limitations set forth in this letter agreement, the benefits and obligations of
this letter agreement will be binding on the executors, administrators, heirs,
legal representatives, successors, and assigns of the parties.

 

4

 

Governing Law.  This letter agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware excluding
those laws that direct the application of the laws of another jurisdiction.

 

Costs.  You will repay the Company for all costs and
damages, including incidental and consequential damages and attorney’s fees,
resulting from any transfer of the Option Shares which is not in compliance
with the provisions of this letter agreement.

 

Notices.  All notices and other communications under
this letter agreement shall be in writing. 
Unless and until you are notified in writing to the contrary, all
notices, communications, and documents directed to the Company and related to
the agreement, if not delivered by hand or by telecopier, shall be mailed,
addressed to:

 

Peregrine
Systems, Inc.

Attention:
Stock Option Plan

Administrator

3611
Valley Center Drive

San
Diego, CA 92130

 

Communications.  Unless and
until you notify the Company in writing to the contrary, all notices,
communications, and documents intended for you and related to this letter
agreement, if not delivered by hand or by telecopier, shall be mailed to your
last known address as shown on the Company’s books.  Notices and communications shall be mailed by first class mail,
postage prepaid.  All mailings and
deliveries related to this letter agreement shall be deemed received when
actually received, if by hand delivery or telecopier, and three business days
after mailing, if by mail.  The
Administrator may, by notice to you in the form set forth above, specify that
future notices and communications may be sent electronically in a manner
acceptable to the Administrator.

 

Taxes.  You acknowledge that the Company has made no
warranties or representations to you with respect to the income tax
consequences of the transactions contemplated by this letter agreement,
including the grant or exercise of the Option or the sale of the Option Shares,
and you are not relying on the Company or its representatives for an assessment
of such tax consequences.  You have had
adequate opportunity to consult with your personal tax advisor before
submitting this letter agreement to the Company.

 

This is not an employment contract.  This letter
agreement is not to be interpreted as a guarantee or contract of continuing
employment.

 

We value your efforts and
look forward to your continued contribution.

 

	
   

  	
  Sincerely,

  
	
   

  	
   

  
	
   

  	
  /s/ John Mutch

  	
   

  
	
   

  	
  John Mutch

  
	
   

  	
  CEO

  

 

5

 

I accept this
option and agree to the terms of this offer letter agreement and the Plan.

 

	
   

  	
   

  	
                                      

  	
  , 200   

  
	
  Optionee signature

  	
   

  	
  Date

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

6

 

Stock
Option Grant Letter

 

	
   

  	
  Option Shares:

  	
   

  	
  Grant Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Price per Share:

  	
   

  	
  Vesting Base Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Fully-Vested Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Option Control No:

  	
   

  	
  Expiration Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Sale Restriction End Date:

  

 

Dear:

 

I am pleased to confirm that
the Company has granted you an option to purchase shares of our common stock
under the 2003 Equity Incentive Plan of Peregrine Systems, Inc.  (the “Plan”).  To acknowledge receipt of your stock option, please sign the
enclosed copy of this Option Grant Letter and return it to the Finance
Department {in the envelope provided}.

 

General terms

 

Your
Option is intended to benefit from the preferred tax regime applicable to
qualified stock options under French law. 
The basic terms of your Option Grant are identified in the information
block at the top of this Option Grant Letter, but other important terms and
conditions are described in this Option Grant Letter and in the Plan.  For the purposes of this Option Grant
Letter, “Plan” includes the terms of the French sub-plan adopted by the Company
in order to allow the grant of options to French employees (the “French
Sub-Plan”) We encourage you to carefully review the Plan, a copy of which is
available on the intranet at
http://falconnet.peregrine.com/stock_plan_admin/index.cfm?objectID=E752A718-60E3-4892-A72AF8449EA248D2.

 

Capitalized words in this
Option Grant Letter, which are not defined in this Option Grant Letter, are
defined in the Plan.  This Option Grant
Letter constitutes the document evidencing the grant of an Award called for in
the Plan.

 

If the terms of this Option
Grant Letter differ from the rules of the French Sub-Plan the rules of the
French Sub-Plan shall prevail.  A French
translation of this Option Grant Letter shall be made available to you for
information purposes only.  In the event
of any conflict between the terms of this Option Grant Letter and the French
translation of the Option Grant Letter, the English language version shall
prevail.

 

Purchase and payment

 

Subject to the Plan, your
option vests (becomes exercisable) to the extent of 25% of the Option Shares
one year after the Vesting Base Date (or, if no Vesting Base Date is specified,
the Grant Date), the so-called first Initial Exercise Date, and then in
cumulative

 

 

monthly increments of 2.0833% of the Option
Shares (Initial Exercise Date, calculated to the closest whole Share on each
monthly anniversary of the Vesting Base Date), so that all Shares will become
purchasable on the Fully-Vested Date shown above, subject to your continuing
status as an Employee on each vesting date.

 

Notwithstanding anything to
the contrary in this Option Grant Letter, if you have a Company-initiated
Termination without Cause within 12 months after the occurrence of a Change in
Control, one half of the portion of this Option which would otherwise be unvested
as of the date of your Termination under the provisions set forth above shall
become vested as of the date of your Termination.  Furthermore, notwithstanding anything to the contrary in this
Option Grant Letter, upon the occurrence of a Change in Control, the Company’s
Board of Directors may, in its discretion, take any or all of the steps set
forth in Section 10.4 of the US Plan and Section 12(c) of the French Sub Plan,
provided that the vesting of this Option shall be no less favourable to you
than the vesting set forth in the preceding sentence.  Notwithstanding anything to the contrary in this Option Grant
Letter, in the event of a Fundamental Transaction, the Company’s Board of
Directors may, in its discretion, take any or all of the steps set forth in
Section 10.3 of the US Plan and Section 12(c) of the French Sub Plan.(1)

 

If you decide to purchase
Shares under this Option, you will be required to submit a completed exercise
notice on a form approved by the Company, together with payment for the Option
Shares, and in accordance the procedure for exercise provided for in Section 10
(a) of the French Sub-Plan.  You may pay
for the Option Shares (plus any associated withholding taxes and broker fees)
using cash, a check, a wire transfer or any other form of payment listed in
Section 9 (d) of the French Sub-Plan and permitted by the Administrator at the
time you wish to exercise.  Shares
available under this Option must be purchased, if at all, no later than the Expiration
Date.

 

Acceleration of Vesting

 

Notwithstanding anything to
the contrary in this Option Grant Letter, in the event of a Change in Control
or Fundamental Transaction, the Company’s Board of Directors may, in its
discretion, take any or all of the steps set forth in Sections 10.3 or 10.4 of
the US Plan and Section 12(c) of the French Sub Plan(2).

 

Your Termination

 

In the event of your
Termination for any reason other than death, disability or retirement (as
defined in section 10 (c), (d) and (e) of the French Sub-Plan), this Option
shall cease to be exercisable three months following your Termination
date.  In the event of your Termination
on account of disability, this Option shall cease to be exercisable six months
following your Termination date in accordance with section 10 (c) of the French
Sub-Plan.  In the event of your
Termination on account of death, this Option shall cease to be exercisable six
months following the date of your death in accordance with section 10 (d) of
the French Sub-Plan.  In the event of
your Termination on account of retirement, this Option

 

(1) You should however note
that in these circumstances you may not benefit from the preferred tax
treatment in France.

 

(2) You should however note
that in these circumstances you may not benefit from the preferred tax treatment
in France.

 

2

 

shall cease to be
exercisable before the beginning of the 3-months period preceding the date of
your Termination date for Options vested before this date in accordance with
section 10 (e) of the French Sub-Plan. 
In no event, however, may this Option be exercisable past the Expiration
Date or for the Option Shares that were not yet vested as of your Termination
date, except as otherwise provided in Section 10(d) and (e) of the French
Sub-Plan.

 

Limitations on Transfer

 

This Option may not be
transferred in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during your lifetime only by you.  No shares subject to this Option may be
exercised, sold or transferred in any manner whatsoever except through the
Authorised Broker, as defined in Section 2(b) of the French Sub-Plan.  Subject to all of the other terms and
conditions of this Option Grant Letter, following your death, this Option may, to
the extent it is vested and exercisable by you in accordance with its terms on
the date of death, be exercised by your heirs or legal representatives in the
event of your death.

 

Restrictions on Exercise

 

No Shares will be issued
pursuant to the exercise of this Option unless and until there shall have been
full compliance with all applicable requirements of the United States of
America Securities Act of 1933, as amended (whether by registration or
satisfaction of exemption conditions), all applicable laws, and all applicable
listing requirements of any national securities exchange or other market system
on which the Shares are then listed.  As
a condition to the exercise of this Option, the Company may require you to make
any representation and warranty to the Company as may be necessary or
appropriate, in the judgment of the Administrator, to comply with any
applicable law.  You understand and
acknowledge that, because the Company has recently emerged from a bankruptcy
reorganization, the Company has not filed all reports under Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, that would enable it to be
eligible to file a Registration Statement on Form S-8 relating to this
Option.  Accordingly, you understand and
acknowledge that a considerable period of time may pass before the Company is
eligible to use Form S-8 with respect to this Option, and that the
exercisability of this Option may be deferred for such period.

 

Restrictions on Sale

 

Except in the event of
Optionee’s disability, death, or retirement, as set forth in Sections 10(c),
(d) and (e) of the French Sub-Plan, the Shares subject to this Option shall not
be transferred, assigned, hypothecated or sold in any manner otherwise than by
will or by the laws of descent or distribution before the Sale Restriction End
Date, as defined above.

 

In
this respect, the Option Shares acquired upon exercise of the Options cannot be
sold:

 

(i)                                     for the 25% of Option Shares that vest one
year after the Vesting Base Date, before the expiry of three years from the
first Initial Exercise Date;

 

3

 

(ii)                                  for each cumulative monthly increment of
2.0833% of the Option Shares that vest as set out in the Option Grant Letter,
before the expiry of three years from the relevant Initial Exercise Date, less
the number of whole months between the first Initial Exercise Date (relating to
the 25% of Option Shares) and the relevant Initial Exercise Date, whenever that
shall be.(3)

 

Equitable Relief

 

You acknowledge that, in the
event of a threatened or actual breach of any of the provisions of this grant
letter, damages alone will be an inadequate remedy, and such breach will cause
the Company great, immediate and irreparable injury and damage.  Accordingly, you agree that the Company
shall be entitled to injunctive and other equitable relief, and that such
relief shall be in addition to, and not in lieu of, any remedies it may have at
law or under this grant letter.

 

Miscellaneous Provisions

 

Successors.  Subject to the limitations set forth in this
Option Grant Letter, the benefits and obligations of this Option Grant Letter
will be binding on the executors, administrators, heirs, legal representatives
and successors of the parties.

 

Governing Law.  This Option Grant Letter shall be governed
by, and construed in accordance with, the laws of the State of Delaware
excluding those laws that direct the application of the laws of another
jurisdiction.

 

Costs.  You will repay the Company for all costs and
damages, including incidental and consequential damages and attorney’s fees,
resulting from any transfer of the Option Shares which is not in compliance
with the provisions of this Option Grant Letter in particular and the Plan in
general.

 

Notices.  All notices and other communications under
this Option Grant Letter shall be in writing. 
Unless and until you are notified in writing to the contrary, all
notices, communications, and documents directed to the Company and related to
the Option Grant Letter, if not delivered by hand or by telecopier, shall be
mailed, addressed to:

 

Peregrine
Systems, Inc.

Attention:
Stock Option Plan

Administrator

 

(3)                                  Working example

 

Assuming a date of grant of
the Option : 01.01. Year 2004

 

25% of the Option shall vest on 01.01.  Year 2005.  The restriction on sale of this portion of the Option lapses 3
years as from the Initial Exercise Date i.e. 
01.01.Year 2008.

 

Then, a further 1/36 of the Option shall vest on
01.02.Year 2005.  The restriction on
sale applicable to this portion of the Option lapses 3 years less the number of
months between the first Initial Exercise Date (0l.0l.Year 2005) and the
relevant Initial Exercise Date (01.02.Year 2005) i.e., 35 months (36 months
less one month), as from the relevant Initial Exercise Date of this portion of
Option (01.02.Year 2005) so that the Sale Restriction End Date is 01.01.Year
2008.

 

In
practice, the
restriction on sale always expires 4 years
after the date of grant.

 

4

 

3611
Valley Center Drive

San
Diego, CA 92130

 

Communications.  Unless and
until you notify the Company in writing to the contrary, all notices,
communications, and documents intended for you and related to this Option Grant
Letter, if not delivered by hand or by telecopier, shall be mailed to your last
known address as shown on the Company’s books. 
Notices and communications shall be mailed by first class mail, postage
prepaid.  All mailings and deliveries
related to this Option Grant Letter shall be deemed received when actually
received, if by hand delivery or telecopier, and three business days after
mailing, if by mail.  The Administrator
may, by notice to you in the form set forth above, specify that future notices
and communications may be sent electronically in a manner acceptable to the
Administrator.

 

Taxes.  You acknowledge that the Company has made no
warranties or representations to you with respect to the income tax
consequences of the transactions contemplated by this Option Grant Letter,
including the grant or exercise of the Option or the sale of the Option Shares,
and you are not relying on the Company or its representatives for an assessment
of such tax consequences.  You have had
adequate opportunity to consult with your personal tax advisor before
submitting this Option Grant Letter to the Company.

 

This is not an employment contract.  This Option
Grant Letter is not to be interpreted as a guarantee or contract of continuing
employment.

 

We value your efforts and
look forward to your continued contribution.

 

	
   

  	
  Sincerely,

  
	
   

  	
   

  
	
   

  	
  /s/ John Mutch

  	
   

  
	
   

  	
  John Mutch

  
	
   

  	
  CEO

  

 

I
acknowledge receipt of this Option Grant Letter and declare that I fully
understand all the terms and conditions of the Plan and this Option Grant
Letter.

 

[I understand that, in order to perform its
requirements under this Plan, my Employer and/or Peregrine Systems, Inc. or any
agent apppointed by Peregrine Systems Inc., may process personal data and/or
sensitive personal data about me.  Such
data include but are not limited to the information provided on the Payroll
Deduction Authorisation form and any changes thereto, other appropriate
personal and financial data about me, and information about the amount in my
Plan account and my purchases under the Plan from time to time.  I hereby give my explicit consent to my
Employer and/or Peregrine Systems Inc., or any agent appointed by Peregrine
Inc.  to process any such personal data
and/or sensitive personal data for the exclusive purpose of administrating the
Plan, excluding other transfers of data unrelated to the Plan’s aim.  I understand that in some of the countries
outside the European Union, regulations on the protection of personal data may
be weaker than those existing in the European Union, or non-existent.  I also hereby give my explicit consent to my

 

5

 

Employer and/or Peregrine Systems, Inc to
transfer any such personal data and/or sensitive personal data outside the
country in which I work or am employed and outside the European Union.  The legal persons for whom my personal data
are intended are my Employer and any independent agent or contractor appointed
by my Employer or Peregrine Systems, Inc.

 

I have been informed of my right of access
and correction to my personal data.  I
understand that completion of this form is required for my enrolment in the
Plan].

 

	
   

  	
   

  	
   

  	
  , 200   

  
	
  Optionee signature

  	
   

  	
  Date

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

6

 

Stock
Option Grant Letter

 

	
   

  	
  Option Shares:

  	
   

  	
  Grant Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Price per Share:

  	
   

  	
  Vesting Base Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Fully Vested Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Option Control No:

  	
   

  	
  Expiration Date:

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Sale Restriction End Date:

  

 

Dear:

 

I am pleased to confirm that
the Company has granted you an option to purchase shares of our common stock
under the 2003 Equity Incentive Plan of Peregrine Systems, Inc.  (the “Plan”).  To acknowledge receipt of your stock option, please sign the
enclosed copy of this Option Grant Letter and return it to the Finance
Department {in the envelope provided}.

 

General terms

 

Your Option is intended to
benefit from the preferred tax regime applicable to qualified stock options
under French law.  The basic terms of
your Option Grant are identified in the information block at the top of this
Option Grant Letter, but other important terms and conditions are described in
this Option Grant Letter and in the Plan. 
For the purposes of this Option Grant Letter, “Plan” includes the terms
of the French sub-plan adopted by the Company in order to allow the grant of
options to French employees (the “French Sub-Plan”) We encourage you to
carefully review the Plan, a copy of which is available on the intranet at
http://falconnet.peregrine.com/stock_plan_admin/index.cfm?objectID=E752A718-60E3-4892-A72AF8449EA248D2.

 

Capitalized words in this
Option Grant Letter, which are not defined in this Option Grant Letter, are
defined in the Plan.  This Option Grant
Letter constitutes the document evidencing the grant of an Award called for in
the Plan.

 

If the terms of this Option
Grant Letter differ from the rules of the French Sub-Plan the rules of the
French Sub-Plan shall prevail.  A French
translation of this Option Grant Letter shall be made available to you for
information purposes only.  In the event
of any conflict between the terms of this Option Grant Letter and the French
translation of the Option Grant Letter, the English language version shall
prevail.

 

Purchase and payment

 

Subject to the Plan, your
option vests (becomes exercisable) to the extent of 25% of the Option Shares
one year after the Vesting Base Date (or, if no Vesting Base Date is specified,
the Grant Date), the so-called first Initial Exercise Date, and then in
cumulative

 

 

monthly increments of 2.0833% of the Option
Shares (Initial Exercise Date, calculated to the closest whole Share on each monthly
anniversary of the Vesting Base Date), so that all Shares will become
purchasable on the Fully-Vested Date shown above, subject to your continuing
status as an Employee on each vesting date.

 

Notwithstanding
anything to the contrary in this Option Grant Letter, upon the occurrence of a
Change in Control, the Company’s Board of Directors may, in its discretion,
take any or all of the steps set forth in Section 10.4 of the US Plan and
Section 12(c) of the French Sub Plan, provided that the vesting of this Option
shall be no less favourable to you than the vesting set forth in the preceding
sentence.  Notwithstanding anything to
the contrary in this Option Grant Letter, in the event of a Fundamental
Transaction, the Company’s Board of Directors may, in its discretion, take any
or all of the steps set forth in Section 10.3 of the US Plan and Section 12(c)
of the French Sub Plan.(1)

 

If
you decide to purchase Shares under this Option, you will be required to submit
a completed exercise notice on a form approved by the Company, together with
payment for the Option Shares, and in accordance the procedure for exercise
provided for in Section 10 (a) of the French Sub-Plan.  You may pay for the Option Shares (plus any
associated withholding taxes and broker fees) using cash, a check, a wire
transfer or any other form of payment listed in Section 9 (d) of the French
Sub-Plan and permitted by the Administrator at the time you wish to
exercise.  Shares available under this
Option must be purchased, if at all, no later than the Expiration Date.

 

Acceleration of Vesting

 

Notwithstanding anything to
the contrary in this Option Grant Letter, in the event of a Change in Control
or Fundamental Transaction, the Company’s Board of Directors may, in its
discretion, take any or all of the steps set forth in Sections 10.3 or 10.4 of
the US Plan and Section 12(c) of the French Sub Plan(2).

 

Your Termination

 

In
the event of your Termination for any reason other than death, disability or
retirement (as defined in section 10 (c), (d) and (e) of the French Sub-Plan),
this Option shall cease to be exercisable three months following your
Termination date.  In the event of your
Termination on account of disability, this Option shall cease to be exercisable
six months following your Termination date in accordance with section 10 (c) of
the French Sub-Plan.  In the event of
your Termination on account of death, this Option shall cease to be exercisable
six months following the date of your death in accordance with section 10 (d)
of the French Sub-Plan.  In the event of
your Termination on account of retirement, this Option shall cease to be
exercisable before the beginning of the 3-months period preceding the date of
your Termination date for Options vested before this date in accordance with
section 10 (e) of the French Sub-Plan. 
In no event, however, may this Option be exercisable past the Expiration
Date or for the Option Shares that were not yet vested as of your Termination
date, except as otherwise provided in Section 10(d) and (e) of the French
Sub-Plan.

 

(1) You should however note
that in these circumstances you may not benefit from the preferred tax
treatment in France.

 

(2) You should however note
that in these circumstances you may not benefit from the preferred tax
treatment in France.

 

2

 

Limitations on Transfer

 

This Option may not be
transferred in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during your lifetime only by you.  No shares subject to this Option may be
exercised, sold or transferred in any manner whatsoever except through the
Authorised Broker, as defined in Section 2(b) of the French Sub-Plan.  Subject to all of the other terms and
conditions of this Option Grant Letter, following your death, this Option may,
to the extent it is vested and exercisable by you in accordance with its terms
on the date of death, be exercised by your heirs or legal representatives in
the event of your death.

 

Restrictions on Exercise

 

No Shares will be issued
pursuant to the exercise of this Option unless and until there shall have been
full compliance with all applicable requirements of the United States of
America Securities Act of 1933, as amended (whether by registration or satisfaction
of exemption conditions), all applicable laws, and all applicable listing
requirements of any national securities exchange or other market system on
which the Shares are then listed.  As a
condition to the exercise of this Option, the Company may require you to make
any representation and warranty to the Company as may be necessary or
appropriate, in the judgment of the Administrator, to comply with any
applicable law.  You understand and
acknowledge that, because the Company has recently emerged from a bankruptcy
reorganization, the Company has not filed all reports under Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, that would enable it to be
eligible to file a Registration Statement on Form S-8 relating to this Option.  Accordingly, you understand and acknowledge
that a considerable period of time may pass before the Company is eligible to
use Form S-8 with respect to this Option, and that the exercisability of this
Option may be deferred for such period.

 

Restrictions on Sale

 

Except in the event of
Optionee’s disability, death, or retirement, as set forth in Sections 10(c),
(d) and (e) of the French Sub-Plan, the Shares subject to this Option shall not
be transferred, assigned, hypothecated or sold in any manner otherwise than by
will or by the laws of descent or distribution before the Sale Restriction End
Date, as defined above.

 

In this respect, the Option
Shares acquired upon exercise of the Options cannot be sold:

 

(i)                                     for the 25% of Option Shares that vest one
year after the Vesting Base Date, before the expiry of three years from the
first Initial Exercise Date;

 

(ii)                                  for each cumulative monthly increment of
2.0833% of the Option Shares that vest as set out in the Option Grant Letter,
before the expiry of three years from the relevant Initial Exercise Date, less
the number of whole months between the first Initial Exercise

 

3

 

Date (relating to the 25% of Option Shares)
and the relevant Initial Exercise Date, whenever that shall be.(3)

 

Equitable Relief

 

You acknowledge that, in the
event of a threatened or actual breach of any of the provisions of this grant
letter, damages alone will be an inadequate remedy, and such breach will cause
the Company great, immediate and irreparable injury and damage.  Accordingly, you agree that the Company
shall be entitled to injunctive and other equitable relief, and that such
relief shall be in addition to, and not in lieu of, any remedies it may have at
law or under this grant letter.

 

Miscellaneous Provisions

 

Successors.  Subject to the limitations set forth in this
Option Grant Letter, the benefits and obligations of this Option Grant Letter
will be binding on the executors, administrators, heirs, legal representatives
and successors of the parties.

 

Governing Law.  This Option Grant Letter shall be governed
by, and construed in accordance with, the laws of the State of Delaware
excluding those laws that direct the application of the laws of another
jurisdiction.

 

Costs.  You will repay the Company for all costs and
damages, including incidental and consequential damages and attorney’s fees,
resulting from any transfer of the Option Shares which is not in compliance
with the provisions of this Option Grant Letter in particular and the Plan in
general.

 

Notices.  All notices and other communications under
this Option Grant Letter shall be in writing. 
Unless and until you are notified in writing to the contrary, all
notices, communications, and documents directed to the Company and related to
the Option Grant Letter, if not delivered by hand or by telecopier, shall be
mailed, addressed to:

 

Peregrine
Systems, Inc.

Attention:
Stock Option Plan

Administrator

3611
Valley Center Drive

San
Diego, CA 92130

 

(3)                                  Working example

 

Assuming a date of grant of
the Option : 01.01.  Year 2004

 

25% of the Option shall vest
on 01.01.  Year 2005.  The restriction on sale of this portion of
the Option lapses 3 years as from the Initial Exercise Date i.e.  01.01.Year 2008.

 

Then, a further 1/36 of the Option
shall vest on 01.02.Year 2005.  The
restriction on sale applicable to this portion of the Option lapses 3 years
less the number of months between the first Initial Exercise Date (0l.0l.Year
2005) and the relevant Initial Exercise Date (01.02.Year 2005) i.e., 35 months
(36 months less one month), as from the relevant Initial Exercise Date of this
portion of Option (01.02.  Year 2005) so
that the Sale Restriction End Date is 01.01. 
Year 2008.

 

In
practice, the
restriction on sale always expires 4 years
after the date of grant.

 

4

 

Communications.  Unless and
until you notify the Company in writing to the contrary, all notices,
communications, and documents intended for you and related to this Option Grant
Letter, if not delivered by hand or by telecopier, shall be mailed to your last
known address as shown on the Company’s books. 
Notices and communications shall be mailed by first class mail, postage
prepaid.  All mailings and deliveries
related to this Option Grant Letter shall be deemed received when actually
received, if by hand delivery or telecopier, and three business days after
mailing, if by mail.  The Administrator
may, by notice to you in the form set forth above, specify that future notices
and communications may be sent electronically in a manner acceptable to the
Administrator.

 

Taxes.  You acknowledge that the Company has made no
warranties or representations to you with respect to the income tax
consequences of the transactions contemplated by this Option Grant Letter,
including the grant or exercise of the Option or the sale of the Option Shares,
and you are not relying on the Company or its representatives for an assessment
of such tax consequences.  You have had
adequate opportunity to consult with your personal tax advisor before
submitting this Option Grant Letter to the Company.

 

This is not an employment contract.  This Option
Grant Letter is not to be interpreted as a guarantee or contract of continuing
employment.

 

We value your efforts and
look forward to your continued contribution.

 

	
   

  	
  Sincerely,

  
	
   

  	
   

  
	
   

  	
  /s/ John Mutch

  	
   

  
	
   

  	
  John Mutch

  
	
   

  	
  CEO

  

 

I
acknowledge receipt of this Option Grant Letter and declare that I fully
understand all the terms and conditions of the Plan and this Option Grant Letter.

 

[I understand that, in order to perform its
requirements under this Plan, my Employer and/or Peregrine Systems, Inc. or any
agent apppointed by Peregrine Systems Inc., may process personal data and/or
sensitive personal data about me.  Such
data include but are not limited to the information provided on the Payroll
Deduction Authorisation form and any changes thereto, other appropriate
personal and financial data about me, and information about the amount in my
Plan account and my purchases under the Plan from time to time.  I hereby give my explicit consent to my
Employer and/or Peregrine Systems Inc., or any agent appointed by Peregrine
Inc.  to process any such personal data
and/or sensitive personal data for the exclusive purpose of administrating the
Plan, excluding other transfers of data unrelated to the Plan’s aim.  I understand that in some of the countries
outside the European Union, regulations on the protection of personal data may
be weaker than those existing in the European Union, or non-existent.  I also hereby give my explicit consent to my
Employer and/or Peregrine Systems, Inc to transfer any such personal data
and/or sensitive personal data outside the country in which I work or am
employed and outside the European

 

5

 

Union. 
The legal persons for whom my personal data are intended are my Employer
and any independent agent or contractor appointed by my Employer or Peregrine
Systems, Inc.

 

I have been informed of my right of access
and correction to my personal data.  I
understand that completion of this form is required for my enrolment in the
Plan].

