BEA SYSTEMS INC, 10KSB, 1998-04-30

BEA SYSTEMS INC
10KSB, 1998-04-30
COMPUTER PROGRAMMING SERVICES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-KSB

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[X]ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934

FOR THE FISCAL YEAR ENDED JANUARY 31, 1998

[_]TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

COMMISSION FILE NUMBER: 0-22369

BEA SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

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DELAWARE 77-0394711
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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385 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)

(408) 743-4000
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE

SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days. Yes [X] No [_]

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [_]

State issuer's revenues for its most recent fiscal year. $157,189,000

The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common
equity was sold on March 23, 1998 as reported on the Nasdaq National Market,
was approximately $621,700,000. Shares of common equity held by each officer
and director have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status does not reflect a
determination that certain persons are affiliates for any other purposes.

As of March 23, 1998, there were approximately 65,300,000 shares of the
Registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be issued in
connection with the registrant's Annual Meeting of Stockholders to be held on
June 25, 1998, are incorporated by reference into Part III.

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BEA SYSTEMS, INC.
FORM 10-KSB

TABLE OF CONTENTS

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PART I.
Item 1. Description of Business....................................... 1
Item 2. Description of Property....................................... 8
Item 3. Legal Proceedings............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders........... 8
PART II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 9
Item 6. Management's Discussion and Analysis or Plan of Operation..... 10
Item 7. Financial Statements.......................................... 22
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 46
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act............. 46
Item 10. Executive Compensation........................................ 46
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................... 46
Item 12. Certain Relationships and Related Transactions................ 46
Item 13. Exhibits and Reports on Form 8-K.............................. 47
Signatures............................................................... 49
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PART I

FORWARD-LOOKING INFORMATION

The filing contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding
beliefs, plans, expectations or intentions regarding the future. These
forward-looking statements involve risks and uncertainties and actual results
could differ materially from those discussed in the forward-looking
statements. Factors that could cause actual results to differ materially
include risks and uncertainties including, but not limited to, those described
under the heading "Management's Discussion and Analysis or Plan of Operation-
Factors that May Impact Future Operating Results." All forward-looking
statements included and factors that could cause results of operations to
differ are made as of the date hereof, based on information available to BEA
as of the date hereof, and BEA assumes no obligation to update any forward-
looking statement.

ITEM 1. DESCRIPTION OF BUSINESS

BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of software
which provides cross-platform middleware solutions for enterprise business
applications. The Company's products and services help enable mission-
critical, distributed applications to work seamlessly in client/server,
Internet and legacy environments. BEA provides transactional, messaging, and
distributed object-based software for developing and deploying these
enterprise applications. In addition to its product line, BEA provides
enterprise solutions through its extensive partner network, and a wide range
of related services including consulting, training and support.

BEA's products are marketed and sold worldwide through a network of sales
offices and distribution partners. The Company's products have been adopted in
a wide variety of industries, including banking and finance, manufacturing,
retail, telecommunications and transportation.

INDUSTRY BACKGROUND

Over the past decade, the information systems of many large organizations
have evolved from traditional mainframe-based systems to distributed computing
environments. This evolution is driven by the benefits offered by distributed
computing, including lower incremental technology costs, faster application
development and deployment, increased flexibility, and improved access to
business information. Despite these benefits, large-scale mission-critical
applications that enable and support fundamental business processes, such as
airline reservations, credit card processing and customer billing and support
systems, have largely remained in mainframe environments. For several decades,
the high levels of reliability, scalability, security, manageability and
control required for these complex, transaction-intensive systems have been
provided by mainframe middleware software. These mainframe environments,
however, suffer from several shortcomings, including inflexibility, lengthy
development and maintenance cycles and limited, character-based user
interfaces. Increasingly, these shortcomings are forcing many organizations to
seek out technologies that will enable them to overcome the limitations of
distributed computing for mission-critical applications while providing the
robust computing infrastructure previously unavailable outside the mainframe
environment.

PRODUCTS AND SERVICES

The BEA Enterprise Transaction Framework is an integrated middleware
software platform for building, deploying and managing distributed mission-
critical applications. The BEA Enterprise Transaction Framework provides the
scalability, manageability, platform independence, interoperability,
integrity, reliability and security requirements of complex, large-scale,
transaction-intensive mission-critical applications in a distributed computing
environment. The core of the BEA Enterprise Transaction Framework is BEA
TUXEDO, a market-proven and time-tested technology first developed at AT&T
Bell Labs in 1984. The Company took over development, sales and support of BEA
TUXEDO from Novell, Inc. ("Novell") in February 1996 and has subsequently
shipped BEA TUXEDO Release 6.3 and Release 6.4 as well as several products
that work in

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conjunction with BEA TUXEDO such as BEA Connect, BEA Jolt, BEA Manager and BEA
Builder. In March 1997, the Company acquired exclusive rights to BEA MessageQ,
BEA ObjectBroker and other related products from Digital Equipment Corporation
("Digital").

BEA TUXEDO

BEA TUXEDO is a robust platform for developing, deploying and managing
mission-critical applications in distributed computing environments. BEA
TUXEDO provides distributed transaction processing and application messaging
capabilities and the full complement of services necessary to build and run
mission-critical applications. It enables developers to create applications
that interoperate across multiple hardware platforms, databases and operating
systems.

BEA TUXEDO provides mainframe-like performance for distributed mission-
critical applications. It allows these applications to accommodate thousands
of worldwide users, high-transaction throughput, multiple concurrent database
access and large volumes of data, while maintaining short response times, high
data integrity and security and 7x24x365 system availability. At the same
time, BEA TUXEDO enables developers and systems managers to take advantage of
the benefits offered by distributed computing environments, such as lower
incremental technology costs, increased flexibility, faster application
development and deployment and improved access to business information.

BEA MessageQ

BEA MessageQ enables messages to be sent from one application to another
through an advanced queued message bus. Queued messaging allows applications
to communicate without interruption, either synchronously or asynchronously,
through queues or publish-and-subscribe mechanisms. BEA MessageQ ensures that
messages on incoming and outgoing queues are recognized and executed only when
the receiving or sending system is ready for processing. The communicating
programs can be on the same computer or on many different computers in an
enterprise-wide network.

BEA ObjectBroker

BEA ObjectBroker is a CORBA-compliant Object Request Broker ("ORB") that
simplifies software integration and the development of new, object-oriented
distributed solutions. Throughout its development and ongoing enhancements,
BEA ObjectBroker has focused on high performance and enterprise-level
robustness. By using BEA ObjectBroker in conjunction with additional
separately released features, developers can integrate object-oriented
enterprise applications with desktop and workgroup applications running on
Microsoft Windows NT and Windows 95.

BEA Jolt

BEA Jolt extends the capabilities of BEA TUXEDO to the Internet and
intranets, making mission-critical applications immediately accessible through
these media without the need for any additional application programming. It
enables Internet and intranet application developers to take full advantage of
the benefits offered by the BEA Enterprise Transaction Framework and, the
Company believes, provides the means for resolving many of the technical
issues hindering the development of electronic commerce solutions on the
Internet. BEA Jolt ensures that transaction integrity is maintained,
notwithstanding the Internet's inherent inability to retain the current state
of any transaction or the frequently unreliable connections encountered by
users. BEA Jolt employs a Java-based interface that allows programmers to
execute service requests from any Java-enabled web browser without requiring
any knowledge of detailed transaction semantics. BEA Jolt also ensures an
application's security, since neither transactional programming nor semantics
are accessible from the Internet or intranets.

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BEA TUXEDO Application Personality (TAP)

BEA TUXEDO Application Personality (TAP) provides mainframe-to-UNIX and
mainframe-to-NT application portability, compatibility and connectivity for
IBM Corporation's ("IBM") Customer Information and Control Systems ("CICS")
based transaction processing. With BEA TAP, organizations can extend the
useful lives of CICS applications, either by seamlessly sharing the
transaction processing load with UNIX- or NT-based hardware or by migrating
applications and data from the mainframe to a UNIX- or NT-based distributed
computing environment. BEA TAP preserves organizations' investments in
CICS/COBOL programs and programmers, while enabling them to take advantage of
UNIX- and NT-based technologies. Programmers can continue to develop and
deploy mission-critical applications on the mainframe using CICS/COBOL and to
rely upon BEA TAP to connect or migrate those applications to UNIX and NT
whenever necessary.

BEA Connect

BEA Connect is a family of connectivity products that allow applications to
extend across heterogeneous hardware and software platforms. Designed to work
in concert with all other BEA products, BEA Connect assures ready, transparent
access to critical information across the network with a single, standard
programming interface. BEA Connect supports a variety of mainframe-based and
distributed transactional technologies, including CICS and IBM Information
Management Systems ("IMS"), by using standard network protocols such as
TCP/IP, LU6.2/SNA or OSI TP. Interfaces can also be built for connectivity
with specific packaged software applications, such as SAP's R/3. BEA Connect
also enables customers to write mission-critical applications that access
remote application services on mainframes or other hosts via industry-standard
communications mechanisms.

BEA Builder for TUXEDO

BEA Builder for TUXEDO enables programmers to use familiar graphical
development environments, such as Visual Basic, Visual C++ and PowerBuilder,
in the development of BEA TUXEDO-based applications. BEA Builder incorporates
application frameworks and code generators that enhance programmers'
productivity, and provides pre-programmed wizards to automate the
configuration and deployment of an application. By leveraging developers'
familiarity with popular development environments and adding the capabilities
noted above, BEA Builder reduces the training and development needed to design
and deploy distributed mission-critical applications using BEA TUXEDO.

BEA Manager

The BEA Manager family of products extends the native management
capabilities of BEA TUXEDO by enabling it to integrate with, and take
advantage of the capabilities of, various third-party management frameworks,
including IBM's NetView, Hewlett-Packard Corporation's OpenView, Computer
Associates' CA-UNICENTER, and Sun Microsystems, Inc.'s Solstice Enterprise
Manager. BEA Manager adds application level instrumentation for performance
measurement and centralized message logging, which together provide increased
detection and isolation capabilities for application faults. BEA Manager also
provides a set of customizable intelligent agents that reduce the human
involvement required to handle routine maintenance and fault correction.

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Consulting and Support Services

The Company provides a wide range of consulting, educational and customer
support services to customers developing, deploying and managing mission-
critical applications using BEA products. The Company believes that its
ability to provide quality support services to customers is critical to its
future success and is a key strategic advantage. The Company's service
offerings include:

Consulting services. BEA offers a variety of both packaged and custom
consulting services to help customers meet a wide range of objectives
throughout the project life cycle. These consulting services include
architectural assessment, prototyping, legacy migration, application
integration, performance evaluation and tuning, and data conversions. The
Company frequently works closely with third party consulting firms and
systems integrators who provide customers with reengineering,
customization, project management and implementation services.

Educational services. The Company offers education and training services
to assist customers in building competency in its middleware products.
These programs range from introductory seminars to immersion training and
certification programs. Educational services are offered at customer sites
or BEA designated locations and are led by on-staff instructors or
consultants.

Maintenance and support services. The Company provides support offerings
including 24-hour hot-line telephone support, staffed with professionals
experienced in the use of the Company's software products. The Company
supports worldwide operations with call center hubs in Sunnyvale,
California; Paris, France; Yokohama, Japan and Brisbane, Australia.

PRODUCT DEVELOPMENT

BEA's total research and development expenses were approximately $27.0
million and $18.2 million in fiscal years 1998 and 1997, respectively. The
Company believes that its success will depend largely upon its ability to
enhance existing products and develop or acquire new products that meet the
needs of the rapidly evolving middleware marketplace and increasingly
sophisticated and demanding customers. The Company intends to continue to
devote substantial resources to expanding its product offerings, introducing
new products and services, and offering higher levels of integration among its
products.

The Company has made substantial investments in technology acquisitions and
product development. BEA TUXEDO was originally developed by AT&T Bell Labs,
and had been revised by UNIX System Labs and Novell before BEA became the
developer of the product in February 1996. The Company acquired BEA
ObjectBroker and BEA MessageQ from Digital as key components of BEA's on-going
efforts to enhance its middleware product offerings. Important additional
products and technologies for the BEA Enterprise Transaction Framework were
gained through many of the Company's acquisitions. The Company intends to
continue to consider the licensing and acquisition of complementary software
technologies and businesses where appropriate.

The Company's software development activities are conducted in various sites
throughout the United States including Sunnyvale, California; Dallas, Texas;
Liberty Corners, New Jersey; and Nashua, New Hampshire. As of January 31,
1998, the Company had a research and software development staff of
approximately 200 professionals, which includes the original four architects
and many of the original developers of TUXEDO. The Company intends to continue
to recruit and hire experienced software developers. See "Management's
Discussion and Analysis or Plan of Operation--Factors That May Impact Future
Operating Results--Rapid Technology Change; Dependence on New Products and
Product Enhancements."

MARKETING AND SALES

The Company's sales strategy is to pursue opportunities worldwide within
large organizations through its direct sales, professional services and
technical support organizations, complemented by indirect sales channels such
as hardware OEMs, packaged application software developers, systems
integrators and independent

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consultants, software tool vendors and distributors. The Company currently
intends to continue to add to its direct sales, support and professional
services organizations in all major worldwide markets.

Direct Sales Organization

BEA markets its software and services primarily through its direct sales
organization. As of January 31, 1998, the Company's direct sales force,
including technical sales engineers, totaled approximately 230 professionals
in 50 offices in 24 countries. Field sales representatives are assigned quotas
and compensated for all Company revenues, both direct and indirect, resulting
from their assigned territory. Leads are generally qualified by a third party
and then passed through the field sales organization.

The Company typically uses a consultative, solution-oriented sales model
that entails the collaboration of technical and sales personnel to formulate
proposals to address specific customer requirements. Because the Company's
products are typically used to integrate applications that are critical to a
customer's business, the Company focuses its initial sales efforts on senior
information technology department personnel who are responsible for such
applications. Subsequent efforts often include other senior members of a
customer's executive management team.

Product Sales and Implementation Cycle

The license of the Company's software products is often an enterprise-wide
decision and requires BEA to engage in a lengthy sales cycle to provide a
significant level of education to prospective customers regarding the use and
benefits of the Company's products. The Company's sales process consists of
several phases: lead generation, initial contact, lead qualification, needs
assessment, proposal generation and contract negotiation. Following the
signing of a license contract for BEA products, a customer's implementation
consists of a pre-deployment and a deployment phase. While the sales and
implementation cycle varies substantially from customer to customer, for
initial sales it has ranged from 18 to 24 months from the initial contact to
the completion of the deployment phase. In many cases, a customer begins a
second development project using BEA products, often with substantially
shortened development and deployment time frames. Additional development
projects by a particular customer are often implemented in progressively
abbreviated time frames. See "Management's Discussion and Analysis or Plan of
Operations - Factors That May Impact Future Operating Results - Lengthy Sales
Cycle."

Strategic Relations

An important element of the Company's sales and marketing strategy is to
expand its relationships with third parties and strategic partners to increase
the market awareness, demand and acceptance of BEA and its products. The
Company often benefits from third-party selling assistance and believes that,
in a number of instances, its relationships with strategic partners have
substantially shortened the Company's sales cycle. Partners have often
generated and qualified sales leads, made initial customer contacts, assessed
needs and recommended contact with the Company prior to BEA's introduction.
Strategic partners can provide customers with additional resources and
expertise, especially in vertical markets, to help meet their system
application development requirements. Types of strategic partners include:

System platform companies. BEA Systems' partners often act as resellers
of BEA TUXEDO, either under the BEA TUXEDO name or integrated with their
own software products, or recommend BEA TUXEDO to their customers and
prospects who are planning to implement high-end, mission-critical
applications on their hardware platform. BEA has relationships with
hardware manufacturers including Digital, Fujitsu Limited, Hewlett-Packard
Corporation, IBM, NEC Corporation, Pyramid Technology Corporation, Sequent
Computer Systems, Inc., Siemens-Nixdorf Informations Systeme A.G., Sun
Microsystems, Inc., Unisys Corporation and Tandem Computers, Inc.