 

	
   

  	
   

  	
   

  	
  , 200   

  
	
  Optionee signature

  	
   

  	
  Date

  	
   

  

 

6Exhibit
10.7

 

AMENDED AND
RESTATED OFFICE LEASE

 

AND
SETTLEMENT AGREEMENT

 

KILROY
CENTRE DEL MAR

 

KILROY REALTY, L.P.,

a Delaware limited partnership

 

as Landlord,

 

 

and

 

 

PEREGRINE SYSTEMS, INC.,

a Delaware corporation

 

as Tenant

 

BUILDING 2

 

 

TABLE OF CONTENTS

 

	
  ARTICLE 1

  	
  PREMISES,
  BUILDING, PROJECT, AND COMMON AREAS

  	
   

  
	
  1.1

  	
  Premises, Building, Project and
  Common Areas

  	
   

  
	
  1.2

  	
  Stipulation of
  Rentable Square Feet of Premises and Building

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 2

  	
  LEASE TERM

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 3

  	
  BASE
  RENT

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 4

  	
  ADDITIONAL
  RENT

  	
   

  
	
  4.1

  	
  General Terms

  	
   

  
	
  4.2

  	
  Definitions
  of Key Terms Relating to Additional Rent

  	
   

  
	
  4.3

  	
  Allocation of Direct
  Expenses

  	
   

  
	
  4.4

  	
  Calculation
  and Payment of Additional Rent

  	
   

  
	
  4.5

  	
  Taxes and Other
  Charges for Which Tenant is Directly Responsible

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 5

  	
  USE
  OF PREMISES

  	
   

  
	
  5.1

  	
  Permitted Use

  	
   

  
	
  5.2

  	
  Prohibited Uses

  	
   

  
	
  5.3

  	
  CC&R’s

  	
   

  
	
  5.4

  	
  Building Lobby

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 6

  	
  SERVICES AND
  UTILITIES

  	
   

  
	
  6.1

  	
  Standard Tenant
  Services

  	
   

  
	
  6.2

  	
  Overstandard
  Tenant Use

  	
   

  
	
  6.3

  	
  Interruption of Use

  	
   

  
	
  6.4

  	
  Additional
  Services

  	
   

  
	
  6.5

  	
  Intentionally Omitted

  	
   

  
	
  6.6

  	
  Emergency
  Generator

  	
   

  
	
  6.7

  	
  Building
  Reconfiguration Costs

  	
   

  
	
  6.9

  	
  Abatement Event

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 7

  	
  REPAIRS

  	
   

  
	
  7.1

  	
  Obligations

  	
   

  
	
  7.2

  	
  Tenant’s Failure
  to Comply 

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 8

  	
  ADDITIONS AND
  ALTERATIONS

  	
   

  
	
  8.1

  	
  Landlord’s
  Consent to Alterations

  	
   

  
	
  8.2

  	
  Manner of
  Construction

  	
   

  
	
  8.3

  	
  Payment for
  Improvements

  	
   

  
	
  8.4

  	
  Construction
  Insurance

  	
   

  
	
  8.5

  	
  Landlord’s
  Property

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 9

  	
  COVENANT
  AGAINST LIENS

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 10

  	
  INSURANCE

  	
   

  
	
  10.1

  	
  Indemnification
  and Waiver

  	
   

  
	
  10.2

  	
  Tenant’s
  Compliance with Landlord’s Fire and Casualty Insurance

  	
   

  
	
  10.3

  	
  Tenant’s Insurance

  	
   

  
	
  10.4

  	
  Fire
  and Casualty Insurance of Landlord

  	
   

  
	
  10.5

  	
  Form of Policies

  	
   

  
	
  10.6

  	
  Subrogation

  	
   

  
	
  10.7

  	
  Additional
  Insurance Obligations

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 11

  	
  DAMAGE AND
  DESTRUCTION

  	
   

  
	
  11.1

  	
  Repair of
  Damage to Premises by Landlord

  	
   

  
	
  11.2

  	
  Landlord’s Option to
  Repair

  	
   

  
	
  11.3

  	
  Landlord’s
  Option to Repair

  	
   

  
	
  11.4

  	
  Waiver
  of Statutory Provisions

  	
   

  
	
  11.5

  	
  Damage Near End of Term

  	
   

  

 

i

 

	
  ARTICLE 12

  	
  NONWAIVER

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 13

  	
  CONDEMNATION

  	
   

  
	
  13.1

  	
  Permanent Taking

  	
   

  
	
  13.2

  	
  Temporary Taking

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 14

  	
  ASSIGNMENT
  AND SUBLETTING

  	
   

  
	
  14.1

  	
  Transfers

  	
   

  
	
  14.2

  	
  Landlord’s
  Consent

  	
   

  
	
  14.3

  	
  Transfer
  Premium

  	
   

  
	
  14.4

  	
  Landlord’s Option
  as to Subject Space

  	
   

  
	
  14.5

  	
  Effect of
  Transfer

  	
   

  
	
  14.6

  	
  Additional
  Transfers

  	
   

  
	
  14.7

  	
  Affiliated
  Transfers

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE I5

  	
  SURRENDER OF PREMISES;
  REMOVAL OF TRADE FIXTURES

  	
   

  
	
  15.1

  	
  Surrender
  of Premises

  	
   

  
	
  15.2

  	
  Removal of Tenant
  Property by Tenant

  	
   

  
	
  15.3

  	
  Removal of
  Tenant’s Property by Landlord

  	
   

  
	
  15.4

  	
  Landlord’s Actions on
  Premises

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 16

  	
  HOLDING OVER

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 17

  	
  ESTOPPEL CERTIFICATES

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 18

  	
  SUBORDINATION

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 19

  	
  DEFAULTS; REMEDIES

  	
   

  
	
  19.1

  	
  Defaults

  	
   

  
	
  19.2

  	
  Remedies
  Upon Default

  	
   

  
	
  19.3

  	
  Sublessees
  of Tenant

  	
   

  
	
  19.4

  	
  Form of Payment After
  Default

  	
   

  
	
  19.5

  	
  Waiver of
  Default

  	
   

  
	
  19.6

  	
  Efforts to
  Relet

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 20

  	
  COVENANT OF QUIET
  ENJOYMENT

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 21

  	
  LETTER OF CREDIT

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 22

  	
  ROOF RIGHTS

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 23

  	
  SIGNAGE

  	
   

  
	
  23.1

  	
  General

  	
   

  
	
  23.2

  	
  Tenant’s Exterior
  Signage Rights

  	
   

  
	
  23.3

  	
  Tenant’s Interior
  Signage Rights

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 24

  	
  COMPLIANCE WITH LAW

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 25

  	
  LATE PAYMENTS

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 26

  	
  LANDLORD’S RIGHT TO CURE
  DEFAULT; PAYMENTS BY TENANT

  	
   

  
	
  26.1

  	
  Landlord’s Cure

  	
   

  
	
  26.2

  	
  Tenant’s
  Reimbursement

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 27

  	
  ENTRY BY LANDLORD

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 28

  	
  TENANT PARKING

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 29

  	
  MISCELLANEOUS PROVISIONS

  	
   

  
	
  29.1

  	
  Binding Effect

  	
   

  
	
  29.2

  	
  Modification
  of Lease/Memorandum of Lease

  	
   

  
	
  29.3

  	
  Transfer of Landlord’s
  Interest

  	
   

  
	
  29.4

  	
  Consents
  by the Parties

  	
   

  

 

ii

 

	
  29.5

  	
  Captions

  	
   

  
	
  29.6

  	
  Time of Essence

  	
   

  
	
  29.1

  	
  Partial
  Invalidity

  	
   

  
	
  29.8

  	
  No Warranty

  	
   

  
	
  29.9

  	
  Construction

  	
   

  
	
  29.10

  	
  Entire
  Agreement

  	
   

  
	
  29.11

  	
  Right to Lease

  	
   

  
	
  29.12

  	
  Force Majeute

  	
   

  
	
  29.13

  	
  Notices

  	
   

  
	
  29.14

  	
  Joint and
  Several

  	
   

  
	
  29.15

  	
  Authority

  	
   

  
	
  29.16

  	
  Governing Law

  	
   

  
	
  29.17

  	
  Submission
  of Lease

  	
   

  
	
  29.18

  	
  Brokers

  	
   

  
	
  29.19

  	
  Independent
  Covenants

  	
   

  
	
  29.20

  	
  Intentionally
  Omitted

  	
   

  
	
  29.21

  	
  Transportation Management

  	
   

  
	
  29.22

  	
  No
  Discrimination

  	
   

  
	
  29.23

  	
  Hazardous
  Material

  	
   

  
	
  29.24

  	
  Development of the Project

  	
   

  
	
  29.25

  	
  Landlord
  Exculpation

  	
   

  
	
  29.26

  	
  Waiver
  of Redemption by Tenant

  	
   

  
	
  29.27

  	
  Attorneys’ Fees

  	
   

  
	
  29.28

  	
  Communications and
  Computer Lines

  	
   

  
	
  29.29

  	
  No Air Rights

  	
   

  
	
  29.30

  	
  Counterparts

  	
   

  
	
  29.31

  	
  Confidentiality

  	
   

  
	
  29.32

  	
  Disclosures and Mutual
  Release

  	
   

  
	
  29.33

  	
  Central
  Security Office

  	
   

  
	
  29.34

  	
  Effectiveness

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE 30

  	
  SETTLEMENT OF LANDLORD
  CLAIMS

  	
   

  
	
  30.1

  	
  Landlord’s
  Allowed Claim

  	
   

  
	
  30.2

  	
  Release
  of Landlord

  	
   

  
	
  30.3

  	
  Waiver of 1542

  	
   

  

 

	
  EXHIBIT
  “A”

  	
  OUTLINE
  OF PREMISES

  	
   

  
	
  EXHIBIT
  “B”

  	
  INTENTIONALLY
  OMITTED

  	
   

  
	
  EXHIBIT
  “C”

  	
  INTENTIONALLY
  OMITTED

  	
   

  
	
  EXHIBIT
  “D”

  	
  RULES
  AND REGULATIONS

  	
   

  
	
  EXHIBIT
  “E”

  	
  FORM
  OF TENANT’S ESTOPPEL CERTIFICATE

  	
   

  
	
  EXHIBIT
  “F”

  	
  FORM
  OF RECOGNITION OF COVENANTS CONDITIONS AND RESTRICTIONS

  	
   

  
	
  EXHIBIT
  “G”

  	
  INTENTIONALLY
  OMITTED

  	
   

  
	
  EXHIBIT
  “H”

  	
  INTENTIONALLY
  OMITTED

  	
   

  
	
  EXHIBIT
  “I”

  	
  INTENTIONALLY
  OMITTED

  	
   

  
	
  EXHIBIT
  “J”

  	
  SIGNAGE
  CRITERIA

  	
   

  
	
  EXHIBIT
  “K”

  	
  FORM
  OF BILL, OF SALE, PERSONAL PROPERTY

  	
   

  
	
  EXHIBIT
  “L”

  	
  REMOVABLE
  PROPERTY

  	
   

  
	
  EXHIBIT
  “M”

  	
  FORM
  OF LETTER OF CREDIT

  	
   

  
	
  EXHIBIT
  “N”

  	
  FORM
  OF BILL OF SALE, FF&E

  	
   

  

 

iii

 

KILROY
CENTRE DEL MAR AMENDED AND RESTATED

OFFICE LEASE
AND SETTLEMENT AGREEMENT

 

SUMMARY OF
BASIC LEASE INFORMATION

 

The undersigned hereby agree to the following terms
of this Summary of Basic Lease Information (the “Summary”). This Summary is hereby incorporated into and made a
part of the attached Amended and Restated Office Lease and Settlement Agreement
(the “Office Lease”) which
pertains to the “Project,” as that term is defined in the Office Lease, to be
known as “Kilroy Centre Del Mar”.
This Summary and the Office Lease are collectively referred to herein as the “Lease”. Each reference in the Office Lease
to any term of this Summary shall have the meaning set forth in this Summary
for such term. In the event of a conflict between the terms of this Summary and
the Office Lease, the terms of the Office Lease shall prevail. Any capitalized
terms used herein and not otherwise defined herein shall have the meanings set
forth in the Office Lease.

 

	
  TERMS OF LEASE

  (References are to the

  Office Lease)

  	
   

  	
  DESCRIPTION

  
	
   

  	
   

  	
   

  	
   

  
	
  1.

  	
  Date:

  	
   

  	
  For
  reference purposes only, April 1, 2003.

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  Landlord:

  	
   

  	
  KILROY
  REALTY, L.P., a Delaware limited partnership.

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  Tenant:

  	
   

  	
  PEREGRINE
  SYSTEMS, INC., a Delaware corporation.

  
	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  Premises
  (Article 1):

  	
   

  	
  A
  total of 78,037 rentable (73,242 usable) square feet of space consisting of
  approximately 27,689 rentable (24,338 usable) square feet of space located on
  the first (lst) floor, approximately 24,375 rentable (23,653
  usable) square feet of space located on the second (2nd) floor,
  and approximately 25,973 rentable (25,251 usable) square feet of space
  located on the third (3rd) floor of that certain office building
  located at 3611 Valley Centre Drive, San Diego, California 92130 (the “Building”), as generally depicted on Exhibit A attached hereto.

  
	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  Lease
  Term (Article 2):

  	
   

  	
  The
  Lease Term for Tenant’s lease of the Premises shall be approximately eleven
  (11) years and eight (8) months commencing on the Effective Date and ending
  on April 30, 2013 (the “Lease
  Expiration Date”). The “Effective
  Date” shall be August 28, 2003.

  
	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  Initial
  Base Rent (Article 3):

  	
   

  	
   

  

 

	
  ????

  	
   

  	
  ????

  	
   

  	
  ????

  	
   

  	
  ????

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Effective Date through April 30, 2004

  	
   

  	
  $

  	
  2,273,873.28

  	
   

  	
  $

  	
  189,489.44

  	
   

  	
  $

  	
  2.4282

  	
   

  
	
  May 1, 2004 through April 30, 2006

  	
   

  	
  $

  	
  2,421,675.88

  	
   

  	
  $

  	
  201,806.25

  	
   

  	
  $

  	
  2.5860

  	
   

  
	
  May 1, 2006 through April 30,2008

  	
   

  	
  $

  	
  2,579.083.37

  	
   

  	
  $

  	
  214,923.66

  	
   

  	
  $

  	
  2.7541

  	
   

  
	
  May 1, 2008 through April 30, 2010

  	
   

  	
  $

  	
  2,746,724.40

  	
   

  	
  $

  	
  228,893.70

  	
   

  	
  $

  	
  2.9331

  	
   

  
	
  May 1, 2010 through April 30, 2012

  	
   

  	
  $

  	
  2,925,261.48

  	
   

  	
  $

  	
  243,771.79

  	
   

  	
  $

  	
  3.1238

  	
   

  

 

1

 

	
  7.

  	
   

  	
  Additional
  Rent (Article 4):

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  7.1

  	
  Base
  Year:

  	
   

  	
  2000

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  7.2

  	
  Tenant’s
  Share:

  	
   

  	
  Approximately
  60.18%.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
   

  	
  Letter of Credit:

  	
   

  	
  See Article 21.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
   

  	
  Parking
  Privileges (Article 28):

  	
   

  	
  Four
  and one-half (4 1/2) parking permits for every 1,000 usable square feet of
  the Premises as such square footage is specified in Section 4 of
  the Summary. Each permit shall entitle Tenant to utilize one (1) parking
  space on an unreserved basis in the Project parking facilities.

   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
   

  	
  Brokers
  (Section 29.18):

  	
   

  	
  None.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
   

  	
  Address
  of Tenant:

  	
   

  	
  See
  Section 29.13.

  

 

2

 

KILROY
CENTRE DEL MAR

 

AMENDED AND
RESTATED OFFICE LEASE

 

AND
SETTLEMENT AGREEMENT

 

R E C I T A L S :

 

A.                                   This Amended and Restated Office Lease and
Settlement Agreement (“Office Lease”),
which includes the preceding Summary of Basic Lease Information (the “Summary”) attached hereto and incorporated
herein by this reference (the Office Lease and Summary are sometimes
collectively referred to herein as the “Lease”),
dated as of the date set forth in Section 1 of the Summary is made
by and between KILROY REALTY, L.P., a Delaware limited partnership  (“Landlord”),
and PEREGRINE SYSTEMS, INC., a Delaware corporation (“Tenant”).

 

B.                                     KR-Carmel Partners, LLC, a Delaware limited
liability company (the “Original Landlord”),
predecessor-in-interest to Landlord, and Tenant previously entered into that
certain Office Lease dated June 9, 1999 (the “Original Lease”), as amended by that certain First Amendment
to Office Lease  (Building 2) dated as
of January 17, 2003 (the  “First Amendment”) (the Office Lease and the
First Amendment are, collectively, the “Existing
Lease”) for office premises consisting of the entirety of that
certain office building located at 3611 Valley Centre Drive, San Diego,
California 92130.  In addition to the
Existing Lease, Original Landlord and Tenant were parties to four (4) other
leases with respect to four (4) other buildings located at 3579 Valley Centre
Drive (“Building 1 Lease”), 3661
Valley Centre Drive (“Building 3 Lease”),
3721 Valley Centre Drive (“Building 4 Lease”),
and 3811 Valley Centre Drive (“Building 5
Lease”), all in San Diego, California 92130.

 

C.                                     On September 22, 2002, Tenant, as well as
its wholly-owned subsidiary Peregrine Remedy, Inc., filed voluntary petitions
for relief under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101, et
seq. (the “Bankruptcy Code”),
in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), commencing Tenant’s
bankruptcy case, Case No. 02-12740 (the “Bankruptcy
Case”).

 

D.                                    On September 23, 2002, Tenant Filed a
motion seeking approval to reject the Building 1 Lease, the Building 3 Lease
and the Building 4 Lease (the “Rejection
Motion”). On September 24, 2002, the Bankruptcy Court entered
its order, effective as of September 23, 2002, granting the Rejection
Motion, provided no lessor timely filed an opposition. Landlord filed an
opposition to Tenant’s rejection of the Building 1, 3 and 4 Leases. On
January 17, 2003, Tenant and Landlord entered into that certain
“Stipulated Agreement Regarding: (i) Lease Rejection, (ii) Ownership of Certain
FF&E; and (iii) Waiver of Claims” (the “Stipulation”),
pursuant to which the parties entered into an agreement regarding, among other
things, (i) the rejection of the Building 1, 3 and 4 Leases; (ii) the
modification of the Existing Lease and the Building 5 Lease to reflect, among
other things, the modification in total space leased by Tenant, (iii) the
disposition of certain personal property, and (iv) the waiver of Landlord’s
administrative claims in respect of the Building 1, 3 and 4 Leases.  The parties also entered into various
ancillary agreements effecting the terms of the Stipulation. On
February 14, 2003, the Bankruptcy Court entered its Order Granting
Debtors’ Motion for Order Approving Settlement (Related to Docket No. 16),
pursuant to which it approved the Stipulation.

 

E.                                      On December 23, 2002, Landlord filed five
(5) proofs of claim in Tenant’s bankruptcy case in respect of claims arising in
connection with each of the potential rejection of the Existing Lease and the
Building 5 Lease and the actual rejection of the Building 1, 3 and 4 Leases
(collectively, the “Landlord Claims”),
in the aggregate minimum amount of $27,953,497.85.  On March 14, 2003, Landlord amended the Landlord Claims
alleging that, assuming section 502(b)(6) applies to limit the Landlord
Claims, the Landlord Claims would be capped at a maximum amount of $30,467,462.00.
Landlord has reserved the right to claim additional amounts arising in
connection with each of the leases, including the right to assert that
section 502(b)(6) does not, in any way, limit the Landlord Claims based
upon Tenant’s alleged pre-petition misstatements of its financial condition.
Tenant disputes the amounts alleged in the Landlord Claims.

 

1

 

F.                                      Landlord and Tenant desire to resolve the
disputes between them concerning the Building 5 Lease and the Existing Lease
and to amend and restate the terms of the Existing Lease in their entirety as
set forth herein. Landlord and Tenant shall continue to perform all of their
obligations set forth in the Existing Lease through the day immediately
preceding August 28, 2003 (the “Effective
Date”). Subject to the foregoing, effective from and after the
Effective Date, this Lease amends and restates the Existing Lease in its
entirety and supersedes the Existing Lease.

 

A  G  R  E  M
E  N  T :

 

ARTICLE 1

 

PREMISES,
BUILDING, PROJECT, AND COMMON AREAS

 

1.1                                 Premises, Building, Project and Common Areas.

 

1.1.1                        The Premises. Upon and subject to the terms hereinafter set forth in this Lease,
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the
premises set forth in Section 4 of the Summary (the “Premises”). The outline of the Premises is
set forth in Exhibit A  attached
hereto and each floor or floors of the Premises has approximately the number of
rentable square feet as set forth in Section 4 of the Summary. The
parties hereto agree that the lease of the Premises is upon and subject to the
terms, covenants and conditions herein set forth, and Tenant covenants as a
material part of the consideration for this Lease to keep and perform each and
all of such terms, covenants and conditions by it to be kept and performed and
that this Lease is made upon the condition of such performance. The parties
hereto hereby acknowledge that the purpose of Exhibit A is to show the approximate location of the Premises
in the “Building,” as that term is
defined in Section 1.1.2, below, only, and such Exhibit is not
meant to constitute an agreement, representation or warranty as to the
construction of the Premises, the precise area thereof or the specific location
of the Common Areas, as that term is defined in Section 1.1.3 below
and the elements thereof or of the accessways to the Premises or the “Project,” as that term is defined in Section 1.1.2
below. Landlord and Tenant acknowledge that Tenant has been occupying the
Premises pursuant to the Existing Lease and therefore Tenant continues to
accept the Premises in its presently existing, “as is” condition. Except as
specifically set forth in this Lease, Landlord shall not be obligated to
provide or pay for any improvement work or services related to the improvement
of the Premises. Tenant also acknowledges that neither Landlord nor any agent
of Landlord has made any representation or warranty regarding the condition of
the Premises, the Building, the “Adjacent Buildings,” as defined in Section 1.1.2,
below, or the Project or with respect to the suitability of any of the
foregoing for the conduct of Tenant’s business, except as specifically set
forth in this Lease.

 

1.1.2                        The Building and The Project.  The
Premises are a part of the building set forth in Section 4 of the
Summary (the “Building”). The
Building is part of an office project known as “Kilroy Centre Del Mar.” The term “Project,” as used in this Lease, shall mean (i) the Building,
the Adjacent Buildings and the “Common Areas,” as that term is defined in Section 1.1.3,
below, and (ii) the land (which is or will be improved with landscaping,
parking facilities and other improvements) upon which the Buildings and the
Common Areas are to be located.  For
purposes of this Lease, (A) the term “Building
1” shall mean that
certain building with an address of 3579 Valley Centre Drive, (B) the term “Building 3” shall mean that certain
building with an address of 3661 Valley Centre Drive, (C) the term “Building 4” shall mean that certain
building with an address of 3721 Valley Centre, (D) the term “Building 5” shall mean that certain office
building with an address of 3811 Valley Centre Drive, and (E) the term “Adjacent Buildings” shall mean,
collectively, Building 1, Building 3, Building 4 and Building 5.

 

1.1.3                        Common Areas.  Tenant shall have the
non-exclusive right to use in common with other tenants in the Building and the
Project, and subject to the rules and regulations referred to in Article 5
of this Lease, those portions of the Building and the Project which are
provided, from time to time, for use in common by Landlord, Tenant and any
other tenants of the Building and the Project, whether or not those areas are
open to the general public (such areas, together with such other portions of
the Project designated by Landlord, in its discretion, specifically including
the “Central Security Office,” as that term is defined in

 

2

 

Section 29.33, below, and also including certain areas
designated for the exclusive use of certain tenants, or to be shared by
Landlord and certain tenants, are collectively referred to herein as the “Common Areas”). The Common Areas shall
consist of the Project Common Areas and the Building Common Areas. The term “Project Common Areas,” as used in this
Lease, shall mean the portion of the Project designated as such by Landlord.
The Project Common Areas shall consist of all parking facilities, entrances and
exits, driveways, exterior walkways, first-class landscaped and hardscaped
areas which are generally consistent with the quality of landscaped and
hardscaped areas of Comparable Buildings in existence as of the date of this
Lease, open space areas and plazas on the real property comprising the Project.
The term “Building Common Areas,”
as used in this Lease, shall mean the portions of the Common Areas located
within the Building designated as such by Landlord. The manner in which the
Common Areas are maintained and operated shall be in accordance with a standard
which is not less than that customarily followed in the operation and
maintenance of first class mid-rise office buildings located within the
University Towne Center (i.e., the area from two (2) blocks to the North of La
Jolla Village Drive to two (2) blocks to the South of La Jolla Village Drive
between the I-5  and 1-805
freeways), Del Mar, Carmel Valley and Torrey Hills geographical areas, provided
that Landlord shall manage, maintain and operate the same in a manner
consistent with that of Comparable Buildings, and the use thereof shall be
subject to such rules and regulations as Landlord reasonably may make from time
to time. As used herein, “Comparable
Buildings” shall mean the first class mid-rise office buildings (now
existing or subsequently constructed) within the projects located within the
University Towne Center, Del Mar, Carmel Valley and Torrey Hills geographical
areas and having substantially similar characteristics to the Building
pertaining to size, accessibility, design, quality, amenities and tenancies.
Landlord reserves the right to make alterations or additions to, or to change
the location of, elements of the Project and the Common Areas, provided that if
any such changes might affect Tenant’s use of the Premises (in other than an
immaterial manner), Landlord obtains Tenant’s prior written approval of any
such alterations, additions and changes and such alterations, additions and
changes do not unreasonably interfere with Tenant’s access to the Premises.
Except when and where Tenant’s right of access is specifically excluded in this
Lease, Tenant shall have the right of access to the Building and the parking
facilities designated by Landlord for Tenant’s use twenty-four (24) hours per
day, seven (7) days per week during the Lease Term.

 

1.2                                 Stipulation of Rentable Square Feet of Premises and Building.  For
purposes of this Lease, the “rentable square feet” and “usable square feet” of
the Premises shall be deemed as set forth in Section 4 of the
Summary, and the “rentable square feet” of the Building shall be deemed as set
forth in Section 4.2.9, below.

 

1.3                                 Fourth and Fifth Floor Premises. 
Landlord and Tenant hereby acknowledge that as of the date of this
Lease, Tenant is, and as of the Effective Date Tenant may be, in possession of
all or a portion of fourth (4th) and fifth (5th) floors
of the Building (such portion shall be referred to herein as the “4th
and 5th Floor Premises”) pursuant to the terms and conditions of the
Existing Lease. Tenant shall have up to sixty (60) days following the Effective
Date to vacate and surrender exclusive possession of the 4th and 5th
Floor Premises to Landlord in accordance with the removal and repair
obligations set forth in the Existing Lease (or, to the extent that as of the
Effective Date Tenant has not commenced the permitting process required for the
construction and/or reconfiguration of the Premises in order to accommodate
Tenant’s property and personnel from the 4th and 5th
Floor Premises, Tenant shall have up to ninety (90) days) (the “Permitted Holdover Period”).
Notwithstanding the foregoing, Landlord and Tenant hereby acknowledge and agree
that throughout the Permitted Holdover Period, (i) the 4th and 5th
Floor Premises shall be deemed to be a part of the Premises, (ii) the “Premises”
shall consist of the entire Building, and (iii) the 4th and 5th
Floor Premises shall be subject to all of the applicable provisions of this
Lease, including, but not limited to the payment of “Base Rent” and “Additional
Rent,” as those terms are defined in Articles 3 and 4, respectively,
below; provided, however with respect to the payment of Base Rent, throughout
the remainder of the Permitted Holdover Period, Tenant shall pay monthly
installments of Base Rent for the entire Building in the amount of Three
Hundred Fourteen Thousand Eight Hundred Eighty-Eight and 97/100 Dollars
($314,888.97) (i.e., $2.4282 per
rentable square foot of the Building per month times 129,680 rentable square
feet); provided further, however, with respect to the payment of Additional
Rent, for purposes of calculating the amount of Tenant’s Share of Direct
Expenses for the entire Building throughout the remainder of the Permitted
Holdover Period, Tenant’s Share shall be equal to one hundred percent (100%).

 

3

 

ARTICLE 2

 

LEASE TERM; OPTION TERM

 

2.1                                 Initial Term.  The terms, covenants and
conditions and provisions of this Lease shall be effective as of the Effective
Date. The term of this Lease (the “Least Term”)
shall be as set forth in Section 5 of the Summary and shall commence on
the Effective Date. The Lease Term shall terminate on April 30, 2012 (the
“Lease Expiration Date”), unless
this Lease is sooner terminated or extended as hereinafter provided.

 

2.2                                 Option to Extend.  Tenant shall have one (1) option to extend (the “Extension Option”) the Lease Term for a
five (5) year period (the foregoing option term shall be referred to
hereinafter sometimes as the “Extension Term”),
by delivering a written notice of exercise to Landlord (“Extension Notice”) with respect to the
Extension Term, which Extension Notice may not be delivered earlier than the
date which is eighteen (18) months prior to the end of the initial Lease Term
and may not be delivered later than the date which is thirty (30) days after
the “Reminder Notice”. If Landlord
has not received an Extension Notice by the date which is twelve (12) months
prior to the end of the initial Lease Term, Landlord may provide written notice
(“Reminder Notice”) to Tenant that the Extension Option will expire if Tenant
fails to deliver the Extension Notice to Landlord within thirty (30) days after
the date of such notice from Landlord. If Tenant fails to deliver the Extension
Notice within said thirty (30) day period, Tenant shall be deemed to have
waived its right to exercise such Extension Option. The parties acknowledge
that Tenant’s Extension Option will not lapse until the date which is thirty
(30) days after Landlord’s delivery of the Reminder Notice pursuant to this Section 2.2.
The Extension Option shall apply to all space (and not a portion of the space)
then leased by Tenant in the Building. Tenant may exercise the Extension Option
only if this Lease is in full force and effect and there is no uncured Event of
Default under this Lease, at the time of exercise of Such Extension Option
and/or at the time of the commencement of the Extension Term, but Landlord
shall have the right to waive such conditions herein. The rights of Tenant
contained in this Section 2.2 shall be personal to the original
Tenant named in the Summary (“Original Tenant”)
and any Permitted Affiliate and may only be exercised by the Original Tenant or
such Permitted Affiliate if Tenant’s or such Permitted Affiliate’s net worth
and financial standing are, as of the date of Tenant’s Extension Notice, are no
less than Tenant’s or such Permitted Affiliate’s net worth and financial
standing as of the effective dale (the “Financial
Standards”). The Base Rent during the Extension Term (“Extension Term Base Rent”) shall be an
amount equal to the then “Fair Market Rental
Value” of the Premises (as such term is defined in Section 2.2.5,
below), as stated on a monthly basis and determined pursuant to this Section 2.2
as of the first (1st) day of the Extension Term (“Extension Term Commencement Date”);
provided, however, the Base Year shall remain calendar year 2000 and in no
event shall the Base Rent payable during the Extension Term for the Premises be
less than the Base Rent payable during the period immediately preceding such
Extension Term for the Premises and provided further that, on the first
anniversary of the Extension Term Commencement Date, and on each subsequent
anniversary thereof during such Extension Term, the then payable monthly
Extension Term Base Rent shall be increased in accordance with market rate
increases, as mutually agreed to by Landlord and Tenant or, if Landlord and
Tenant cannot agree, as determined by the appraisal process described below.
Upon receipt by Landlord of Tenant’s Extension Notice under this Section 2.2,
above, Landlord and Tenant shall meet in an effort to  negotiate, in good faith, the Extension Term Base Rent
which shall become effective as of the Extension Term Commencement Date. If
Landlord and Tenant have not agreed upon the Extension Term Base Rent
(including the annual market rate increases) on or before the “Withdrawal Date” (as that term is defined
below), Tenant may elect to withdraw the Extension Notice thereby canceling
Tenant’s exercise of the Extension Option. The term “Withdrawal Date” shall mean (i) if Landlord delivers the
Reminder Notice prior to Tenant’s delivery of the Extension Notice, the date
which is thirty (30) days after the date of the Reminder Notice, or (ii) if
Landlord has not yet delivered a Reminder Notice at the time of Tenant’s
delivery of the Extension Notice, the date which is the earlier of (1) the date
which is eleven (11) months prior to the end of the initial Lease Term, or (2)
the date which is sixty (60) days after the date of Tenant’s delivery of the
Extension Notice. If Tenant fails to deliver written notice to Landlord so
withdrawing the Extension Notice on or before the Withdrawal Date and if
Landlord and Tenant have not agreed upon the Extension Term Base Rent
(including the annual market rate increases) within sixty (60) days after the
delivery of Tenant’s Extension Notice, the Extension Term Base Rent shall be
determined as follows:

 

4

 

2.2.1                        Landlord and Tenant shall attempt to agree in
good faith upon a single appraiser not later than the date (“Single Appraiser Date”) which is forty-five
(45) days after delivery of Tenant’s Extension Notice. If Landlord and Tenant
are unable to agree upon a single appraiser within such time period, then
Landlord and Tenant shall each appoint one appraiser not later than five (5)
days after the deadline for selecting a single appraiser.  Landlord and Tenant shall each give written
notice to the other as to the name of the appraiser it has selected, within
five (5) days after the deadline for selecting a single appraiser.  Within ten (10) days thereafter, the two (2)
appointed appraisers shall appoint a third appraiser.  All appraisers shall be independent from, and disinterested in,
both Landlord and Tenant.

 

2.2.2                        The only tasks which the appraiser(s) shall
perform shall be forming and reporting to Landlord and Tenant an opinion of the
Fair Market Rental Value (including annual market rate increases) of the
Premises for use in determining the Extension Term Base Rent.

 

2.2.3                        If either Landlord or Tenant fails to appoint
its appraiser within the prescribed time period, the single appraiser appointed
shall determine the Fair Market Rental Value of the Premises.  If both parties fail to appoint appraisers
within the prescribed time periods, or if the two (2) appointed appraisers
cannot agree on a third appraiser then either party shall have the right to
apply to the presiding judge of the Superior Court of San Diego County for the
appointment of an appraiser meeting the qualifications hereof to determine the
Fair Market Rental Value of such Premises.

 

2.2.4                        Each party shall bear the cost of its own
appraiser and the parties shall share equally the cost of any single or third
appraiser, if applicable. All appraisers so designated herein shall have at
least ten (10) years’ experience in the appraisal of commercial properties
similar to the Premises and Comparable Buildings and shall be members of
professional organizations such as MAI or its equivalent.

 

2.2.5                        For the purpose of such appraisal and this
subsection (e), the term “Fair Market
Rental Value” shall mean the price that a ready and willing,
non-equity, non-sublease tenant would pay as annual rent as of the Extension
Term Commencement Date (taking into consideration the annual market rate
increases specified in Section2.2.2, above) and a ready and willing
landlord would accept on a non-sublease, non-renewal basis, at arm’s length,
from creditworthy tenants (provided Tenant is then in compliance with the
Financial Standards) for a five (5) year term for unencumbered “space
comparable to the Premises” in Comparable Buildings. Such “space comparable to
the Premises” shall mean office space of comparable size, with tenant
improvements of substantially similar quality and layout as the Premises.  Fair Market Rental Value shall include or
take into consideration any lease concessions offered by landlords in lease
transactions from and after the date which is twelve (12) months prior to the
Single Appraiser Date (the “Qualifying Period”)
for space comparable to the Premises within such Comparable Buildings,
including, without limitation, free rent, tenant improvement allowances or any
other payments or concessions; however, Fair Market Rental Value shall also
take into consideration (i) the market trend (i.e., all other factors being
equal, comparable transactions entered into earlier in the Qualifying Period
shall be accorded less weight than comparable transactions entered into later
in the Qualifying Period), and (ii) the value in the market of the existing
improvements in the Premises, as compared to the value in the market of the
existing improvements in such space comparable to the Premises. Further, in
calculating the Fair Market Rental Rate, no consideration shall be given to the
fact that Landlord is or is not required to pay a real estate brokerage
commission in connection with the Extension Term or the fact that comparable
deals do or do not involve the payment of real estate brokerage commissions.  If there are less than two (2) lease
transactions for “space comparable to the Premises,” as defined in this Section 2.2.5,
entered into during the Qualifying Period, then the term “space comparable to
the Premises” shall be expanded as necessary to allow appraiser(s) to consider
lease transactions covering multiple floors in a building (but less than an
entire building).

 

2.2.6                        If a single appraiser is chosen, then such
appraiser shall determine the Fair Market Rental Value of the Premises.  Otherwise, the Fair Market Rental Value of
the Premises shall be the arithmetic average of the two (2) appraisals which
are closest in amount, and the third appraisal shall be disregarded.

 

2.2.7                        Landlord and Tenant shall instruct the
appraiser(s), in writing, to complete their written determination of the Fair
Market Rental Value not later than thirty

 

5

 

(30)
days after their selection. If the Fair Market Rental Value has not been
determined by such date, then the Fair Market Rental Value shall be determined
thereafter, and if it has not been determined by the Extension Term
Commencement Date, then Tenant shall continue to pay Landlord monthly
installments of Base Rent in the amount applicable to the Premises immediately
prior to the Extension Term Commencement Date until the Fair Market Rental
Value is determined. When the Fair Market Rental Value of the Premises is
determined, Landlord shall deliver notice thereof to Tenant, and Tenant shall
pay to Landlord, within ten (10) days after receipt of such notice, the
difference between the monthly installments ofBase Rent actually paid by Tenant to Landlord subsequent to the
Extension Term Commencement Date and the new monthly installments of Base Rent
which are determined to have been actually owing during such period in
accordance with this Section 2.2, plus interest at the Interest
Rate from the date the applicable monthly installments were due until such
difference is actually paid.

 

ARTICLE 3

 

BASE RENT

 

Tenant shall pay, without notice or demand, to Landlord or Landlord’s
agent at the management office of the Project, or at such other place as
Landlord may from time to time designate in writing, in currency or a check for
currency which, at the time of payment, is legal tender for private or public
debts in the United States of America, base rent (“Base Rent”) as set forth in Section 6 of the
Summary, payable in equal monthly installments as set forth in Section 6
of the Summary in advance on or before the first day of each and every month during
the Lease Term, without any offset or deduction whatsoever except as otherwise
expressly set forth in this Lease. Base Rent shall commence on the Effective
Date. If any Rent payment date (including the Effective Date) falls on a day of
the month other than the first day of such month or if any payment of Rent is
for a period which is shorter than one month, the Rent for any fractional month
shall accrue on a daily basis for the period from the date such payment is  due to the end of such calendar month or
to the end of the Lease Term at a rate per day which is equal to 1/365 (or
1/366 in a leap year) of the Rent. All other payments or adjustments required
to be made under the terms of this Lease that require proration on a time basis
shall be prorated on the same basis.

 

ARTICLE 4

 

ADDITIONAL RENT

 

4.1                                 General Terms.  In addition to paying the Base
Rent specified in Article 3 of this Lease, Tenant shall pay
“Tenant’s Share” of the annual “Building Direct Expenses,” as those terms are
defined in Sections 4.2.9 and 4.2.2 of this Lease, respectively,
which are in excess of the amount of Building Direct Expenses applicable to the
“Base Year” for such Building, as that term is defined in Section 4.2.1,
below.  Further, in no event shall any
decrease in Building Direct Expenses for such Building for any “Expense Year” for the Building as that term
is defined in Section 4.2.6 below, below Building Direct Expenses
for the Base Year entitle Tenant to any decrease in Base Rent for the Building
or any credit against sums due under this Lease. It is the intent of Landlord
and Tenant hereunder that Building Direct Expenses be calculated for the
Building separately based on the Building Direct Expenses allocated to such
Building. Such payments by Tenant, together with any and all other amounts
payable by Tenant to Landlord pursuant to the terms of this Lease, are
collectively referred to in this Lease as the “Additional Rent”, and the Base Rent and the Additional Rent
are collectively referred to in this Lease as “Rent.” All amounts due under this Article 4 as
Additional Rent shall be payable for the same periods and in the same manner as
the Base Rent.  Without limitation on
other obligations of Tenant which Survive the expiration of the Lease Term, the
obligations of Tenant to pay the Additional Rent provided for in this Article 4,
and the obligation of Landlord to refund to Tenant any overpayment of Building
Direct Expenses pursuant to Section 4.2 below, shall survive the
expiration of the Lease Term.

 

4.2                                 Definitions of
Key Terms Relating to
Additional Rent. As used in
this Article.4, the following terms shall have the meanings hereinafter
set forth:

 

4.2.1                        “Base Year”
shall mean the period set forth in Section 7.1 of the Summary.

 

6

 

4.2.2                        “Building
Direct Expenses” shall mean “Building Operating Expenses” and
“Building Tax Expenses,” as those terms are defined in Sections 4.2.3
and 4.2.4 below, respectively.

 

4.2.3                        “Building
Operating Expenses” shall mean the portion of “Operating Expenses,”
as that term is defined in Section 4.2.7 below, allocated to the
tenants of the Building pursuant to the terms of Section 4.3.1
below.

 

4.2.4                        “Building
Tax Expenses” shall mean that portion of “Tax Expenses,” as that
term is defined in Section 4.2.8 below, allocated to the tenants of
the Building pursuant to the terms of Section 4.3.1 below.

 

4.2.5                        “Direct
Expenses” shall mean “Operating Expenses” and “Tax Expenses.”

 

4.2.6                        “Expense
Year” shall mean each calendar year in which any portion of the
Lease Term falls, through and including the calendar year in which the Lease
Term expires.

 

4.2.7                        “Operating
Expenses” shall mean all expenses, costs and amounts which Landlord
pays or accrues during any Expense Year because of or in connection with the
ownership, management, maintenance, security, repair, replacement, restoration
or operation of the Project, or any portion thereof.  Without limiting the generality of the foregoing, Operating
Expenses shall specifically include any and all of the following: (i) the cost
of supplying all utilities to the Project, the cost of operating, repairing,
maintaining, and renovating the utility, telephone, mechanical, sanitary, storm
drainage, and elevator systems, and the cost of maintenance and service contracts
in connection therewith; (ii) the cost of licenses, certificates, permits and
inspections and the cost of contesting any governmental enactments which may
affect Operating Expenses, and the costs incurred in connection with a
governmentally mandated transportation system management program or similar
program; (iii) the cost of all insurance carried by Landlord in connection with
the Project as reasonably determined by Landlord; (iv) the cost of landscaping,
relamping, and supplies, tools, equipment and materials used in the operation,
repair and maintenance of the Project, or any portion thereof; (v) the cost of
parking area (including any parking structures) repair, restoration, and
maintenance; (vi) reasonable fees and other costs, including a five (5%)
management fee, and the consulting, legal and accounting fees of all
contractors and consultants in connection with the management, operation,
maintenance and repair of the Project; (vii) payments under any equipment
rental agreements and the fair rental value of any on-site or off-site
management office space for the Project (as described in Section 6.1.4
below) not to exceed 2,000 rentable square feet (which fair rental value for
the purpose of determining the Direct Expenses for the Base Year and any
subsequent Expense Years shall be the same rate per rentable square foot as the
monthly fair market rental rate per rentable square foot charged by the
landlords of the Comparable Buildings, but in no event less than the rental
rate per rentable square foot utilized in calculating the Base Year Direct
Expenses for the Building); (viii) wages, salaries and other compensation and
benefits, including taxes levied thereon, of all non-executive persons
reasonably engaged in the operation, maintenance and security of the Project;
(ix) costs under any instrument pertaining to the reasonable sharing of costs
by the Project and the additional land and improvements subject to the
CC&R’s (including, without limitation, any assessments and association dues
under the CC&R’s); (x) operation, repair, maintenance and replacement of
all systems and equipment and components thereof of the Project including, but
not limited to HVAC systems, electrical, plumbing and life-safety systems,
elevators, any Project locker rooms and workout facilities; (xi) the cost of
janitorial, alarm, security and other services, replacement of wall and floor
coverings, ceiling tiles and fixtures in common areas, maintenance and
replacement of curbs, roadways, driveways, and walkways, repair to roofs and
re-roofing; (xii) amortization (including interest on the unamortized cost)
over the useful life as Landlord shall reasonably determine, of the cost of
acquiring or the rental expense of personal property used in the maintenance,
operation and repair of the Project, or any portion thereof; (xiii) the cost of
capital improvements or other costs incurred in connection with the Project (A)
which are intended, in good faith, to effect economies in the operation or
maintenance of the Project, or any portion thereof, and only to the extent such
anticipated economies exceed the cost of such item, (B) that are required to
comply with present or anticipated conservation programs, (C) required by laws,
ordinances or regulations enacted after the date permits for the construction
of the Building were obtained, (D) that are made in connection with the
“Project Reconfiguration,” as that term is set forth in Section 6.8,
below, and (E) includable in Operating Expenses pursuant to consistently
applied

 

7

 

and
sound accounting and management principles (including, but not limited to, the
repair, resurfacing and replacement of parking lots and Project roadways and
driveways); provided, however, that any capital expenditure shall be amortized
(including interest at the greater of ten percent (10%) or the amortized cost
at Landlord’s actual cost of funds) over its useful life as Landlord shall
reasonably determine; and (xiv) costs, fees, charges or assessments imposed by,
or resulting from any mandate imposed on Landlord by, any federal, state or
local government for fire and police protection, trash removal, community
services, of other services which do not constitute “Tax Expenses” as that term
is defined in Section 4.2.8 below. Notwithstanding the foregoing,
for purposes of this Lease, Operating Expenses shall not, however, include:

 

(a)                                  non-cash items such as deductions for
depreciation and amortization of the initial costs of the construction of the
Building and the Building Systems and Equipment;

 

(b)                                 costs, including marketing costs, legal fees,
space planners’ fees, and brokerage fees incurred in connection with the
original or future leasing of the Project, and costs, including permit, license
and inspection costs and allowances and other concessions, incurred with
respect to the installation of tenant improvements made for new tenants in the
Project or incurred in renovating or otherwise improving, decorating, painting
or redecorating vacant leasable space for tenants or other occupants (or
prospective tenants or occupants) of the Project;

 

(c)                                  except as set forth in items (v), (xii),
(xiii), and (xiv) above, depreciation, interest and principal payments on
mortgages and other debt costs, if any, penalties and interest, costs of
capital repairs and alterations, and costs of capital improvements and
equipment;

 

(d)                                 costs for which Landlord is reimbursed by any
tenant or occupant of the Project or by insurance by its carrier or any
tenant’s carrier (or if Landlord fails to carry the insurance required to be
carried by Landlord pursuant to Section 10.4 below, costs which
would have been covered by insurance had Landlord obtained the coverage
required to be carried under this Lease) or by the “Association” under the
CC&R’s or by anyone else, and electric power costs for which any tenant
directly contracts with the local public service company;

 

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

 

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

 

(g)                                 the wages and benefits of any employee who
does not devote substantially all of his or her employed time to the Project
unless such wages and benefits are prorated to reflect time spent on operating
and managing the Project vis-à-vis time spent on matters unrelated to operating
and managing the Project, or the wages and/or benefits attributable to
personnel above the level of asset manager;

 

(h)                                 amount paid as ground rental for the Project
by Landlord;

 

(i)                                     any compensation paid to clerks, attendants or
other persons in commercial concessions operated by Landlord, provided that any
compensation paid to any concierge at the Project and any compensation paid
regarding parking operations shall be includable as an Operating Expense;

 

(j)                                     rentals and other related expenses incurred in
leasing air conditioning systems, elevators or other equipment which if
purchased the cost of which would be excluded from Operating Expenses as a
capital cost, except equipment not affixed to the Project which is used in
providing janitorial or similar services and, further excepting from this
exclusion such

 

8

 

equipment
rented or leased to remedy or ameliorate an emergency condition in the Project,
or during periods when the systems or equipment is being repaired;

 

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

 

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

 

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

 

(n)                                 costs incurred to comply with laws or
otherwise relating to the removal or abatement of hazardous material in the
soil and costs incurred to comply with laws or otherwise relating to the
removal or abatement of hazardous material in the Building or any Common Area
improvements except where such removal or abatement in the Building or Common
Area improvements in  required to
be performed during the Lease Term by laws not in effect as of April 1.
2003;

 

(o)                                 costs arising from Landlord’s charitable or
political contributions;

 

(p)                                 expenses directly resulting from the active or
gross negligence of Landlord, its agents, servants or employees;

 

(q)                                 rental for any space in the Building set aside
for conference facilities, storage facilities or exercise facilities;

 

(r)                                    the amounts of any payments by Landlord or to
its affiliates for goods or services in the Project in excess of a competitive
(but not necessarily the lowest) rate;

 

(s)                                  costs (not including Tax Expenses), incurred
in connection with the sale, financing, refinancing, mortgaging, selling or
change of ownership of the Building, including brokerage commissions,
consultant’s, attorneys’ and accountant’s fees, closing costs, title insurance
premiums, transfer taxes and interest charges;

 

(t)                                    intentionally omitted;

 

(u)                                 intentionally omitted; and

 

(v)                                 assessments, charges, and dues under the
CC&R’s which would result in a duplicative charge to Tenant or a charge
which is otherwise precluded under this Section 4.2.7 or other
provisions of this Lease including without limitation (1) any expense, cost or
charge which would be duplicative of a charge for which Tenant already is
responsible under this Lease; (2) any expense for property management which
would be duplicative of a charge for which Tenant already is responsible under
this Lease; (3) special assessments levied under the CC&R’s which would be
precluded by subsection 4.2.7(c) above; and (4) any expense precluded by Section
5.3 below.

 

There shall be deducted from Operating Expenses the following items in
the year in which they are applicable: (i) insurance and condemnation proceeds
to the extent that such proceeds relate to costs and expenses previously
included in Operating Expenses, (ii) all other funds recovered from any tenant
of the Building, contractors, or other parties as payment for expenses which
were previously included in Operating Expenses, other than tenants’
contributions for their proportionate share of Operating Expenses, and (iii)
all funds available through the CC&R’s which were previously included in
Operating Expenses. Operating Expenses shall reflect reductions for cash
discounts and trade discounts taken by Landlord.

 

If Landlord does not carry a form of insurance coverage (e.g.,
earthquake insurance) for the Building during any part of the Base Year but
subsequently obtains such insurance for the Building during the Lease Term,
then from and after the date upon which Landlord obtains such insurance coverage
and continuing throughout the period during which Landlord maintains such
insurance. Operating Expenses for the Base Year shall be deemed to be increased
by the amount of the premium Landlord reasonably estimates it would have
incurred had Landlord maintained

 

9

 

such insurance for the same period of time during the Base Year as such
insurance was maintained by Landlord during such subsequent calendar year.
Conversely, if Landlord carries a form of insurance coverage (e.g., earthquake
insurance) for the Building during any part of the Bass Year but subsequently
no longer carries such form of insurance coverage, then from and after the date
upon which Landlord no longer carries such insurance coverage and continuing
throughout the period during which Landlord no longer maintains such insurance
coverage, Operating Expenses for the Base Year shall be deemed to be decreased
by the amount of premium Landlord incurred for such insurance for the same
period of time during the Base Year as such insurance was no longer maintained
by Landlord during such subsequent calendar year.

 

If Landlord is not furnishing any particular work or service (the cost
of which, if performed by Landlord, would be included in Operating Expenses) to
a tenant who has undertaken to perform such work or service in lieu of the
performance thereof by Landlord, then Operating Expenses shall be deemed to be
increased by an amount equal to the additional Operating Expenses which would
reasonably have been incurred during such period by Landlord if it had at its
own expense furnished such work or service to such tenant. If the Building is
not at least ninety-five percent (95%) occupied during all or a portion of the
Base Year or any Expense Year, Landlord shall make an appropriate adjustment to
the components of Operating Expenses for such year to determine the amount of
Operating Expenses that would have been paid had such Building been ninety-five
percent (95%) occupied; and the amount reasonably so determined shall be deemed
to have been the amount of Operating Expenses for such year.

 

4.2.8                        Taxes.

 

4.2.8.1               “Tax
Expenses” shall mean all federal, state, county, or local
governmental or municipal taxes, fees, charges or other impositions of every kind
and nature, whether general, special, ordinary or extraordinary, (including,
without limitation, real estate taxes, general and special assessments, transit
taxes, leasehold taxes or taxes based upon the receipt of rent, including gross
receipts or sales taxes applicable to the receipt of rent, unless required to
be paid by Tenant, personal property taxes imposed upon the fixtures,
machinery, equipment, apparatus, systems and equipment, appurtenances,
furniture and other personal property used in connection with the Project, or
any portion thereof), which shall be paid or accrued during any Expense Year
(without regard to any different fiscal year used by such governmental or
municipal authority) because of or in connection with the ownership, leasing and
operation of the Project, or any portion thereof.  Tax Expenses for the Base Year of the Lease Term for the Building
(and the underlying land for the tax parcel) shall be calculated as if the
value of such Building, the Base, Shell and Core of such Building and the
Tenant Improvements thereto and related improvements to the Common Area as
reasonably allocated to such Building were fully assessed. With respect to
Tenant Improvements in each Building, such Tax Expenses shall be calculated to
include the actual “soft” and “hard” costs of such improvements.

 

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

 

10

 

transaction
or any document to which Tenant is a party, creating or transferring an interest
or an estate in the Premises.

 

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

 

4.2.8.4               If in any Expense Year subsequent to the Base
Year (the “Adjustment Year”), the
amount of Tax Expenses decreases below the amount of Tax Expenses for the Base
Year as a result of a Proposition 8 reduction, then for purposes of all
subsequent Expense Years, including the Expense Year in which such decrease in
Tax Expenses occurs, the Building Direct Expenses for the Base Year shall be
decreased by an amount equal to such decrease in assessed value or direct
assessments, as applicable, in the Adjustment Year. Conversely, if the Tax
Expenses thereafter are decreased by a lesser amount during any comparison year
subsequent to the Adjustment Year (the “Readjustment
Year”) as a result of Landlord’s failure to secure a Proposition 8
reduction which is greater than or equal to  the
Proposition 8 reduction secured during the Adjustment Year, then for purposes
of all subsequent comparison years, including the comparison year in which such
lesser decrease in Tax Expenses occurs, the Building Direct Expenses for the
Base Year shall only be decreased by an amount equal to the decrease in
assessed value or direct assessments, as applicable, during such Readjustment
Year which resulted from Landlord’s failure to secure a Proposition 8 reduction
greater than or equal to the Proposition 8 reduction secured during the
Adjustment Year; provided that any costs and expenses incurred by Landlord in
securing any Proposition 8 reduction shall not be included in Building Direct
Expenses for purposes of this Lease. Landlord and Tenant acknowledge that this Section 4.2.8.4
is not intended to in any way affect (A) the inclusion in Tax Expenses of the
statutory two percent (2%) annual increase in Tax Expenses (as such statutory
increase may be modified by subsequent legislation), or (B) the inclusion or
exclusion of Tax Expenses pursuant to the terms of Proposition 13, which shall
be governed pursuant to the terms of Sections 4.2.8.1 through 4.2.8.3.
above and Section 4.4.4 below. Notwithstanding the foregoing, in
the event that the Project is reassessed (the “Reassessment”) for real estate tax purposes by the appropriate
governmental authority pursuant to the terms of Proposition 13, and such
Reassessment results in a decrease in Tax Expenses, the component of Tax
Expenses for the Base Year which is attributable to the assessed value of the
Project under Proposition 13 prior to the Reassessment (without taking into
account any Proposition 8 reductions) shall be reduced for the purposes of
comparison to all subsequent Expense Years (commencing with the Expense Year
for which the Reassessment is first attributable) to an amount equal to the
real estate taxes based Upon such Reassessment.

 

4.2.9                        “Tenant’s
Share” shall equal the percentage set forth in Section 7.2
of the Summary. Tenant’s Share was calculated by multiplying the number of
rentable square feet of the Premises, as set forth in Section 4 of
the Summary, by 100, and dividing the product by the 129,680 rentable square
feet in the Building.

 

4.3                                 Allocation of Direct Expenses.

 

4.3.1                        Method of Allocation. The parties acknowledge that the Building
will be a part of a multi-building project and that the costs and expenses
incurred in connection with the Project (i.e. the Direct Expenses)
should be shared among the tenants of the Building and the

 

11

 

tenants
of the Adjacent Buildings in the Project. Direct Expenses shall also include
cost and expenses (or assessments charged in connection therewith) to maintain,
repair and operate additional common areas (including parking areas and
landscape areas) westerly of the Project, and also subject to the CC&R’s,
and allocated to the Building and Adjacent Buildings. Such allocation shall be
made in accordance with the CC&R’s; provided, however, that to the extent
such allocation is  not addressed
in the CC&R’s, Landlord shall, in Landlord’s reasonable judgment, determine
which Direct Expenses are properly allocable to an individual building (because
the expense applies to only such building) and which Direct Expenses shall be
allocable to tenants of more than one (1) building (in which case Building
Direct Expenses shall include those expenses so allocated to the Building based
upon the relative square footages of the affected buildings). Such portion of
Direct Expenses allocated to Tenant shall include (i) Tenant’s Share of all
Direct Expenses attributable solely to the Building, and (ii) Tenant’s Share of
all Direct Expenses attributable to the Project Common Areas (as opposed to
Direct Expenses which are solely and directly attributable to any other
building in the Project).

 

4.3.2                        Cost Pools. Notwithstanding anything to the contrary contained herein, Landlord
shall have the right, from time to time, to equitably allocate some or all of
the Direct Expenses for the Project among different portions or occupants of
the Project (the “Cost Pools”), in
Landlord’s reasonable judgment. Such Cost Pools may include, but shall not be
limited to, the office space tenants of a building of the Project or of the
Project, and the retail space tenants of a building of the Project or of the
Project. The Direct Expenses within each such Cost Pool shall be allocated and
charged to the tenants within such Cost Pool in an equitable manner.

 

4.4                                 Calculation and
Payment of Additional
Rent.  If for any Expense Year ending or commencing
within the Lease Term, Tenant’s Share of Building Direct Expenses for such
Expense Year exceeds Tenant’s Share of Building Direct Expenses applicable to
the Base Year, then Tenant shall pay to Landlord, in the manner set forth in Section 4.4.1,
below, and as Additional Rent, an amount equal to the excess (the “Excess”).

 

4.4.1                        Statement of Estimated Building Direct
Expenses.  By May 1 of each year, Landlord shall give
Tenant a yearly expense estimate statement (the “Estimate Statement”) which shall set forth Landlord’s
reasonable estimate (the “Estimate”)
of what the total amount of Building Direct Expenses for the then-current
Expense Year shall be and the estimated excess (the “Estimated Excess”) as calculated by comparing the Building
Direct Expenses for such Expense Year, which shall be based upon the Estimate,
to the amount of Building Direct Expenses for the Base Year.  The failure of Landlord to timely furnish
the Estimate Statement for any Expense Year shall not preclude Landlord from
enforcing its rights to collect any Estimated Excess under this Article 4,
nor shall Landlord be prohibited from revising any Estimate Statement or
Estimated Excess theretofore delivered to the extent necessary but Landlord
shall not do so more than twice during any Expense Year.  Thereafter, Tenant shall pay, with its next
installment of Base Rent due, a fraction of the Estimated Excess for the
then-current Expense Year (reduced by any amounts paid pursuant to the next to
last sentence of this Section 4.4.1).  Such fraction shall have as its numerator the number of months
which have elapsed in such current Expense Year, including the month of such
payment, and twelve (12) as its denominator. 
Until a new Estimate Statement is furnished (which Landlord shall have
the right to deliver to Tenant at any time), Tenant shall pay monthly, with the
monthly Base Rent installments, an amount equal to one-twelfth (1/12th)
of the total Estimated Excess set forth in the previous Estimate Statement
delivered by Landlord to Tenant. 
Landlord shall maintain books and records with respect to Building
Direct Expenses in accordance with generally accepted and sound accounting and
management practices, consistently applied.

 

4.4.2                        Statement of Actual Building Direct Expenses
and Payment by Tenant.  In addition, Landlord shall give to Tenant
following the end of each Expense Year, a statement (the “Statement”) which shall state the Building
Direct Expenses incurred or accrued for such preceding Expense Year for the
Building, and which shall indicate the amount of the Excess. Upon receipt of
the Statement for each Expense Year commencing or ending during the Lease Term,
if an Excess is present, Tenant shall pay, with its next installment of Base
Rent due, the full amount of the Excess for such Expense Year, less the
amounts, if any, paid during such Expense Year as Estimated Excess, and if
Tenant paid more as Estimated Excess than the actual Excess, Tenant shall
receive a credit in the amount of Tenant’s overpayment against Rent next due
under this Lease. In addition, Landlord shall, within ten (10) days after
written request from Tenant, distribute (or if Landlord does not control the
Association, request the Association to distribute) to Tenant a copy of (1) the
budget, notice and summary prepared pursuant to

 

12

 

Section 3.3 of the CC&R’s and (2) the accounting
prepared pursuant to Section 3.6(c) of the CC&R’s. The failure
of Landlord to timely furnish the Statement, or any other information required
under this Section 4.4.2, for any Expense Year shall not prejudice
Landlord or Tenant from enforcing its rights under this Article 4.
Even though the Lease Term has expired and Tenant has vacated the Premises,
when the final determination is made of Tenant’s Share of Building Direct
Expenses for the Expense Year in which this Lease terminates, if an Excess if
present, Tenant shall pay to Landlord such amount within thirty (30) days, and
if Tenant paid more as Estimated Excess than the actual Excess, Landlord shall,
within thirty (30) days, deliver a check payable to Tenant in the amount of the
overpayment. The provisions of this Section 4.4.2 shall survive the
expiration or earlier termination of the Lease Term.

 

4.4.3                        Tenant’s Audit Right. 
Within six (6) months after receipt of a Statement by Tenant (“Review Period”), if Tenant disputes the
amount set forth in the Statement, an independent certified public accountant
(which accountant is a member of a nationally or regionally recognized
accounting firm), designated by Tenant, may, at Tenant’s sole cost and expense
subject to reimbursement, as provided for herein and after reasonable notice to
Landlord and at reasonable times, inspect Landlord’s records at Landlord’s
offices, provided that Tenant is not then in default in the payment of Bast
Rent or Building Direct Expenses after expiration of all applicable cure
periods and provided further that Tenant and such accountant or representative
shall execute a confidentiality agreement, in a form reasonably acceptable to
Landlord in Landlord’s reasonable discretion sole discretion, to maintain all
information contained in Landlord’s records in strict confidence.  Landlord shall cooperate with Tenant in
obtaining all necessary or appropriate information from the Association.  Notwithstanding the foregoing, Tenant shall
only have the right to review Landlord’s records one (1) time during any twelve
(12) month period. Tenant’s failure to dispute the amounts set forth in any
Statement by written notice to Landlord within thirty (30) days after the
Review Period shall be deemed to be Tenant’s approval of such Statement and
Tenant, thereafter, waives the right or ability to dispute the amounts set
forth in such Statement. If after such inspection, but within thirty (30) days
after the Review Period, Tenant notifies Landlord in writing that Tenant still
disputes such amounts, a certification as to the proper amount shall be made by
an independent certified public accountant selected by Landlord and reasonably
approved by Tenant who is a member of a nationally or regionally recognized
accounting firm.  Landlord shall
cooperate in good faith with Tenant and the accountant to show Tenant and the
accountant the information upon which the certification is to be based. If such
certification by the accountant proves that the Building Direct Expenses set
forth in the Statement were (i) overstated by less than four percent (4%), then
the cost of the accountant and the cost of such certification shall be paid for
by Tenant, (ii) overstated by four percent (4%) or more but less than six
percent (6%), then the cost of the accountant and the cost of certification
shall be split evenly between Landlord and Tenant, or (iii) overstated by six
percent (6%) or more, then the cost of the accountant and the cost of such
certification shall be paid for by Landlord. 
Promptly following the parties receipt of such certification, the
parties shall make such appropriate payments or reimbursements, as the ease may
be, to each other, as are determined to be owing pursuant to such
certification.