Packaged application software developers. BEA licenses its software to
packaged application software vendors. These vendors embed BEA software as
a middleware infrastructure for the applications

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they supply, giving these applications increased distribution, scalability
and portability across all platforms on which BEA TUXEDO runs. Customers
can also easily integrate custom applications built using BEA TUXEDO into
these existing packaged applications. Vendors that embed BEA TUXEDO
software in their packaged applications include 3M Health Information
Systems, Alltel Corp., CableData, Inc., Lucent Technologies, Inc., Cycare
Systems, Inc., Filoli Information Systems, Mincom, Inc. and PeopleSoft,
Inc.

Systems integrators and independent consultants. Systems integrators
often refer their customers to BEA and may utilize BEA as a subcontractor
in some situations. BEA TUXEDO has been designated by Electronic Data
Systems Corporation ("EDS") as a certified framework product, and BEA seeks
similar certification from other systems integrators. BEA also works
cooperatively with independent consulting organizations, often being
referred to prospective customers by professional services organizations
with expertise in high-end transactional applications. In addition to EDS,
BEA has relationships with systems integrators such as Andersen Consulting,
Oracle Corporation ("Oracle") and Perot Systems Corporation, as well as
many independent consultants.

Independent software tool vendors. Independent Software Vendors ("ISVs")
who partner with the Company integrate their tools with BEA TUXEDO to
enable their customers to build scalable distributed applications more
easily. BEA has relationships with approximately 40 tool vendors, including
BMC Software, Inc., Compuware Corporation, Dynasty Technologies, Inc.,
Informix Corp., Mercury Interactive Corporation, Microsoft, Inc., Oracle,
Prolifics, Rational Software Corporation and Symantec Corp.

Distributors. The Company uses software distributors to sell its products
in Europe, Asia, Latin America and, to a lesser degree, North America to
augment the efforts of its direct sales force. As of January 31, 1998, the
Company was represented by over 25 distributors.

Professional Services

Due to the complex nature of its customers' mission-critical applications,
the Company believes that its professional services organization plays a key
role in facilitating initial license sales and enabling customers to develop,
deploy and manage such applications successfully. As of January 31, 1998, the
Company employed over 150 professional services consultants. Fees for
professional services are generally charged on a time and materials basis and
vary depending upon the nature and extent of services to be performed.

Marketing

The Company's marketing efforts are directed at broadening the demand for
BEA TUXEDO and the BEA Enterprise Transaction Framework by increasing
awareness of the benefits of using the Company's products to build mission-
critical distributed applications. Marketing efforts are also aimed at
supporting the Company's worldwide direct and indirect sales channels.
Marketing personnel engage in a variety of activities including conducting
public relations and product seminars, issuing newsletters, sending direct
mailings, preparing sales collateral and other marketing materials,
coordinating the Company's participation in industry trade shows, programs and
forums, and establishing and maintaining close relationships with recognized
industry press and analysts. The Company's senior executives are frequent
speakers at industry forums in many of the major markets the Company serves.

CUSTOMER AND DEALER SUPPORT

The Company believes that a high level of customer support is integral to
the successful marketing and sale of BEA products. Mission-critical
applications require rapid support response and problem resolution. The
Company's direct sales to customers include a basic level of maintenance.
Comprehensive 7x24 support contracts are also available, typically on an
annual basis. In addition, the Company offers introductory and advanced
classes and training programs at the Company's offices, customer sites and
training centers worldwide. Telephone hot line support is offered worldwide at
either a standard or around-the-clock level, depending on customer
requirements. The Company maintains product and technology experts on call at
all times worldwide

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and has support call centers located in Sunnyvale, California; Paris, France;
Yokohama, Japan; and Brisbane, Australia. The Company sponsors a worldwide
user group conference each year and additional local user group conferences in
many geographic areas around the world.

COMPETITION

The market for middleware software and related services is highly
competitive. The Company's competitors are diverse and offer a variety of
solutions directed at various segments of the middleware software marketplace.
These competitors include system and database vendors such as IBM and database
vendors such as Oracle, which offer their own middleware functionality for use
with their proprietary systems. Microsoft has also announced that it will
provide middleware functionality in future versions of its Windows NT
operating system and has introduced a product that includes certain middleware
functionality. In addition, there are companies offering and developing
middleware and application integration software products and related services
that directly compete with products offered by the Company. Further, the
software development tool vendors typically emphasize the broad versatility of
their toolsets and, in some cases, offer complementary middleware software
that supports these tools and performs messaging and other basic middleware
functions. Lastly, internal development groups within prospective customers'
organizations may develop software and hardware systems that may substitute
for those offered by the Company. A number of the Company's competitors and
potential competitors have longer operating histories, significantly greater
financial, technical, marketing, sales and other resources, greater name
recognition and a larger installed base of customers than the Company.

The Company believes that the principal competitive factors in the market
for its products are the ability to scale to accommodate a large number of
users, interoperability with major hardware and software platforms and legacy
systems, cost, time to implementation, robustness and support services. Based
on these factors, the Company believes its products compete favorably,
although there can be no assurance that the Company can maintain its
competitive position against current and potential competitors. See
"Management's Discussion and Analysis or Plan of Operation - Factors That May
Impact Future Operating Results - Competition."

INTELLECTUAL PROPERTY AND LICENSES

The Company's success depends upon its proprietary technology and
intellectual property. The Company relies on a combination of copyright,
trademark and trade secret rights, confidentiality procedures and licensing
arrangements to establish and protect its proprietary rights. The Company
presently has a portfolio of several issued patents and pending patent
applications, as well as an exclusive license to several other issued patents
and pending patent applications. No assurance can be given that competitors
will not successfully challenge the validity or scope of the Company's patents
or that such patents will provide a competitive advantage to the Company. As
part of its confidentiality procedures, the Company generally enters into non-
disclosure agreements with its employees, distributors and corporate partners,
and into license agreements with respect to its software, documentation and
other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the Company's products
or technology without authorization, or to develop similar technology
independently. In particular, the Company has, in the past, provided certain
hardware OEMs with access to its source code, and any unauthorized publication
or proliferation of this source code could materially adversely affect the
Company's business, operating results and financial condition. Policing
unauthorized use of the Company's products is difficult, and although the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
Effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. There can be no assurance that the Company's
protection of its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology, duplicate the
Company's products or design around any patents issued to the Company or other
intellectual property rights of the Company.

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current or future products. The Company expects that software product
developers will increasingly be subject to such claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in the industry segment overlaps. Any such claims,
with or without merit, could result in costly litigation that could absorb
significant management time. Such claims might require the Company to enter
into royalty or license agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.

EMPLOYEES

As of January 31, 1998, BEA employed approximately 800 full-time personnel,
including 200 in research and development, 450 in consulting, training, sales,
support and marketing and 150 in administration. BEA's employees are not
represented by any collective bargaining organization, and BEA has never
experienced any work stoppage. Management believes that its employee relations
are good.

ITEM 2. DESCRIPTION OF PROPERTY

BEA's executive offices and those related to product development, corporate
marketing and administrative functions are located at two sites totaling
approximately 61,000 square feet in Sunnyvale, California under leases
expiring in July 1998 and January 2001. The Company also leases office space
in various locations throughout the United States for sales, support and
development personnel and BEA's foreign subsidiaries lease space for their
operations. The Company owns substantially all of the equipment used in its
facilities, except equipment held under capitalized lease arrangements.

In December 1997, the Company signed a ten year lease for approximately
224,000 square feet of office space in San Jose, California to house the
Company's corporate headquarters, sales, marketing and software development
personnel. The Company expects to occupy the space in the late summer or fall
of 1998. The Company currently plans to temporarily sublease as much as
100,000 square feet. The Company believes its existing facilities will be
adequate to meet its anticipated needs for the foreseeable future. See Note 10
to the consolidated financial statements for information regarding the
Company's lease obligations.

ITEM 3. LEGAL PROCEEDINGS

None.

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1998.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since its initial public offering on April 11, 1997, the Company's common
stock has traded in the Nasdaq National Market under the symbol "BEAS."
According to the Company's transfer agent, the Company had approximately 250
stockholders of record as of March 23, 1998. Because many of such shares are
held by brokers and other institutions on behalf of stockholders, the Company
is unable to estimate the total number of stockholders represented by these
holders of record.

The following table sets forth the high and low closing sales prices
reported on the Nasdaq National Market for BEA common stock for the periods
indicated:

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LOW HIGH
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Fiscal year 1998:
First Quarter (from date of initial public offering)........ $ 6.00 $ 6.38
Second Quarter.............................................. $ 6.13 $20.38
Third Quarter............................................... $12.94 $24.13
Fourth Quarter.............................................. $11.56 $20.00
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The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain earnings, if any, to support
the development of its business and does not anticipate paying cash dividends
for the foreseeable future. Payment of future dividends, if any, will be at
the discretion of the Company's Board of Directors after taking into account
various factors, including the Company's financial condition, operating
results and current and anticipated cash needs.

During the fiscal year 1998, there were no sales of equity securities of the
Company that were not either registered under the Securities Act of 1933, as
amended (the "Securities Act"), or exempt from registration under Regulation S
of the Securities Act.

Pursuant to a registration statement on Form SB-2 declared effective on
April 10, 1997 (Commission File No. 333-20791) covering shares of its common
stock with an aggregate offering price of $34.3 million, the Company sold an
aggregate of 5.4 million shares of common stock for a total purchase price of
$32.2 million (including shares sold pursuant to the underwriters' partial
exercise of their overallotment option). The offering has concluded, and all
registered shares have been sold, except for $2.1 million in shares remaining
after the partial exercise of the underwriters' overallotment option. Goldman,
Sachs & Co., Alex. Brown & Sons Incorporated, Robertson, Stephens & Company
LLC and SoundView Financial Group, Inc. were the managing underwriters for the
offering. An estimated total of $4.5 million in expenses were incurred and
paid by the Company in connection with the issuance and distribution of the
shares registered of which $2.3 million represented the underwriters discount
and $2.2 million were other direct expenses of the offering. All such payments
were to persons other than (i) directors, officers, general partners of the
Company or their associates, (ii) persons owning 10% or more of any class of
equity securities of the Company and (iii) affiliates of the Company. The
estimated net offering proceeds to the Company after deducting all expenses as
described above were $27.7 million. This amount has been used as follows: $1.6
million for the acquisition of other businesses; $9.1 million for the
repayment of amounts due under line of credit facilities; $400,000 for the
purchase of computer equipment, furniture and leasehold improvements; and
$16.6 million for the repayment of notes payable and capital lease
obligations. All of such proceeds were paid to persons other than (i)
directors, officers, general partners of the Company or their associates, (ii)
persons owning 10% or more of any class of equity securities of the Company
and (iii) affiliates of the Company.

9
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The discussion in "Management's Discussion and Analysis or Plan of
Operation" contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding
beliefs, plans, expectations or intentions regarding the future. All forward-
looking statements included in discussion are made as of the date hereof,
based on information available to BEA as of the date thereof, and BEA assumes
no obligation to update any forward-looking statement. These forward-looking
statements involve risks and uncertainties and actual results which could
differ materially from those discussed in the forward-looking statements.
These risks and uncertainties include, but are not limited to, those described
under the heading "Factors That May Impact Future Operating Results."

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of total revenues,
consolidated statements of operations data for the periods indicated. These
operating results are not necessarily indicative of results for any future
periods.

<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JANUARY 31,
-------------
1998 1997
----- -----
<S> <C> <C>
Revenues:
License fees............................................. 76% 76%
Services................................................. 24 24
----- -----
Total revenues......................................... 100 100
Cost of revenues:
Cost of license fees..................................... 2 3
Cost of services......................................... 15 13
Amortization of certain acquired intangible assets....... 7 14
----- -----
Total cost of revenues................................. 24 30
----- -----
Gross margin............................................... 76 70
Operating expenses:
Sales and marketing...................................... 48 50
Research and development................................. 17 30
General and administrative............................... 11 21
Write-off of in-process research and development......... 9 101
----- -----
Total operating expenses............................... 85 202
----- -----
Loss from operations....................................... (9) (132)
Interest expense........................................... (4) (11)
Interest income and other, net............................. 1 -
----- -----
Loss before provision for income taxes..................... (12) (143)
Provision for income taxes................................. 2 1
----- -----
Net loss................................................... (14)% (144)%
===== =====
</TABLE>

The Company acquired the TUXEDO product from Novell in February 1996. Since
this acquisition, the Company has continued to purchase and develop additional
middleware products and technologies, as well as establish distribution
channels for its products and services.

REVENUES

The Company's consolidated revenues for fiscal year 1998 were $157.2
million, which represented a 155 percent increase from fiscal year 1997
revenues of $61.6 million. Revenue increases were reported in all sales

10
<PAGE>

geographies. Specifically, revenues in the Asia/Pacific region, Europe and the
Americas increased by 578 percent, 141 percent and 124 percent, respectively,
over the fiscal year 1997 results. These results reflect the addition of new
customer accounts, further penetration of existing accounts and an increase in
consulting, education and support services. International revenues accounted
for 45 percent of total revenues in fiscal year 1998, up from 36 percent in
fiscal year 1997. The increase in international revenues as a percentage of
total consolidated revenues was the result of expansion of the Company's
direct sales force in international markets and the acquisition of foreign
distributors.

The Company currently derives the majority of its license revenues from BEA
TUXEDO and products that work in conjunction with BEA TUXEDO. Additionally,
service revenues, including software maintenance and support, training and
consulting projects, relate principally to the BEA TUXEDO product family.
Management expects that license and service revenues of BEA TUXEDO will
continue to account for the majority of the Company's revenues for the
foreseeable future.

License Revenues. Consolidated license revenues in fiscal year 1998 were
$118.9 million, which represented a 154 percent increase from fiscal year 1997
license revenues of $46.8 million. The increase was mainly due to continued
market acceptance of the Company's products, primarily BEA TUXEDO, the
acquisition of sales distribution channels and expansion of the Company's
direct sales force. License revenues represented 76 percent of total revenues
in both fiscal years 1998 and 1997.

Service Revenues. For the fiscal year ended January 31, 1998, service
revenues were $38.3 million, an increase of 159 percent over fiscal year 1997
levels of $14.8 million. The increase in service revenues was due in large
part to increased software license sales and an increase in support and
consulting products offered by the Company. Service revenues represented 24
percent of total revenues for both fiscal years 1998 and 1997. While service
revenues remained the same as a percent of total revenues, the Company
significantly increased the number of support and services personnel in the
latter half of fiscal year 1998. As a result, management anticipates that
service revenues will increase as a percentage of total revenues in future
periods.

COST OF REVENUES

Consolidated cost of revenues in fiscal year 1998 was $37.4 million as
compared to $18.6 million in fiscal year 1997, an increase of 101 percent. As
a percent of total revenue, total cost of revenues declined from 30 percent in
fiscal year 1997 to 24 percent in fiscal year 1998. This percentage decrease
was due to lower amortization costs of certain acquired developed technology
as a percent of total revenues.

Cost of Licenses. Cost of licenses includes expenses related to the purchase
of disks and compact discs, costs associated with transferring the Company's
software to electronic media, the printing of user manuals, packaging and
distribution costs. Cost of licenses totaled $2.4 million and $1.6 million for
the fiscal years ended January 31, 1998 and 1997, respectively, representing 2
percent and 3 percent of license revenues. The decrease in cost of licenses as
a percentage of license revenues was due to cost control measures primarily in
the areas of printed material, freight and distribution costs.