 

4.4.4                        Intentionally Omitted.

 

4.5                                 Taxes and Other Charges for Which Tenant Is Directly
Responsible.

 

4.5.1                        Tenant shall be liable for and shall pay ten
(10) days before delinquency, taxes levied against Tenant’s equipment,
furniture, fixtures and any other personal property located in or about the
Premises.  If any such taxes on Tenant’s
equipment, furniture, fixtures and any other personal property are levied
against Landlord or Landlord’s property or if the assessed value of Landlord’s
property is increased by the inclusion therein of a value placed upon such
equipment, furniture, fixtures or any other personal property and if Landlord
pays the taxes based upon such increased assessment, which Landlord shall have
the right to do regardless of the validity thereof but only under proper
protest if requested by Tenant, Tenant shall upon demand repay to Landlord the
taxes so levied against Landlord or the proportion of such taxes resulting from
such increase in the assessment, as the case may be.

 

4.5.2                        If the tenant improvements in the Premises,
whether installed and/or paid for by Landlord or Tenant and whether or not
affixed to the real property so as to become a part thereof, are assessed for
real property tax purposes at a valuation higher than the “Tenant Improvement
Allowance,” as that term is used in Section 2.1 of the Tenant Work
Letter attached to the Original Lease, actually used to build-out the Premises
then the Tax Expenses levied

 

13

 

against
Landlord or the property by reason of such excess assessed valuation shall be
deemed to be taxes levied against personal property of Tenant and shall be
governed by the provisions of Section 4.5.1, above.

 

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

 

ARTICLE 5

 

USE OF PREMISES

 

5.1                                 Permitted Use.  Tenant shall use the Premises
for office, software development, training, research and development, storage,
distribution and other lawful uses permitted under the CC&R’s (as defined
below) and the Project’s permitted zoning and for no other purpose or purposes
whatsoever without Landlord’s consent, which may be withheld in Landlord’s sole
discretion.

 

5.2                                 Prohibited Uses. Tenant further covenants and agrees that Tenant shall not use, or
suffer or permit any person or persons to use, the Premises or any part thereof
for (i) offices of any agency or bureau of the United States or any state or
political subdivision thereof; (ii) offices or agencies of any foreign
governmental or political subdivision thereof; (iii) offices of any health care
professionals or service organization; (iv) schools or other training
facilities which are not ancillary to corporate, executive or professional
office use; (v) retail or restaurant uses (as opposed to Tenant’s employee
cafeteria); (vi) communications firms such as radio and/or television stations,
or (vii) any use or purpose contrary to the provisions of the Rules and
Regulations set forth in Exhibit D.
attached hereto, or in violation of the laws of the United States of America,
the State of California, or the ordinances, regulations or requirements of the
local municipal or county governing body or other lawful authorities having
jurisdiction over the Project. Tenant shall not do or permit anything to be
done in or about the Premises which will obstruct or interfere with the rights
of other tenants or occupants of the Buildings or Project, or injure them or
use or allow the Premises to be used for any unlawful purpose, nor shall Tenant
cause or maintain any nuisance in, on or about the Premises. Tenant shall not
use or knowingly allow another person or entity to use any part of the Premises
for the storage, use, treatment, manufacture or sale of “Hazardous Material,”
(as that term is defined in Section 29.23 of this Lease); provided,
however, Tenant may use commercially reasonable amounts of any Hazardous
Material in accordance with the terms and conditions set forth in Section 29.23,
below. 

 

5.3                                 CC&R’s.  Tenant continues to acknowledge
and agree that the Project is subject     to those
certain covenants, conditions, and restrictions contained within that certain
Agreement Between Landowners Including Covenants, Conditions and Restrictions
and Grants of Easements for Carmel Center and Including Amendment and
Restatement of Former Declaration and Termination of Prior Grants of Easements,
recorded March 25, 2002 (the “Amended
CC&R’s”), including the Site Plan attached thereto as Exhibit A,
and the Carmel Center Parking Management Plan attached thereto as Exhibit D
(the “CC&R’s Parking Plan”).  In addition, Tenant acknowledges that the
Project may be subject to any future covenants, conditions and restrictions
(the “Future CC&R’s”) which
Landlord, in Landlord’s discretion, deems reasonably necessary or desirable,
and Tenant agrees that the Lease, as hereby amended, shall be subject and
subordinate to such Future CC&R’s. Landlord shall have the right to require
Tenant to execute and acknowledge, within fifteen (15) business days of a request
by Landlord, a “Recognition of Covenants, Conditions, and Restriction,” in a
form substantially similar to that attached hereto as Exhibit F, agreeing to and
acknowledging the Future CC&R’s.

 

5.4                                 Building
Lobby.  Tenant acknowledges and agrees that the lobby
area located on the ground floor of the Building (the “Building Lobby”) is Building Common Area.
Notwithstanding the foregoing, subject to the terms of this Section 5.4.
Tenant shall have the right to use and maintain, throughout the Lease Term,
Tenant’s current reception desk (which reception desk shall be staffed by no
more than (2) individuals), located in the eastern portion of such Building
Lobby, and that such reception desk shall be identified by a desk placard
approved

 

14

 

by
Landlord, and staffed, used and maintained by Tenant in a first-class,
professional manner. Tenant hereby expressly acknowledges Landlord’s continued
right (i) to itself utilize the Building Lobby, and (ii) to install the “Building
Directory,” as that term is defined in Section 23.3, below, and any other
signage in the Building Lobby, for Landlord or any other tenant of the
Building, as determined by Landlord, in Landlord’s sole and absolute
discretion.

 

ARTICLE 6

 

SERVICES AND UTILITIES

 

6.1                                 Standard Tenant Services.  Landlord shall provide the
following services on all days (unless otherwise stated below) during the Lease
Term.

 

6.1.1                        Subject to all governmental rules, regulations
and guidelines applicable thereto, Landlord shall provide heating, ventilation
and air conditioning (“HVAC”) from
Monday through Friday, during the period from 7:00 A.M. to 7:00 P.M. and on
Saturday during the period from 9:00 A.M. to 1:00 P.M. (the “Building Hours”), except for the dates of
observation of New Year’s Day, Presidents Day, Independence Day, Labor Day,
Memorial Day, Thanksgiving Day, and Christmas Day and other nationally
recognized holidays that are not nationally recognized as of the date of this
Lease (collectively, the “Holidays”).  Notwithstanding the foregoing, Landlord
shall change the Building Hours as requested by Tenant from time to time (but
not more than two (2) times per calendar year) so long as (i) the total
Building Hours for the weekly period (i.e., Monday through Sunday) do not
exceed sixty-four (64) hours, (ii) Tenant leases the entire Premises, (iii) any
such Building Hours so designated by Tenant for any day must be consecutive
hours, and (iv) Tenant shall be responsible for any additional reasonable costs
incurred by Landlord as a result of such change in hours requested by Tenant
(which costs shall be payable as Additional Rent within thirty (30) days after
Tenant’s receipt of invoice therefor). 
Tenant shall be entitled to install as an Alteration dedicated heating,
ventilation and air conditioning units (“Package
Units”) within or serving the Premises at Tenant’s sole cost and
expense (but not window units). The plans and specifications for any Package
Units shall, as indicated in Article 8 below and the Tenant Work
Letter (as applicable), be subject to Landlord’s reasonable approval and the
electricity required to power such Package Units shall be included within the
allotment set forth in Section 6.1.2 below and such electricity and
any other utilities used by such Package Units shall be payable by Tenant in
accordance with Section 6.2 below. 
Tenant shall be solely responsible for maintenance and repair of the
Package Units and such units shall be considered to be a fixture within the
Premises and shall remain upon the Premises upon the expiration or earlier
termination of Lease Term unless Landlord requires Tenant to remove such items
upon expiration or earlier termination of this Lease pursuant to the provisions
of Section 8.5 below. 
Notwithstanding the foregoing, Tenant may remove any “Libert” or similar
type HVAC units from the Premises at any time prior to expiration or earlier
termination of the Lease Term provided that Tenant removes all associated
wiring and cabling, repairs any damage resulting from such removal and restores
the Premises to the condition prior to the placement of such unit(s),
reasonable wear and tear excepted.

 

6.1.2                        Landlord shall provide adequate electrical
wiring, facilities and power for connection to Tenant’s equipment, provided
that the connected electrical load of such equipment does not exceed an average
of four (4) watts per rentable square foot of the Premises during each of the
Building Hours on a monthly basis (i.e., the total number of watts per rentable
square foot allocable to such equipment during a given month divided by the
number of Building Hours that occur
during such given month shall not exceed four (4) watts per rentable square
foot) and sufficient to provide
an additional one point five (1.5) watts (per rentable square foot of thePremises during the Building Hours on a
monthly basis) of connected electrical load for Tenant’s lighting fixtures. Any such electrical usage
shall be subject to applicable laws and regulations.  Tenant
shall bear the cost of replacement of any non-Building standard lamps, starters
and ballasts for lighting
fixtures within the Premises; replacement of any such Building standard items (as shown on the “Specifications,” as
that term was defined in Section 2.3 of the Tenant Work Letter attached to the Original Lease)
shall be included in Operating Expenses.

 

6.1.3                        Landlord shall provide city water from the
regular Building outlets for drinking, lavatory and toilet purposes.

 

15

 

6.1.4                        Landlord shall manage the Project and employ
qualified property management personnel and maintenance personnel to operate
and manage the Project in accordance with a standard which is not less than
customarily observed in the operation and management of Comparable Buildings.

 

6.1.5                        Landlord shall provide janitorial services
five (5) days per week except the date of observation of the Holidays, in and
about the Building and window washing services in accordance with a standard
which is not less than that customarily observed in other Comparable Buildings.

 

6.1.6                        Landlord shall provide nonexclusive,
non-attended automatic passenger elevator service during the Building Hours;
Landlord shall have one elevator available at all other times, including
Holidays.

 

6. 1.7                     Landlord shall provide security services to
the Project and Building in a commercially reasonable manner.

 

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

 

Tenant shall cooperate fully with Landlord at all times and abide by all
regulations and requirements that Landlord may reasonably prescribe for the
proper functioning and protection of the HVAC, electrical, mechanical and
plumbing systems (collectively, “Building
Systems and Equipment”).

 

6.2                                 Overstandard Tenant Use.

 

6.2.1                        In General.  Tenant shall not, without
Landlord’s prior written consent, use heat-generating machines, machines other
than normal fractional horsepower office machines, or equipment or lighting
other than Building standard lights in the Premises, which may affect the
temperature otherwise maintained by the air conditioning system or increase the
water normally furnished for the Premises by Landlord pursuant to the terms of Section 6.1
of this Lease. If such consent is given, Landlord shall have the right to
install supplementary air conditioning units or other facilities in the
Premises, including supplementary or additional metering devices, and the cost
thereof, including the cost of installation, operation and maintenance,
increased wear and tear on existing equipment and other similar charges, shall
be paid by Tenant to Landlord upon billing by Landlord. If Tenant uses water,
heat or air conditioning in excess of that supplied by Landlord pursuant to Section 6.1
of this Lease, Tenant shall pay to Landlord, upon billing, the cost of such
excess consumption, the cost of the installation, operation, and maintenance of
equipment which is installed in order to supply such excess consumption, and
the cost of the increased wear and tear on existing equipment caused by such
excess consumption; and Landlord may install devices to separately meter any
increased use and in such event Tenant shall pay the increased cost directly to
Landlord, on demand, at the rates charged by the public utility company
furnishing the same, including the cost of such additional metering devices.
Tenant’s use of electricity shall never exceed the capacity of the feeders to
the Project or the risers or wiring installation, and subject to the terms of Section 29.28,
below, Tenant shall not install or use or permit the installation or use of any
computer or electronic data processing equipment in the Premises, without the
prior written consent of Landlord. Landlord hereby acknowledges Tenant’s
current use, as of April 1, 2003, of the Premises, does not constitute an
over-standard use as set forth in this Section 6.2.1, and hereby approves
Tenant’s current use of Tenant’s computers and data processing equipment
located in the Premises.

 

6.2.2                        Tenant shall pay for all electricity
attributable to its use of the entire Premises (including, without limitation,
electricity required in order to provide HVAC to the Premises) and Tenant shall
timely pay all charges for such service directly to Landlord, on demand, at the
rates charged by the public utility company furnishing the same. The actual
cost of electricity provided to the Premises (including, without limitation,
electricity required in order to provide HVAC to the Premises which Tenant
shall be responsible for pursuant to the terms of

 

16

 

Section 6.2.3, below) shall, notwithstanding anything to
the contrary contained in this Lease, not be included in Operating Expenses
(including, without limitation, Operating Expenses for the Base Year) for the
Building (except for electricity relating to the Common Areas, which shall be
included in Operating Expenses (including, without limitation, Operating
Expenses for the Base Year) and paid by Tenant as part of  Building Direct Expenses).

 

6.2.3                        HVAC. If Tenant desires to use HVAC during hours other than those for which
Landlord is obligated to supply such HVAC pursuant to the terms of Section 6.1
of this Lease (i.e., in excess of sixty-four (64) hours in any week), Tenant
shall not be required to give Landlord prior notice of Tenant’s desired use but
rather Tenant may control its after-hours HVAC use from within the Premises.
Landlord shall supply such after-hours HVAC to Tenant subject to Tenant’s
payment to Landlord of an amount reasonably determined by Landlord to be
directly attributable to increased wear and tear on existing Building Systems
and Equipment caused by such after-hours use, any engineer’s over-time and a
nominal amount attributable to overhead and accounting costs. Amounts payable
by Tenant to Landlord for such use of additional HVAC shall be deemed
Additional Rent hereunder and shall be paid within thirty (30) days after
Tenant’s receipt of invoice therefor.

 

6.3                                 Interruption of Use.  Tenant agrees that Landlord
shall not be liable for damages, by abatement of Rent (except for abatement as
specifically provided in Section 6.8 below), or otherwise, for
failure to furnish or delay in furnishing any service (including telephone,
electrical and telecommunication services), or for any diminution in the
quality or quantity thereof, when such failure or delay or diminution is
occasioned, in whole or in part, by repairs, replacements, or improvements, by
any strike, lockout or other labor trouble, by inability to secure electricity,
gas, water, or other fuel at the Building or the Project after diligent and
reasonable efforts to do so, by any accident or casualty whatsoever, by act or
default of Tenant or other parties, or by any other cause beyond Landlord’s
reasonable control; and such failures or delays or diminution shall never be
deemed to constitute an eviction or disturbance of Tenant’s use and possession
of the Premises or relieve Tenant from paying Rent (except for abatement as
specifically provided in Section 6.8 below), or performing any of
its obligations under this Lease. Furthermore, Landlord shall not be liable
under any circumstances for a loss of, or injury to, property or for injury to,
or interference with, Tenant’s business, including, without limitation, loss of
profits, however occurring, through or in connection with or incidental to a
failure to furnish any of the services or utilities as set forth in this Article 6,
except in any circumstances where the failure to furnish any such services or
utilities arises out of or is a result of, Landlord’s sole or gross negligence
or intentional misconduct (in which case Landlord shall be responsible to the
extent such item is not covered by insurance required to be carried by Tenant
under this Lease or actually carried by Tenant). Landlord shall be entitled to
cooperate in a reasonable manner with the mandatory requirements of national,
state or local governmental agencies or utilities suppliers in reducing the
consumption of energy or other resources (including temporary stoppages in the
supply of any utilities), and Landlord shall not be in default hereunder or be
liable for any damages directly or indirectly resulting from, nor shall the
Rent herein reserved be abated (except as expressly provided in Section 6.8
below) by reason of such cooperation by Landlord.

 

6.4                                 Additional Services.  Landlord shall also provide
any additional services which may be reasonably requested by Tenant, including,
without limitation, locksmithing, lamp replacement, additional janitorial
service, and additional repairs and maintenance, provided that Tenant shall pay
to Landlord within fifteen (15) days after receipt of written notice from
Landlord, the sum of all costs to Landlord of such additional services plus a
reasonable administration fee.  Charges
for any service for which Tenant is required to pay from time to time hereunder
shall be deemed Additional Rent hereunder and shall be billed on a monthly
basis.  Tenant shall not be required to
use Landlord for such any additional services; provided, however, that Landlord
shall have the right to reasonably approve any other provider of such services
should Tenant elect not to use Landlord for the providing of such
services.  However, nothing in this Section 6.4
shall be construed as requiring Landlord to provide any such service which
would, in Landlord’s reasonable judgment, result in the receipt by Landlord of
amounts that would fail to qualify as “rents from real property” within the
meaning of Section 856(d) of the Internal Revenue Code of 1986, as
amended, or any successor section thereto.

 

6.5                                 Intentionally Omitted.

 

6.6                                 Emergency Generator.  Subject to Tenant’s compliance
with all Applicable Laws, Landlord shall permit Tenant to maintain, at Tenant’s
sole cost and expense, the above-ground

 

17

 

emergency
generator (as a Miscellaneous Common Area Item) previously installed by Tenant
pursuant to the Existing Lease for Tenant’s use in the Premises (the “Emergency Generator”); provided, however,
Tenant hereby acknowledges and agrees that promptly following the execution of
this Lease, Tenant shall, at Tenant’s sole cost and expense, disconnect and/or
remove all cabling, wiring, conduit and other such connections of the Emergency
Generator, which cabling, wiring, conduit or other such connections are
connected to any non-Premises portions of the Building, in accordance with the
removal and repair requirements set forth in Section 8.5, below.
Such Emergency Generator shall be used by Tenant only during (i) testing and
regular maintenance, and (ii) any period of electrical power outage in the
Building. Tenant shall be entitled to operate the Emergency Generator for
testing and regular maintenance only upon notice to Landlord and at times
reasonably approved by Landlord. Any repairs and maintenance of such Emergency
Generator shall be the sole responsibility of Tenant. Upon the expiration or
earlier termination of the Lease, Tenant may, at Tenant’s sole cost and
expense, remove the Emergency Generator and all associated cabling and wiring
and repair all damage resulting from such removal; provided, however, to the
extent this Lease is terminated prior to the Lease Expiration date pursuant to Article 19
of this Lease, then, unless Landlord provides prior written notice to Tenant
requiring Tenant to remove such Emergency Generator in accordance with the
removal and repair obligations in Section 8.5, below, such Emergency
Generator shall become the sole property of Landlord in accordance with the
terms of Section 8.5, below. Landlord makes no representation or
warranty with respect to the Emergency Generator or its suitability for use by
Tenant and Article 10 of the Lease shall apply with respect to
Tenant’s use, maintenance, repair and operation of the Emergency Generator.

 

6.7                                 Building
Reconfiguration Costs. 
Tenant acknowledges and agrees that Tenant shall pay the costs incurred
by Landlord in connection with the reconfiguration of the Building, including,
but not limited to: (i) the cost of installing submeters on each floor of the
Building and in the Building Common Areas, as determined by Landlord, which
submeters shall be for the use of monitoring Tenant’s utility usage in the
Premises as well the utility usage by other tenants in the Building and of the
Building Common Areas, (ii) the cost of reconfiguring and/or replacing the access
control panels of the Building elevators, and (iii) the cost to replace all of
the master locks and master keys in the Building (collectively, the “Building Reconfiguration Costs”). Tenant
shall pay such Building Reconfiguration Costs to Landlord within thirty (30)
days following Tenant’s receipt of an invoice which shall provide a reasonable
description of such Building Reconfiguration Costs. To the extent practicable,
(i) Landlord shall not, in connection with the performance of the work set forth
in this Section 6.7, cause material interference with Tenant’s
ongoing business operations in the Premises, (ii) Landlord shall only perform
such work after prior written notice thereof to Tenant, and (iii) Landlord
shall use commercially reasonable efforts to coordinate the work to be
performed pursuant to this Section 6.7 with the work that Tenant is
anticipating performing in the Premises in connection with the reduction of
Tenant’s occupancy of the entire Building under the terms of the Existing Lease
to the Premises set forth in this Lease.

 

6.8                                 Project Reconfiguration.  Landlord and Tenant hereby
acknowledge and agree that due to the changing nature of the Project from a
single-tenant Project to a multi-tenant Project, certain reconfigurations of
the Common Areas are required.  Landlord
shall implement the changes that are reasonably required in connection
therewith (collectively, the “Project
Reconfiguration”). All such costs incurred in connection with the
Project Reconfiguration shall initially be paid for by Landlord, but shall be
included as an Operating Expense under the terras of Section 4.2.7,
above.

 

6.9                                 Abatement Event.  An “Abatement Event” shall be defined as an event that prevents
Tenant from using the Premises or any portion thereof, as a result of any
failure to provide services or access to the Premises, whether directly or as a
result of any failure to provide services or access to the Common Area of the
Building in which the Premises are a part where (i) Tenant does not actually
use the Premises or such portion thereof, and (ii) such event is not caused by
the negligence or willful misconduct of Tenant, its agents, employees or
contractors.  Tenant shall give Landlord
notice (“Abatement Notice”) of any
such Abatement Event, and if such Abatement Event continues beyond the
“Eligibility Period” (as that term is defined below), then the Base Rent and
Tenant’s Share of Direct Expenses shall be abated entirely or reduced, as the
case may be, after expiration of the Eligibility Period for such time that
Tenant continues to be so prevented from using, and does not use, the Premises
or a portion thereof, in the proportion that the rentable area of the portion
of the Premises that Tenant is prevented from using, and does not use, bears to
the total rentable area of the Premises leased by

 

18

 

Tenant;
provided, however, in the event that Tenant is prevented from using, and does
not use, a portion of the Premises for a period of time in excess of the Eligibility
Period and the remaining portion of the Premises is not sufficient to allow
Tenant to effectively conduct its business therein, and if Tenant does not
conduct its business from such remaining portion, then for such time after
expiration of the Eligibility Period during which Tenant is so prevented from
effectively conducting its business therein, the Base Rent and Tenant’s Share
of Direct Expenses for the entire Premises shall be abated entirely for such
time as Tenant continues to be so prevented from using, and does not use, the
Premises for Tenant’s business purposes. If, however, Tenant reoccupies any
portion of the Premises during such period, the Base Rent and Tenant’s Share of
Direct Expenses allocable to such reoccupied portion, based on the proportion
that the rentable area of such reoccupied portion of the Premises bears to the
total rentable area of the Premises, shall be payable by Tenant from the date
Tenant reoccupies such portion of the Premises. The term “Eligibility Period” shall mean a period of
five (5) consecutive business days after Landlord’s receipt of any Abatement
Notice(s). If the Abatement Event is caused by the negligence or willful
misconduct of Tenant, the Abatement described in this Section 6.8
shall not apply; however, Tenant may seek recovery from its business
interruption insurance. Except as provided in Article 11 and Article 13,
such right to abate Base Rent and Tenant’s Share of Direct Expenses shall be
Tenant’s sole and exclusive remedy at law or in equity for an Abatement Event.

 

ARTICLE 7

 

REPAIRS

 

7.1                                 Obligations.  Landlord shall maintain and
repair any and all defects in the base, shell and core of the Building (the “Base, Shell and Core”), including, without
limitation, the foundations, floor/ceiling slabs, structural portions of the
roof (including the roof membrane), curtain wall, exterior glass, columns,
beams, shafts, stairs, stairwells, and elevator cabs, and shall also maintain
and repair the basic mechanical, electrical, life safety, plumbing, sprinkler systems
and heating, ventilating and air conditioning systems of the Building (i.e.,
all of such systems except for distribution within the Premises, in which case
(i) Landlord shall be responsible for repair of construction defects, (ii) with
respect to design defects, that party that retained the consultant to design
such distribution shall be responsible for repair of the defect and any
additional costs incurred as a result of such defect (to the extent not covered
by warranty or insurance), and (iii) Tenant shall be responsible for all other
repairs and maintenance to interior of Premises), the exterior portions of the
Building and the Common Areas. In addition, Landlord shall make repairs
necessitated by the acts or omissions of Landlord or its respective agents,
employees or contractors. Tenant shall, at Tenant’s own expense, keep the
Premises and specifically all tenant improvements, fixtures and furnishings
therein, in good order, repair and condition at all times during the Lease
Term, and in this regard, Tenant shall at Tenant’s own expense within a
reasonable period of time but under the supervision and subject to the prior
approval of Landlord with respect to any repairs for which a building permit is
required, adequately repair all such damage thereto. Except with respect to the
express maintenance and repair obligations of Tenant under this Lease, Landlord
shall maintain and repair the Building and the Project (including the Common
Areas) and replace or repair all damaged, broken, or worn fixtures and
appurtenances, the cost of which shall be included in Operating Expenses
(subject to the provisions of Article 4 above). Landlord may enter
the Premises at all reasonable times upon reasonable prior notice to Tenant
(except that no notice will be required in case of emergency) to make such
repairs, alterations, improvements or additions to the Buildings or to the
Project or to any equipment located in the Project as Landlord is obligated
under this Lease or Landlord shall deem reasonably necessary or as Landlord may
be required to do by governmental or quasi-governmental authority or court
order or decree.

 

7.2                                 Tenant’s Failure to Comply. If Tenant fails to make any repairs required of Tenant under this
Lease, after written notice to Tenant and the expiration of a reasonable cure
period, Landlord may (but need not) enter the Premises pursuant to Section 7.1  above to make such repairs and
replacements, and Tenant shall pay Landlord the cost thereof, including a
percentage (not to exceed five percent (5%)) of the cost thereof to compensate
Landlord for all overhead, general conditions, fees and other costs or expenses
arising from Landlord’s involvement with such repairs and replacements within
fifteen (15) days of being billed for same. Tenant hereby waives and releases
its right to make repairs at Landlord’s expense under Sections 1941 and 1942 of
the California Civil Code or under any similar law, statute, or ordinance now
or hereafter in effect.

 

19

 

ARTICLE 8

 

ADDITIONS AND ALTERATIONS

 

8.1                                 Landlord’s Consent to Alterations. 
Tenant may not make any improvements, alterations, additions or changes
to the Premises (collectively, the “Alterations”)
without first procuring the prior written consent of Landlord to such
Alterations, which consent shall be requested by Tenant not less than thirty
(30) days prior to the commencement thereof, and which consent (as indicated in
Section 29.4 below) shall not be unreasonably withheld by Landlord.
However, Tenant may make (i) cosmetic changes to the finish work in the
Premises, not requiring any structural or other substantial modifications to
the Premises (e.g., voice/data cabling), without Landlord’s prior consent, (ii)
cosmetic changes to the interior of any Tenant space within the Building  (e.g., changes to the carpet, wallcovering
and paint)  and (iii) nonstructural
changes to the interior of any Tenant space within the Building (such cosmetic
and nonstructural changes to be referred to hereafter collectively as the “Acceptable Changes”) upon at least tan
(10)days prior notice to Landlord but without Landlord’s prior consent provided
(a) with respect to the changes described in Subsection 8.1(iii)
above only, such changes do not cost in excess of Seventy-Five Thousand and
No/100 Dollars ($75,000.00) for any one (l) job, (b) such Acceptable Changes do
not affect the exterior appearance of the Building or Common Areas, the
structural aspects of the Building, or any Building System or Equipment, and
(c) Tenant shall perform such Acceptable Changes in a good and workmanlike
manner and in conformance with any and all applicable federal, state, county or
municipal laws, rules or regulations (collectively, “Applicable Laws”).  At
any time Tenant proposes to make Alterations which require the consent of
Landlord pursuant to this Section.8.1. Tenant’s notice regarding the
proposed Alterations shall be provided together with plans and specifications
for the Alterations, and Landlord shall approve or disapprove of the same
within fifteen (15) days after Landlord’s receipt thereof.  The term “Alterations” does not refer to any
tenant improvements installed pursuant to the Tenant Work Letter attached to
the Original Lease.

 

8.2                                 Manner of
Construction. 
Landlord may impose, as a condition of its consent to any and all
Alterations or repairs of the Premises or about the Premises, such requirements
as Landlord may reasonably require, including, but not limited to, the
requirement that Tenant shall, at Tenant’s expense, remove such Alterations
upon the expiration or any early termination of the Lease Term, provided
Landlord imposed such removal requirement as a condition to consenting to such
Alterations when they arc installed, and/or the requirement that Tenant utilize
for such purposes only contractors, subcontractors, materials, mechanics and
materialmen approved by Landlord (which approval (as indicated in Section 29.4
below) shall not be unreasonably withheld or delayed). In any event, Tenant
shall utilize subcontractors of Landlord’s selection to perform any and all
work that may affect the Building Systems and Equipment, structural aspects of
the Building, the Base Shell or Core or exterior appearance of the Building or
Common Areas provided that (i) if such subcontractors are unwilling or unable
to perform such work, Tenant may utilize the services of any other qualified
subcontractor which normally and regularly performs similar work in comparable
first-class, institutional quality, office buildings in the San Diego,
California area, and (ii) Landlord shall cause such subcontractor selected by
Landlord to charge Tenant for such work in an amount equal to the cost that a
comparable, first-class, reputable and reliable subcontractor would have
charged Tenant if selected pursuant to competitive bidding procedures (and if
such subcontractor refuses to meet such pricing requirements, Landlord shall
have the option to either pay the excess charges of such subcontractor or to
permit Tenant to utilize any other qualified subcontractor which meets the
requirements of Subsection 8.2(i) above).  Tenant shall construct such Alterations and perform such repairs
in conformance with any and all Applicable Laws and pursuant to a valid
building permit, issued by the City of San Diego, all in conformance with
Landlord’s construction rules and regulations. 
All work with respect to any Alterations must be done in a good and
workmanlike manner and diligently prosecuted in completion to the end that the
Premises shall at all times be a complete unit except during the period of
work. In performing the work of any such Alterations, Tenant shall have the
work performed in such manner so as not to obstruct access to the Project or
any portion thereof by any other tenant of the Project, and so as not to
obstruct the business of other tenants in the Project.  In addition to Tenant’s obligations under Article 9
of this Lease, upon completion of any Alterations, Tenant agrees to cause a
Notice of Completion to be recorded in the office of the Recorder of the County
of San Diego in accordance with California Civil Code Section 3093 or any
successor statute, and Tenant shall

 

20

 

deliver
to the Project management office a reproducible copy of the “as built” drawings
of the Alterations.