Cost of Services. Cost of services, which consists primarily of salaries and
benefits for the Company's consulting and product support personnel, were
$23.6 million and $8.3 million for the fiscal years ended January 31, 1998 and
1997, respectively, representing 62 percent and 56 percent of total service
revenues. The increase in costs as a percent of related service revenues was
due to the hiring of additional dedicated consulting, education and support
personnel, the fixed costs associated with expansion of support centers in
Europe and Asia and costs to improve the Company's overall customer support
infrastructure.

Amortization of Certain Acquired Intangible Assets. The amortization of
certain acquired intangible assets, consisting of developed technology,
distribution rights, trademarks and tradenames, totaled $11.3 million and $8.7
million for the fiscal years ended January 31, 1998 and 1997, respectively. As
a percentage of total revenues, amortization expense decreased from 14 percent
in fiscal year 1997 to 7 percent in fiscal year 1998 as a result of

11
<PAGE>

the Company's higher total revenues. In the future, amortization expense
associated with these intangible assets acquired through January 31, 1998 is
expected to total $7.3 million, $2.3 million and $700,000 for the fiscal years
ending January 31, 1999, 2000 and 2001, respectively.

OPERATING EXPENSES

Sales and Marketing. Sales and marketing expenses include salaries, sales
commissions, travel and facility costs for the Company's sales and marketing
personnel. These expenses also include programs aimed at increasing revenues,
such as advertising, public relations, trade shows and expositions. Sales and
marketing expenses were $74.9 million and $31.0 million for the fiscal years
ended January 31, 1998 and 1997, respectively, representing 48 percent and 50
percent of total consolidated revenues for each period. While decreasing as a
percentage of total revenues, sales and marketing expenses increased in
absolute dollars due to the expansion of the Company's direct sales force and
an increase in marketing personnel and programs. The Company expects to
continue to invest in sales channel expansion and demand creation to promote
the Company's competitive position. Accordingly, the Company expects sales and
marketing expenses to continue to increase in future periods in absolute
dollars while remaining constant as a percentage of total revenues.

Research and Development. Research and development expenses consist
primarily of salaries and benefits for software engineers, contract
development fees, costs of computer equipment used in software development and
facilities expenses. For the fiscal years ended January 31, 1998 and 1997,
research and development expenses were $27.0 million and $18.2 million,
respectively, representing 17 percent and 30 percent of total consolidated
revenues in each period. The increase in research and development spending
year over year in absolute dollars was attributed to an increase in software
development personnel and related expenses, including expenses resulting from
the acquisition of MessageQ and ObjectBroker from Digital. The decrease in
research and development expenses as a percentage of total revenues was
primarily due to the substantial increase in license and service revenues. The
Company expects to continue to commit substantial resources to product
development and engineering in future periods. As a result, the Company
expects research and development expenses to continue to increase in future
periods. Additionally, management intends to continue recruiting and hiring
experienced software development personnel and to consider the licensing and
acquisition of technologies complementary to the Company's business.

General and Administrative. General and administrative expenses include
costs for the Company's human resources, corporate finance, information
technology and general management functions, as well as the amortization of
goodwill associated with various acquisitions. General and administrative
expenses were $16.8 million and $12.7 million for the fiscal years ended
January 31, 1998 and 1997, respectively, representing 11 percent and 21
percent of total revenues for each period. The increase in general and
administrative expenses in absolute dollars was attributed to the expansion of
the Company's support infrastructure, including information systems and
associated expenses necessary to manage the Company's growth. The decrease in
general and administrative expenses as a percentage of total revenue was due
to the substantial increase in the Company's total revenues and economies of
scale achieved in its administrative function. Goodwill amortization totaled
$500,000 and $200,000 in fiscal years 1998 and 1997, respectively. In the
future, amortization of goodwill acquired prior to January 31, 1998 is
expected to total $800,000, $800,000 and $300,000 for the fiscal years ending
January 31, 1999, 2000 and 2001, respectively. The Company anticipates that
general and administrative expenses will continue to decrease as a percentage
of total revenues while increasing in absolute dollar terms to support the
Company's anticipated growth.

Write-off of In-process Research and Development. In connection with certain
acquisitions, the Company acquired a number of research projects and products
that were in-process on the acquisition dates and were written off, in
accordance with generally accepted accounting principles. Write-offs of in-
process research and development expenses were $16.0 million for the fiscal
year ended January 31, 1998 relating to the acquisition of certain assets from
Digital and $62.2 million in fiscal year 1997 relating to the acquisitions of
BEA TUXEDO ($60.9 million) and Client Server Technologies, OY ($1.3 million).

12
<PAGE>

Interest Expense; Interest Income and Other, Net. Interest expense was $6.1
million in fiscal year 1998 and $6.7 million in fiscal year 1997 associated
with the Company's borrowing, while interest income was $2.9 million and none
in fiscal years 1998 and 1997, respectively. The decrease in interest expense
was due to a lower average amount of outstanding borrowings and a lower
average rate of interest during fiscal year 1998. Interest income increased
due to the investment of higher average cash, cash equivalents and short-term
investments balances, generated primarily from the Company's initial public
offering and follow-on offering of its common stock in fiscal 1998.

The Company has a hedging program to minimize the effect of foreign exchange
transaction gains and losses, from recorded foreign currency-denominated
assets and liabilities. This program involves the use of forward foreign
exchange contracts in certain European and Asian currencies. The Company does
not currently hedge anticipated foreign currency-denominated revenues and
expenses not yet incurred. Losses on foreign currency transactions, which are
included in interest and other expense, were $600,000 and $400,000 in fiscal
years 1998 and 1997, respectively.

Provision for Income Taxes. While the Company has experienced operating
losses to date, the Company has incurred income tax expense of $2.8 million
and $800,000 for the fiscal years ended January 31, 1998 and 1997,
respectively. The income tax expense consists primarily of foreign withholding
taxes and foreign income tax expense incurred as a result of local country
profits. The increase in income taxes for 1998 is primarily due to an overall
increase in foreign license and service revenues.

Under Statement of Financial Accounting Standards No. 109 Accounting for
Income Taxes (FAS 109), deferred tax assets and liabilities are determined
based on the difference between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. FAS 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the available evidence, which
includes BEA's historical operating performance and the reported cumulative
net losses from prior years, the Company has provided a full valuation
allowance against its net deferred tax assets. The Company intends to evaluate
the realizability of the deferred tax assets on a quarterly basis. See Note 11
to the consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception in January 1995, the Company has financed its operations
and acquisitions primarily through public and private offerings of equity
securities and borrowings.

Working capital totaled $56.5 million at January 31, 1998 as compared to a
working capital deficit of $32.8 million at January 31, 1997. The increase in
working capital was primarily from proceeds of the Company's initial public
offering in April 1997, which raised $27.7 million from the sale of 5.4
million shares of common stock and the follow-on common offering in July 1997,
which raised $110.4 million from the sale of 6.9 million common shares. As of
January 31, 1998, the Company had cash, cash equivalents and short-term
investments of $98.4 million, which was invested principally in commercial
paper, money market mutual funds and time deposits.

The Company's operating activities provided net cash of $2.8 million for the
fiscal year ended January 31, 1998, compared to a net use of cash of $21.7
million for the preceding fiscal year. Operating cash flows increased
primarily due to improved operating results, exclusive of one-time charges and
amortization of acquired intangible assets, partially offset by an increase in
accounts receivable.

The Company decreased its outstanding short and long-term debt obligations
from $86.8 million at January 31, 1997 to $44.9 million at January 31, 1998, a
decrease of $41.9 million. At year end, the Company's outstanding debt
obligations consisted principally of $38.7 million due to Novell related to
the acquisition of BEA TUXEDO, which is scheduled for final payment in fiscal
year 1999.

13
<PAGE>

At January 31, 1998, the Company had outstanding debt of $1.9 million,
pursuant to revolving lines of credit arrangements with commercial lenders in
Japan and Korea. The maximum credit available under these agreements is $2.8
million and borrowings available under the lines totaled approximately
$900,000 at January 31, 1998. Borrowings under the credit arrangements bear
interest at rates ranging from 2 percent to 24 percent and are secured by $2.5
million in certificates of deposits.

In addition to the Company's outstanding debt obligations, the Company has
outstanding lease commitments for facilities. In December 1997, the Company
entered into a ten year lease agreement for approximately 224,000 square feet
of office space in San Jose, California to house the Company's corporate
headquarters, sales, marketing and research personnel. Initially, the Company
intends to temporarily sublease approximately 100,000 square feet. The Company
expects to occupy this space in the late summer or fall of 1998. See Note 10
to the consolidated financial statements for information regarding the
Company's lease obligations.

In addition to normal operating expenses, cash requirements are anticipated
for the development of new software products, financing anticipated growth,
payment of outstanding debt obligations and the acquisition of products and
technologies complementary to the Company's business. The Company believes
that its existing cash, cash equivalents, short-term investments, available
lines of credit and cash generated from operations, if any, will be sufficient
to satisfy its currently anticipated cash requirements for fiscal year 1999.
However, the Company intends to make additional acquisitions and may need to
raise additional capital through future debt or equity financing to the extent
necessary to fund any such acquisitions.

IMPACT OF THE YEAR 2000

The Company has designed, developed and tested the most current version of
BEA TUXEDO and its other software products to be Year 2000 compliant. However,
some of the Company's customers may be using software versions that are not
Year 2000 compliant. The Company has been encouraging such customers to
upgrade to current product versions. It is possible that the Company may
experience additional costs associated with assisting customers with these
upgrades. In addition, the current products may contain undetected errors or
defects associated with Year 2000 functions that may have a material adverse
effect on the Company's business, results of operations and financial
condition. Year 2000 compliance issues are expected to result in a significant
amount of litigation against software vendors and the extent to which the
Company may be affected is uncertain.

The Company has been informed by substantially all of its business
application software suppliers that their software is Year 2000 compliant. The
software from these suppliers is used in the Company's financial, sales,
customer support and administrative operations. Accordingly, the Company
expects that the advent of the millennium will have no adverse effect on its
business, operating results and financial condition. However, there can be no
assurances that Year 2000 problems will not occur with respect to the
Company's computer systems. The Year 2000 problem may affect other entities
with which the Company transacts business and the Company cannot predict the
effect of the Year 2000 problem on such entities.

FACTORS THAT MAY IMPACT FUTURE OPERATING RESULTS

BEA Systems, Inc. operates in a rapidly changing environment that involves
numerous risks and uncertainties. The following section lists some, but not
all, of these risks and uncertainties which may have a material adverse effect
on the Company's business, financial condition or results of operations. This
section should be read in conjunction with the audited Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis or Plan
of Operation included in this Form 10-KSB.

Limited Operating History; Integration of Acquisitions; No Assurance of
Profitability

The Company was incorporated in January 1995 and, accordingly, has a limited
operating history upon which an evaluation of the Company and its prospects
can be based. Revenues generated by the Company to

14
<PAGE>

date have been derived primarily from sales of BEA TUXEDO, a product to which
the Company acquired worldwide rights in February 1996, and from fees for
related services. Since its inception, the Company has acquired a number of
businesses, technologies and products. Prior to the consummation of these
acquisitions, the Company had no revenues and limited business activities.
Accordingly, the Company is subject to the risks inherent both in the
operation of a new business enterprise and the integration of a number of
previously separate and independent business operations and there can be no
assurance that the Company will be able to address these risks successfully.
Although the Company has experienced recent substantial revenue growth, the
Company has incurred significant net losses since its inception, including
losses of approximately $22.0 million and $88.7 million for the fiscal years
ended January 31, 1998 and 1997, respectively. At January 31, 1998, the
Company had an accumulated deficit of approximately $129.6 million. In
addition, in connection with certain acquisitions completed prior to January
31, 1998, the Company recorded approximately $122.4 million as intangible
assets, approximately $110.1 million of which has already been amortized and
approximately $12.3 million of which is expected to be amortized in future
periods through the Company's fiscal year ending January 31, 2003. The amount
of such intangible assets to be expensed to cost of revenues and general and
administrative expense in future periods, for intangible assets acquired prior
to January 31, 1998, are expected to be $8.1 million and $3.1 million in the
fiscal years ending January 31, 1999 and 2000, respectively. To the extent the
Company makes additional acquisitions of businesses, products and technologies
in the future, the Company may report additional, potentially significant,
expenses related thereto. To the extent future events result in the impairment
of any capitalized intangible assets, amortization expenses may occur sooner
than the Company expects. For the foregoing reasons, there can be no assurance
that the Company will be profitable in any future period and recent operating
results should not be considered indicative of future financial performance.

Potential Fluctuations in Quarterly Operating Results

The Company expects that it will experience significant fluctuations in
future quarterly operating results as a result of many factors, including,
among others: the size and timing of customer orders, introduction or
enhancement of products by the Company or its competitors, market acceptance
of middleware products, the lengthy sales cycle for the Company's products,
technological changes in computer systems and environments, the structure and
timing of future acquisitions of businesses, products and technologies, the
ability of the Company to develop, introduce and market new products on a
timely basis, changes in the Company's or its competitors' pricing policies,
interpretations of the recently introduced statement of position on software
revenue recognition, customer order deferrals in anticipation of future new
products and product enhancements, the Company's success in expanding its
sales and marketing programs, mix of products and services sold, mix of
distribution channels, ability to meet the service requirements of its
customers, costs associated with acquisitions, the terms and timing of
financing activities, loss of key personnel, fluctuations in foreign currency
exchange rates and general economic conditions. As a result of all of these
factors, the Company believes that quarterly revenues and operating results
are difficult to forecast and period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.

A portion of the Company's revenues are derived from large orders as
customers deploy BEA products throughout their organizations. As the revenue
size of individual license transactions increases, the risk of fluctuation in
future quarterly results can also be expected to increase. Any inability of
the Company to generate large customer orders, or any delay or loss of such
orders in a particular quarter, will have a material adverse effect on the
Company's revenues and, more significantly on a percentage basis, its net
income or loss in that quarter. Moreover, the Company typically receives and
fulfills a majority of its orders within the quarter, with a substantial
portion occurring in the last month of a fiscal quarter. As a result, the
Company may not learn of revenue shortfalls until late in a fiscal quarter.
Additionally, the Company's operating expenses are based in part on its
expectations for future revenue and are relatively fixed in the short term.
Any revenue shortfall below expectations could have an immediate and
significant adverse effect on the results of operations.

As is common in the software industry, the Company believes that its fourth
quarter orders are favorably impacted by a variety of factors including year-
end capital purchases by larger corporate customers and sales

15
<PAGE>

incentive programs. This increase typically results in first quarter customer
orders being lower than orders received in the immediately preceding fourth
quarter. The Company anticipates that this seasonal impact is likely to
increase as it continues to focus on large corporate accounts.

Similarly, shortfalls in BEA's revenues and earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock. Moreover, the Company's stock
price is subject to the volatility generally associated with software and
technology stocks and may also be affected by broader market trends unrelated
to the Company's performance.

Past and Future Acquisitions

From its inception in January 1995, the Company has made a number of
strategic acquisitions. Integration of acquired companies, divisions and
products involves the assimilation of potentially conflicting operations and
products, which divert the attention of the Company's management team and may
have a material adverse effect on the Company's operating results in future
quarters. In addition, in connection with certain of its acquisitions, the
Company is required to make certain future payments. See Note 9 to the
consolidated financial statements. Any failure to make such payments or
otherwise perform continuing obligations relative to these acquisitions would
result in the loss of certain of its rights in the acquired businesses or
products and would have a material adverse effect on the Company's business,
operating results and financial condition. The Company intends to make
additional acquisitions in the future, although there can be no assurance that
suitable companies, divisions or products will be available for acquisition.
Such acquisitions entail numerous risks, including an inability to
successfully assimilate acquired operations and products, an inability to
retain key employees of the acquired operations, diversion of management's
attention, and difficulties and uncertainties in transitioning the key
business relationships from the acquired entity to the Company. In addition,
future acquisitions by the Company may result in the issuance of dilutive
securities, the assumption or incurrence of debt obligations, large one-time
expenses and the creation of intangible assets that result in significant
future amortization expense. These factors could have a material adverse
effect on the Company's business, operating results and financial condition.