 

8.3                                 Payment for Improvements.  The cost of all Alterations
shall be paid for by Tenant.  In the
event Tenant orders any Alterations or repair work directly from Landlord, the
charges for such work shall be deemed Additional Rent under this Lease, payable
within fifteen (15) days of billing therefor, either periodically during
construction in reasonable progress payments or upon the substantial completion
of such work, at Landlord’s option. 
Upon completion of such work, Tenant shall deliver to Landlord evidence
of payment, contractors’ affidavits and full and final waivers of all liens for
labor, services or materials. If Tenant orders any work directly from Landlord,
Tenant shall pay to Landlord a percentage of the cost of such work not to exceed
three percent (3%) of such cost to compensate Landlord for all overhead,
general conditions, fees and other costs and expenses arising from Landlord’s
involvement with such work.  If Tenant
does not order such work directly from Landlord, Tenant shall pay to Landlord a
fee equal to one percent (1%) of the cost of such work and shall reimburse
Landlord for Landlord’s reasonable out-of-pocket costs and expenses actually
incurred in connection with review of such work; provided, however, that this
sentence shall not apply to Acceptable Changes.

 

8.4                                 Construction Insurance.  In the event that Tenant makes
any Alterations (other than work described in Subsections 8.1(i) and (ii)
above). Tenant agrees to carry “Builder’s All Risk” insurance in a reasonable
amount covering the construction of such Alterations, and such other insurance
as Landlord may reasonably require, it being understood and agreed that all of
such Alterations shall be insured by Tenant pursuant to Article 10
of this Lease immediately upon completion thereof.  In addition, if the cost of the Alteration exceeds One Hundred
Thousand Dollars ($100,000.00), Landlord may, in its reasonable discretion,
require Tenant to obtain a lien and completion bond or some alternate form of
security satisfactory to Landlord in an amount sufficient to ensure the
lien-free completion of such Alterations and naming Landlord as a co-obligee.

 

8.5                                 Landlord’s Property.  All Alterations, “Tenant
Improvements,” as that term was defined in Section 2.1 of the
Tenant Work Letter attached to the Original Lease, fixtures and/or equipment
which may be installed or placed in or about the Premises, and all signs
installed in, on or about the Premises, from time to time, shall be at the sole
cost of Tenant and shall be and become the property of Landlord; provided,
however, Tenant may remove any fixtures, equipment and/or personal property
owned by Tenant (including, without limitation, property that was purchased by
Tenant pursuant to the terms of Section 2.2.10 of the Tenant Work
Letter attached to the Original Lease), to the extent such property is
expressly identified on Exhibit L,
attached hereto (such identified property to be the “Removable Property”); provided, however, (i) Tenant shall
repair any damage to the Premises and Building caused by any such removal, (ii)
Tenant shall give Landlord at least ten (10) business days prior written notice
before any such Removable Property shall be removed from the Premises, and
(iii) during such ten (10)-day period, Landlord shall be given a reasonable
opportunity to inspect the Removable Property and to make a first offer to
Tenant to purchase all or a portion of such Removable Property. Furthermore,
Landlord may require Tenant, at Tenant’s expense, to remove any Alterations,
the rotunda previously constructed by Tenant pursuant to the terms of the
Tenant Work Letter attached to the Original Lease, Tenant’s data center,
Tenant’s engineering laboratory on the third (3rd) floor of the Building, and
any item indicated as a “must remove” items on Exhibit L and to repair
any damage to the Premises and Building caused by such removal; provided,
however, that with regard to the Alterations {as opposed to the
above-referenced rotunda, data center or engineering laboratory), Landlord
shall give Tenant written notice concurrently with Landlord’s consent to such
Alterations, and within ten (10) business days of Landlord’s receipt of notice
of any Acceptable Changes, that Landlord would require such removal at the end
of the Lease Term or following any earlier termination of this Lease.  If Tenant fails to complete such removal
and/or to repair any damage caused by the removal of such Alterations or Tenant
Improvements, Landlord may do so and may charge the actual cost thereof to
Tenant.

 

ARTICLE 9

 

COVENANT AGAINST LIENS

 

Landlord shall have the right at all times to post and keep posted on
the Premises any notice which it deems necessary for protection from mechanics’
liens.  Tenant covenants and

 

21

 

agrees
not to suffer or permit any lien of mechanics or materialmen or others to be
placed against the Project, the Building or the Premises, or any portion
thereof, with respect to work or services claimed to have been performed for or
materials claimed to have been furnished to Tenant or the Premises, and, in
case of any such lien attaching or notice of any lien, Tenant covenants and
agrees to cause it to be promptly released and removed of record.
Notwithstanding anything to the contrary set forth in this Lease, in the event
that such lien is not released and removed by bond or otherwise on or before
the date occurring thirty (30) days after notice of such lien is delivered by
Landlord to Tenant (which thirty (30) day period shall be subject to reduction as
provided in the next sentence below), Landlord, at its sole option, may
immediately take all action necessary to release and remove such lien, without
any duly to investigate the validity thereof, and all sums, costs and expenses,
including reasonable attorneys’ fees and costs, incurred by Landlord in
connection with such lien shall he deemed Additional Rent under this Lease and
shall immediately be due and payable by Tenant, However, if Landlord’s notice
of such lien to Tenant indicates that Landlord is in escrow to sell or finance
the Building or has an executed letter of intent to sell or a commitment letter
to finance the Building (or a substantially similar document), Landlord may
indicate in such notice that such thirty (30) day period shall be reduced to a  period designated by Landlord which is
not less than ten (10) business days.

 

ARTICLE 10

 

INSURANCE

 

10.1                           Indemnification
and Waiver.  To
the extent not prohibited by law, Landlord, its members, partners, subpartners
and affiliates and their respective officers, agents, servants, employees, and
independent contractors (collectively, “Landlord
Parties”) shall not be liable for, any damage either to person or
properly or resulting from the loss of use thereof, which damage is sustained
by Tenant. Tenant shall indemnify, defend, protect, and hold harmless Landlord
Parties from any and all loss, cost, damage, expense and liability, including
without limitation court costs and reasonable attorneys’ fees (collectively, “Claims”) incurred in connection with or
arising from any cause in, on or about the Premises during the Lease Term,
provided that the terms of the foregoing indemnity by Tenant shall not apply to
the gross negligence or willful misconduct of Landlord or its agents,
contractors, servants, employees or licensees in connection with Landlord’s
activities in the Project and Landlord shall indemnify, defend, protect and
hold Tenant, its officers, directors, agents, servants and employees harmless
from any such Claims (except for damage to the Tenant Improvements and Tenant’s
personal property, fixtures, furniture and equipment in the Premises, to the
extent Tenant is required to obtain the requisite insurance coverage pursuant
to this Lease). The provisions of this Section 10.1 shall survive
the expiration or sooner termination of this Lease with respect to any claims
or liability occurring prior to such expiration or termination.

 

10.2                           Tenant’s
Compliance with
Landlord’s Fire and Casuality Insurance.  Tenant shall, at Tenant’s
expense, comply with all insurance company requirements pertaining to the use
of the Premises. If Tenant’s conduct or use of the Premises causes any increase
in the premium for such insurance policies then Tenant shall reimburse Landlord
for any such increase. Tenant, at Tenant’s expense, shall comply with all
rules, orders, regulations or requirements of the American Insurance
Association (formerly the National Board of Fire Underwriters) and with any
similar body.

 

10.3                           Tenant’s Insurance.  Tenant shall maintain the
following coverages in the following amounts.

 

10.3.1                  Commercial/Comprehensive General Liability
Insurance covering the insured against claims of bodily injury, personal injury
and property damage arising out of Tenant’s operations, assumed liabilities or
use of the Premises, including a comprehensive general liability endorsement
with broad form covering the insuring provisions of this Lease and the
performance by Tenant of the indemnity agreements set forth in Section 10.1
of this Lease, for limits of liability not less than:

 

	
  Bodily
  Injury and

  	
   

  	
  $5,000,000
  each occurrence

  
	
  Property
  Damage Liability

  	
   

  	
  $5,000,000
  annual aggregate, or any combination of primary insurance and excess
  liability

  

 

22

 

	
  Personal
  Injury Liability

  	
   

  	
  $5,000,000
  each occurrence

  
	
   

  	
   

  	
  $5,000,000
  annual aggregate, or any combination of primary insurance and excess
  liability

  

 

10.3.2                  Property Insurance covering (i) all office
furniture, trade fixtures, office equipment, merchandise and all other items of
Tenant’s property on the Premises installed by, for, or at the expense of
Tenant, (ii) the Tenant Improvements, and (iii) all Other improvements,
alterations and additions to die Premises. 
Such insurance shall be written on a special form “all risk” basis, for
the full replacement cost value, with a special theft form for the covered
items and in amounts that meet any co-insurance clauses of the policies of
insurance and shall include sprinkler leakage coverage.

 

10.3.3                  Worker’s Compensation and Employer’s Liability
Insurance, with a waiver of subrogation endorsement, with minimum limits of
$1,000,000 per employee and $ 1,000,000 per occurrence.

 

10.3.4                  Business Interruption, loss of income find
extra expense insurance in such amounts as will reimburse Tenant for actual
direct or indirect loss of earnings for up to one (l) year attributable to the
risks outlined in Section 10.3.2 above; however, Tenant shall be
entitled to self-insure the coverage described in this Section 10.3.4
only, in which case such self- insurance shall be deemed to contain all of the
terms and conditions applicable to the coverage described in this Section 10.3.4
including, without limitation, a deemed waiver of subrogation and,
consequently, Landlord shall be treated, for all purposes, as if Tenant had
actually purchased such insurance from a third party.

 

10.3.5                  Comprehensive Automobile Liability Insurance
covering all owned, hired, or non-owned vehicles with the following limits of
liability:    One Million Dollars
($1,000,000.00) combined single limit for bodily injury and property damage.

 

10.4                           Fire and
Casualty Insurance of
Landlord.  Landlord shall maintain during the Lease
Term and as an Operating Expense, a policy or policies of insurance insuring
the Building and Project Common Areas and Landlord’s remaining interest in the
Tenant Improvements and Alterations against loss or damage due to fire and
other casualties covered within the classification of fire and extended
coverage, vandalism coverage and malicious mischief, sprinkler leakage, water
damage and special extended coverage. 
Such coverage shall be in the amount of full replacement cost for the
Building (including coverages for enforcement of Applicable Laws requiring the
upgrading, demolition, reconstruction or replacement of any portion of the
Building as the result of a covered loss) and other improvements and may
include, at  the option of
Landlord, the risks of earthquakes and/or flood damage and additional hazards,
a rental loss endorsement for a period of one (1) year and one or more loss
payee endorsements in favor of the holders of any mortgages or deeds of trust
encumbering the interest of Landlord in the Building or any ground or
underlying lessors of the Building.

 

10.5                           Form of Policies.  The minimum limits of policies
of insurance required of Tenant under this Lease shall in no event limit the
liability of Tenant under this Lease. 
All insurance shall be issued on an occurrence basis and shall be (i) be
issued by an insurance company having a rating of not less than A-X in Best’s
Insurance Guide or which is otherwise acceptable to Landlord and licensed to do
business in the State of California; and (ii) provide that said insurance shall
not be canceled or coverage changed unless thirty (30) days’ prior written notice
shall have been given to Landlord and any mortgagee or ground or underlying
lessor of Landlord. In addition, the insurance described in Section 10.3.1
above shall (a) name Landlord, and any other party reasonably specified by
Landlord, as an additional insured; (b) specifically cover the liability
assumed by Tenant under this Lease including, but not limited to, Tenant’s
obligations under Section 10.1 of this Lease; (c) be primary
insurance as to all claims thereunder and provide that any insurance obtained
by Landlord is excess and is non-contributing with any insurance requirement of
Tenant; and (d) contain a cross-liability endorsement or severability of
interest clause acceptable to Landlord. Tenant shall deliver said policy or
policies or certificates thereof to Landlord before the Effective Date and at
least thirty (30) days before the expiration dates thereof.  In the event Tenant shall fail to procure
such insurance, or to deliver such certificate, Landlord may, at its option,
procure such policies for the account of Tenant, and the costs of it shall be
paid to Landlord as Additional Rent within fifteen (15) days after delivery to
Tenant of bills therefor. Tenant may satisfy the insurance coverage described
in this Article. 10

 

23

 

through
one or more blanket policies so long as such policies otherwise meet the
requirements specified above.

 

10.6                           Subrogation.  Landlord and Tenant agree to
have their respective insurance companies issuing property damage and loss of
insurance and extra expense insurance waive any rights of subrogation that such
companies may have against Landlord or Tenant, as the case may be, so long as
the insurance carried by Landlord and Tenant, respectively, is not invalidated
thereby.  As long as such waivers of
subrogation are contained in their respective insurance policies (or are deemed
to be contained in any self-insurance maintained by Tenant pursuant to the
provisions of Section 10.3.4 above), Landlord and Tenant hereby
waive any right that either may have against the other on account of any loss
or  damage to the extent such loss
or damage is insurable under such policies of insurance.

 

10.7                           Additional
Insurance Obligations. 
Tenant shall carry and maintain during the entire Lease Term, at
Tenant’s sole cost and expense, increased amounts of the insurance required to
be carried by Tenant pursuant to this Article 10, and such other
reasonable types of insurance coverage and in such reasonable amounts covering
the Premises and Tenant’s operations therein, as may be reasonably requested by
Landlord. Notwithstanding the foregoing, Landlord’s request shall only be
considered reasonable if such increased amounts and any such other coverages
are standard amounts and coverages for Comparable Buildings, and Landlord shall
not increase amounts and require additional coverages during the first five (5)
years of the Lease Term and thereafter not more often than one time in any five
(5) year period.

 

ARTICLE 11

 

DAMAGE AND DESTRUCTION

 

11.1                           Repair of Damage to Premises by Landlord. 
Tenant shall promptly notify Landlord of any damage to the Building or
other portion of the Project resulting from fire or any other casualty. If such
Building or any Common Areas serving or providing access to such Building shall
be damaged by fire or other casualty, Landlord shall promptly and diligently,
subject to reasonable delays for insurance adjustment or other matters beyond
Landlord’s reasonable control, and subject to all other terms of this Article 11,
restore the Base, Shell, and Core of such Building and such Common Areas. Such
restoration shall be to substantially the same condition of the Base, Shell,
and Core of the Premises and the Common Areas prior to the casually, except for
modifications required by zoning and building codes and other laws or by the
holder of a mortgage on the Building or Project or any other modifications to
the Common Areas deemed desirable by Landlord and reasonably approved by
Tenant, provided that access to the Building shall not be materially impaired.
Upon the occurrence of any damage to such Building, Tenant shall assign to
Landlord (or to any party designated by Landlord) all insurance proceeds
payable to Tenant under Tenant’s physical damage and property damage insurance required
under Section 10.3 of this Lease (excluding, however, proceeds
payable with respect to any damage to Tenant’s furniture, equipment and other
personal property on the Premises), and Landlord shall repair any injury or
damage to the Tenant Improvements installed in the Premises and shall return
such Tenant Improvements and Alterations to their original condition; provided
that if the cost of such repair by Landlord exceeds the amount of insurance
proceeds received by Landlord from Tenant’s insurance carrier, as assigned by
Tenant, plus the amount of insurance proceeds received by Landlord from
Landlord’s insurance carrier to the extent allocable to damage of such Tenant
Improvements and Alterations, the cost of such repairs shall be paid by Tenant
to Landlord in reasonable progress payments as Landlord repairs the damage
(provided that if any mortgage holder or deed of trust beneficiary so requires,
Tenant shall deposit such cost of repairs with such mortgage holder or deed of
trust beneficiary prior to the commencement of repair by Landlord of such
injury or damage, in which case Tenant shall be entitled to interest on such
funds to the extent permitted by such lender). In connection with such repairs
and replacements, Tenant shall, prior to the commencement of construction,
submit to Landlord, for Landlord’s review and approval, all plans,
specifications and working drawings relating thereto, and Landlord shall select
the contractors (subject to Tenant’s approval thereof, not to be unreasonable
withheld or delayed (as indicated in Section 29.4 below)) to
perform such improvement work. Landlord shall not be liable for any
inconvenience or annoyance to Tenant or its visitors, or injury to Tenant’s
business resulting in any way from such damage or the repair thereof; provided
however, that if such fire or other casualty shall have damaged the Building or
Common Areas necessary to Tenant’s occupancy, Landlord shall allow Tenant a
proportionate abatement of Base Rent during the time and to the extent the Building
is unfit for occupancy for

 

24

 

the
purposes permitted under this Lease, and not occupied by Tenant as a result
thereof for the conduct of Tenant’s business; provided, however, that if such
damage is the result of the negligence or willful misconduct of Tenant or
Tenant’s employees, contractors, licensees or invitees, such abatement of Base
Rent shall apply only to the extent Landlord is reimbursed from the proceeds of
rental interruption insurance purchased by Landlord as a part of Operating
Expenses.

 

11.2                           Landlord’s Option to Repair. 
Notwithstanding the terms of Section 11.1 of this Lease,
Landlord may elect not to rebuild and/or restore the Building; and instead
terminate this Lease by notifying Tenant in writing of such termination within
ninety (90) days after the date Landlord learns of the necessity for repairs as
the result of damage, such notice to include a termination date giving Tenant
ninety (90) days to vacate the Building, but Landlord may so elect only if (i)
the Building shall be damaged by fire or other casualty or cause, and the
damage is not fully covered, except for deductible amounts, by insurance
policies required to be carried by Landlord under this Lease and (ii) Tenant is
not willing to fund the amount of the shortfall in excess of deductible
amounts.

 

11.3                           Landlord’s
Option to Repair. 
Notwithstanding the terms of Section 11.l of this Lease,
Landlord may elect to terminate this Lease by notifying Tenant in writing of
such termination with ninety (90) days after the date Landlord learns of the
necessity for repairs as a result of such damage, such notice to include a
termination date giving Tenant ninety (90) days to vacate the Building, but
Landlord may so elect only if the Building shall be damaged by fire or other
casualty or cause and one or more of the following conditions is present: (i)
the repair or restoration is reasonably estimated to cost more than sixty
percent (60%) of the replacement cost of such Building, or (ii) repairs cannot
reasonably be substantially completed within three hundred sixty (360) days
after the date Landlord learns of the necessity for repairs as the result of
damage (when such repairs are made without the payment of overtime or other
premiums).

 

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

 

11.5                           Damage Near End of Term.  In the event that the Building
is destroyed or damaged during the last twelve (12) months of the Lease Term
and the repair or restoration is reasonably estimated to cost more than the
“Threshold Level” (as that term is defined below), then notwithstanding
anything contained in this Article 11, Landlord shall have the
option to terminate this Lease by giving written termination notice to Tenant
of the exercise of such option within thirty (30) days after Landlord learns of
the necessity for repairs as the result of such damage or destruction, and, to
the extent such damage or destruction was not caused as a result of the
negligence or willful misconduct of Tenant or any of Tenant’s employees,
agents, contractors, licensees or invitees and the repair of same is reasonably
expected by Landlord to require more than three (3) months to complete, Tenant
shall have the option to terminate this Lease by giving written termination
notice to Landlord of the exercise of such option within thirty (30) days after
Landlord learns of the necessity for repairs as the result of such damage or
destruction. The term “Threshold Level”
shall mean twenty percent (20%) of the replacement cost of the Building where
the damage occurs during the period from the first day of the ninth (9th)
month prior to the scheduled date of expiration of the Lease Term to the last
day of the twelfth (I2th) month prior to the scheduled date of
expiration of the Lease Term, fifteen percent (15%) of the replacement cost of
the Building where the damage occurs during the period from the first day of
the fifth (5th) month prior to the scheduled date of expiration of
the Lease Term until the last day of the eighth (8th) month prior to
the scheduled date of expiration of the Lease Term, and ten percent (10%) of
the replacement cost of the Building where the damage occurs during the last
four (4) months of the Lease Term. If either Landlord or Tenant exercises such
option to terminate this Lease as provided above (i) this Lease shall cease and
terminate as of the earlier of (1) the date ninety (90) days after the date of
such notice, or (2) the expiration date of this Lease, (ii) Tenant shall pay
the Base Rent and Additional Rent, properly apportioned up to such date of
termination, and (iii) both parties hereto shall thereafter be freed and
discharged of

 

25

 

all
further obligations hereunder, except as provided for in provisions of this
Lease which by their terms survive the expiration or earlier termination of the
Lease Term.

 

ARTICLE 12

 

NONWAIVER

 

No waiver of any provision of this Lease shall be implied by any failure
of either party to enforce any remedy on account of the violation of such
provision, even if such violation shall continue or be repeated subsequently.
Any waiver by either party of any provision of this Lease may only be in
writing. Additionally, no express waiver shall affect any provision other than
the one specified in such waiver and then only for the time and in the manner
specifically stated. No receipt of monies by Landlord from Tenant after the
termination of this Lease shall in any way alter the length of the Lease Term
or of Tenant’s right of possession hereunder, or after the giving of any notice
shall reinstate, continue or extend the Lease Term or affect any notice given
Tenant prior to the receipt of such monies, it being agreed that after the
service of notice or the commencement of a suit, or after final judgment for
possession of the Premises, Landlord may receive and collect any Rent due, and
the payment of said Rent shall not waive or affect said notice, suit or
judgment.

 

ARTICLE 13

 

CONDEMNATION

 

13.1                           Permanent Taking.  If more than twenty-five
percent (25%) of the rentable square feet of the Premises or of the Building
Common Area shall be taken by power of eminent domain or condemned by any
competent authority for any public or quasi-public use or purpose, or if
Landlord shall grant a deed or other instrument in lieu of such taking by
eminent domain or condemnation, Landlord shall have the option to terminate
this Lease upon ninety (90) days’ notice, provided such notice is given no
later than one hundred twenty (120) days after the date of such taking,
condemnation, reconfiguration, vacation, deed or other instrument. If more than
twenty-five percent (25%) of the rentable square feet of the Premises or of the
Building Common is taken, Tenant shall have the option to terminate this Lease
upon ninety (90) days’ notice, provided such notice is given no later than one hundred
twenty (120) days after the date of such taking. Landlord shall be entitled to
the entire award or payment in connection therewith, except that Tenant shall
have the right to file any separate claim available to Tenant for any taking of
Tenant’s personal property and fixtures belonging to Tenant and removable by
Tenant upon expiration of the Lease Term pursuant to the terms of this Lease,
and for moving expenses, so long as such claims do not diminish the award
available to Landlord, its ground lessor with respect to such Building or
Project or its mortgagee, and such claim is payable separately to Tenant.  All Rent shall be apportioned as of the date
of such termination, or the date of. such taking, whichever shall first
occur.  If any part of the Premises
shall be taken, and this Lease is not terminated pursuant to this Section 13.1,
the Rent shall be abated proportionately based on the percentage of the
rentable square feet of the Building which is taken. Tenant hereby waives any
and all rights it might otherwise have pursuant to California Code of Civil
Procedure Section 1265.130.

 

13.2                           Temporary Taking.  Notwithstanding anything to
the contrary contained in this Article 13. in the event of a
temporary taking of all or any portion of the Premises for a period of one (1)
year or less, then this Lease shall not terminate but the Base Rent shall be
abated for the period of such taking for the number of rentable square feet of
the Premises so taken. Landlord shall be entitled to receive the entire award made
in connection with any such temporary taking.

 

ARTICLE 14

 

ASSIGNMENT AND SUBLETTING

 

14.1                           Transfers.  Tenant shall not, without the
prior written consent of Landlord, except as otherwise expressly provided
herein, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to
attach to, or otherwise transfer, this Lease or any interest hereunder, permit
any assignment, or other transfer of this Lease or any interest hereunder by
operation of law, sublet the Premises or any part thereof, or permit the use of
the Premises by any persons other than Tenant and its employees (all of the
foregoing are hereinafter sometimes referred to

 

26

 

collectively as “Transfers”
and any person to whom any Transfer is made or sought to be made is hereinafter
sometimes referred to as a “Transferee”).
Where Landlord’s consent to  a
proposed Transfer is required under this Article 14, if Tenant desires
Landlord’s consent to any Transfer, Tenant shall notify landlord in writing,
which notice (the “Transfer Notice”)
shall include (i) the proposed effective date of the Transfer, which shall not
be less than fifteen (15) business days nor more than one hundred eighty (180)
days after the date of delivery of the Transfer Notice, (ii) a description of
the portion of the Premises to be transferred (the “Subject Space”), (iii) all of the material terms of the
proposed Transfer and the consideration therefor (including calculation of the
“Transfer Premium,” as that term is defined in Section 14.3 below, in
connection with such Transfer), the name and address of the proposed
Transferee, and a copy of all existing executed and/or proposed documentation
pertaining to the proposed Transfer, including all existing operative documents
to be executed to evidence such Transfer or the agreements incidental or
related to such Transfer, and (iv) current financial statements of the proposed
Transferee certified by an officer, partner or owner thereof, and any other
information reasonably required by Landlord to determine the financial
responsibility, character, and reputation of the proposed Transferee, nature of
such Transferee’s business and proposed use of the Subject Space, and such
other information as Landlord may reasonably require. Landlord shall approve or
disapprove of the proposed Transfer within fifteen (15) business days after
Landlord’s receipt of the applicable Transfer Notice including all items
required pursuant to the immediately preceding sentence. Where Landlord’s
consent to a proposed Transfer is required under this Article 14, any
Transfer made without Landlord’s prior written consent shall, at Landlord’s
option, be null, void and of no effect, and shall, at Landlord’s option,
constitute a default by Tenant under Section 19.1.2 of this Lease. Where
Landlord’s consent to a proposed Transfer isrequired under this Article 14, whether or not Landlord
consents to such proposed Transfer, for each proposed Transfer Tenant shall pay
to Landlord a review and processing fee in an amount equal to $500.00 and any
reasonable legal fees incurred by Landlord (which legal fees shall not exceed
$1,000 per proposed Transfer during the Lease Term), upon request by Landlord.

 

14.2                           Landlord’s
Consent. Where Landlord’s consent to a proposed
Transfer is required under this Article 14, Landlord shall not
unreasonably withhold its consent to any proposed Transfer of the Subject Space
to the Transferee on the terms specified in the Transfer Notice. Without
limitation as to other reasonable grounds for withholding consent, the parties
hereby agree that it shall be reasonable under this Lease and under any
applicable law for Landlord to withhold consent to any proposed Transfer where
one or more of the following apply:

 

14.2.1                  The Transferee is of a character or reputation
or engaged in a business which Landlord reasonably determines is not consistent
with the quality of the Project as a first- class, institutional quality office
project;

 

14.2.2                  The Transferee is either a governmental agency
or instrumentality thereof which Landlord reasonably determines is not
consistent with the quality of the Project as a first-class, institutional
quality office project;

 

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

 

14.2.4                  The Transfer will result in more than a
reasonable and safe number of occupants per floor within the Subject Space;

 

14.2.5                  The Transferee is not a party of reasonable
financial worth and/or financial stability in light of the responsibilities
involved under the Transfer on the date consent is requested (provided,
however, that this Section 14.2.5 shall only apply if the Transfer is
for a full floor or more of the Building);

 

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

 

14.2.7                  The Transfer occurs during the period from the
Effective Date until the earlier of (i) the fourth anniversary of the Effective
Date or (ii) the date at least ninety-five percent (95%) of the rentable square
feet of the Building is leased, and the rent charged by

 

27

 

Tenant to such Transferee
during the term of such Transfer (the “Transferee’s
Rent”), calculated using a present value analysis, is less than
ninety-five percent (95%) of the
rent being quoted by Landlord at the time of such Transfer for computable space
in the Project for a comparable terra (the “Quoted
Rent”), calculated using a present value analysis;

 

14.2.8                  The terms of the proposed Transfer will allow
the Transferee to exercise a right of renewal, right of expansion, right of
first offer, or other similar right held by Tenant (or will allow the Transferee
to occupy space leased by Tenant pursuant to any such right); or

 

14.2.9                  Either the proposed Transferee, or any person
or entity which directly or indirectly, controls, is controlled by, or is under
common control with, the proposed Transferee, (i) occupies space in the Project
at the time of the request for consent, or (ii) is negotiating with Landlord to
lease space in the Project at such time, or (iii) has negotiated with Landlord
during the twelve (12)-month period immediately preceding the Transfer Notice;
or

 

14.2.10            The Transferee does not intend to occupy the
entire Premises and conduct its business therefrom for a substantial portion of
the term of the Transfer.

 

If
Landlord consents to any Transfer pursuant to the terms of this Section 14.2
(and does not exercise any recapture rights Landlord may have under Section
14.4 of this Lease), Tenant may within six (6) months after Landlord’s
consent, but not later than the expiration of said six-month period, enter into
such Transfer of the Premises or portion thereof, upon substantially the same
terms and conditions as are set forth in the Transfer Notice furnished by
Tenant to Landlord pursuant to Section 14.1 of this Lease, provided that
if there are any material changes in the terms and conditions from those
specified in the Transfer Notice (i) such that Landlord would initially have
been entitled to refuse its consent to such Transfer under this Section
14.2. or (ii) which would cause the proposed Transfer to be more favorable
to Tenant than the terms set forth in Tenant’s original Transfer Notice, Tenant
shall again submit the Transfer to Landlord for its approval and other action
under this Article 14 (including Landlord’s right of recapture, if any,
under Section 14.4 of this Lease). Notwithstanding any contrary
provisions of this Lease, if Tenant claims that Landlord has unreasonably
withheld or delayed its consent to a proposed Transfer or otherwise has
breached its obligations under this Article, Tenant’s only remedies shall be to
seek a declaratory judgment and/or injunctive relief and/or monetary damages,
and Tenant waives the right to terminate this Lease as to all or any portion of
the Premises.

 

14.3                           Transfer Premium.

 

14.3.1                  Definition of Transfer Premium.  If
Landlord consents to a Transfer, as a condition thereto which the parties
hereby agree is reasonable, Tenant shall, except as otherwise provided in this Article
14, pay to Landlord fifty percent (50%) of any “Transfer Premium,” as that
term is defined in this Section 14.3, received by Tenant from such
Transferee (the amount which may be so payable to Landlord may be referred to
herein as the “Premium Base Amount”).  “Transfer
Premium” shall mean all rent, additional rent or other consideration
payable by such Transferee in excess of the Rent and Additional Rent payable by
Tenant under this Lease on a per rentable square foot basis if less than all of
the Premises is transferred, after deducting the reasonable expenses incurred
by Landlord or Tenant for (i) any changes, alterations and improvements to the
Premises in connection with the Transfer, (ii) any brokerage commissions,
reasonable attorneys’ and architectural fees and reasonable advertising costs
incurred in connection with the Transfer, (iii) any Rent and Additional Rent paid
by Tenant for the portion of the Premises transferred while such space is being
actively marketed for sublease or assignment to the extent Tenant is not
occupying such space, and (iv) any other out-of-pocket costs reasonably
incurred by Tenant in connection with such Transfer (collectively, the “Subleasing Costs”), “Transfer Premium”
shall also include, but not be limited to, key money and bonus money paid by
Transferee to Tenant in connection with such Transfer, and any payment in
excess of fair market value for services rendered by Tenant to Transferee or
for assets, fixtures, inventory, equipment, or furniture transferred by Tenant
to Transferee in connection with such Transfer.

 

14.3.2                  Payment of Transfer Premiums.  The
determination of the amount of the Transfer Premium shall be made on an annual
basis in accordance with the terms of this Section 14.3.2, but an
estimate of the amount of the Transfer Premium shall be made each month and
one-twelfth (1/12th) of such estimated amount shall be paid to Landlord
promptly, but in no event later than the next date for payment of Base Rent
hereunder, subject to an annual

 

28

 

reconciliation on each anniversary date of the
Transfer. If the payments to Landlord under this Section 14.3.2 during
the twelve (12) months preceding each annual reconciliation exceed the amount
of Transfer Premium determined on an annual basis and actually received by
Tenant, then Landlord shall promptly refund the excess to Tenant. If Tenant has
underpaid the Transfer Premium, as determined by such annual reconciliation.
Tenant shall pay the amount of such deficiency to Landlord promptly, but in no
event later than the next date for payment of Basic Rent hereunder. For
purposes of calculating the Transfer Premium on an annual basis, Tenant’s
Subleasing Costs shall be amortized on a slight-line basis over the term of the
Transfer.

 

14.3.3                  Limitation on Amount and Timing. 
Notwithstanding the foregoing provisions of this Section.14,
Tenant shall have no obligation to pay, and shall not pay, any percentage of
the foregoing Transfer Premium under this or any oilier section of this Lease
in any calendar year, to the extent Tenant is advised by Landlord that such
payment would exceed the sum of; (A) the maximum amount (if any) that can be
paid to Landlord without causing Kilroy Realty Corporation, a Maryland
corporation (“KRC”) to fail to
meet the requirements of sections 856(c)(2) and (3) of the Internal Revenue
Code of 1986, as amended (the “Code”)
for such year determined as if (i) the payment of such amount did not
constitute income described in sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I)
of the Code (“Qualifying Income”),
(ii) the payment of such amount resulted in all other amounts received by
Landlord from Tenant pursuant to this Lease during such year failing to
constitute Qualifying Income, and (iii) KRC had $1,000,000 of income from
unknown sources during such year which was not Qualifying Income (in addition
to any known or anticipated income of KRC which was not Qualifying Income), in
each case as determined by KRC’s independent accountants, and (B) the Premium
Base Amount less the amounts paid under clause (A) in the event KRC receives
and provides Tenant with a copy of a reasoned opinion from outside counsel or a
ruling from the Internal Revenue Service (the “Premium
Guidance”) indicating that Landlord’s receipt of the Premium Base
Amount would constitute Qualifying Income and would not cause other amounts
paid by Tenant to Landlord to fail to constitute Qualifying Income (the “RE1T Requirements”).  In the event that Landlord is not able to
receive the full Premium Base Amount due to the above limitation, Tenant shall
not pay any amounts in excess of such limit unless and until KRC receives (and
delivers to Tenant) any one or combination of the following, once or more
often:  (i) a letter from KRC’s
independent accountants indicating the maximum amount that can be paid by
Tenant to Landlord at that time without causing KRC to fail to meet the REIT
Requirements (calculated as described above) or (ii) the Premium Guidance; in
which event Tenant shall pay to Landlord the lesser of the unpaid Transfer
Premium or the maximum amount stated in the letter referred to in (i) above.
Tenant’s obligation to pay any unpaid portion of the Transfer Premium shall
terminate on the December 31 following the date which is three (3) years after
the date such payment would (without regard to the limitations in this
subparagraph) have initially been due. 
Any amounts paid shall first be applied to the Transfer Premium which is
the oldest.  Tenant shall cooperate with
Landlord and KRC and provide them with any information or documents that are
necessary or helpful to Landlord or KRC in obtaining any Premium Guidance or in
calculating the amount of any payment due hereunder.

 

14.4                           Landlord’s Option as to Subject Space.  Landlord shall have the option, by giving written notice (“Recapture Notice”) to Tenant within
fifteen (15) days after receipt of any Transfer Notice, to recapture the
Subject Space. Such recapture shall cancel and terminate this Lease, with
respect to the Subject Space as of the date stated in the Transfer Notice as
the effective date of the proposed Transfer until the last day of the term of
the Transfer as set forth in the Transfer Notice. However, if Landlord delivers
a Recapture Notice to Tenant, Tenant may, within ten (10) days after Tenant’s
receipt of the Recapture Notice, deliver written notice to Landlord indicating
that Tenant is rescinding its request for consent to the proposed Transfer, in which case such Transfer shall not be
consummated and this Lease shall remain in full force and effect as to the
portion of the Premises that was the subject of the Transfer. Tenant’s failure
to so notify Landlord in writing within said ten (10) day period shall be
deemed to constitute Tenant’s election to allow the Recapture Notice to be
effective. In the event of a recapture by Landlord, if this Lease shall be
canceled with respect to less than all of the rentable square feet within the
Building, the Rent reserved herein shall be prorated on the basis of the number
of rentable square feet retained by Tenant in proportion to the number of
rentable square feet contained in the Building, and this Lease as so amended
shall continue thereafter in full force and effect, and upon request of either
party, the parties shall execute written confirmation of the same.  If Landlord declines, or fails to timely
elect to recapture the Subject Space under this Section 14.4, then,
provided Landlord has consented to the proposed Transfer with respect to any
Transfer

 

29

 

which
such consent is required, Tenant shall be entitled to transfer the Subject
Space to the proposed Transferee, subject to the provisions of this Article
14.

 

14.5                           Effect of
Transfer.  If
Landlord consents to a Transfer, (i) the terms and conditions of this Lease
shall in no way be deemed to have been waived or modified, (ii) such consent
shall not be deemed consent to any further Transfer by either Tenant or a
Transferee, (iii) Tenant shall deliver to Landlord, promptly after execution,
an original executed copy of all documentation pertaining to the Transfer in
form reasonably acceptable to Landlord, (iv) Tenant shall furnish upon
Landlord’s request a complete statement, certified by an independent certified
public accountant, or Tenant’s chief financial officer, setting forth in detail
the computation of any Transfer Premium Tenant has derived and shall derive
from such Transfer, and (v) no Transfer relating to this Lease or agreement
entered into with respect thereto, whether with or without Landlord’s consent,
shall relieve Tenant from liability under this Lease. Landlord or its
authorized representatives shall have the right at all reasonable times (but no
more than one (1) time per calendar year) to audit the books, records and
papers of Tenant relating to any Transfer, and shall have the right to make
copies thereof.  If the Transfer Premium
respecting any Transfer shall be found understated, Tenant shall, within thirty
(30) days after demand, pay the deficiency and, in addition, if understated by
more than (a) two percent (2%), Tenant shall pay Landlord’s cost of such audit
within thirty (30) days after demand, and (b) ten percent (10%), Landlord shall
be entitled to interest on the understated amount at the rate of ten percent
(10%) per annum from the date upon which the understated amount would have been
paid if the Transfer Premium had been accurately determined in the first place
to the date Tenant pays to Landlord in full such understated amounts;
Landlord’s rights pursuant to the immediately preceding sentence shall
constitute Landlord’s sole remedy for any understatement of the Transfer
Premium (in the absence of fraud by Tenant).

 

14.6                           Additional
Transfers.  For
purposes of this Lease, the term “Transfer” shall also include (i) if Tenant is
a partnership or limited liability company, the withdrawal or change, voluntary, involuntary or by
operation of law, of fifty percent (50%) or more of the partners or members, or
transfer of fifty percent (50%) or more of partnership or membership interests,
within a twelve (12)-month period, or the dissolution of the partnership or
company without immediate reconstitution thereof, and (ii) except as otherwise
provided in Section 14.7 below, if Tenant is a closely held corporation
(i.e., whose stock is not publicly held and not traded through an exchange or
over the counter), (A) the dissolution, merger, consolidation or other
reorganization of Tenant or, (B) the sale or other transfer of more than an
aggregate of fifty percent (50%) of the voting shares of Tenant (other than to
immediate family members by reason of gift or death) within a twelve (12)-month
period, or (C) the sale, mortgage, hypothecation or pledge of more than an
aggregate of fifty percent (50%) of the value of the unencumbered assets of
Tenant within a twelve (12)-month period.

 

14.7                           Affiliated
Transfers. 
Notwithstanding anything contained in this Lease to the contrary, an
assignment, subletting or permitting the use of all or any portion of the
Premises to or by a Permitted Affiliate (as defined below) of Tenant shall not
be deemed a Transfer under this Article 14 and thus shall not be subject
to (i) any requirement of obtaining Landlord’s consent thereto under this Article
14, (ii) Landlord’s right to receive fifty percent (50%) of any Transfer
Premium in connection therewith under Section 14.3 or (iii) Landlord’s
right to recapture the Premises under Section 14.4, provided that (a)
Tenant notifies Landlord of such assignment or sublease and the identity of the
Permitted Affiliate prior to the effective date thereof and promptly after
request from Landlord supplies Landlord with any documents or information
reasonably requested by Landlord regarding such assignment or sublease and/or
such Permitted Affiliate; (b) such assignment or sublease is not a subterfuge
by Tenant to avoid its obligations under this Lease or the restrictions on
Transfers pursuant to this Article 14, and (c) as of the date of such
assignment, subletting or use, such Permitted Affiliate’s net worth and
financial standing are no less
than that of Tenant’s net worth and financial standing as of the Effective
Date.  As used in this Section 14.7.
“Permitted Affiliate” shall mean
(1) any person, corporation or other entity which is controlled by, controls,
or in common control with Tenant, or (2) any entity which merges with Tenant or
acquires substantially all of Tenant’s stock or assets, and in either case of
(1) or (2) above, such person, corporation or other entity has a net worth as
of the effective date of the assignment or sublease at least equal to the net
worth of Tenant as of the date of execution of this Lease.  “Control,” as used in this Section 14.7,
shall mean the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person or entity, whether
through the ownership of voting securities, by contract or otherwise.

 

30

 

ARTICLE 15

 

SURRENDER OF PREMISES;

REMOVAL OF TRADE FIXTURES

 

15.1                           Surrender of  Premises.  No act or thing done by
Landlord or any agent or employee of Landlord during the Lease Term shall be
deemed to constitute an acceptance by Landlord of a surrender of the Premises
unless such intent is specifically acknowledged in a writing signed by
Landlord. The delivery of keys to any portion of the Premises to Landlord or
any agent or employee of Landlord shall not constitute a surrender of the
Premises or any portion thereof or effect a termination or partial termination
of this Lease, whether or not the keys are thereafter retained by Landlord, and
notwithstanding such delivery Tenant shall be entitled to the return of such
keys at any reasonable time upon request until this Lease shall have been
properly terminated.  The voluntary or
other surrender of this Lease by Tenant, whether accepted by Landlord or not,
or a mutual termination hereof, shall not work a merger, and at the option of
Landlord shall operate as an assignment to Landlord of all subleases or
subtenancies affecting the Premises.

 

15.2                           Removal
of Tenant Property by Tenant.  Upon
the expiration of the Lease Term, or upon any earlier termination of this
Lease, Tenant shall, subject to the provisions of this Article 15, quit
and surrender possession of the Premises to Landlord in as good order and
condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant, reasonable wear
and tear and repairs which are specifically made the responsibility of Landlord
hereunder excepted.  Upon such
expiration or termination, Tenant shall, without expense to Landlord, remove or
cause to be removed from the Premises all debris and rubbish, and such items of
furniture, equipment, Alterations and Tenant Improvements which do not conform
to the Specifications (provided Landlord conditioned its approval of their
installation under Section 8.5 above upon Tenant’s removal of such
Alterations or non-standard Tenant Improvements (as applicable) upon the
expiration or earlier termination of this Lease), free- standing cabinet work,
and other articles of personal property owned by Tenant or installed or placed
by Tenant at its expense in the Premises, and such similar articles of any
other persons claiming under Tenant, as Landlord may, in its sole discretion,
require to be removed, and Tenant shall repair at its own expense all damage to
the Building resulting from such removal. Tenant also shall comply with the
provisions of Section 8.5 of this Lease. Notwithstanding the foregoing,
with respect to Tenant’s cabling, Landlord shall have the option, exercisable
by written notice to Tenant on or before the day which is thirty (30) days
prior to the expiration or earlier termination of this Lease, to require Tenant
to remove any or all of its cabling from the Premises and to repair any damage
to the Premises resulting from such removal; provided, however, that if
Landlord so requires Tenant to remove such cabling and if, within six (6)
months after the date of expiration or earlier termination of this Lease,
leasehold improvements within the Premises are demolished in a manner such that
the amount expended to remove such cabling as a part of such demolition would
have been less than the amount previously incurred by Tenant to remove such
cabling, Landlord shall promptly rebate to Tenant the difference between the
amount expended by Tenant to remove such cabling and the amount which would
have been incurred by Landlord to remove such cabling as a part of the
demolition process described herein.

 

15.3                           Removal of Tenant’s Property by Landlord. 
Whenever Landlord shall re-enter the Premises as provided in this Lease,
any personal property of Tenant not removed by Tenant upon the expiration of
the Lease Term, or within five (5) days after a termination by reason of
Tenant’s default as provided in this Lease, shall be deemed abandoned by Tenant
and may be disposed of by Landlord in accordance with California Civil Code Sections 1980 through 1991 and California Code of
Civil Procedure Section 1174, or in accordance with any laws or judicial
decisions which may supplement or supplant those provisions from time to time.

 

15.4                           Landlord’s
Actions on Premises. 
Excepting any claims for damages or other liability arising out of
Landlord’s or its agents’ or its representatives’ gross negligence or willful
misconduct, Tenant hereby waives, and releases Landlord from, all claims for
damages or other liability in connection with Landlord’s or its agents’ or
representatives’ reentering and taking possession of the Premises or removing,
retaining, storing or selling the property of Tenant as herein provided, and Tenant hereby indemnifies and holds
Landlord harmless from any such damages or other liability, and no such
re-entry shall be considered or construed to be a forcible entry.

 

31

 

ARTICLE 16

 

HOLDING OVER

 

If
Tenant holds over after the expiration of the Lease Term or earlier termination
thereof, with or without the express or implied consent of Landlord, such
tenancy shall be from month-to-month only, and shall not constitute a renewal
hereof or an extension for any further term, and in such case Rent shall be
payable at a monthly rate equal to one hundred and fifty percent (150%) of the
Rent applicable during the last rental period of the Lease Term under this
Lease.  Such month-to-month tenancy
shall be subject to every other applicable term, covenant and agreement
contained herein. Notwithstanding the foregoing, Tenant shall have the one-time
right, upon notice (the “Holdover Notice”)
to Landlord not less than twelve (12) months prior to the expiration of the
then Lease Term, to extend the Lease Term for a period of up to two (2) months
(the “Permitted Holdover Term”),
in which case the Rent payable by Tenant during such Permitted Holdover Term
shall equal one hundred twenty-five percent (125%) of the Rent applicable
during the last rental period of the Lease Term under this Lease for the first
(1st) month of such Permitted Holdover Term and one hundred fifty
percent (150%) for the second (2nd) months of such Permitted
Holdover Term. Nothing contained in this Article 16 shall be construed
as consent by Landlord to any holding over by Tenant, and Landlord expressly
reserves the right to require Tenant to surrender possession of the Premises to
Landlord as provided in this Lease upon the expiration or other termination of
this Lease.  The provisions of this Article
16 shall not be deemed to limit or constitute a waiver of any other rights
or remedies of Landlord provided herein or at law. If Tenant fails to surrender
the Premises upon the termination or expiration of this Lease, in addition to
any other liabilities to Landlord accruing therefrom, Tenant shall protect,
defend, indemnify and hold Landlord harmless from all loss, costs (including
reasonable attorneys’ fees) and liability resulting from such failure,
including, without limiting the generality of the foregoing, any claims made by
any succeeding tenant founded upon such failure to surrender and any lost
profits to Landlord resulting therefrom; , provided Landlord promptly notified
Tenant in writing of any lease or signed letter of intent for all or any
portion of the Premises.

 

ARTICLE 17

 

ESTOPPEL CERTIFICATES

 

Within
fifteen (15) days following a request in writing by either party to the other,
but in no event more frequently than three (3) times in any twelve (12) month
period, the recipient party shall execute and deliver to the requesting party
an estoppel certificate, which shall be substantially in the form of Exhibit E, attached hereto (or such
other form as may be reasonably required by any prospective mortgagee or
purchaser of the Building or other portion of the Project, or any portion
thereof), indicating therein any exceptions thereto that may exist at that
time, and shall also contain any other information reasonably requested by
Landlord or Landlord’s mortgagee or prospective mortgagee. Tenant shall execute
and deliver whatever other instruments may be reasonably required for such
purposes. Failure of either party to timely execute and deliver such estoppel
certificate or other instruments shall constitute an acceptance of the Premises
(if addressed to Tenant) and an acknowledgment by such party that the
statements included in the estoppel certificate in good faith are true and
correct, without exception. At any time during the Lease Term, Landlord may
require Tenant to provide Landlord with a current financial statement and
financial statements of the two (2) years prior to the current financial
statement year. Such statements shall be prepared in accordance with generally
accepted accounting principles, shall be certified by Tenant’s board of
directors or by an officer of Tenant, and, if such is the normal practice of
Tenant, shall be audited by an independent certified public accountant.

 

ARTICLE 18

 

SUBORDINATION

 

This
Lease shall be subject and subordinate to all present and future ground or
underlying leases of the Building or Project and to the lien of any first
mortgage or trust deed, now or hereafter in force against the Building or
Project, if any, and to all renewals, extensions, modifications, consolidations and replacements
thereof, and to all advances made or hereafter to be made upon the security of
such mortgages or trust deeds, unless the holders of such mortgages

 

32

 

or trust deeds, or the
lessors under such ground lease or underlying leases, require in writing that
this Lease be superior thereto. Landlord agrees to provide Tenant, within sixty
(60) days after written request by Tenant, with commercially reasonable
nondisturbance agreements(s) in favor of Tenant from any ground lessors,
mortgage holders or deed of trust beneficiaries under any ground lease,
mortgage or deed of trust affecting the Project or any portion thereof leased
by Tenant (whether now existing or coming into existence at any time after the
date of execution of this Lease but prior to the expiration of the Lease Term)
and in consideration of, and as a condition precedent to, Tenant’s agreement to
be bound by the terms of this Article 18. Tenant covenants and agrees in
the event any proceedings are brought for the foreclosure of any such mortgage
or deed in lieu thereof, to attorn, without any deductions or set-offs
whatsoever, to the purchaser or any successors thereto upon any such
foreclosure sale or deed in lieu thereof if so requested to do so by such
purchaser, and to recognize such purchaser as the lessor under this Lease.
Tenant shall, within fifteen (15) days of request by Landlord, execute such
further instruments or assurances as Landlord or any mortgage holder or deed of
trust beneficiary may reasonably deem necessary to evidence or confirm the
subordination or superiority of this Lease to any such mortgages, trust deeds,
ground leases or underlying leases or other typical provisions contained in
Subordination, Non-Disturbance and Attornment Agreements. Tenant waives the
provisions of any current or future statute, rule or law which may give or
purport to give Tenant any right or election to terminate or otherwise
adversely affect this Lease and the obligations of Tenant hereunder in the
event of any foreclosure proceeding or sale.

 

ARTICLE 19

 

DEFAULTS; REMEDIES

 

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

 

19.1.1                  Any failure by Tenant to pay any Rent or any
other charge required to be paid under this Lease, or any part thereof, when
due, where such failure continues for five (5) days after written notice
thereof from Landlord to Tenant; or

 

19.1.2                  Any failure by Tenant to observe or perform
any other provision, covenant or condition of this Lease to be observed or performed
by Tenant where such failure continues for thirty (30) days after written
notice thereof from Landlord to Tenant; provided, however, if the nature of
such a default is such that the same cannot be reasonably be cured within a
thirty (30) day period, Tenant shall not be deemed to be in default if it
diligently commences such cure within such period and thereafter diligently
proceeds to rectify and cure said default as soon as is reasonably possible
under the circumstances; or

 

19.1.3                  To the extent permitted by law, a general
assignment by Tenant or any guarantor of the Lease for the benefit of
creditors, or the filing by or against Tenant or any guarantor of any
proceeding under an insolvency or bankruptcy law, unless in the case of a
proceeding filed against Tenant or any guarantor the same is dismissed within
sixty (60) days, or the appointment of a trustee or receiver to take possession
of all or substantially all of the assets of Tenant or any guarantor, unless
possession is restored to Tenant or such guarantor within thirty (30) days, or
any execution or other judicially authorized seizure of all or substantially
all of Tenant’s assets located upon the Premises or of Tenant’s interest in
this Lease, unless such seizure is discharged within thirty (30) days; or

 

19.1.4                  The hypothecation or assignment of this Lease
or subletting of the Premises in violation of Article 14 hereof; or

 

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

 

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

 

33

 

damages
therefor; and subject to the liquidated damages provision set forth in Article
31 of this Lease, Landlord may recover from Tenant the following
(collectively, the “1951.2 Damage Amount”):

 

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

 

(iv)          Any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant’s
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, specifically including
but not limited to, brokerage commissions and advertising expenses incurred,
and an amortized portion (over the balance of the Lease Term compared to the
term of any new lease) of any expenses of remodeling the Premises or any
portion thereof for a new tenant, whether for the same or a different use, and
any special concessions made to obtain a new tenant; and

 

(v)           At Landlord’s election, such other
amounts in addition to or in lieu of the foregoing as may be permitted from
time to time by applicable law.

 

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

 

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

 

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

 

19.4                           Form
of Payment After Default. 
Following the occurrence of more than two (2) monetary events of default
by Tenant in any twelve (12) month period during the Lease Term, landlord shall
have the right to require that any or all subsequent amounts paid by Tenant to
Landlord hereunder, whether in the cure of the default in question or
otherwise, be paid in the form of cash, money order, cashier’s or certified
check drawn on an institution acceptable to Landlord, or by other means
approved by Landlord, notwithstanding any prior practice of accepting payments
in any different form.

 

19.5                           Waiver of
Default. No waiver by Landlord or Tenant of any
violation or breach of any of the terms, provisions and covenants herein
contained shall be deemed or construed to

 

34

 

constitute a waiver of any
other or later violation or breach of the same or any other of the terms,
provisions, and covenants herein contained. 
Forbearance by Landlord in enforcement of one or more of the remedies
herein provided upon an event of default shall not be deemed or construed to
constitute a waiver of such default. 
The acceptance of any Rent hereunder by Landlord following the
occurrence of any default, whether or not known to Landlord, shall not be
deemed a waiver of any such default, except only a default in the payment of
the Rent so accepted.

 

19.6                           Efforts to Relet.  For the purposes of this Article
19, Tenant’s right to possession shall not be deemed to have been
terminated by efforts of Landlord to relet the Premises, by its acts of maintenance
or preservation with respect to the Premises, or by appointment of a receiver
to protect Landlord’s interest hereunder. 
The foregoing enumeration is not exhaustive, but merely illustrative of
acts which may be performed by Landlord without terminating Tenant’s right to
possession.

 

19.7                           Landlord Default. 
Notwithstanding anything to the contrary set forth in this Lease,
Landlord shall be in default in the performance of any obligation required to
be performed by Landlord pursuant to this Lease if Landlord fails to perform
such obligation within thirty (30) days after the receipt of notice from Tenant
specifying in detail Landlord’s failure to perform; provided, however, if the
nature of Landlord’s obligation is such that more than thirty (30) days are
required for its performance, then Landlord shall not be in default under this
Lease if it shall commence such performance within such thirty (30) day period
and thereafter diligently pursues the same to completion.  Upon any such default by Landlord under this
Lease, Tenant may, except as otherwise specifically provided in this Lease to
the contrary, exercise any of its rights provided at law or in equity. Any
award from a court or arbitrator in favor of Tenant requiring payment by
Landlord which is not paid by Landlord within the time period directed by such
award, may be offset by Tenant from Rent next due and payable under this Lease;
provided, however, Tenant may not deduct the amount of the award against more
than fifty percent ( 0 ) of ?ase Rent next due and owing (until such time as
the entire amount of such ?udgment is deducted) to the extent following a
foreclosure or a deed in lieu of foreclosure

 

ARTICLE 20

 

COVENANT OF QUIET ENJOYMENT

 

Landlord
covenants that Tenant, on paying the Rent, charges for services and other
payments herein reserved and on keeping, observing and performing all the other
terms, covenants, conditions, provisions and agreements herein contained on the
part of Tenant to be kept, observed and performed, shall, during the Lease
Term, peaceably and quietly have, hold and enjoy the Premises subject to the
terms, covenants, conditions, provisions and agreements hereof without
interference by any persons lawfully claiming by or through Landlord.  The foregoing covenant is in lieu of any
other covenant express or implied.

 

ARTICLE 21

 

LETTER OF CREDIT

 

21.1                           Delivery of Letter of Credit. 
Tenant shall deliver to Landlord, within ten (10) business days
following the entry of the “Court Order,” as that term is defined in Section 29.34,
below, an unconditional, clean, irrevocable letter of credit (the “L-C”) in an amount equal to Two Million
Three Hundred Thousand and No/100 
Dollars ($2,300,000.00); the “L-C
Amount”), which L-C shall be issued by a money-center bank (a bank
which accepts deposits, maintains accounts, has a Southern California office
which will negotiate a letter of credit, and whose deposits are insured by the
FDIC) reasonably acceptable to Landlord, and which L-C shall be in the form of Exhibit M, attached hereto. Tenant
shall pay all expenses, points and/or fees incurred by Tenant in obtaining the
L-C.

 

21.2                           Application of Letter of Credit. Landlord shall have the immediate right to
draw upon the L-C, in whole or in part and without prior notice to Tenant,
other than that required under the Lease, at any time and from time to time:
(i) if a default occurs under this Lease (beyond any applicable notice and cure
period), or (ii) Tenant either files a voluntary petition, or an involuntary
petition is filed against Tenant by an entity other than Landlord, under any
chapter of the Federal Bankruptcy Code or Tenant executes an assignment for the
benefit of creditors.  No condition or
term of this Lease shall be deemed to render the L-C conditional,

 

35

 

thereby justifying the issuer
of the L-C in failing to honor a drawing upon such L-C in a timely manner. The
L-C and its proceeds shall constitute Landlord’s sole and separate property
(and not Tenant’s property or, in the event of a bankruptcy filing by Tenant,
property of  Tenant’s bankruptcy
estate) and Landlord may immediately upon any draw (and without notice to
Tenant) apply or offset the proceeds of the L-C: (i) against any amounts
payable by Tenant under this Lease that are not paid when due, after the
expiration of any applicable notice and cure period; (ii) against all losses
and damages that Landlord has suffered or may reasonably estimate that it may
suffer as a result of any default by Tenant under this Lease, including any
damages arising under Section 1951.2 of the California Civil Code for rent due
following termination of this Lease; (iii) against any costs incurred by
Landlord in connection with this Lease (including attorneys’ fees); and (iv)
against any other amount that Landlord may spend or become obligated to spend
by reason of Tenant’s default under this Lease but in no event in excess of
amounts to which the Landlord would be entitled under the law. Provided Tenant
has performed all of its obligations under this Lease, Landlord agrees to pay
to Tenant within thirty (30) days after the Lease Expiration Date the amount of
any proceeds of the L-C received by Landlord and not applied as allowed above,
and return the L-C to Tenant within the foregoing thirty (30) day period;
provided that if prior to the Lease Expiration Date a voluntary petition is
filed by Tenant, or an involuntary petition is filed against Tenant by any of
Tenant’s creditors other than Landlord, under the Federal Bankruptcy Code, or
Tenant executes an assignment for the benefit of creditors, then Landlord shall
not be obligated to return the L-C or any proceeds of the L-C until all
statutes of limitations for any preference avoidance statutes applicable to
such bankruptcy or assignment for the benefit of creditors have elapsed or the
bankruptcy court or assignee, whichever is applicable, has executed a binding
release releasing the Landlord of any and all liability for preferential
transfers relating to payments made under this Lease, and Landlord may retain
and offset against any remaining L-C proceeds the full amount Landlord is
required to pay to any third party on account of preferential transfers
relating to this Lease.  If Landlord
draws on the L-C as permitted in this Section 21.2, then, upon demand of
Landlord, Tenant shall restore the amount available under the L-C to the amount
set forth in Section 21.1, above, by providing Landlord with an
amendment to the L-C evidencing that the amount available under the L-C has
been restored to the amount set forth in Section 21.1, above. In the
alternative, Tenant may provide Landlord with cash, to be held by Landlord in
accordance with this Section 21.2  in
an amount equal to the restoration amount required under this Section 21.2.  Tenant shall pay all expenses, points and
fees incurred by Tenant or Landlord in renewing, replacing, drawing or
transferring the L-C. Landlord and Tenant (a) acknowledge and agree that in no
event or circumstance shall the L-C or any renewal thereof or substitute
therefor or any proceeds thereof be deemed to be or treated as a “security
deposit” under any law applicable to security deposits in the commercial
context, including, but not limited to, Section 1950.7 of the California Civil
Code, as such Section now exists or as it may be hereafter amended or succeeded
(the “Security Deposit Laws”), (b)
acknowledge and agree that the L-C (including any renewal thereof or substitute
therefor or any proceeds thereof) is not intended to serve as a security
deposit, and the Security Deposit Laws shall have no applicability or relevancy
thereto, and (c) waive any and all rights, duties and obligations that any such
party may now, or in the future will, have relating to or arising from the
Security Deposit Laws. Tenant hereby waives the provisions of Section 1950.7 of
the California Civil Code and all other provisions of law, now or thereafter in
effect, which (A) establish the time frame by which a landlord must refund a
security deposit under a lease, and/or (B) provide that a landlord may claim
from a security deposit only those sums reasonably necessary to remedy defaults
in the payment of rent, to repair damage caused by a tenant or to clean the
premises, it being agreed that Landlord may, in addition, claim those sums
specified in this Section 21.2 and/or those sums reasonably necessary to
compensate Landlord for any loss or damage caused by Tenant’s breach of this
Lease, including any damages Landlord suffers following termination of this
Lease.