Product Concentration

The Company currently derives the majority of its license and service
revenues from BEA TUXEDO and from related products and services. These
products and services are expected to continue to account for the majority of
the Company's revenues for the foreseeable future. As a result, factors
adversely affecting the pricing of or demand for BEA TUXEDO, such as
competition, product performance or technological change, could have a
material adverse effect on the Company's business and consolidated results of
operations and financial condition. Furthermore, the Company is obligated to
make certain payments to Novell through January 1999 to acquire the perpetual
rights to the BEA TUXEDO product. Failure by the Company to make these
payments for any reason could terminate the Company's continuing rights to
this product.

Dependency on Growth of Market for Middleware

The middleware market, in which the Company conducts its business, is
emerging and is characterized by continuing technological developments,
evolving industry standards and changing customer requirements. BEA's success
is dependent in large part on the Company's middleware software products'
achieving market acceptance by large customers with substantial legacy
mainframe systems. The Company's future financial performance will depend in
large part on continued growth in the number of companies extending their
mainframe-based, mission-critical applications to an enterprise-wide
distributed computing environment through the use of middleware technology.
There can be no assurance that the market for middleware technology and
related services will continue to grow. If the middleware market fails to grow
or grows more slowly than the Company currently anticipates, or if the Company
experiences increased competition in this market, the Company's business,
results of operations and financial condition will be adversely affected.

16
<PAGE>

Lengthy Sales Cycle

The Company's products are typically used to integrate large, sophisticated
applications that are critical to a customer's business and the purchase of
the Company's products is often part of a customer's implementation of a
distributed computing environment. Customers evaluating the Company's software
products face complex decisions regarding alternative approaches to the
integration of enterprise applications, competitive product offerings, rapidly
changing software technologies and limited internal resources due to other
information systems requirements. For these and other reasons, the sales cycle
for the Company's products is lengthy and is subject to delays or cancellation
over which the Company has little or no control. To the extent the revenue
size of license transactions increases, customer evaluations and procurement
processes are expect to lengthen the overall sales cycle. Any significant
change in the Company's sales cycle could have a material adverse effect on
the Company's business, results of operations and financial condition.

Although the Company has a standard license agreement which meets the
revenue recognition criteria under current generally accepted accounting
principles, the Company must often negotiate and revise terms and conditions
of this standard agreement, particularly in larger sales transactions.
Negotiation of mutually acceptable language can extend the sales cycle and in
certain situations, may require the Company to defer recognition of revenue on
the sale. In addition, while the recently issued Statement of Position (SOP)
97-2, Software Revenue Recognition (as amended by SOP 98-4), is not expected
to have a material impact on the Company's revenues and earnings, detailed
implementation guidance of these standards has not yet been issued. Once
issued, such guidance could lead to unanticipated changes in the Company's
current revenue recognition practices and have an adverse impact on revenues
and earnings. In the event that implementation guidance is different, the
Company believes that it can adapt its current business practice to comply
with this guidance; however, there can be no assurances that this will be the
case.

Competition

The market for middleware software and related services is highly
competitive. The Company's competitors are diverse and offer a variety of
solutions directed at various segments of the middleware software marketplace.
These competitors include system and database vendors such as IBM and database
vendors such as Oracle, which offer their own middleware functionality for use
with their proprietary systems. Microsoft has also announced that it will
provide middleware functionality in future versions of its Windows NT
operating system and has announced a product that includes certain middleware
functionality. In addition, there are companies offering and developing
middleware and integration software products and related services that
directly compete with products offered by the Company. Further, the software
development tool vendors typically emphasize the broad versatility of their
toolsets and, in some cases, offer complementary middleware software that
supports these tools and performs messaging and other basic middleware
functions. Last, internal development groups within prospective customers'
organizations may develop software and hardware systems that may substitute
for those offered by the Company. A number of the Company's competitors and
potential competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, greater name recognition
and a larger installed base of customers than the Company.

The Company's principal competitors currently include hardware vendors who
bundle their own middleware software products with their computer systems and
database vendors that advocate client/server networks driven by the database
server. IBM is the primary hardware vendor who offers a line of middleware and
database solutions for its customers. The bundling of middleware functionality
in IBM proprietary hardware and database systems requires the Company to
compete with IBM in its installed base, where IBM will have certain inherent
advantages due to its significantly greater financial, technical, marketing
and other resources, greater name recognition and the integration of its
enterprise middleware functionality with its proprietary hardware and database
systems. The Company needs to differentiate its products based on
functionality, interoperability with non-IBM systems, performance and
reliability and establish its products as more effective solutions to
customers' needs. Oracle is the primary relational database vendor offering
products that are intended to serve as alternatives to the Company's
enterprise middleware solutions. There can be no assurance that the

17
<PAGE>

Company will compete successfully with hardware, database, or other vendors,
or that the products offered by such vendors will not achieve greater market
acceptance than the Company's products.

Microsoft has announced that it will provide middleware functionality in
future versions of its Windows NT operating system and has introduced a
product that includes certain middleware functionality. The bundling of
middleware functionality in Windows NT will require the Company to compete
with Microsoft in the Windows NT marketplace, where Microsoft will have
certain inherent advantages due to its significantly greater financial,
technical, marketing and other resources, greater name recognition, its
substantial installed base and the integration of its enterprise middleware
functionality with Windows NT. If Microsoft successfully incorporates
middleware functionality into Windows NT or separately offers middleware
applications, the Company will need to differentiate its products based on
functionality, interoperability with non-Microsoft platforms, performance and
reliability and establish its products as more effective solutions to
customers' needs. There can be no assurance that the Company will be able to
successfully differentiate its products from those offered by Microsoft, or
that Microsoft's entry into the middleware market will not materially
adversely affect the Company's business, operating results and financial
condition.

In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of the Company's current and prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors
may emerge and rapidly gain significant market share. Such competition could
materially adversely affect the Company's ability to sell additional software
licenses and maintenance, consulting and support services on terms favorable
to the Company. Further, competitive pressures could require the Company to
reduce the price of its products and related services, which could materially
adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current and future competitors and the failure to do so
would have a material adverse effect upon the Company's business, operating
results and financial condition.

Management of Growth

The Company currently is experiencing a period of rapid and substantial
growth that has placed, and is expected to continue to place, a strain on the
Company's administrative and operational infrastructure. The Company's ability
to manage its staff and growth effectively will require continued improvement
in its operational, financial and management controls, reporting systems and
procedures. In this regard, the Company is currently updating its management
information systems to integrate financial and other reporting among the
Company's multiple domestic and foreign offices. In addition, the Company
intends to increase its staff in its foreign offices and to improve financial
reporting and controls for the Company's international operations. There can
be no assurance that the Company will be able to successfully implement
improvements to its management information and control systems in an efficient
or timely manner or that, during the course of this implementation,
deficiencies in existing systems and controls will be discovered. If
management of the Company is unable to manage growth effectively, the
Company's business, results of operations and financial condition will be
materially adversely affected.

Dependence on Key Personnel and Need to Hire Additional Personnel

The Company believes its future success will depend upon its ability to
attract and retain highly skilled personnel including the Company's founders,
Messrs. William T. Coleman III, Edward W. Scott, Jr., Alfred S. Chuang and key
members of management. Competition for such personnel is intense and there can
be no assurance that the Company will be able to retain its key employees or
that it will be successful in attracting, assimilating and retaining them in
the future. As the Company seeks to expand its worldwide organization, the
hiring of qualified sales, technical and support personnel in foreign
countries will be difficult due to the limited number of qualified
professionals. Failure to attract, assimilate and retain key personnel would
have a material adverse effect on the Company's business, results of
operations and financial condition.

18
<PAGE>

Expanding Distribution Channels and Reliance on Third Parties

To date, the Company has sold its products principally through its direct
sales force, as well as through indirect sales channels, such as ISVs,
hardware OEMs, systems integrators, independent consultants and distributors.
The Company's ability to achieve significant revenue growth in the future will
depend in large part on its success in expanding its direct sales force and in
further establishing and maintaining relationships with distributors, ISVs and
OEMs. In particular, a significant element of the Company's strategy is to
embed its technology in products offered by the Company's ISV customers. The
Company intends to seek distribution arrangements with other ISVs to embed the
Company's technology in their products and expects that these arrangements
will account for a significant portion of the Company's revenues in future
periods. There can be no assurance that the Company will be able to
successfully expand its direct sales force or other distribution channels,
secure license agreements with additional ISVs on commercially reasonable
terms or at all, or otherwise further develop its relationships with
distributors and ISVs, or that any such expansion or additional license
agreements would result in an increase in revenues. Although the Company
believes that its investments in the expansion of its direct sales force and
in the establishment of other distribution channels through third parties
ultimately will improve the Company's operating results, to the extent that
such investments are made and revenues do not correspondingly increase, the
Company's business, results of operations and financial condition will be
materially and adversely affected.

International Operations

International revenues accounted for 45 percent and 36 percent of
consolidated revenues in the fiscal years 1998 and 1997, respectively. The
Company sells its products and services through a network of branches and
subsidiaries located in international markets, including Canada, Mexico,
Brazil, France, Finland, U.K., Germany, Sweden, South Africa, Belgium,
Switzerland, Japan, Australia, Hong Kong and Korea. In addition, the Company
also markets through distributors in Europe and the Asia/Pacific region.
Management believes that its success depends upon continued expansion of its
international operations. The Company's international business is subject to a
number of risks, including unexpected changes in regulatory practices and
tariffs, greater difficulties in staffing and managing foreign operations,
longer collection cycles, seasonality, potential changes in tax laws, greater
difficulty in protecting intellectual property and the impact of fluctuating
exchange rates between the US dollar and foreign currencies in markets where
BEA does business, in particular the French franc, the German mark, the
British pound, the Japanese yen, the Australian dollar and the Korean won. The
Company's international revenues may also be impacted by general economic and
political conditions in these foreign markets. Since the late summer of 1997,
a number of Pacific Rim countries have begun to experience economic, banking
and currency difficulties that has led to economic downturns in those
countries. Among other things, the decline in value of Asian currencies,
together with difficulties obtaining credit, has resulted in a decline in the
purchasing power of the Company's Asian customers, which in turn could result
in the cancellation or delay of orders for the Company's products from certain
Asian customers and is likely to result in further delays and, possibly the
cancellation, of such orders. The future impact of these conditions is
difficult to predict. There can be no assurances that these factors and other
factors will not have a material adverse effect on the Company's future
international revenues and consequently on the Company's business and
consolidated financial condition and results of operations.

Rapid Technology Change; Dependence on New Products and Product Enhancements

The market for the Company's products is highly fragmented, competitive with
alternative computing architectures and characterized by continuing
technological development, evolving industry standards and changing customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render the Company's existing products obsolete and unmarketable. As a result,
the Company's success depends upon its ability to enhance existing products,
respond to changing customer requirements and develop and introduce in a
timely manner new products that keep pace with technological developments and
emerging industry standards. There can be no assurance that the Company's
products will adequately address the changing needs of the marketplace or that

19
<PAGE>

the Company will be successful in developing and marketing enhancements to its
existing products or products incorporating new technology on a timely basis.
Failure to develop and introduce new products, or enhancements to existing
products, in a timely manner in response to changing market conditions or
customer requirements will materially and adversely affect the Company's
business, results of operations and financial condition.

Risk of Software Defects

The software products offered by the Company are internally complex and,
despite extensive testing and quality control, may contain errors or defects,
especially when first introduced. Such defects or errors could result in
corrective releases for the Company's software products, damage to the
Company's reputation, loss of revenue, product returns or order cancellations,
or lack of market acceptance of its products, any of which could have a
material and adverse effect on the Company's business, results of operations
and financial condition.

The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
as a result of existing or future federal, state or local laws or ordinances
or unfavorable judicial decisions. Although the Company has not experienced
any product liability claims to date, the sale and support of its products may
entail the risk of such claims, which could be substantial in light of the use
of such products in mission-critical applications. A successful product
liability claim brought against the Company could have a material adverse
effect on the Company's business, results of operations and financial
condition.

Dependence of Proprietary Technology; Risk of Infringement

The Company's success depends upon its proprietary technology. The Company
relies on a combination of copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
its proprietary rights. No assurance can be given that competitors will not
successfully challenge the validity or scope of the Company's patents or that
such patents will provide a competitive advantage to the Company.

As part of its confidentiality procedures, the Company generally enters into
non-disclosure agreements with its employees, distributors and corporate
partners and into license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In particular, the Company has, in the past,
provided certain hardware OEMs with access to its source code and any
unauthorized publication or proliferation of this source code could materially
adversely affect the Company's business, operating results and financial
condition. Policing unauthorized use of the Company's products is difficult,
and although the Company is unable to determine the extent to which piracy of
its software products exists, software piracy can be expected to be a
persistent problem. Effective protection of intellectual property rights is
unavailable or limited in certain foreign countries. There can be no assurance
that the Company's protection of its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar
technology, duplicate the Company's products or design around any patents
issued to the Company or other intellectual property rights of the Company.

The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third
parties will not claim such infringement by the Company with respect to
current or future products. Any such claims, with or without merit, could
result in costly litigation that could absorb significant management time,
which could have a material adverse effect on the Company's business,
operating results and financial condition. Such claims might require the
Company to enter into royalty or license agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.

20
<PAGE>

Volatility of Stock Price

The market price for the Company's common stock is affected by a number of
factors, including the announcement of new products or product enhancements by
the Company or its competitors, quarterly variations in the Company's or its
competitors' results of operations, changes in earnings estimates or
recommendations by securities analysts, developments in the software industry,
general market conditions and other factors, including factors unrelated to
the operating performance of the Company or its competitors. In addition,
stock prices for many companies in the technology and emerging growth sectors
have experienced wide fluctuations that have often been unrelated to the
operating performance of such companies. Such factors and fluctuations, as
well as general economic, political and market conditions, such as recessions,
may materially adversely affect the market price of the Company's common
stock.

Control by Management and Current Stockholders

As of January 31, 1998, the Company's officers and directors and their
affiliates, in the aggregate, had voting control over approximately 62 percent
of the Company's voting common stock. In particular, Warburg, Pincus Ventures,
L.P. ("Warburg") has voting control over approximately 49 percent of the
Company's voting common stock and beneficially owned approximately 64 percent
of the Company's common stock (which includes the non-voting Class B common
stock owned by Warburg). As a result, these stockholders will be able to
control all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. The voting power
of Warburg and the Company's officers and directors under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company.

21
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

BEA SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... 23
Consolidated Balance Sheets............................................... 24
Consolidated Statements of Operations..................................... 25
Consolidated Statement of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)........................................... 26
Consolidated Statements of Cash Flows..................................... 27
Notes to Consolidated Financial Statements................................ 28
</TABLE>

22
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
BEA Systems, Inc.

We have audited the accompanying consolidated balance sheets of BEA Systems,
Inc. as of January 31, 1998 and 1997, and the related consolidated statements
of operations, redeemable convertible preferred stock and stockholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BEA Systems,
Inc. at January 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Palo Alto, California
February 24, 1998

23
<PAGE>

BEA SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 89,702 $ 3,283
Short-term investments................................. 8,708 -
Accounts receivable, net of allowance for doubtful
accounts of $1,895 at January 31, 1998; $1,095 at
January 31, 1997...................................... 46,910 24,778
Other current assets................................... 2,970 3,083
--------- ---------
Total current assets................................. 148,290 31,144
Computer equipment, furniture and leasehold improvements,
net..................................................... 7,815 6,648
Acquired intangible assets, net.......................... 12,315 17,226
Other assets............................................. 2,897 2,955
--------- ---------
Total assets......................................... $ 171,317 $ 57,973
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under lines of credit....................... $ 1,879 $ 9,050
Accounts payable....................................... 4,817 3,488
Accrued liabilities.................................... 25,431 14,206
Accrued income taxes................................... 2,741 321
Deferred revenues...................................... 14,620 8,697
Current portion of notes payable and capital lease
obligations........................................... 42,301 28,180
--------- ---------
Total current liabilities............................ 91,789 63,942
Notes payable and capital lease obligations.............. 691 49,540
Series B redeemable convertible preferred stock - $0.001
par value, no shares authorized or outstanding at
January 31, 1998; 20,000 shares authorized, 19,848
shares issued and outstanding at January 31, 1997....... - 20,780
Stockholders' equity (deficit):
Preferred stock issuable in series - $0.001 par value,
5,000 shares authorized, none outstanding at January
31, 1998; Series A 20,000 shares authorized, 17,166
shares issued and outstanding at January 31, 1997 .... - 17
Common stock - $0.001 par value, 80,000 shares
authorized, 34,820 shares issued and outstanding at
January 31, 1998; 10,748 shares issued and outstanding
at January 31, 1997................................... 35 11
Class B common stock - $0.001 par value, 35,000 shares
authorized, 30,224 shares issued and outstanding at
January 31, 1998; no shares authorized or outstanding
at January 31, 1997................................... 30 -
Additional paid-in capital............................. 210,116 32,335
Accumulated deficit.................................... (129,627) (107,337)
Notes receivable from stockholders..................... (544) (544)
Deferred compensation.................................. (601) (845)
Foreign currency translation adjustment................ (572) 74
--------- ---------
Total stockholders' equity (deficit)................. 78,837 (76,289)
--------- ---------
Total liabilities and stockholders' equity (deficit). $ 171,317 $ 57,973
========= =========
</TABLE>

See accompanying notes.

24
<PAGE>

BEA SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
License fees............................................. $118,906 $ 46,839
Services................................................. 38,283 14,759
-------- --------
Total revenues......................................... 157,189 61,598
-------- --------
Cost of revenues:
Cost of license fees..................................... 2,429 1,591
Cost of services......................................... 23,591 8,320
Amortization of certain acquired intangible assets....... 11,336 8,696
-------- --------
Total cost of revenues................................. 37,356 18,607
-------- --------
Gross margin............................................... 119,833 42,991
Operating expenses:
Sales and marketing...................................... 74,867 30,970
Research and development................................. 27,008 18,183
General and administrative............................... 16,793 12,732
Write-off of in-process research and development......... 16,000 62,248
-------- --------
Total operating expenses............................... 134,668 124,133
-------- --------
Loss from operations....................................... (14,835) (81,142)
Interest expense........................................... (6,054) (6,727)
Interest income and other, net............................. 1,737 4
-------- --------
Loss before provision for income taxes..................... (19,152) (87,865)
Provision for income taxes................................. 2,843 800
-------- --------
Net loss................................................... $(21,995) $(88,665)
======== ========
Basic and diluted net loss per share....................... $ (0.43) $ (9.48)
======== ========
Shares used in computing basic and diluted net loss per
share..................................................... 51,252 9,444
======== ========
</TABLE>

See accompanying notes.

25
<PAGE>

BEA SYSTEMS, INC.

CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY(DEFICIT)

TWO-YEAR PERIOD ENDED JANUARY 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
SERIES B STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE ----------------------------------------------
CONVERTIBLE CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
----------------- ----------------- ------------- -------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- -------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31,
1996............ 6,060 $ 6,112 11,100 $ 11 8,274 $ 8 - $ -
Issuance of
Series A
preferred stock. - - 6,066 6 - - - -
Issuance of
common stock.... - - - - 2,000 2 - -
Common shares
issued under
stock option
plans........... - - - - 404 1 - -
Issuance of
Series B
redeemable
convertible
preferred stock. 13,788 13,788 - - - - - -
Accretion of
cumulative
dividends on
Series B
redeemable
convertible
preferred stock. - 880 - - - - - -
Issuance of
common stock for
services........ - - - - 70 - - -
Deferred
compensation
related to grant
of stock
options......... - - - - - - - -
Amortization of
deferred
compensation.... - - - - - - - -
Foreign currency
translation
adjustment...... - - - - - - - -
Net loss........ - - - - - - - -
------- -------- -------- ------ ------ ---- ------ ------
Balance at
January 31,
1997............ 19,848 20,780 17,166 17 10,748 11 - -
Issuance of
common stock,
net of issuance
costs of $3,062. - - - - 12,273 12 - -
Common shares
issued under
stock option and
employee stock
purchase plans.. - - - - 1,812 2 - -
Issuance and
exercise of
common stock
warrant......... - - - - 364 - - -
Accretion of
cumulative
dividends on
Series B
redeemable
convertible
preferred stock. - 268 - - - - - -
Conversion of
Series A and
Series B
preferred stock. (19,848) (21,048) (17,166) (17) 7,880 8 30,224 30
Conversion of
debt
obligations..... - - - - 1,743 2 - -
Amortization of
deferred
compensation.... - - - - - - - -
Foreign currency
translation
adjustment...... - - - - - - - -
Unrealized
losses on
available-for-
sale
investments..... - - - - - - - -
Net loss........ - - - - - - - -
------- -------- -------- ------ ------ ---- ------ ------
Balance at
January 31,
1998............ - $ - - $ - 34,820 $ 35 30,224 $ 30
======= ======== ======== ====== ====== ==== ====== ======
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------
NOTES FOREIGN TOTAL
ADDITIONAL RECEIVABLE CURRENCY STOCKHOLDERS'
PAID-IN ACCUMULATED FROM DEFERRED TRANSLATION EQUITY
CAPITAL DEFICIT STOCKHOLDERS COMPENSATION ADJUSTMENT (DEFICIT)
---------- ----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 31,
1996............ $ 20,355 $ (17,792) $ (544) $ - $ - $ 2,038
Issuance of
Series A
preferred stock. 10,306 - - - - 10,312
Issuance of
common stock.... 568 - - - - 570
Common shares
issued under
stock option
plans........... 113 - - - - 114
Issuance of
Series B
redeemable
convertible
preferred stock. - - - - - -
Accretion of
cumulative
dividends on
Series B
redeemable
convertible
preferred stock. - (880) - - - (880)
Issuance of
common stock for
services........ 20 - - - - 20
Deferred
compensation
related to grant
of stock
options......... 973 - - (973) - -
Amortization of
deferred
compensation.... - - - 128 - 128
Foreign currency
translation
adjustment...... - - - 74 74
Net loss........ - (88,665) - - - (88,665)
---------- ----------- ------------ ------------ ----------- -------------
Balance at
January 31,
1997............ 32,335 (107,337) (544) (845) 74 (76,289)
Issuance of
common stock,
net of issuance
costs of $3,062. 138,064 - - - - 138,076
Common shares
issued under
stock option and
employee stock
purchase plans.. 3,887 - - - - 3,889
Issuance and
exercise of
common stock
warrant......... 790 - - - - 790
Accretion of
cumulative
dividends on
Series B
redeemable
convertible
preferred stock. - (268) - - - (268)
Conversion of
Series A and
Series B
preferred stock. 21,027 - - - - 21,048
Conversion of
debt
obligations..... 14,013 - - - - 14,015
Amortization of
deferred
compensation.... - - - 244 - 244
Foreign currency
translation
adjustment...... - - - - (646) (646)
Unrealized
losses on
available-for-
sale
investments..... - (27) - - - (27)
Net loss........ - (21,995) - - - (21,995)
---------- ----------- ------------ ------------ ----------- -------------
Balance at
January 31,
1998............ $210,116 $(129,627) $ (544) $ (601) $ (572) $ 78,837
========== =========== ============ ============ =========== =============
</TABLE>

See accompanying notes.

26
<PAGE>

BEA SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net loss................................................. $(21,995) $(88,665)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 2,438 1,490
Amortization of deferred compensation.................. 244 128
Amortization of acquired intangible assets and write-
off of in-process research and development............ 27,796 71,054
Other.................................................. 358 20
Changes in operating assets and liabilities, net of
business combinations:
Accounts receivable.................................. (22,132) (13,968)
Other current assets................................. 5,944 (2,024)
Other assets......................................... 58 (2,231)
Accounts payable..................................... 1,329 2,598
Accrued liabilities.................................. 2,842 3,555
Deferred revenues.................................... 5,923 6,378
-------- --------
Net cash provided by (used in) operating activities........ 2,805 (21,665)
-------- --------
Investing activities:
Purchases of computer equipment, furniture and leasehold
improvements............................................ (2,891) (4,667)
Payments for business combinations, net of cash acquired. (2,925) (2,566)
Purchases of available-for-sale short-term investments... (8,708) -
-------- --------
Net cash used in investing activities...................... (14,524) (7,233)
-------- --------
Financing activities:
Net borrowings (payments) under lines of credit.......... (7,171) 9,050
Proceeds from notes payable and capital lease
obligations............................................. 6,123 1,264
Payments on notes payable and capital lease obligations.. (42,133) (7,540)
Proceeds from issuance of common and preferred stock..... 141,965 24,784
-------- --------
Net cash provided by financing activities.................. 98,784 27,558
-------- --------
Net increase (decrease) in cash and cash equivalents....... 87,065 (1,340)
Foreign currency translation adjustment.................... (646) 74
Cash and cash equivalents at beginning of year............. 3,283 4,549
-------- --------
Cash and cash equivalents at end of year................... $ 89,702 $ 3,283
======== ========
</TABLE>

See accompanying notes.

27
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Description of business

BEA Systems, Inc. (the "Company" or "BEA") is a leading provider of cross-
platform middleware solutions for enterprise applications. The Company's
products and services help enable mission-critical, distributed applications
to work seamlessly in client/server, Internet and legacy environments. BEA
provides transactional, messaging and distributed object-based software for
developing and deploying these enterprise applications. In addition to its
product line, BEA provides enterprise solutions through its partner network
and a wide range of services including consulting, education and support.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All intercompany transactions and balances
have been eliminated. Operations of businesses acquired and accounted for as
purchases are consolidated as of the date of acquisition.

Use of estimates

The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ from those
estimates.

Foreign currencies

The assets and liabilities of foreign subsidiaries are translated from their
respective functional currencies at the rates in effect at the balance sheet
date while revenue and expense accounts are translated at weighted average
rates during the period. Foreign currency translation adjustments are
reflected as a separate component of stockholders' equity (deficit).

The Company hedges a portion of its exposure on certain intercompany
receivables and payables denominated in foreign currencies using forward
foreign exchange contracts, which are recorded at fair value at each balance
sheet date. Gains and losses resulting from exchange rate fluctuations on
forward foreign exchange contracts are recorded currently in interest and
other expense and offset corresponding gains and losses on the foreign
currency accounts being hedged. Net losses resulting from foreign currency
transactions, were approximately $600,000 and $400,000 in fiscal years 1998
and 1997, respectively.

Cash, cash equivalents and short-term investments

Cash and cash equivalents consist of highly liquid investments with
maturities of 90 days or less from the date of purchase. The carrying amounts
reported on the consolidated balance sheets for cash and cash equivalents
approximates their fair market value.

Short-term investments consist principally of commercial paper and time
deposits with remaining maturities of one year or less. The Company determines
the appropriate classification of its short-term investments at the time of
purchase and re-evaluates such designations as of each balance sheet date. All
short-term investments in the Company's portfolio are classified as
"available-for-sale" and are stated at fair market value, with the unrealized
gains and losses reported in stockholders' equity (deficit) until disposition.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
interest income along with interest earned.

28
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Concentration of credit risk

The Company invests its cash, cash equivalents and short-term investments
with financial institutions with high credit standing and, by policy, limits
the amounts invested with any one financial institution, type of security and
issuer.

The Company sells its products to customers, typically large corporations,
in a variety of industries in the Americas, Europe and the Asia/Pacific
region. The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit extended as deemed
appropriate, but generally requires no collateral. The Company maintains
reserves for estimated credit losses and, to date, such losses have been
within management's expectations.

Computer equipment, furniture and leasehold improvements

Computer equipment, furniture and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from three to seven years. Assets under
capital leases are amortized over five years or the life of the lease; while
leasehold improvements are amortized over the shorter of the estimated useful
life or the lease term.

Acquired intangible assets

Acquired intangible assets consist of developed technology, distribution
rights, trademarks, tradenames and goodwill related to the Company's
acquisitions accounted for using the purchase method. Amortization of these
purchased intangibles is calculated on the straight-line basis over the
respective estimated useful lives of the intangible assets ranging from
twenty-four to thirty months for developed technology and distribution rights
to sixty months for trademarks and goodwill. Amortization of developed
technology, distribution rights, trademarks and tradenames is included as a
component of cost of revenues, while amortization of goodwill is included in
general and administrative expenses. Acquired in-process research and
development without alternative future use is expensed when acquired.

Long-lived assets

The Company has adopted Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed of (FAS
121). In accordance with FAS 121, the Company identifies and records
impairment losses, as circumstances dictate, on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. No such events have
occurred with respect to the Company's long-lived assets, which consist
primarily of acquired intangible assets, computer equipment, furniture and
leasehold improvements. The adoption of FAS 121 did not have a material impact
on the financial position, results of operations or cash flows of the Company.

Capitalized software

Statement of Financial Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed, requires the
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready
for general release have been insignificant. Accordingly, the Company has
charged all such costs to research and development expense in the period
incurred.

29
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Product concentration

The Company currently derives the majority of its license and service
revenues from products in the BEA TUXEDO product line. These products and
services are expected to continue to account for the majority of the Company's
revenues for the foreseeable future. Furthermore, as discussed in Note 9 to
the consolidated financial statements, under the terms of its agreement with
Novell, the Company is obligated to make certain payments to Novell through
January 1999 to acquire perpetual rights to the BEA TUXEDO product. Failure by
the Company for any reason to make these payments could terminate the
Company's continuing rights to BEA TUXEDO.

Revenue recognition

The Company recognizes revenue in accordance with American Institute of
Certified Public Accountants Statement of Position 91-1, Software Revenue
Recognition. Revenues from software license agreements are recognized at the
time of product shipment, provided there are no significant vendor obligations
remaining to be fulfilled and collectibility is probable. Ongoing license
royalty revenues are recognized as reported by the Company's customers.

Service revenues include consulting services, post-contract customer support
and training. Consulting revenues and the related cost of services are
recognized on a time and materials basis; however, revenue from certain fixed
price contracts are recognized on the percentage of completion basis, which
involves the use of estimates. Actual results could differ from those
estimates and, as a result, future profitability on such contracts may be more
or less than planned. The amount of consulting contracts recognized on a
percentage of completion basis has not been material to date. Post-contract
customer support revenues are recognized ratably over the term of the support
period (generally one year) and training and other service revenues are
recognized as the related services are provided. The unrecognized portion of
amounts paid in advance for licenses and services is reported as deferred
revenues.

Stock-based compensation

The Company generally grants stock options to its employees for a fixed
number of shares with an exercise price equal to the fair market value of the
stock on the date of grant. As allowed under the Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation FAS 123,
the Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations
in accounting for stock awards to employees. Accordingly, no compensation
expense is recognized in the Company's financial statements in connection with
stock awards.

Net loss per share

On January 31, 1998, the Company adopted Statement of Financial Accounting
Standard No. 128, Earnings per Share (FAS 128). Under this standard, basic net
loss per share is computed based on the weighted average number of shares of
the Company's common stock. Diluted net loss per share is computed based on
the weighted average number of shares of the Company's common stock and common
equivalent shares (stock options, warrants, convertible notes and preferred
stock), if dilutive.