 

ARTICLE 22

ROOF RIGHTS

 

Subject
to all governmental laws, rules and regulations and compliance with the
CC&R’s, Tenant and Tenant’s contractors (which shall first be approved by
Landlord but which approval shall not be unreasonably withheld or delayed (as
specified in Section 29.4 below)) shall have the nonexclusive right
and access, without further payment of Rent to Landlord, to install, repair,
replace, remove, operate and maintain satellite dishes and/or microwave dishes,
and other radio transmitting and receiving antennae, together with all
necessary cable, wiring, conduits and

 

36

 

related equipment
(collectively, “Communication Equipment”),
for the purpose of receiving and sending telephone and other communication
signals servicing the business conducted by Tenant from within the Premises, at
a location on the roof of the Building as reasonably requested by Tenant and
reasonably approved by Landlord in writing; provided, however, in no event
shall Tenant be permitted to use more than twenty-five percent (25%) of the
space available for such Communications Equipment on the roof of the Building.
Subject to the applicable restrictions below, as of April 1, 2003, Landlord
hereby approves Tenant’s existing Tenant’s Communication Equipment.  Tenant’s installation and operation of the
Communication Equipment shall be governed by the following terms and
conditions:

 

(i)                                     Tenant’s right to install, replace, repair,
remove, operate and maintain the Communication Equipment shall be subject to
all governmental laws, rules and regulations and Landlord makes no
representations that such laws, rules and regulations permit such installation
and operation. Any such installation shall be under the supervision of
Landlord, by a contractor approved by Landlord and shall be installed in a
lien-free manner in accordance with the provisions of this Lease.

 

(ii)                                  The exact size, quality, materials and
aesthetics of, and any required screening for, the Communication Equipment
shall be subject to Landlord’s prior written consent which shall not be
unreasonably withheld or delayed. In addition, the installation, protection for
roof membrane, specifications for roof penetration and flashing shall be
subject to Landlord’s prior written consent, which shall not be unreasonably
withheld or delayed.

 

(iii)                               All costs of installation, operation and
maintenance of the Communication Equipment and any necessary related equipment
(including, without limitation, costs of obtaining any necessary permits and of
connections to the Building’s electrical system) shall be borne by Tenant. All
such Communication Equipment shall be screened to commercially reasonable
standards and to prevent visual impairment. Tenant shall be responsible for the
replacement, repair and maintenance, at Tenant’s sole cost and expense, of
those areas on the roof of the Building surrounding Tenant’s Communication
Equipment to the extent any such replacement, repair or maintenance is required
by virtue of Tenant’s installation, operation or maintenance of Tenant’s Communication
Equipment, notwithstanding anything to the contrary contained in this Lease.

 

(iv)                              Tenant shall endeavor to use the Communication
Equipment so as not to cause any interference (i) with any other communications
from or to the Project or (ii) to other existing tenants or occupants in the
Project who may use the communication facilities located at the Project and/or
related facilities.

 

(v)                                 Landlord shall not have any obligations with
respect to the Communication Equipment. Landlord makes no representation that
the Communication Equipment will be able to receive or transmit communication
signals without interference or disturbance and Tenant agrees that Landlord
shall not be liable to Tenant therefor.

 

(vi)                              Tenant’s rights with respect to such Communication
Equipment shall be personal to the Original Tenant executing this Lease and may
not be assigned or transferred to, or utilized by, any other person or entity
with the exception of any Permitted Affiliate (“Qualifying Transferee”); provided, however, such Qualifying
Transferee’s rights with respect to Communication Equipment shall be subject to
all the terms and conditions of this Article 22.  Other than Qualifying Transferees, Tenant
shall not be permitted to allow any third party to use any portion of the roof
for Communication Equipment or otherwise without Landlord’s consent, which
shall not be unreasonably withheld.

 

(vii)                           Tenant shall (i) be solely responsible for any
damage caused as a result of the Communication Equipment, (ii) promptly pay any
tax, license or permit fees charged pursuant to any laws or regulations in
connection with the installation, maintenance or use of the Communication
Equipment and comply with all precautions and safeguards recommended by all
governmental authorities, and (iii) pay for all necessary repairs, replacements
to or maintenance of the Communication Equipment and all roof repairs required
by the installation and maintenance of the Communication Equipment.

 

37

 

(viii)                        The Communication Equipment shall remain the
sole property of Tenant. Tenant shall remove the Communication Equipment and
related equipment at Tenant’s sole expense upon the expiration or sooner
termination of this Lease or upon the imposition of any governmental law or
regulation which may require removal, and shall repair the Building upon such
removal to the extent required by such work of removal. If Tenant fails to
remove the Communication Equipment and repair the Building within thirty (30)
days after the expiration or earlier termination of this Lease with respect to
such Building, Landlord may do so at Tenant’s expense.

 

(ix)                                Tenant hereby expressly acknowledges
Landlord’s continued right (i) to itself utilize any rooftop space, and (ii) to
re-sell, license or lease of any rooftop space to an unaffiliated third party;
provided, however, such Landlord (or third-party) use shall not materially
interfere with (or preclude the installation of) Tenant’s Communication
Equipment.

 

ARTICLE 23

 

SIGNAGE

 

23.1                           General. Other than as contemplated by Section 23.2 below, Tenant shall
have no right to install or maintain any Tenant identification signs (or any
other signs, banners or other such displays) in any location on the Building or
in the Project which may be visible from the exterior of the Building, except
as may be approved by Landlord in writing prior to installation (which approval
shall not be unreasonably withheld, and are consistent and compatible with (a)
the restrictions contained in this Article 23, (b) all governmental
regulations and requirements, (c) the Project’s signage criteria, a copy of
which is attached hereto as Exhibit J
(“Signage Criteria”), and (d) the
CC&R’s.

 

23.2                           Tenant’s
Exterior Signage Rights.

 

23.2.1                  Subject to Landlord’s prior written consent
(which consent shall not be unreasonably withheld, conditioned or delayed),
Tenant shall have the right, at Tenant’s sole cost and expense, to install
during the Lease Term one (1) identity sign on the exterior of the Building
(the “Building Top Sign”). Subject
to the terms of Section 23.2.9, below, Landlord hereby approves Tenant’s
current Building Top Sign.

 

23.2.2                  Tenant’s right to the Building Top Sign shall
be personal to the Original Tenant, any Permitted Affiliate and any other assignee
of Tenant’s entire interest in this Lease (collectively, “Permitted Signage Entities”) and may not
be transferred to any other person or entity, except that, subject to the occupancy requirements of Section
23.2.4 below, Tenant may assign Tenant’s rights to the Building Top Sign to
any Transferee occupying at least 65,000 rentable square feet of the Premises
where Landlord reasonably determines that the name of the Transferee is not an
“Objectionable Name,” as that term is defined below.  The term “Objectionable Name”
shall mean any name that (i) relates to an entity that is of a character or
reputation, or is associated with a political orientation or faction, that is
inconsistent with the quality of the Project as a first-class, institutional
quality office project, or which a landlord of a first-class, institutional
quality office project would reasonably find to be offensive, taking into
consideration the level and visibility of the Building Top Sign, or (ii)
conflicts with any exclusive use covenants in other leases of space in the
Project.

 

23.2.3                  To the extent Landlord constructs a monument
sign for the Building, Tenant shall be entitled to use, on a non-exclusive
basis. Tenant’s then-existing pro-rata share of such monument sign’s signage
area to have its professional name and logo displayed.  Notwithstanding the foregoing, Landlord shall have the right,
in Landlord’s sole and absolute discretion, in construct additional monument
signs for the Project and Tenant shall have no rights in connection therewith.

 

23.2.4                  To the extent that (i) Tenant’s (or any other
Permitted Signage Entity’s) occupancy of the Premises falls below 53,000
rentable square feet of the Premises, (ii) Tenant has been in default under the
Lease (beyond any applicable notice and cure periods) more than once during the immediately preceding twelve (12)
months, or (iii) Tenant is in default of the Lease pursuant to the terms and
conditions of Section 19.1.3, above, then upon notice to Tenant,
Tenant’s right to the Building Top Sign shall terminate and Tenant shall remove
such sign in accordance with Section 23.2.8 below.

 

38

 

23.2.5                  Any utility costs for illuminated signs shall
be charged to Tenant pursuant to Article 6.

 

23.2.6                  Notwithstanding the foregoing, Landlord hereby
reserves and retains the right to identify Landlord (or its successor) as owner and/or manager of the Project on monument
signage and at the entry to the Building.

 

23.2.7                  Tenant’s Building Top Sign shall remain on the
west elevation of the Building in such Building Top Sign’s current
location.  The Building Top Sign shall
be maintained, at the sole cost and expense of Tenant, pursuant to a
maintenance program approved by Landlord.

 

23.2.8                  Tenant shall, at Tenant’s sole cost and
expense (subject to Landlord’s supervision, but without charge to Tenant for
such supervision), cause the Building Top Sign to be removed and the Building
to be restored to the condition existing prior to the placement of such Building Top Sign(reasonable wear and
tear excepted) at the expiration or earlier termination of this Lease (or such
earlier time as Tenant elects or is required to remove any such Building Top
Sign).  If Tenant fails to remove Building
Top Sign and restore the Building as provided above within thirty (30) days
following Landlord’s demand therefor, then Landlord may perform such work and
all costs and expenses incurred by Landlord in so performing such work shall be
reimbursed by Tenant to Landlord within fifteen (15) days following Landlord’s
delivery to Tenant of an invoice therefor.

 

23.2.9                  Notwithstanding anything in this Article 23
to the contrary, Landlord shall be permitted to install (or permit to be
installed) one (1) other building top sign on the Building in Landlord’s sole
and absolute discretion.  To the extent
that Tenant’s Building Top Sign should need to be reduced in size in order to
accommodate such other building top sign, Landlord shall have the right, upon prior written notice to Tenant and at
Landlord’s sole cost and expense, to cause Tenant’s Building Top Sign to be
reduced in size (but in no event to less than a total of 100 square feet in
size).

 

23.3                           Tenant’s
Interior Signage Rights. A building directory will be installed by
Landlord, at Landlord’s sole cost and expense, and shall be located in the
lobby of the Building (“Directory Board”).
Tenant shall be entitled to its Building pro-rata share of the space on such
Directory Board. In addition, Tenant shall have the right to use Tenant’s
pro-rata share of the available signage area on the signage wall in the
Building Lobby (the “Signage Wall”).
In no event shall Landlord install (or allow to be installed) any tenant’s
signage on such Signage Wall to the extent such tenant occupies less than
one-half (1/2) of a full-floor of the Building. Tenant acknowledges and agrees
that notwithstanding anything to the contrary in the Existing Lease, that
consistent with the multi-tenant nature of the Building, except to the extent
set forth herein, all Tenant signage currently located in the Building Lobby
shall be removed by Tenant, at Tenant’s sole cost and expense, and any
additional Tenant signage located and or installed in the Building Lobby (“Tenant’s Lobby Signage”) shall be subject
to Landlord’s reasonable approval and the Signage Criteria, and, to the extent
that Tenant’s Lobby Signage should need to be moved and/or reduced in size or
number in order to accommodate the multi-tenant nature of the Building, as
reasonably determined by Landlord, Landlord shall have the right, upon prior
written notice to Tenant and at Landlord’s sole cost and expense, to move
and/or reduced in size or number Tenant’s Lobby Signage; provided however, in
no event shall Landlord install (or permit to be installed) any “eyebrow” signage
other than Tenant’s in the east elevation portion of the Building Lobby. Tenant
shall also have the right to install other signage identifying Tenant within
the Premises, including, but not limited to, one (1) sign identifying Tenant’s
Premises, which signage shall be in compliance with the Signage Criteria.

 

ARTICLE 24

 

COMPLIANCE WITH LAW

 

Tenant shall not do anything or suffer
anything to be done in or about the Premises which will in any way conflict
with any law, statute, ordinance or other governmental rule, regulation or
requirement now in force or which may hereafter be enacted or promulgated. At
its sole cost and expense, Tenant shall promptly comply with all such
governmental measures, other than the making of (i) structural changes to the Building
or (ii) changes to the Building’s life safety system, or (iii) any capital
improvements to the Project the requirement of which is not related to

 

39

 

Tenant’s
particular use of the Premises or Alterations made by Tenant.  Compliance with the items described in
subsections (i), (ii) and (iii) above shall be Landlord’s responsibility and
shall, subject to the terms of Article 4 above, be included in Operating
Expenses. Should any standard or regulation now or hereafter be imposed on
Landlord or Tenant by a state, federal or local governmental body charged with
the establishment, regulation and enforcement of occupational, health or safety
standards for employers, employees, landlords or tenants, then Tenant agrees,
at its sole cost and expense, to comply promptly with such standards or
regulations. The judgment of any court of competent jurisdiction or the
admission of Tenant in any judicial action, regardless of whether Landlord is a
party thereto, that Tenant has violated any of said governmental measures,
shall be conclusive of that fact as between Landlord and Tenant.
Notwithstanding the foregoing or anything to the contrary contained in this
Lease, Landlord hereby warrants to Tenant that the Building shall be in
compliance with the requirements of the Americans With Disabilities Act (“ADA”) 
and California Administrative Code Title 24 (“Title 24”) in effect at the time Landlord obtains the
certificate of occupancy (or its equivalent) for the Base, Shell and Core;
provided, however, that if the requirements of ADA and/or Title 24 change after
the date upon which Landlord obtains the permit for the initial construction of
the Building and Landlord is not required by law to comply with such change,
Landlord shall not be in violation of this provision so long as Landlord not
making such change does not increase the cost of construction of the Tenant
Improvements or delay the construction of the Tenant Improvements.  Landlord will be fully responsible for making
all alterations and repairs to the Building, at Landlord’s cost (which shall
not be included in Operating Expenses) resulting from or  necessitated by the failure of Landlord
or Landlord’s contractors to comply with the foregoing ADA and Title 24 warranty.
The obtaining of a Certificate of Occupancy by either Landlord or Tenant
permitting Tenant occupy the Building shall be prima facia evidence that
Landlord has complied with the foregoing requirements of this Article 24
(“Requirements”) as of the date of
such Certificate of Occupancy, unless refuted or reversed by any applicable
governmental authorities.  However,
notwithstanding anything to the contrary contained in this Article 24.  Tenant, at Tenant’s sole cost and expense,
shall promptly make all repairs, replacements, alterations or improvements
needed to comply with the Requirements to the extent that the Requirements
relate to or are triggered by (a) Tenant’s particular use of the Building for
other than general office use, or (b) any Alterations made to the Building by
Tenant.

 

ARTICLE 25

 

LATE PAYMENTS

 

If
any installment of Rent or any other sum due from Tenant shall not be received
by Landlord or Landlord’s designee within five (5) days after said amount is
due, then Tenant shall pay to Landlord a late charge equal to five percent (5%)
of the overdue amount plus any attorneys’ fees incurred by Landlord by reason
of Tenant’s failure to pay Rent and/or other charges when due hereunder. The
late charge shall be deemed Additional Rent and the right to require it shall
be in addition to all of Landlord’s other rights and remedies hereunder or at
law and shall not be construed as liquidated damages or as limiting Landlord’s
remedies in any manner.  In addition to
the late charge described above, any Rent or other amounts owing hereunder
which are not paid within five (5) days alter the date they are due shall bear
interest from the date when due until paid at a rate per annum (“Interest Rate”) equal to the lesser of (i)
the annual “Bank Prime Loan” rate cited
in the Federal Reserve Statistical Release Publication G.13(415), published on
the first Tuesday of each calendar month (or such other comparable index as
Landlord and Tenant shall reasonably agree upon if such rate ceases to be
published) plus four (4) percentage points, and (ii) the highest rate permitted
by applicable law.

 

ARTICLE 26

 

LANDLORD’S RIGHT TO CURE DEFAULT;

PAYMENTS BY TENANT

 

26.1                           Landlord’s Cure.  All covenants and agreements to be kept or
performed by Tenant under this Lease shall be performed by Tenant at Tenant’s
sole cost and expense and without any reduction of Rent.  If Tenant shall fail to perform any of its
obligations under this Lease, within a reasonable time after such performance
is required by the terms of this Lease, Landlord may, but shall not be
obligated to, after reasonable prior notice to Tenant (except in the case of an
emergency), make any such payment or perform any such act on Tenant’s part
without

 

40

 

waiving
its rights based upon any default of Tenant and without releasing Tenant from
any obligations hereunder.

 

26.2                           Tenant’s
Reimbursement. 
Except as may be specifically provided to the contrary in this Lease,
Tenant shall pay to Landlord, within fifteen (15) days after delivery by
Landlord to Tenant of statements therefor: (i) sums equal to expenditures
reasonably made and obligations incurred by Landlord in connection with the
remedying by Landlord of Tenant’s defaults pursuant to the provisions of Section
26.1;  (ii) sums equal to all
losses, costs, liabilities, damages and expenses referred to in Article 10
of this Lease; and (iii) sums equal to all expenditures reasonably made and
obligations incurred by Landlord in collecting or attempting to collect the
Rent or in enforcing or attempting to enforce any rights of Landlord under this
Lease or pursuant to law, including, without limitation, all legal fees and
other amounts so expended. Tenant’s obligations under this Section 26.2
shall survive the expiration or sooner termination of the Lease Term.

 

ARTICLE 27

 

ENTRY BY LANDLORD

 

Landlord
reserves the right at all reasonable times and upon reasonable notice to Tenant
(except in the case of an emergency) to enter the Premises to (i) inspect them;
(ii) show the Premises to prospective purchasers, mortgagees or tenants (but as
to prospective tenants, only during the last twelve (12) months of the initial
Lease Term), or to the ground or underlying lessors; (iii) post notices of
nonresponsibility; or (iv) alter, improve or repair the Premises or the
Building if necessary to comply with current building codes or other applicable
laws, or for structural alterations, repairs or improvements to the Building.
Tenant shall be offered an opportunity to accompany Landlord in connection with
any such entry and Landlord shall use reasonable efforts to comply with
Tenant’s security procedures in connection with such entry (except that these
restrictions shall not apply in the case of an emergency where Tenant is not
available to accompany Landlord). Notwithstanding anything to the contrary
contained in this Article 27, Landlord may enter the Premises at any
time to (A) perform services required of Landlord; (B) take possession due to
any breach of this Lease in the manner provided herein; and (C) perform any
covenants of Tenant which Tenant fails to perform. Landlord may make any such
entries without the abatement of Rent so long as Tenant can continue to occupy
and use any affected portion of the Premises for the same business purposes as
Tenant had been using such affected portion prior to Landlord’s entry, and
Landlord may take such reasonable steps as required to accomplish the stated
purposes, provided, however, that any such entry shall be accomplished as
expeditiously as reasonably possible and in a manner so as to not materially
and adversely interfere with Tenant’s normal business functions. Tenant hereby
waives any claims for damages or for any injuries or inconvenience to or
interference with Tenant’s business, lost profits, any loss of occupancy or
quiet enjoyment of the Premises, and any other loss occasioned thereby except
any claims arising out of Landlord’s gross negligence or willful misconduct.
For each of the above purposes, Landlord shall at all times have a key with which
to unlock all the doors in the Premises, excluding Tenant’s vaults, safes and
special security areas designated from time to time in advance by Tenant. In an
emergency, Landlord shall have the right to use any means that Landlord may
deem proper to open the doors in and to the Premises. Any entry into the
Premises by Landlord in the manner hereinbefore described shall not be deemed
to be a forcible or unlawful entry into, or a detainer of, the Premises, or an
actual or constructive eviction of Tenant from any portion of the Premises.

 

ARTICLE 28

 

TENANT PARKING

 

Commencing
on the Effective Date, Tenant shall have the right, at no cost to Tenant during
the initial Lease Term to the use of the number of parking permits set forth in
Section 9 of the Summary, which parking permits shall pertain to the
Project parking facilities. Such parking permits shall permit Tenant and its
employees and invitees to use, on a nonexclusive basis, together with other
tenants and their respective employees and invitees, any undesignated,
unreserved spaces available in only those parking areas designated in the
CC&R’s Parking Plan as Section 6 (the “Parking
Structure”) and Section 7 (the surface parking areas between
Buildings 2-5 and the Parking Structure), and no others. Tenant shall be
responsible for the full amount of any taxes imposed by any governmental
authority in connection with the renting of

 

41

 

such parking passes by Tenant
or the use of the Project parking facility by Tenant. Tenant shall abide by the
CC&R’s Parking Plan and all rules and regulations which are prescribed from
time to time for the orderly operation and use of the Project parking facility
(including without limitation those attached hereto as Exhibit D).
provided that Landlord shall not prescribe any other rules and regulations
which unreasonably and adversely affect Tenant’s use of the Project parking
facility. Such rules and regulations shall provide that Tenant shall pay
Landlord’s then current nominal charge for any replacement of any Tenant
parking pass card, if any, which is lost, stolen, damaged or destroyed. Tenant
understands and agrees that, pursuant to the CC&R’s, other owners of
adjacent property to the Project have been or will be granted reciprocal rights
of access and parking over certain portions of the Project as more particularly
set forth in the CC&R’s; provided, however, the use of the parking
structure will be limited to tenants of the Project. Tenant acknowledges and
agrees that Landlord may, without incurring any liability to Tenant and without
any abatement of Rent under this Lease, from time to time, temporarily restrict
access to the Project parking facility for purposes of permitting any such
construction, alteration or improvements so long as Landlord takes all
reasonable measures to minimize any disruption to Tenant’s use or access of the
Project parking facilities for the duration of any such construction,
alteration or improvements. Notwithstanding the foregoing, Landlord may,
without Tenant’s prior, written approval, make such changes to the Project
parking facilities to the extent such changes are mandated by any applicable
governmental law, rule or regulation or any changes to any governmental law,
rule or regulation. If Landlord is forced to relocate Tenant’s parking off site
of the Project parking facility, any such relocation shall be temporary and
Landlord shall use commercially reasonable efforts to cause such relocation to
be within a reasonable walking or shuttle distance of the Project. Landlord may
delegate its responsibilities hereunder to a parking operator in which case
such parking operator shall have all the rights of control attributed hereby to
the Landlord. Tenant’s parking permits under this Article 28 are provided
to Tenant solely for use by Tenant’s own personnel and such privileges may not
be transferred, assigned, subleased or otherwise alienated by Tenant without
Landlord’s prior approval other than on a pro rata basis to Permitted
Affiliates. Tenant’s invitees and guests may use parking spaces in such parking
(limited to the Section 6 and Section 7 parking areas designated in the
CC&R’s Parking Plan) facility which are not allocated or reserved for
Tenant or other occupants or visitors of the Building or Project on a
first-come, first-serve basis. The parking permits allocated to Tenant are not
for long term (i.e., more than ninety-six (96) hours) storage of automobiles,
and are not for short or long term storage of boats, trailers, recreational
vehicles, motorcycles or other vehicles or equipment.

 

ARTICLE 29

 

MISCELLANEOUS PROVISIONS

 

29.1                           Binding Effect.  Subject to all other provisions of this
Lease, each of the provisions of this Lease shall extend to and shall, as the
case may require, bind or inure to the benefit not only of Landlord and of
Tenant, but also of their respective successors or assigns, provided this
clause shall not permit any assignment by Tenant contrary to the provisions of Article
14 of this Lease.

 

29.2                           Modification of Lease/Memorandum of
Lease. Should any current or prospective mortgagee
or ground lessor for the Building or Project require a modification or
modifications of this Lease, which modification or modifications will not cause
an increased cost or expense to Tenant or in any other way change the rights
and obligations of Tenant hereunder (as reasonably determined by Tenant), then
and in such event, Tenant agrees that this Lease may be so modified and agrees
to execute whatever documents are reasonably required therefor and to deliver
the same to Landlord within ten (10) days following a request therefor.  Landlord agrees to pay to Tenant, within,
thirty (30) days after invoice, any reasonable attorneys’ fees incurred by
Tenant in connection with any modification to this Lease executed by Tenant
pursuant to the immediately preceding sentence.  Should Landlord or any such prospective mortgagee or ground
lessor request execution of a short form Memorandum of Lease for recording,
containing, among other customary provisions, the names of the parties, a
description of the Premises and the Lease Term, Tenant agrees to execute and
deliver such short form Memorandum of Lease to Landlord within twenty (20) days
following the request therefor.

 

29.3                           Transfer
of Landlord’s Interest. Tenant acknowledges that Landlord has the
right to transfer all or any portion of its interest in the Project and in this
Lease, and Tenant agrees that in the event of any such transfer, Landlord shall
automatically be released from all liability under

 

42

 

this Lease for obligations
accruing after the date of transfer and Tenant agrees to look solely to such
transferee for the performance of Landlord’s obligations to be performed
hereunder after the date of transfer. Tenant further acknowledges that Landlord
may assign its interest in this Lease to the holder of any mortgage or deed of
trust as additional security, but agrees that an assignment shall not release
Landlord from its obligations hereunder and Tenant shall continue to look to
Landlord for the performance of its obligations hereunder.

 

29.4                           Consents by
the Parties.  The
parties intend that whenever Landlord’s or Tenant’s consent or approval is
expressly or impliedly required by any provision of this Lease, the consent or
approval may not be unreasonably or arbitrarily withheld, conditioned or
delayed; and on the contrary, shall be approved or disapproved by a party
acting in a commercially reasonable manner. 
Notwithstanding anything to the contrary contained in this Lease, except
as expressly provided in Section 14.2 above, an action for declaratory
judgment or specific performance shall be Tenant’s or Landlord’s sole right and
remedy in any dispute as to whether Tenant or Landlord has breached this Section
29.4 concerning a consent or approval.

 

29.5                           Captions.  The captions of articles and sections are
for convenience only and shall not be deemed to limit, construe, affect or
alter the meaning of such articles and sections.

 

29.6                           Time of Essence.
Time is of the essence of this Lease and each of its provisions.

 

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

 

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

 

29.9                           Construction.  Should any provision of this
Lease require interpretation by a court of law, it is agreed that the court
interpreting or construing this Lease shall not apply a presumption that the
terms shall be more strictly construed against one party who by itself or
through its agents prepared this document.

 

29.10                     Entire Agreement.  It is understood and
acknowledged that there are no oral agreements between the parties hereto
affecting this Lease and this Lease supersedes and cancels any and all previous
negotiations, arrangements, brochures, agreements arid understandings, if any,
between the parties hereto or displayed by Landlord to Tenant with respect to
the subject matter thereof, and none thereof shall he used to interpret or
construe this Lease. This Lease and any side letter or separate agreement
executed by Landlord and Tenant in connection with this Lease and dated of even
date herewith, contain all of the terms, covenants, conditions, warranties and
agreements of the parties relating in any manner to the rental, use and
occupancy of the Premises and shall be considered to be the only agreements
between the parties hereto and their representatives and agents. None of the
terms, covenants, conditions or provisions of this Lease can be modified,
deleted or added to except in writing signed by the parties hereto.

 

29.11                     Right to Lease.  Subject to Tenant’s rights hereunder,
Landlord reserves the absolute right to effect such other tenancies in the Project
as Landlord in the exercise of its sole business judgment shall determine to
best promote the interests of the Building or Project, provided that Landlord
shall lease space in the Project only to tenants who are consistent with the
quality of the Project as a first-class, institutional quality office project.
Tenant does not rely on the fact, nor does Landlord represent, that any
specific tenant or type or number of tenants shall, during the Lease Term,
occupy any space in the Building or Project.

 

29.12                     Force Majeure.
Any prevention, delay or stoppage due to strikes, lockouts, labor disputes,
acts of God, inability to obtain services, labor, or materials or reasonable
substitutes therefor, governmental actions, civil commotions, fire or other
casualty, and other causes beyond

 

43

 

the reasonable control of the
party obligated to perform, except with respect to the obligations imposed with
regard  to Rent and other charges
to be paid by Tenant pursuant to this Lease (collectively, the “Force Majeure”), notwithstanding anything
to the contrary contained in this Lease, shall excuse the performance of such
party for a period equal to any such prevention, delay or stoppage and,
therefore, if this Lease specifies a time period for performance of an
obligation of either party, that time period shall be extended by the period of
any delay in such party’s performance caused by a Force Majeure.

 

29.13                     Notices.  All notices, demands, statements,
designations, approvals or other communications (collectively, “Notices”) given or  required to be given by either party to
the other hereunder shall be in writing, shall be sent by (i) United States
certified or registered mail, postage prepaid, return receipt requested, (ii) nationally
recognized and reputable overnight courier (e.g.. Federal Express and Network
Courier), or (iii) delivered personally. Notice shall be sent to Landlord or
Tenant at the following addresses, or to such other firm or to such other place
as Landlord or Tenant may from time to time designate in a Notice to the other
party;

 

	
  if to Landlord:

  	
  Kilroy Realty Company

  
	
   

  	
  12200 W. Olympic Boulevard,
  Suite 200

  
	
   

  	
  Los Angeles, California
  90064

  
	
   

  	
  Attention: Jeffrey Hawken

  
	
   

  	
  Facsimile: (310)481-6540

  
	
   

  	
  Telephone; (310) 481-8400

  
	
   

  	
   

  
	
   

  	
  and

  
	
   

  	
   

  
	
   

  	
  Kilroy
  Realty

  
	
   

  	
  3811 Valley Centre Drive,
  Suite 300

  
	
   

  	
  San Diego, California 92130

  
	
   

  	
  Attention: Asset Manager

  
	
   

  	
  Facsimile: (858) 523-0330

  
	
   

  	
  Telephone; (310) 523-0300

  
	
   

  	
   

  
	
   

  	
  and

  
	
   

  	
   

  
	
   

  	
  Allen, Matkins, Leek,
  Gamble & Mallory

  
	
   

  	
  1901 Avenue of the Stars

  
	
   

  	
  Suite 1800

  
	
   

  	
  Los Angeles, California
  90067

  
	
   

  	
  Attention; Anton N. Natais,
  Esq.