In addition, in 1998, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 98 (SAB 98) which eliminates the inclusion in
the calculation of net loss per share of common and common equivalent shares
issued during the twelve month period prior to an initial public offering at
prices below the public offering price as if they were outstanding for all
periods presented.

All loss per share amounts for all periods have been calculated and, where
appropriate, restated to conform to the requirements of FAS 128 and SAB 98.

Certain prior year amounts have been reclassified to conform to the current
year's presentation.

30
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. FINANCIAL INSTRUMENTS

Short-term investments

The following is a summary of available-for-sale securities at January 31,
1998; the Company had no available-for-sale securities at January 31, 1997 (in
thousands):

<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------------------
GROSS
AMORTIZED UNREALIZED FAIR
COST LOSSES VALUE
--------- ---------- -------
<S> <C> <C> <C>
Commercial paper............................... $40,460 $ (27) $40,433
Money market................................... 42,772 - 42,772
Time deposits.................................. 3,722 - 3,722
Forward foreign currency contracts............. (22) - (22)
------- ------- -------
$86,932 $ (27) $86,905
======= ======= =======
</TABLE>

Included in the above table are securities with fair values totaling $78.2
million, which are classified as cash and cash equivalents and $8.7 million,
which are classified as short-term investments in the accompanying
consolidated balance sheets. All short-term investments mature within six
months. At January 31, 1998, short-term investments included restricted time
deposits of $2.5 million which collateralize borrowings (see Note 9).

Foreign currency contracts

The Company enters into forward foreign currency contracts to hedge the
value of certain intercompany assets and liabilities denominated in foreign
currencies to reduce the exposure to foreign currency fluctuations. At January
31, 1998, the Company had outstanding forward foreign currency contracts with
a notional amount of approximately $20 million, predominantly to exchange
British pounds, German marks, Japanese yen, French francs and Swedish krona
with notional amounts of $3.5 million, $3.1 million, $8.0 million, $3.2
million, $1.2 million, respectively. Substantially all of the Company's
forward foreign currency contracts have maturities of 90 days or less. The
fair value of foreign currency contracts is estimated based on the spot rate
of the various hedged currencies as of the end of the period.

Fair value of financial instruments

The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):

<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------
1998 1997
----------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.............. $89,702 $89,702 $ 3,283 $ 3,283
Short-term investments................. 8,708 8,708 - -
Financial liabilities:
Borrowings under lines of credit....... 1,879 1,879 9,050 9,050
Notes payable and capital lease
obligations (including current
portion).............................. 42,992 42,992 77,720 77,720
Off balance sheet instruments:
Foreign currency forward contracts..... (22) (22) - -
</TABLE>

31
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented above are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.

For certain of the Company's financial instruments, including cash and cash
equivalents, short-term investments, notes payable, the carrying amounts
approximate fair value due to their short maturities. The fair value of
foreign currency forward contracts was based on the estimated amount at which
they could be settled based on quoted exchange rates.

3. COMPUTER EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS

Computer equipment, furniture and leasehold improvements consist of the
following (in thousands):

<TABLE>
<CAPTION>
JANUARY 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Computer equipment....................................... $ 5,336 $ 3,933
Furniture and equipment.................................. 2,356 1,616
Leasehold improvements................................... 2,438 1,474
Furniture and equipment under capital leases............. 1,608 1,154
------- -------
11,738 8,177
Accumulated depreciation and amortization................ (3,923) (1,529)
------- -------
$ 7,815 $ 6,648
======= =======
</TABLE>

Accumulated amortization for furniture and equipment under capital leases
was approximately $432,000 and $154,000 at January 31, 1998 and 1997,
respectively.

4. BUSINESS COMBINATIONS

Tuxedo Product Line

On February 23, 1996, the Company entered into a license agreement with
Novell, Inc. and acquired exclusive rights to distribute and make enhancements
to Novell's TUXEDO product on UNIX, Windows NT and all non-NetWare platforms.
In addition, the Company assumed Novell's obligations and rights under all
contracts with TUXEDO partners, distributors and customers and exclusive
rights to the TUXEDO trademark. The purchase price (including direct
acquisition costs) was approximately $77.5 million and consisted primarily of
a note payable to Novell with fixed payment terms (See Note 9).

The following is a summary of the purchase price allocation (in thousands):

<TABLE>
<S> <C>
Current assets and other tangible assets.......................... $ 4,270
Liabilities assumed............................................... (702)
Acquired in-process research and development...................... 60,948
Developed technology.............................................. 9,825
Trademarks and tradenames......................................... 3,159
-------
$77,500
=======
</TABLE>

32
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

USL Finance, S. A.

On May 5, 1996, the Company acquired all of the outstanding stock of USL
Finance, S.A. ("USL"), a distributor of BEA TUXEDO in France. The purchase
price (including direct acquisition costs) was approximately $3.3 million
which was paid in cash. The Company has accounted for the acquisition using
the purchase method.

The following is a summary of the purchase price allocation (in thousands):

<TABLE>
<S> <C>
Current assets and other tangible assets.......................... $ 6,060
Liabilities assumed............................................... (5,482)
Distribution rights............................................... 2,672
-------
$ 3,250
=======

Client Server Technologies, OY

On June 12, 1996, the Company acquired all of the outstanding stock of Client
Server Technologies, OY ("CST"), a distributor of BEA TUXEDO in Finland. The
purchase price (including direct acquisition costs) was approximately $2.2
million which was paid in cash. The Company has accounted for the acquisition
using the purchase method.

The following is a summary of the purchase price allocation (in thousands):

Current assets and other tangible assets.......................... $ 1,483
Liabilities assumed............................................... (1,067)
Acquired in-process research and development...................... 1,300
Distribution rights............................................... 389
Trademarks and tradenames......................................... 58
-------
$ 2,163
=======

Bay Technologies PTY, Limited.

On December 23, 1996, the Company acquired all of the outstanding stock of
Bay Technologies Pty., Limited ("Bay"), a distributor of BEA TUXEDO in
Australia. The purchase price (including direct acquisition costs) was
approximately $1.0 million and consisted primarily of a note payable of
$916,000 (See Note 9). The Company has accounted for the acquisition using the
purchase method.

The following is a summary of the purchase price allocation (in thousands):

Current assets and other tangible assets.......................... $ 121
Liabilities assumed............................................... (293)
Distribution rights............................................... 1,178
-------
$ 1,006
=======
</TABLE>

Digital Equipment Corporation

On March 26, 1997, the Company completed an agreement with Digital Equipment
Corporation ("Digital") to acquire exclusive worldwide rights to MessageQ,
ObjectBroker and other related products. The purchase price (including
$308,000 direct acquisition costs) was approximately $20.1 million. The
acquisition was accounted

33
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

for using the purchase method. Of the aggregate consideration, $5.0 million
was paid in cash on closing and aggregate payments of $17.0 million were due
pursuant to a convertible promissory note. Interest was imputed on the
convertible promissory note at 8 percent which resulted in the recorded
liability of approximately $14.0 million on a present value basis. In
addition, the Company granted Digital a warrant to purchase 500,000 shares of
common stock at a price of $6.00 per share, which resulted in recorded costs
of $790,000.

The following is a summary of the purchase price allocation (in thousands):

<TABLE>
<S> <C>
Current assets and other tangible assets.......................... $ 6,017
Liabilities assumed............................................... (6,247)
Acquired in-process research and development...................... 16,000
Developed technology.............................................. 3,700
Goodwill.......................................................... 613
-------
$20,083
=======
</TABLE>

In August 1997, the Company and Digital entered into an agreement whereby
the Company issued 925,925 shares of Common Stock and paid $4,925,000 in full
settlement of the convertible promissory note. Additionally, the Company
issued 364,022 shares of common stock to Digital in accordance with the terms
of Digital's exercise of the entire warrant as provided for in the warrant
agreement.

Pro forma information

The following unaudited pro forma summary represents the consolidated
results of operations of the Company as if the acquisition of USL and BEA
TUXEDO had occurred at the beginning of fiscal 1997 and does not purport to be
indicative of what would have occurred had the acquisitions been made as of
that date or the results which may occur in the future. The operating results
of the acquisitions of CST and Bay have not been included in the pro forma
amounts as the effect of their inclusion would not be material.

<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
1997
-----------
<S> <C>
Pro forma revenues (in thousands).............................. $ 62,521
Pro forma net loss (in thousands).............................. $(89,040)
Pro forma net loss per share................................... $ (9.52)
</TABLE>

5. PUBLIC OFFERINGS OF COMMON STOCK

In April 1997, the Company completed its initial public offering of common
stock. The offering generated net proceeds of approximately $27.7 million from
the sale of 5.4 million shares. In July 1997, the Company completed a follow-
on public offering of its common stock. The offering generated net proceeds of
approximately $110.4 million from the sale of 6.9 million shares of common
stock.

6. ACQUIRED INTANGIBLE ASSETS

Values assigned to acquired in-process research and development,
distribution rights, developed technology, trademarks and tradenames were
generally determined by independent appraisals using discounted cash flow
analysis. To determine the value of the in-process research and development,
the Company considered, among other factors, the state of development of each
project, the time and cost needed to complete each project, expected income
and associated risks which included the inherent difficulties and
uncertainties in completing the project and thereby achieving technological
feasibility and risks related to the viability of and potential changes

34
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

to future target markets. This analysis results in amounts assigned to in-
process research and development projects that had not yet reached
technological feasibility and does not have alternative future uses. To
determine the value of the distribution rights, the Company considered, among
other factors, the size of the current and potential future customer base,
quality of existing relationships with customers, the expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in transitioning the business relationships from the acquired
entity to the Company and risks related to the viability of and potential
changes to future target markets. To determine the value of the developed
technology, the expected future cash flows of each existing technology product
were discounted taking into account risks related to the characteristics and
applications of each product, existing and future markets and assessments of
the life cycle stage of each product. Based on this analysis, the existing
technology that had reached technological feasibility was capitalized.
Acquired intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
JANUARY 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Developed technology and distribution rights............ $ 27,610 $22,790
Trademarks and tradenames............................... 3,417 3,417
Goodwill................................................ 2,784 933
-------- -------
33,811 27,140
Accumulated amortization................................ (21,496) (9,914)
-------- -------
$ 12,315 $17,226
======== =======
</TABLE>

7. OTHER ASSETS

Included in other assets at January 31, 1998 and 1997 was $1.2 million and
$1.5 million, respectively, invested in bank certificates of deposit with
interest rates ranging from 3.90 percent to 4.25 percent. The certificates of
deposit's support letters of credit that are required as security deposits
under certain of the Company's facilities leases and other credit
arrangements.

Also included in other assets at January 31, 1998 and 1997 was a note
receivable of $720,000 from an officer and founder of the Company for the
financing of real property. The note receivable, which is secured by a deed of
trust on the real property, bears interest at 7 percent per annum and is due
and payable on the earlier of January 1, 2001 or termination of the founder's
employment with the Company. The note may be repaid at any time prior to the
due date.

8. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
JANUARY 31,
---------------
1998 1997
------- -------
<S> <C> <C>
Accrued payroll and related liabilities................... $14,677 $ 6,597
Accrued sales and value added tax......................... 3,422 3,547
Other accrued liabilities................................. 7,332 4,062
------- -------
$25,431 $14,206
======= =======
</TABLE>

9. LINE OF CREDIT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

Borrowings under lines of credit

At January 31, 1998, the Company had outstanding $1.9 million, pursuant to
revolving lines of credit arrangements with commercial lenders in Japan and
Korea. The maximum credit available under the

35
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

arrangements was $2.8 million and borrowings available under the lines totaled
approximately $900,000 at January 31, 1998. Borrowings under the credit
arrangements bear interest at rates ranging from 2 percent to 24 percent with
a weighted average interest rate of 22 percent at January 31, 1998, and are
secured by $2.5 million of certificates of deposits.

At January 31, 1997, the Company had outstanding debt of approximately $9.1
million, pursuant to a revolving line of credit arrangement with a commercial
lender. The maximum credit available under this facility was $10.0 million and
borrowing availability was based on the aggregate of (i) a percentage of
qualifying accounts receivable and (ii) $4.0 million. Additional borrowings
available under the line totaled $1.0 million at January 31, 1997. Borrowings
under the credit arrangement bear interest adjusted monthly at the LIBOR plus
5.1 percent (10.5 percent in aggregate at January 31, 1997) and was secured by
substantially all assets of the Company. In addition, the credit agreement
prohibited the Company from paying dividends without the lender's approval.
The line of credit expired in April 1997.

The Company has not renewed the primary capital lease line which expired in
June 1997 and therefore no longer has capital lease line availability.

Notes payable and capital lease obligations

Notes payable and capital lease obligations consist of the following (in
thousands):

<TABLE>
<CAPTION>
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Note payable to Novell, Inc. with interest imputed at 8
percent. The note is due in quarterly installments of
various amounts totaling $29.0 million, which are
guaranteed by the majority shareholder of the Company,
with a final payment of $12.0 million due in January 1999
upon the Company's exercise of an option to purchase
perpetual rights to BEA TUXEDO............................ $ 38,734 $ 69,900
Note payable to a commercial lender in Japan bearing
interest at 2 percent. Principal payment is due in four
equal installments with the last payment scheduled in
December 1998............................................. 2,606 -
Subordinated notes payable to founders of an acquired
business bearing interest at 8 percent. Accrued interest
of $430,000 is included at January 31, 1997. The note was
paid in full in May 1997.................................. - 4,589
Credit arrangement with the Company's majority stockholder.
Borrowings under the arrangement were unsecured, bear
interest at 11 percent and are convertible into common
stock at the option of the lender. The outstanding balance
and accrued interest aggregating $4.6 million were
converted into 817,334 shares of common stock concurrent
with the Company's initial public offering in April 1997.. - 1,000
Notes payable to the former shareholders of Bay
Technologies Pty., Limited, with interest imputed at 8
percent and payable in quarterly installments............. 482 928
Capital lease obligations.................................. 1,096 1,004
Other notes payable........................................ 74 299
-------- --------
42,992 77,720
Less amounts due within one year........................... (42,301) (28,180)
-------- --------
Notes payable and capital lease obligations due after one
year.................................................... $ 691 $ 49,540
======== ========
</TABLE>

36
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Scheduled maturities of notes payable and capital lease obligations are as
follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL
NOTES LEASE
PAYABLE OBLIGATIONS
------- -----------
<S> <C> <C>
Fiscal year ending January 31,
1999................................................. $41,866 $ 580
2000................................................. 30 601
2001................................................. - 101
------- --------
$41,896 1,282
=======
Less amount representing interest...................... (186)
--------
Present value of minimum lease payments................ 1,096
Less current portion................................... (435)
--------
Long-term capital lease obligations.................. $ 661
========
</TABLE>

Cash payments for interest were $6.2 million and $6.3 million for fiscal
years 1998 and 1997, respectively.

10. OPERATING LEASE COMMITMENTS

The Company leases its facilities under operating lease arrangements.
Certain of the leases provide for specified annual rent increases as well as
options to extend the lease beyond the initial term. Approximate annual
minimum operating lease commitments are as follows (in thousands):

<TABLE>
<S> <C>
Fiscal year ending January 31,
1999............................................................ $ 6,842
2000............................................................ 9,664
2001............................................................ 8,642
2002............................................................ 7,378
2003............................................................ 7,608
Thereafter...................................................... 39,595
-------
Total minimum lease payments.................................. $79,729
=======
</TABLE>

In December 1997, the Company entered into a ten year lease agreement for
approximately 224,000 square feet of office space in San Jose, California to
house the Company's corporate headquarters, sales, marketing, research and
administrative personnel. The Company expects to occupy this space in the late
summer or fall of fiscal year 1999. While the Company intends to temporarily
sublease approximately 100,000 square feet, all of the required future lease
payments are included in the table of annual minimum operating lease
commitments above.

Total rent expense charged to operations for the fiscal years ended January
31, 1998 and 1997 was approximately $5.8 million and $3.3 million,
respectively.

37
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

11. INCOME TAXES

The components of the provisions for income taxes consist of the following
(in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Current provision:
Federal............................................. $ 878 $ -
State............................................... 300 -
Foreign............................................. 1,665 800
-------- --------
Provision for income taxes........................ $ 2,843 $ 800
======== ========

The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rate (34 percent) to income tax
expense is as follows (in thousands):

<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Tax benefit at U.S. statutory rate.................... $ (6,512) $(29,874)
Nondeductible amortization of acquired intangible
assets............................................... 2,720 11,842
Valuation allowance................................... 4,890 18,304
Foreign withholding taxes, net........................ 949 528
Foreign taxes in excess of U.S. rate.................. 397 -
Other................................................. 399 -
-------- --------
Provision for income taxes.......................... $ 2,843 $ 800
======== ========

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes are as
follows (in thousands):

<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves............................... $ 2,507 $ 3,275
Net operating loss carryforwards.................... 5,017 7,279
Computer equipment, furniture, leasehold
improvements and acquired intangible assets........ 18,489 17,547
Other............................................... 950 -
-------- --------
Total deferred tax assets......................... 26,963 28,101
Valuation allowance................................... (26,963) (28,101)
-------- --------
Net deferred tax assets........................... $ - $ -
======== ========
</TABLE>

Realization of deferred tax assets is dependent on future taxable income,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets at January 31,
1998 and 1997, has been established to reflect these uncertainties. The
valuation allowance decreased by

38
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

$1.1 million and increased by $23.0 million in fiscal years 1998 and 1997,
respectively. Approximately $752,000 of the valuation allowance at January 31,
1998 relates to tax benefits associated with exercises of stock options which
will reduce taxes payable and be credited to additional paid-in capital when
realized.

As of January 31, 1998, the Company had federal net operating loss and
foreign tax credit carryforwards of approximately $14.7 million and $1.0
million that will expire in fiscal years 2011 and 2003, respectively.
Utilization of net operating loss and credit carryforwards may be subject to
substantial limitations due to ownership change and other limitations provided
by the Internal Revenue Code and similar state provisions. These limitations
may result in the expiration of net operating loss carryforwards before full
utilization.

Pretax income (loss) from foreign operations was approximately $8.5 million
and $(1.5) million for fiscal years 1998 and 1997, respectively.

Cash refunds received, net of income taxes paid, were $57,000 for fiscal
year 1998, while cash payments for income taxes were $230,000 for fiscal year
1997.

12. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK

At January 31, 1997, the Company had outstanding 19,847,800 shares of Series
B Redeemable Convertible Preferred Stock ("Series B Preferred Stock"). Holders
of the Series B Preferred Stock were entitled to cumulative annual dividends
of $0.07 per share payable prior and in preference to any declaration or
payment of dividends on the Series A Convertible Preferred Stock (the "Series
A Preferred Stock") and the common stock. The right to receive such dividends
was cumulative and accrued to the extent that such dividends were not declared
or paid in any year. No dividends had been declared or paid by the Company on
the Series B Preferred Stock. Total accumulated dividends on the Series B
Preferred Stock were approximately $932,000 at January 31, 1997.

At the time of the Company's initial public offering in April 1997, all of
the outstanding Series B Preferred Stock and accumulated dividends of $1.2
million were converted into 3,772,077 shares of common stock.

13. STOCKHOLDERS' EQUITY

Series A convertible preferred stock

At January 31, 1997, the Company had outstanding 17,166,000 shares of Series
A Preferred Stock. Each share of Series A Preferred Stock was convertible at
any time at the option of the shareholder into two shares of common stock or
automatically at the time of the initial public offering. Holders of Series A
Preferred Stock were entitled to noncumulative annual dividends, when and if
declared by the Board of Directors, of $0.12 per share, payable in preference
to common stock dividends, but after all cumulative dividends payable with
respect to the Series B Preferred Stock had been declared and paid. No
dividends were declared or paid by the Company on the Series A Preferred
Stock.

At the time of the initial public offering in April 1997, all outstanding
shares of Series A Preferred Stock were converted into 34,332,000 shares of
common stock.

Class B common stock

On March 19, 1997, the Company's Board of Directors authorized 35 million
shares of an additional class of common stock ("Class B Common Stock"). All
outstanding shares of Class B Common Stock are held by the Company's majority
stockholder. The Class B Common Stock has the same rights, preferences,
privileges

39
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

and restrictions as the common stock, except that the Class B Common Stock is
convertible into common stock, has no voting rights except as required by
Delaware law and has no right to vote for the election of directors. The
shares of Class B Common Stock are convertible at the option of the holder
into common stock, so long as such conversion results in the majority
stockholder holding equal to or less than 49 percent of the Company's
outstanding voting securities. The shares of Class B Common Stock could be
automatically converted into a like number of shares of common stock upon the
occurrence of certain events.

Stock option plans

Under the Company's stock option plans, incentive and nonqualified stock
options may be granted to eligible participants to purchase shares of the
Company's common stock. Options generally vest over a four-year period and
have terms of up to ten years. A maximum of 17 million shares of common stock
have been authorized for issuance under the plans. Annually the number of
authorized shares are automatically increased by an amount equal to 3.5
percent of the outstanding shares of common stock on December 31 of the
immediately preceding calendar year. The exercise price of the stock options
is determined by the Company's Board of Directors on the date of grant and is
at least equal to the fair market value of the stock on the grant date.

Information with respect to option activity under the Company's stock option
plans are summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS EXERCISE PRICE PRICE PER
OUTSTANDING PER SHARE SHARE
(SHARES IN THOUSANDS) ----------- -------------- ---------
<S> <C> <C> <C>
Options outstanding at January 31, 1996... 2,244 $ 0.29 $ 0.29
Granted................................. 5,368 $0.29 - $ 6.00 $ 1.21
Exercised............................... (404) $ 0.29 $ 0.29
Canceled................................ (527) $ 0.66 $ 0.66
---------
Options outstanding at January 31, 1997... 6,681 $0.29 - $ 6.00 $ 1.00
Granted................................. 3,194 $6.00 - $24.13 $11.13
Exercised............................... (1,179) $0.29 - $ 6.00 $ 0.46
Canceled................................ (480) $0.29 - $20.00 $ 4.50
---------
Options outstanding at January 31, 1998... 8,216 $0.29 - $24.13 $ 4.80
=========
Options exercisable at January 31, 1998... 1,708 $0.29 - $ 6.00 $ 1.00
=========
Options exercisable at January 31, 1997... 405 $ 0.29 $ 0.29
=========
Options available for grant at January 31,
1998..................................... 5,682
=========
</TABLE>

The weighted average grant date fair value of stock options was $5.58 and
$0.36 in fiscal years 1998 and 1997, respectively.

40
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes information about stock options outstanding
at January 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
OF SHARES LIFE (IN YEARS) PRICE
(SHARES IN THOUSANDS) --------- --------------- --------
<S> <C> <C> <C>
Range of per share exercise prices:
$ 0.29............................... 4,174 8.18 $ 0.29
$ 1.00 - $ 6.00...................... 2,381 8.98 $ 5.00
$ 9.25 - $16.00...................... 910 9.65 $13.45
$17.31 - $24.12...................... 751 9.68 $18.80
------
8,216
======
</TABLE>

The following table summarizes information about outstanding and exercisable
stock options at January 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
(SHARES IN THOUSANDS) --------- --------
<S> <C> <C>
Range of per share exercise prices:
$ 0.29................................................ 1,390 $0.29
$ 1.00 - $ 6.00....................................... 318 $4.12
------
1,708
======
</TABLE>

Employee stock purchase plan

In March 1997, the Company's Board of Directors approved an employee stock
purchase plan for all employees meeting certain eligibility criteria. Under
the plan, employees may purchase shares of the Company's common stock, subject
to certain limitations, at not less than 85 percent of fair market value as
defined in the plan. A total of 3,750,000 shares have been authorized for
issuance under the plan. For the fiscal year ended January 31, 1998, a total
of 633,000 shares were issued at an average price of $5.29 per share. At
January 31, 1998, a total of 3,117,000 shares were reserved and available for
future issuance under the plan.

Accounting for stock-based compensation

The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized in the Company's
financial statements.

Pro forma information regarding net loss and net loss per share is required
by FAS 123. This information is required to be determined as if the Company
had accounted for its employee stock options (including shares issued under
the Employee Stock Purchase Plan, collectively called "stock based awards")
granted subsequent to January 31, 1995, under the fair value method of that
statement. The fair value of the Company's stock based awards granted to
employees in fiscal years 1998 and 1997, prior to the Company's initial public
offering, was estimated using the minimum value method. Stock based awards
granted in fiscal year 1998, subsequent to the

41
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Company's initial public offerings, have been valued using the Black-Scholes
option pricing model. Among other things, the Black-Scholes model considers
the expected volatility of the Company's stock price, determined in accordance
with FAS 123, in arriving at an option valuation. The minimum value method
does not consider stock price volatility. Further, certain other assumptions
necessary to apply the Black-Scholes model may differ significantly from
assumptions used in calculating the value of stock based awards granted in
fiscal years 1998 and 1997 under the minimum value method.

The fair value of the Company's stock based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:

<TABLE>
<CAPTION>
EMPLOYEE STOCK EMPLOYEE STOCK
OPTIONS PURCHASE PLAN
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Expected life (in years)............... 4.5 4.0 .5 -
Risk-free interest rate................ 6.12% 5.00% 6.25% -
Volatility............................. .6 - .6 -
</TABLE>

The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected volatility of the stock
price. Because the Company's stock based awards have characteristics
significantly different from those of traded options and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
based awards.

For purposes of pro forma disclosures, the estimated fair value of the above
stock-based awards is amortized to expense over the awards' vesting period.
The Company's pro forma information follows (in thousands, except per share
amount):

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Pro forma basic and diluted net loss.................. $(24,455) $(88,808)
Pro forma, net loss per share......................... $ (0.48) $ (9.40)
</TABLE>

The fiscal year ending January 31, 2000 will be the first fiscal year in
which the pro forma effects of FAS 123 will reflect the expense of four years'
vesting. Therefore, the pro forma effects of FAS 123 for fiscal years 1998 and
1997 are not likely to be representative of the pro forma effects of future
fiscal years.

Deferred compensation

In fiscal year 1997, the Company recorded deferred compensation $973,000 for
certain common stock options granted at prices below the deemed fair market
value of the Company's common stock on the date of grant. The amount of
deferred compensation is being amortized as compensation expense over the
vesting period of the underlying stock options. For the fiscal years ended
January 31, 1998 and 1997, compensation expense recognized totaled $244,000
and $128,000, respectively.

Stockholder notes receivable

In September 1995, the Company issued 3,050,000 shares of common stock to
certain officers in exchange for cash of $325,000 and notes receivable of
$544,000. The notes receivable are issued on full recourse terms

42
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

and bear interest at 7 percent compounded semi-annually. The notes receivable
are due on September 28, 2000 or within a specified period of time following
termination from the Company.

14. NET LOSS PER SHARE

On January 31, 1998, the Company adopted FAS 128, as a result, the Company
has changed the method used to compute net loss per share and has restated net
loss per share for all prior periods as required by FAS 128. The adoption of
FAS 128 did not have a material impact on the Company's consolidated results
of operations. The impact of outstanding stock options has not been included
in the net loss per share as their effect would be antidilutive. The following
is a reconciliation of the numerators and denominators of the basic and
diluted loss per share computations (in thousands, except per share data):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Basic and Diluted loss per share:
Numerator:
Net loss.......................................... $(21,995) $(88,665)
Effect of Series B redeemable convertible
preferred stock dividends........................ (268) (880)
-------- --------
Net loss available to common stockholders......... $(22,263) $(89,545)
======== ========
Denominator:
Weighted average shares........................... 51,252 9,444
======== ========
Basic and diluted net loss per share.................. $ (0.43) $ (9.48)
======== ========
</TABLE>

For fiscal year January 31, 1997, the pro forma net loss per share assuming
conversion of preferred stock on an as-converted basis as of the date of
issuance is as follows:

<TABLE>
<S> <C>
Numerator:
Net loss...................................................... $(88,665)
========
Denominator:
Weighted average shares....................................... 9,444
Dilutive effect of conversion of preferred stock.............. 29,719
--------
39,163
========
Pro forma net loss per share.................................... $ (2.26)
========
</TABLE>

Securities (including those issuable pursuant to contingent stock
agreements) that could potentially dilute basic EPS in the future that were
not included in the computation of diluted EPS because to do so would have
been antidilutive for the periods presented.

15. EMPLOYEE BENEFIT PLAN

The Company has a pre-tax savings plan to provide retirement and incidental
benefits for its employees that qualifies under Section 401(k) of the Internal
Revenue Code. Eligible participants may make voluntary contributions to the
plan of up to 15 percent of their compensation, subject to certain
limitations. The plan permits Company contributions; however, none have been
made to date.

43
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized unaudited quarterly financial information for fiscal years 1998
and 1997 is as follows (in thousands):

<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Fiscal year 1998:
Total revenues.......... $ 30,389 $34,155 $41,020 $51,625 $157,189
Gross margin............ 23,354 25,816 30,547 40,116 119,833
Income (loss) from
operations............. (17,317) (687) 306 2,863 (14,835)
Net income (loss)....... (20,371) (3,121) (317) 1,814 (21,995)
Fiscal year 1997:
Total revenues.......... $ 6,851 $13,482 $16,016 $25,249 $ 61,598
Gross margin............ 4,357 9,239 10,255 19,140 42,991
Loss from operations.... (66,179) (5,962) (7,181) (1,820) (81,142)
Net loss................ (67,451) (7,842) (9,177) (4,195) (88,665)
</TABLE>

Results for the first quarter of fiscal year 1998 included a nonrecurring
charge of $16.0 million relating to the write-off of acquired in-process
research and development associated with the acquisition of certain assets
from Digital. Results for the first and second quarters of fiscal year 1997
included nonrecurring charges of $60.9 million and $1.3 million, respectively,
relating to the write-off of acquired in-process research and development
associated with the acquisitions of the BEA TUXEDO product line and CST.

17. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION

Information regarding the Company's operations by geographic areas at
January 31, 1998 and 1997 and for the fiscal years then ended is as follows
(in thousands):

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Total revenues:
United States....................................... $116,884 $ 48,252
Europe.............................................. 45,229 18,761
Asia/Pacific and other.............................. 25,048 3,494
Consolidating eliminations.......................... (29,972) (8,909)
-------- --------
$157,189 $ 61,598
======== ========
Income (loss) from operations:
United States....................................... $(16,199) $(79,494)
Europe.............................................. 1,120 120
Asia/Pacific and other.............................. 244 (1,768)
-------- --------
$(14,835) $(81,142)
======== ========
Identifiable assets (at end of year):
United States....................................... $124,963 $ 37,418
Europe.............................................. 29,046 16,241
Asia/Pacific and other.............................. 17,308 4,314
-------- --------
$171,317 $ 57,973
======== ========
</TABLE>

Intercompany revenues consist of license revenues payable by the Company's
subsidiaries under software license agreements with the U.S. parent company.