  
	
   

  	
  Facsimile: (310) 788-2410

  
	
   

  	
  Telephone: (310) 788-2400

  
	
   

  	
   

  
	
  if to Tenant:

  	
  Peregrine Systems, Inc.

  
	
   

  	
  3611 Valley Centre Drive

  
	
   

  	
  San Diego, California 92130

  
	
   

  	
  Attention; Director, Global
  Real Estate and Facilities

  
	
   

  	
  Facsimile: (858) 430-3983

  
	
   

  	
  Telephone: (858) 481-5000

  
	
   

  	
   

  
	
   

  	
  and

  
	
   

  	
   

  
	
   

  	
  Peregrine Systems, Inc.

  
	
   

  	
  3611 Valley Centre Drive

  
	
   

  	
  San Diego, California 92130

  
	
   

  	
  Attention; General Counsel

  
	
   

  	
  Facsimile: (858) 480-3989

  
	
   

  	
  Telephone: (858) 481-5000

  
	
   

  	
   

  
	
   

  	
  and

  
	
   

  	
   

  
	
   

  	
  Gray Cary Ware A,
  Freidenrich LLP

  
	
   

  	
  4365 Executive Drive, Suite
  1100

  
	
   

  	
  San Diego, California
  92121-2133

  
	
   

  	
  Attention: Joseph Delaney,
  Esq.

  

 

44

 

	
   

  	
  Facsimile: (858) 677-1477

  
	
   

  	
  Telephone; (858) 677-1400

  
	
   

  	
   

  
	
   

  	
  and

  
	
   

  	
   

  
	
   

  	
  Pachulski, Stang, Ziehl,
  Young, Jones & Weintraub, P.C.

  
	
   

  	
  10100 Santa Monica
  Boulevard, Suite 1100

  
	
   

  	
  Los Angeles, California
  90067

  
	
   

  	
  Attention: Linda Kirios,
  Esq.

  
	
   

  	
   

  	
  Jeremy V, Richards, Esq.

  
	
   

  	
  Facsimile: (310)201-0760

  
	
   

  	
  Telephone: (310) 277-6910

  

 

Any
Notice will be deemed given on the date which is three (3) business days after
the date it is mailed as provided in this Section 29.13, the next
business day if sent by overnight courier, or upon the date personal delivery
is made or refused. If Tenant is notified of the identity and address of the
holder of any deed of trust or ground or underlying lessor, Tenant shall give
to such mortgagee or ground or underlying lessor written notice of any default
by Landlord under the terms of this Lease by registered or certified mail, and
such mortgagee or ground or underlying lessor shall be given the same
opportunity to cure such default as is available to Landlord, prior to Tenant’s
exercising any remedy available to Tenant.

 

29.14                     Joint and
Several.  If
there is more than one Tenant, the obligations imposed upon Tenant under this
Lease shall be joint and several.

 

29.15                     Authority.  Upon the entry of the Bankruptcy Court order
referenced in Section 29-34, below, if Tenant is 11 corporation or partnership,
each individual executing this Lease on behalf of Tenant hereby represents and
warrants that Tenant is a duly formed and existing entity qualified to do
business in California and that Tenant has full right and authority to execute
and deliver this Lease and that each person signing on behalf of Tenant is
authorized to do so.  If only one (1)
officer executes this Lease for Tenant, Tenant agrees to provide to Landlord
evidence reasonably satisfactory to Landlord confirming the authority of the
signing officer of Tenant to bind Tenant to this Lease.

 

29.16       Governing
Law.  This Lease shall be
construed and enforced in accordance with the laws of the State of California.
IN ANY ACTION OR PROCEEDING ARISING HEREFROM, LANDLORD AND TENANT HEREBY
CONSENT TO (l)THE JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF
CALIFORNIA, AND (II) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA
LAW. EACH PARTY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION (FOR
UNLAWFUL DETAINER OR OTHERWISE) BY LANDLORD TO RECOVER POSSESSION OF THE
PREMISES.

 

29.17                     Submission of
Lease. 
Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or an option for lease, and it is not
effective as a lease or otherwise until execution and delivery by both Landlord
and Tenant, and the Effective Date has occurred.

 

29.18                     Brokers.  Landlord and Tenant hereby warrant to each
other that they have had no dealings with any real estate broker or agent in
connection with the negotiation of this Lease and that they know of no real
estate broker or agent who is entitled to a commission in connection with this
Lease. Each party agrees to indemnify and defend the other party against and
hold the other party harmless from any and all claims, demands, losses,
liabilities, lawsuits, judgments, and costs and expenses (including without
limitation reasonable attorneys’ fees) with respect to any leasing commission
or equivalent compensation alleged to be owing on account of any dealings with
any real estate broker or agent occurring by, through, or under the
indemnifying party.

 

29.19                     Independent
Covenants.  This
Lease shall be construed as though the covenants herein between Landlord and
Tenant are independent and not dependent and Tenant hereby expressly waives the
benefit of any statute to the contrary and agrees that if Landlord fails to
perform its obligations set forth herein, Tenant shall not be entitled to make
any repairs or perform any acts hereunder at Landlord’s expense or to any
setoff of the Rent or other amounts

 

45

 

owing hereunder against Landlord except as expressly set forth in this
Lease; provided, however, that the foregoing shall in no way impair the right
of Tenant to commence a separate action against Landlord for any violation by
Landlord of the provisions hereof so long as notice is first given to Landlord.

 

29.20                     Intentionally
Omitted.

 

29.21                     Transportation
Management. 
Tenant shall fully comply with all present or future mandatory programs
imposed by statute or ordinance intended to manage parking, transportation or
traffic in and around the Project or Building, and in connection therewith,
Tenant shall take responsible action for the transportation planning and
management of all employees located at the Premises by working directly with
Landlord, any governmental transportation management organization or any other
transportation-related committees or entities. If any of the foregoing are not imposed
by statute or ordinance, Tenant may participate, in its discretion, on a
voluntary basis. Such programs may include, without limitation: (i)
restrictions on the number of peak-hour vehicle trips generated by Tenant; (ii)
increased vehicle occupancy; (iii) implementation of an in-house ridesharing
program and an employee transportation coordinator; (iv) working with employees
and any Project, Buildings or area-wide ridesharing program manager; (v)
instituting employer-sponsored incentives (financial or in-kind) to encourage
employees to rideshare; and (vi) utilizing flexible work shifts for employees.
Tenant shall be entitled to the benefit of any governmental incentives
(financial or in-kind) available or otherwise offered to induce compliance with
such programs to the extent such incentives arc applicable to Tenant’s
implementation of any such programs.

 

29.22                     No
Discrimination. 
Tenant covenants by and for itself, its heirs, executors, administrators
and assigns, and all persons claiming under or through Tenant, and this Lease
is made and accepted upon and subject to the following Conditions; that there
shall be no discrimination against or segregation of any person or group of
persons, on account of race, color, creed, sex, religion, marital status, ancestry
or national origin in the leasing, subleasing, transferring, use, or enjoyment
of the Premises, nor shall Tenant itself, or any person claiming under or
through Tenant, establish or permit such practice or practices of
discrimination or segregation with reference to the selection, location,
number, use or occupancy, of tenants, lessees, sublessees, subtenants or
vendees in the Premises.

 

29.23                     Hazardous
Material.  For
purposes of this Lease, the following definitions shall apply: “Hazardous Material(s)” shall mean any
solid, liquid or gaseous substance or material that is described or
characterized as a toxic or hazardous substance, waste, material, pollutant,
contaminant or infectious waste, or any matter that in certain specified
quantities would be injurious to the public health or welfare, or words of
similar import, in any of the “Environmental Laws,” as that term is defined
below, or any other words which are intended to define, list or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, toxicity or reproductive toxicity and
includes, without limitation, asbestos, petroleum (including crude oil or any
fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic
gas usable for fuel, or any mixture thereof), petroleum products,
polychlorinated biphenyls, urea formaldehyde, radon gas, nuclear or radioactive
matter, medical waste, soot, vapors, fumes, acids, alkalis, chemicals,
microbia1 matters (such as molds, fungi or other bacterial matters), biological
agents and chemicals which may cause adverse health effects, including but not
limited to, cancers and /or toxicity, “Environmental
Laws” shall mean any and all federal, state, local or
quasi-governmental laws (whether under common law, statute or otherwise),
ordinances, decrees, codes, rulings, awards, rules, regulations or guidance or
policy documents now or hereafter enacted or promulgated and as amended from
time to time, in any way relating to a) the protection of the environment, the
health and safety of persons (including employees), property or the public
welfare from actual or potential release, discharge, escape or emission
(whether past or present) of any Hazardous Materials or b) the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of any
Hazardous Materials.

 

29.2.3.1         Compliance with Environmental Laws. 
Landlord covenants that during the Lease Term, Landlord shall comply
with all Environmental Laws in accordance with, and as required by, the terms
and conditions of Article 24 of this Lease. Tenant represents and
warrants that, except as herein set forth, it will not use, store or dispose of
any Hazardous Materials in or on the Premises. However, notwithstanding the
preceding sentence, Landlord agrees that Tenant may use, store and properly
dispose of commonly available household cleaners and chemicals to

 

46

 

maintain the Premises and
Tenant’s routine office operations (such as printer toner and copier toner)
(hereinafter the “Permitted Chemicals”),
Landlord and Tenant acknowledge that any or all of the Permitted Chemicals
described in this paragraph may constitute Hazardous Materials. However, Tenant
may use, store and dispose of same, provided that in doing so, Tenant fully
complies with all Environmental Laws.

 

23.23.2            Landlord’s Right of Environmental Audit. 
Landlord may, upon reasonable notice to Tenant, be granted access to and
enter the Premises no more than once annually to perform or cause to have
performed an environmental inspection, site assessment or audit. Such
environmental inspector or auditor may be chosen by Landlord, in its sole
discretion, and be performed at Landlord’s sole expense. To the extent that the
report prepared upon such inspection, assessment or audit, indicates the
presence of Hazardous Materials caused by Tenant in violation of Environmental
Laws, or provides recommendations or suggestions to prohibit the release,
discharge, escape or emission of any Hazardous Materials by Tenant at, upon,
under or within the Premises, or to comply with any Environmental Laws, with
which are Tenant’s responsibility to comply, Tenant shall promptly, at Tenant’s
sole expense, comply with such recommendations or suggestions, including, hut
not limited to performing such additional investigative or subsurface
investigations or remediation(s) as recommended by such inspector or auditor.
Notwithstanding the above, if at any time, Landlord has actual notice or
reasonable cause to believe that Tenant has violated, or permitted any
violations of any Environmental Law, then Landlord will be entitled to perform
its environmental inspection, assessment or audit at any time, notwithstanding
the above mentioned annual limitation, and Tenant must reimburse Landlord for
the cost or fees incurred for such as Additional Rent, if it is determined that
Tenant has violated or permitted any violations.

 

29.23.3            Indemnifications. 
Landlord agrees to indemnify, defend, protect and hold harmless the
Tenant Parties from and against any liability, obligation, damage or costs,
including without limitation, attorneys’ fees and costs, resulting directly or
indirectly from any use, presence, removal or disposal of any Hazardous
Materials to the extent such liability, obligation, damage or costs was a
result of actions caused or permitted by Landlord or a Landlord Party.  Tenant agrees to indemnify, defend, protect
and hold harmless the Landlord Parties from and against any liability,
obligation, damage or costs, including without limitation, attorneys’ fees and
costs, resulting directly or indirectly from any use, presence, removal or
disposal of any Hazardous Materials or breach of any provision of this section,
to the extent such liability, obligation, damage or costs was a result of
actions caused or permitted by Tenant or a Tenant Party.

 

29.24                     Development
of the Project.

 

29.24.1            Subdivision.  Tenant acknowledges that the
Project has been, or is in the process of being, subdivided. Landlord reserves
the right to further subdivide all or a portion of the buildings and Common
Areas in the Project. Tenant agrees to execute and deliver, within ten (10)
days after demand by Landlord and in the form reasonably requested by Landlord,
any additional documents needed to conform this Lease to the circumstances
resulting from a subdivision and any all maps in connection therewith provided
Tenant shall not be required to incur any cost, undue burden or diminution of
Tenant’s rights hereunder in connection therewith. Notwithstanding anything to
the contrary set forth in this Lease, the separate ownership of any buildings
and/or Common Areas of the Project by an entity other than Landlord shall not
affect the calculation of Direct Expenses or Tenant’s payment of Tenant’s Share
of Direct Expenses.

 

29.24.2            The Other Improvements.  If
portions of the Project or property adjacent to the Project (collectively, the
“Other Improvements”) arc Owned by an entity other than Landlord, Landlord, at
its option, may enter into an agreement with the owner or owners of any of the
Other Improvements to provide (i) for reciprocal rights of access, use and/or
enjoyment of the Project and the Other Improvements, (ii) for the common
management, operation, maintenance, improvement and/or repair of all or any
portion of the Project and all or any portion of the Other Improvements, (iii)
for the allocation of a portion of the Project Expenses to the Other
Improvements and the allocation of a portion of the operating expenses and
taxes for the Other Improvements to the Project, (iv)for the use or improvement
of the Other Improvements and/or the Project in connection with the
improvement, construction, and/or excavation of the Other Improvements and/or
the Project, and (v) for any other matter which Landlord deems necessary.
Nothing contained herein shall be deemed or construed to limit or

 

47

 

otherwise affect Landlord’s
right to sell all or any portion of the Project or any other of Landlord’s
rights described in this Lease.

 

29.24.3            Construction of Project and Other Improvements. 
Tenant acknowledges that portions of the Project and/or the Other
Improvements may be under construction following Tenant’s occupancy of the Premises,
and that such construction may result in levels of noise, dust, obstruction of
access, etc. which are in excess of that present in a fully constructed
project. Tenant hereby waives any and all rent offsets or claims of
constructive eviction which may arise in connection with such construction,
provided that Landlord shall take all reasonable measures to minimize any
interference or disruption to Tenant’s use of the Premises.

 

29.25                     Landlord
Exculpation.  It
is expressly understood and agreed that notwithstanding anything in this Lease
to the contrary, and notwithstanding any applicable law to the contrary, the
liability of Landlord hereunder (including any successor landlord hereunder)
and any recourse by Tenant against Landlord from and after Landlord’s
Substantial Completion of the Building and delivery of the same to Tenant in
accordance with Landlord’s obligations under this Lease, shall be limited
solely and exclusively to the lesser of (a) the equity interest of Landlord in
the Project or (b) the equity interest Landlord would have in such Project if
such Project were encumbered by third-party debt in an amount equal to eighty
percent (80%) of the value of the Project, except to the extent any such claims
and liability are covered by insurance carried by Landlord. None of Landlord’s
constituent members, owners, partners or subpartners, shall have any liability
far the obligations of Landlord under this Lease, and Tenant, on behalf of
itself and all persons claiming by, through or under Tenant, hereby expressly
waives and releases such members, owners, partners and subpartners from any and
all liability.

 

29.26                     Waiver of
Redemption by Tenant. 
Tenant hereby waives for Tenant and for all those claiming under Tenant,
all rights now or hereafter existing to redeem by order or judgment of any
court or by any legal process or writ, Tenant’s right of occupancy of the
Premises after any termination of this Lease.

 

29.27                     Attorneys’ Fees.  If cither party commences litigation against
the other for the specific performance of this Lease, for damages for the
breach hereof or otherwise for enforcement of any remedy hereunder, the
prevailing party shall be entitled to recover from the other party such costs
and reasonable attorneys’ fees as may have been incurred, including any and all
costs incurred in enforcing, perfecting and executing such judgment.

 

29.28                     Communications
and Computer Lines. 
Tenant may install, maintain, replace, remove or use any communications
or computer wires and cables (collectively, the “Lines”) at underground locations in the Project in or serving
the Premises, provided that (i) Tenant shall use an experienced and qualified
contractor approved in writing by Landlord (which approval shall not be
unreasonably withheld or delayed), and comply with all of the other provisions
of Articles 7 and 8 of this Lease, (ii) an acceptable number of
conduits for additional Lines shall be maintained for existing and future
occupants of the Project, as determined in Landlord’s reasonable opinion, (iii)
conduits for the Lines therefor (including riser cables unless originally
installed by Landlord) shall be appropriately insulated to prevent excessive
electromagnetic fields or radiation, and shall be surrounded by a protective
conduit reasonably acceptable to Landlord, (iv) any new or existing Lines
servicing the Premises shall comply with all applicable governmental laws and
regulations, and (v) Tenant shall pay all costs in connection therewith (except
that Tenant shall have no obligation to remove any Lines between the Buildings
upon the expiration or earlier termination of this Lease). However, Landlord
reserves the right to require that Tenant remove any Lines located in or
serving the Premises which are installed in violation of these provisions, or which
are at any time in violation of any laws or represent a dangerous or
potentially dangerous condition.

 

29.29                     No Air Rights.
No rights to any view or to light or air over any property, whether belonging
to Landlord or any other person, are granted to Tenant by this Lease. If at any
time any windows of the Premises are temporarily darkened or the light or view
therefrom is obstructed by reason of any repairs, improvements, maintenance or
cleaning in or about the Project, the same shall be without liability to
Landlord and without any reduction or diminution of Tenant’s obligations under
this Lease.

 

48

 

29.30                     Counterparts.
This Lease may be executed in counterparts with the same effect as if both
parties hereto had executed the same document. 
Both counterparts shall be construed together and shall constitute a
single lease.

 

29.31                     Confidentiality. Except as expressly provided herein below, Landlord and Tenant
acknowledge that the content of this Lease and any related documents are
confidential information. Landlord and Tenant shall keep such confidential
information strictly confidential and shall not disclose such confidential
information to any person or entity other than (i) their financial, legal, and
space planning consultants, (ii) as may be required by any public reporting
requirements applicable to Landlord or Tenant or any of their respective
affiliates, (iii) in connection with press releases, analyst calls and similar
matters related to the announcement of quarterly or annual operating results
for Landlord or their respective affiliates, and (iv) as may be required by any
applicable governmental law, rule or regulation. Notwithstanding the foregoing,
the parties hereto acknowledge and agree that the document comprising this
Lease shall be a public record attached to Tenant’s Bankruptcy Court filings,
and in connection therewith, shall not be confidential; provided, however, any
modifications or amendments to this Lease entered into after the Effective Date
and which are not required to be made part of the public record by the
Bankruptcy Court shall be kept confidential as set forth in this Section
29.31.

 

29.32                     Disclosures
and Mutual Release. 
Tenant acknowledges that Landlord has advised Tenant (i) that an
earthquake fault may be located under a portion of the Project, and (ii) of the
proximity of the Project to the Miramar military air base’s vectored departure
corridors and the potential overflights and associated noise generated by
various military aircraft in the area. Landlord and Tenant hereby mutually
release, acquit and discharge each other from any and all Claims which either
party may have against the other party arising out of or in connection with (a)
any earthquake affecting all or any portion of the Project (subject to
Landlord’s and Tenant’s rights and obligations under Article 11 above),
and (b) any such overflights and associated noise.

 

29.33                     Central
Security Office. 
Landlord and Tenant hereby acknowledge that Building 2 contains, on the
ground floor, an approximately 145 square foot room commonly known as the “Central Security Office,” which operates
as the centralized point from which the coordinated security systems of the
Project are operated. Landlord and Tenant acknowledge and agree that prior to
the Effective Date of this Lease, auth Central Security Office formed a portion
of Tenant’s premises under the terms of the Existing Lease, and that such
Central Security Office was licensed by Landlord from Tenant pursuant to the
terms of that certain Central Security Office License Agreement, dated as of
January 17, 2003, by and between Landlord and Tenant (the “License Agreement”).  Effective as of the Effective Date, the
License Agreement shall terminate and be of no further force or effect, and,
except as set forth in this Section 29.33, Landlord and Tenant shall be
fully and unconditionally released and discharged from their respective
obligations arising from or connected with the License Agreement.  In connection therewith, Landlord and Tenant
further acknowledge and agree that as of the Effective Date of this Lease, the
Central Security Office shall deemed to be Building Common Area; provided,
however. Tenant shall retain “Access Rights” to such Central Security Office.
For purposes of this Lease, the term “Access
Rights” shall mean the right of Tenant, its employees and agents, to
be provided with occasional, limited and supervised access to, and usage of,
those certain security system elements and/or components which are located within
the Central Security Office and which affect or are related to the internal
security requirements of the Premises; provided, however, that such access
and/or usage rights shall only apply to the extent the same do not materially
interfere (in Landlord’s reasonable judgment) with the security services then
being provided to other tenants of the Building or Project (as opposed to
Tenant). In connection therewith, Landlord and Tenant agree to execute (and
deliver to Landlord within three (3) business days following the Effective
Date) a Bill of Sale in the form set forth on Exhibit K attached hereto whereby those certain items of
personal property owned by Tenant and located in, or used in connection with,
the Central Security Office (collectively, the “Personal Property”) shall be transferred to Landlord, except
for the Removable Property.

 

29.34                     Effectiveness.  The terms and conditions of this Lease, and
the obligations of the parties hereunder, are expressly conditioned upon the
entry by the Bankruptcy Court of a final, immediately effective and
nonappealabte order (the “Court Order”)
that: (i) expressly approves this Lease; (ii) assumes the Existing Lease, as
amended and restated by this Lease; (iii) authorizes and directs Tenant to
enter into that certain Third Amendment to Office Lease (Building 5), dated as
of April 1, 2003, by and between Landlord and Tenant (the “Third Amendment”); (iv) rejects the
Building 5 Lease effective as of August 28, 2003 (provided that

 

49

 

Tenant shall be permitted to
reject such Building 5 Lease prior to August 28, 2003, by providing written
notice thereof to the Bankruptcy Court and Landlord, but in no event shall
Tenant be permitted to reject such Building 5 Lease any earlier than My 31,
2003), except to the extent any space within Building 5 has previously been
surrendered to Landlord pursuant to the terms of the Third Amendment; (v)
approves the final allowance of the Landlord Claims in accordance with Articlc.30,
below; and (vi) grants; Landlord limited relief from the automatic stay to
exercise its rights under the Third Amendment. In the event that such Court
Order has not been obtained on or before December 31, 2003 (the “Outside Approval Date”), this Lease shall
be null and void and of no further force or effect.

 

29.35                     Bill
of Sale for FF&E on the Fourth (4th)  and Fifth
(5th) floors of Building.  Landlord and Tenant
acknowledge that Tenant owns certain items of fixtures, furnishings and
equipment currently located on or used in connection with the fourth (4th)
and fifth (5th) floors of the Building (the “FF&E”). Tenant has agreed to transfer
such FF&E to Landlord, and therefore Tenant acknowledges and agrees that in
addition to the Bill of Sale regarding personal property in the Central
Security Office, us set forth in Section 29.33, above, Tenant shall
execute and deliver to Landlord within three (3) business days following the
Effective Date (or, to the extent there is a Permitted Holdover Period in
accordance with the terms and conditions of Section 1.3, above, within
three (3) business days following the expiration of such Permitted Holdover
Period) a Bill of Sale for such FF&E in the form attached hereto as Exhibit N.

 

ARTICLE 30

 

SETTLEMENT OF LANDLORD CLAIMS

 

30.1                           Landlord’s
Allowed Claim.  Upon
the entry of the Court Order, the Landlord Claims shall be deemed to be a fully
and finally allowed general unsecured claim against Tenant and its bankruptcy
estate in the amount of aggregate $30,467,462.00, which claim shall not be
subject to any defense or right of offset by Tenant, its bankruptcy estate, or
any other party.

 

30.2                           Release of
Landlord. 
Tenant hereby releases, acquits, and forever discharges, both for
itself, its bankruptcy estate and its successors and assigns, Landlord and its
subsidiaries and affiliates, and their present and former agents, successors,
employees, and attorneys from any and all claims, defenses, rights of offset,
or causes of action of any nature whatsoever, whether in contract or in tort, at
law or in equity, known or unknown, including any cause of action or rights
under section 544, 545, 546, 547, 548, 549, 550 and 502(d) of the Bankruptcy
Code, and al1 reasonable attorneys fees and cost incurred relating thereto,
relating to, pertaining to or
affecting the Landlord Claims or constituting an offset to in any way reduce
the Landlord Claims; provided, however, that nothing herein shall be deemed to
release any covenants, obligations, or agreements undertaken under or pursuant
to this Agreement.

 

30.3                           Waiver of 1542.  To the extent released pursuant to the terms
of Section 30.2, above. Tenant expressly waives the provisions of
California Civil Code Section 1542, which provides;

 

	
  “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,”

  

 

Tenant has received the advice of legal counsel with respect to the
aforementioned waiver and understands the terms thereof.

 

ARTICLE 31

 

LIQUIDATED DAMAGES

 

NOTWITHSTANDING
ANYTHING TO THE CONTRARY CONTAINED IN SECTION 19.2.1 (i)-(v) OF THIS
LEASE, AS THE SAME RELATES TO THE CALCULATION OF LEASE TERMINATION DAMAGES
PURSUANT TO CALIFORNIA CIVIL CODE SECTION 1951.2, TO THE EXTENT THAT THIS LEASE
IS TERMINATED

 

50

 

AS A RESULT OF A TENANT
DEFAULT UNDER THE TERMS OF THIS LEASE OCCURRING ON OR BEFORE THE SECOND (2ND)  ANNIVERSARY OF THE EFFECTIVE DATE, THEN
TENANT SHALL BE OBLIGATED TO PAY LANDLORD AN AMOUNT EQUAL TO NINE MILLION ONE
HUNDRED FORTY THOUSAND TWO HUNDRED THIRTY-NINE AND NO/100 DOLLARS
(59,140,239.00) AS LIQUIDATED DAMAGES FOR SUCH 1951.2 DAMAGE AMOUNT, LANDLORD
AND TENANT HEREBY ACKNOWLEDGE AND AGREE THAT DUE TO THE NATURE OF THE LANDLORD
CLAIMS AND THE PROPOSED SETTLEMENT OF SUCH CLAIMS AS PROVIDED FOR IN THIS LEASE
(SPECIFICALLY INCLUDING, BUT NOT LIMITED TO, ARTICLE 30 HEREOF), IT WOULD BE
IMPRACTICABLE AND EXTREMELY DIFFICULT TO ASCERTAIN (AND CALCULATE PURSUANT TO SECTION
19.2.1 OF THIS LEASE, ABOVE) THE ACTUAL DAMAGES SUFFERED BY LANDLORD AS A
RESULT OF SUCH TERMINATION OF THIS LEASE, AND THAT UNDER THE CIRCUMSTANCES
EXISTING AS OF THE DATE OF THIS LEASE, THE LIQUIDATED DAMAGES PROVIDED FOR IN
THIS ARTICLE 31 REPRESENT A REASONABLE ESTIMATE OF THE DAMAGES WHICH
LANDLORD WILL INCUR AS A RESULT OF SUCH TERMINATION OF THIS LEASE AND THE
RECEIPT OF SUCH LIQUIDATED DAMAGES SHALL BE LANDLORD’S SOLE REMEDY WITH REGARD
TO LEASE TERMINATION DAMAGES, PROVIDED, HOWEVER, THAT THIS ARTICLE 31
SHALL NOT LIMIT LANDLORD’S RIGHTS TO RECEIVE REIMBURSEMENT FOR ATTORNEYS’ FEES,
NOR WAIVE OR AFFECT LANDLORD’S RIGHTS AND TENANT’S INDEMNITY OBLIGATIONS UNDER
OTHER SECTIONS OF THIS LEASE (SPECIFICALLY INCLUDING. BUT NOT LIMITED TO,
TENANT’S RESTORATION, INDEMNIFICATION AND REIMBURSEMENT OBLIGATIONS PURSUANT TO
ARTICLE 8 AND SECTIONS 10.1 AND 26.2 OF THIS LEASE,
RESPECTIVELY, WHICH SHALL, FOR PURPOSES OF THIS ARTICLE 31. BE DEEMED TO
BE SEPARATE AND APART FROM TERMINATION DAMAGES). THE PARTIES ACKNOWLEDGE THAT
THE PAYMENT OF SUCH LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR
PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTION 3275 OR 3369, BUT
IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO LANDLORD PURSUANT TO CALIFORNIA
CIVIL CODE SECTION 1671. THE PARTIES HAVE SET FORTH THEIR INITIALS BELOW TO
INDICATE THEIR AGREEMENT WITH THE LIQUIDATED DAMAGES PROVISION CONTAINED IN
THIS ARTICLE 31.

 

	
  TENANTS INITIALS:

  	
  [ILLEGIBLE]

  	
   

  
	
   

  	
   

  	
   

  
	
  LANDLORD’S INITIALS:

  	
  [ILLEGIBLE]

  	
   

  

 

51

 

IN
WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the
day and date first above written to be effective on the Effective Date.

 

	
  “LANDLORD”:

  	
  KILROY REALTY, L.P.,

  
	
   

  	
  a Delaware limited
  partnership

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Kilroy Realty Corporation,

  
	
   

  	
   

  	
  a Maryland corporation

  
	
   

  	
   

  	
  General Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By: 

  	
  /s/ Steve Scott

  
	
   

  	
   

  	
  Name:

  	
  Steve Scott

  
	
   

  	
   

  	
   

  	
  Its:

  	
  Senior Vice President

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Jeffrey C. Hawken

  
	
   

  	
   

  	
  Name:

  	
  JEFFREY C. HAWKEN

  
	
   

  	
   

  	
   

  	
  Its:

  	
  EXECUTIVE
  VICE PRESIDENT

  CHIEF OPERATING OFFICER

  
	
   

  	
   

  
	
  “TENANT”:

  	
  PEREGRINE SYSTEMS, INC.,

  
	
   

  	
  a Delaware corporation

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Gary G. Greenfield

  
	
   

  	
   

  	
  CEO

  
	
   

  	
   

  	
  [Print Name and Office of
  Person Signing]

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Ken Sexton

  
	
   

  	
   

  	
  CFO

  
	
   

  	
   

  	
  [Print Name and Office of
  Person Signing]

  
											

 

52

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