44
<PAGE>

BEA SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

18. RECENT ACCOUNTING PRONOUNCEMENTS

In October 1997, the Accounting Standards Executive Committee issued
Statement of Position No. 97-2, Software Revenue Recognition (SOP 97-2), as
amended by Statement of Position No. 98-4 (SOP 98-4) which provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software sales license transactions. The Company is required to adopt these
statements for all software sales license transactions entered into subsequent
to January 31, 1998. The adoption of the SOPs may, in certain circumstances,
result in the deferral of software license revenues that would have been
recognized upon delivery of the related software under the preceding
accounting standard, Statement of Position 91-1. Detailed implementation
guidelines for the new standard have not yet been issued. Once issued, such
detailed guidance could lead to unanticipated changes in the Company's current
revenue recognition practices and material adverse changes in the Company's
reported revenues and earnings. In the event implementation guidance is
contrary to the Company's revenue recognition practices, the Company believes
it can adapt current business practices to comply with this guidance and avoid
any material adverse effect. However, there can be no assurances that this
will be the case.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 Reporting Comprehensive Income (FAS 130)
and No. 131 Disclosures about Segments of an Enterprise and Related
Information (FAS 131). These statements are effective for fiscal years
commencing after December 15, 1997. The Company will be required to comply
with the provisions of these statements in fiscal year 1999. The Company has
not fully assessed the effect these new standards will have but it is not
expected to have a material impact on the consolidated financial position or
results of operations.

45
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

Certain information required by Part III is omitted from this Report in that
the Registrant will file a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this Report and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee
Report or the Performance Graph included in the Proxy Statement.

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The information required by this item relating to the Company's directors
and nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders and
is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION.

The information required by this Item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders and is incorporated
herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item is included under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders and is incorporated
herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is included under the caption "Certain
Relationships and Related Transactions" in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders and is incorporated herein by
reference.

46
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) EXHIBITS

The Exhibits listed on the accompanying Index to Exhibits immediately
following the consolidated financial statement schedules are filed as part
of, or incorporated by reference into, this Report.

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
3.1(3) Form of Registrant's Amended and Restated Certificate of
Incorporation
3.2(1) Registrant's Bylaws, as currently in effect along with
Certificate of Amendment of Bylaws
4.1(1) Investor Rights Agreements by and among the Registrant and the
investors and the founders named therein
10.1(1)* Employment Agreement between the Registrant and the three
founders dated as of September 28, 1995
10.2(1) Form of Promissory Notes entered into between the Registrant,
William T. Coleman III, Edward W. Scott, Jr. and Alfred S.
Chuang each dated September 28, 1995
10.3(1) Promissory Note secured by deed of trust entered into between the
Registrant and Edward W. Scott, Jr. and Cheryl S. Scott, dated
December 12, 1995
10.4(1) Agreement between the Registrant and Novell, dated January 24,
1996, and Amendments thereto
10.5(1) Lease Agreement between the Registrant and William H. and Leila
A. Cilker dated November 15, 1995 and First Amendment thereto
10.6(1) Stock Purchase Agreement between the Registrant and Warburg,
Pincus Ventures, L.P. dated September 28, 1995, and Amendments
thereto
10.7(1)* Registrant's 1995 Flexible Stock Incentive Plan, including forms
of agreements thereunder
10.8(3)* Registrant's 1997 Stock Incentive Plan, including forms of
agreements thereunder
10.9(3)* Registrant's 1997 Employee Stock Purchase Plan, including forms
of agreements thereunder
10.10(1) Subordinated Bridge Line of Credit between the Registrant and
Warburg, Pincus Ventures, L.P., dated January 22, 1997
10.11(2) License Agreement between the Registrant and Digital Equipment
Corporation, dated January 31, 1997 and Amendments thereto
10.12(2)* 1997 Management Bonus Plan
10.13 Lease agreement between the Registrant and Sobrado Interest III
for premise located at 2315 North First Street, San Jose, dated
December 26, 1997
10.14 Lease agreement between the Registrant and Sobrado Interest III
for premise located at 2345 North First Street, San Jose, dated
December 26, 1997
11.1 Statement re: computation of loss per share (included on page 43
of this Report)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney
27.1 Financial Data Schedules
</TABLE>

47
<PAGE>

- --------
(1) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2, filed January 31, 1997

(2) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2/A, filed March 20, 1997.

(3) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2/A, filed April 3, 1997.

* Denotes a management contract or compensatory plan or arrangement.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed by the Company during the fiscal
quarter ended January 31, 1998.

48
<PAGE>

SIGNATURES

IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED.

BEA Systems, Inc.

/s/ William T. Coleman III
By: _________________________________
William T. Coleman III
President, Chief Executive Officer
and
Chairman of the Board

April 25, 1998

IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN CAPACITIES AND ON THE
DATES INDICATED.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----

<S> <C> <C>
/s/ William T. Coleman III President, Chief Executive April 25, 1998
____________________________________ Officer and Chairman of the
William T. Coleman III Board (Principal Executive
Officer)

/s/ Edward W. Scott, Jr. Executive Vice President of April 25, 1998
____________________________________ Worldwide Field Operations,
Edward W. Scott, Jr. Assistant Secretary and
Director

/s/ Steve L. Brown Executive Vice President, April 25, 1998
____________________________________ Chief Financial Officer and
Steve L. Brown Secretary (Principal
Financial Officer and
Accounting Officer)

/s/ Carol A. Bartz Director April 25, 1998
____________________________________
Carol A. Bartz

/s/ Cary J. Davis Director April 25, 1998
____________________________________
Cary J. Davis

/s/ Stewart K. P. Gross Director April 25, 1998
____________________________________
Stewart K. P. Gross

/s/ William H. Janeway Director April 25, 1998
____________________________________
William H. Janeway

/s/ Dean O. Morton Director April 25, 1998
____________________________________
Dean O. Morton
</TABLE>

49
<PAGE>

CBR0065E0498-1A 1621-AR-98

<PAGE>

EXHIBIT 10.13

LEASE

between

SOBRATO INTERESTS III

Landlord

and

BEA SYSTEMS, INC.

Tenant
<PAGE>

December 26, 1997

John Michael Sobrato
Sobrato Interests III
c/o Sobrato Development Companies
10600 De Anza Blvd., Suite 200
Cupertino, CA 95014-2075

Dear Mr. Sobrato:

Reference is made to the Leases (individually a "Lease" and collectively the
"Leases") between Sobrato Interests III ("Landlord") and BEA Systems, Inc.
("Tenant"), being executed concurrently with this letter agreement, and demising
premises consisting of two 110,881 square foot buildings commonly known as 2315
North First Street, San Jose, California (the "2315 Building") and 2345 North
First Street, San Jose, California (the "2345 Building"), and a 2,500 square
foot historic residence commonly known as 2343 North First Street, San Jose,
California.

We have negotiated the Leases based on the following two assumptions: (1) that
Tenant initially will occupy approximately 91,000 square feet of space or more
in one of the two buildings; and (2) that Tenant's initial occupancy will be in
concentrated in the 2345 Building, with the 2315 Building to be subleased
initially and thus reserved for Tenant's future expansion requirements. As
Tenant works through its programming, these two assumptions may change.

To retain a reasonable degree of flexibility as we proceed with the programming
process, Tenant wants to reserve the right to do one of the following:

(1) Tenant may elect to concentrate its initial occupancy in the 2315
Building and reserve the 2345 Building for future expansion requirements,
such that Tenant's subleasing would be in the 2345 Building. This change
would be accomplished by changing the description of the demised premises
in the two Leases, with appropriate changes in the rent, security deposit
and tenant improvement allowance to account for the fact that the Lease of
the 2345 Building includes the additional 2,500 square feet attributable to
the historic residence.

(2) Tenant may elect to spread its initial occupancy between the two
buildings, provided Tenant's aggregate occupancy in the two buildings is
not less than approximately 91,000 square feet. If Tenant were to make this
election the Leases would be modified to: (a) eliminate from the 2345
Building Lease the 20,000 square foot limit on Deferred Tenant Improvement
Work and restate this limitation in both
<PAGE>

Leases such that the aggregate square footage of Deferred Tenant
Improvement Work in both buildings would not exceed approximately 131,000
square feet; and (b) re-insert in the 2345 Building Lease the provision
allowing Tenant to retain all sublease consideration from subleases
executed within twenty-four months of the Commencement Date, but limit
the application of this provision in both Leases so it applies only to
space in excess of the approximately 91,000 square feet Tenant initially
will occupy.

Please sign this letter in the space provided below to confirm Landlord's
agreement that Tenant may make one of the two elections outlined above and that,
should Tenant do so, Landlord will cooperate with Tenant in amending the Leases
as outlined above.

BEA Systems, Inc.

By: /s/ William T. Coleman III
---------------------------------
William T. Coleman III
Its: Chief Executive Officer

The foregoing letter agreement is accepted and agreed to:

Sobrato Interests III

By: /s/ John Michael Sobrato
--------------------------------------
John Michael Sobrato, as Trustee of the
JOHN MICHAEL SOBRATO 1985
SEPARATE PROPERTY TRUST
Its: General Partner
<PAGE>

TABLE OF CONTENTS
-----------------

Section Page
- --------- ----

1. PARTIES 1

2. PREMISES 1

3. USE 2
A. Permitted Uses 2
B. Uses Prohibited 2
C. Advertisements and Signs 2
D. Covenants, Conditions and Restrictions 3
E. Interference with Tenant's Use 3

4. TERM AND RENTAL 3
A. Base Monthly Rent 3
B. Rental Adjustment 4
C. Late Charges 4
D. Security Deposit 4

5. CONSTRUCTION 6
A. Building Shell Construction 6
B. Tenant Improvement Plans 6
C. Pricing 7
D. Change Orders 8
E. Building Shell Costs 8
F. Tenant Improvement Costs 8
G. Construction 9
H. General Contractor Overhead & Profit 10
I. Tenant Delays 10
J. Insurance 11
K. Punch List & Warranty 11
L. Other Work by Tenant 11
M. Landlord's Failure to Complete Construction 12

6. ACCEPTANCE OF POSSESSION AND COVENANTS TO
SURRENDER: 13
A. Delivery and Acceptance 13
B. Condition Upon Surrender 13
<PAGE>

C. Failure to Surrender 14

7. ALTERATIONS AND ADDITIONS 15
A. Tenant's Alterations 15
B. Free From Liens 16
C. Compliance With Governmental Regulations 16

8. MAINTENANCE OF PREMISES 17
A. Landlord's Obligations 17
B. Tenant's Obligations 17
C. Replacement of Roof Membrane 17

9. HAZARD INSURANCE 18
A. Tenant's Use 18
B. Landlord's Insurance 18
C. Tenant's Insurance 18
D. Waiver 19

10. TAXES 19

11. UTILITIES 20

12. TOXIC WASTE AND ENVIRONMENTAL DAMAGE 20
A. Tenant's Responsibility 20
B. Tenant's Indemnity Regarding Hazardous
Materials 21
C. Actual Release by Tenant 21
D. Landlord's Indemnity Regarding Hazardous
Materials 22
E. Environmental Monitoring 23

13. TENANT'S DEFAULT 23
A. Remedies 23
B. Right to Re-enter 24
C. Abandonment 24
D. No Termination 25
E. Non-Waiver 25
F. Performance by Landlord 26
G. Cross-Default 26

14. LANDLORD'S LIABILITY 26
A. Limitation on Landlord's Liability 26
B. Limitation on Tenant's Recourse 27
<PAGE>

C. Indemnification of Landlord 27

15. DESTRUCTION OF PREMISES 28
A. Landlord's Obligation to Restore 28
B. Limitations on Landlord's Restoration
Obligation 28
C. Unamortized Tenant Improvements 29

16. CONDEMNATION 29

17. ASSIGNMENT OR SUBLEASE 30
A. Consent by Landlord 30
B. Assignment or Subletting Consideration 31
C. No Release 31
D. Reorganization of Tenant 32
E. Permitted Transfers 32
F. Effect of Default 33
G. Conveyance by Landlord 33
H. Successors and Assigns 33
I. Particular Sublease Provisions 33

18. OPTION TO EXTEND THE LEASE TERM 34
A. Grant and Exercise of Option 34
B. Determination of Fair Market Rental 34
C. Resolution of a Disagreement Over the Fair
Market Rental 35

19. GENERAL PROVISIONS 36
A. Attorney's Fees 36
B. Authority of Parties 36
C. Brokers 36
D. Choice of Law 36
E. Dispute Resolution 36
F. Entire Agreement 37
G. Entry by Landlord 37
H. Estoppel Certificates 38
I. Exhibits 38
J. Interest 38
K. Satellite Antennae 38
L. No Presumption Against Drafter 39
M. Notices 39
N. Property Management 39
O. Rent 39
P. Representations 39
<PAGE>

Q. Rights and Remedies 40
R. Severability 40
S. Submission of Lease 40
T. Subordination 40
U. Survival of Indemnities 41
V. Time 41
W. Transportation Demand Management Programs 41
X. Waiver of Right to Jury Trial 41

EXHIBIT "A" - Legal Description of Premises

EXHIBIT "B" - Premises & Projects

EXHIBIT "C" - Building Shell Definition

EXHIBIT "D" - Building Shell Plans

EXHIBIT "E" - Tenant Improvement Plans and Specifications

EXHIBIT "F" - General Conditions
<PAGE>

1. PARTIES: THIS LEASE, is entered into on this 26th day of December,
1997, between SOBRATO INTERESTS III, a California Limited Partnership, whose
address is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014 and
BEA SYSTEMS, INC., a Delaware Corporation, whose address is 385 Moffett Park
Drive, Sunnyvale, CA 94089, hereinafter called respectively Landlord and
Tenant. The effectiveness of this Lease is expressed conditioned upon (i) the
concurrent execution by Landlord and Tenant of the Adjacent Building Lease (as
defined below), (ii) Tenant's receipt of a recognition and non-disturbance
agreement in a form and substance reasonably acceptable to Tenant from Ground
Lessor and from any and all other ground lessors with an interest in the Parcel
(defined below) and from any and all lenders with a lien on the Ground Lease
(defined below) or the Parcel, and (iii) issuance to Tenant, at Tenant's option
and expense, of a leasehold title insurance policy or policies insuring the
leasehold estate and interest of Tenant under this Lease and under the Adjacent
Building Lease, subject only to such recorded matters as are reasonably
acceptable to Tenant. In the event conditions (ii) and (iii) above have not
been satisfied or waived by Tenant within thirty (30) days following execution
of this Lease, Tenant shall have the option to terminate this Lease by providing
written notice to Landlord. Upon the execution of this Lease, Landlord shall
deliver to Tenant a copy of Landlord's ground lessee's title insurance policy
for the Parcel and, if in the possession or control of Landlord, a current title
report for the Parcel reflecting the state of title to the Parcel.

2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from
Landlord those certain Premises with the appurtenances, situated in the City of
San Jose, County of Santa Clara, State of California, consisting of a four-story
steel frame building of 110,881 rentable square feet located at 2315 North First
Street (the "Building") on a parcel leased by Landlord under a Ground Lease
dated as of September 10, 1996 (the "Ground Lease") between Landlord, as tenant,
and Kenji Sakauye and Shizu Sakauye ("Ground Lessor"), as landlord, consisting
of approximately 5.0 acres ("Parcel"), as more particularly described in Exhibit
-------
"A" to this Lease. Subject to Section 19.Y below, Tenant shall have the
- ---
exclusive right to use the common area consisting of all parking areas,
sidewalks and landscape areas ("Common Area") surrounding the Building and an
additional building of 110,881 square feet ("Adjacent Building") and an
existing historic Victorian home consisting of approximately 2,500 rentable
square feet (the "Historic Home") as outlined in red on Exhibit "B", which
-----------
Landlord is concurrently leasing to Tenant on the adjacent land leased from
Edward Sakauye, also known as Eiichi Edward Sakauye, as Trustee under the Will
of Suzuye Sakauye, deceased, and Decree of Distribution of her estate recorded
in Book B818, Page 557 Official Records and Eiichi Sakauye, totaling
approximately 5.0 acres pursuant to another lease between the parties of even
date herewith ("Adjacent Building Lease"). Without limiting the generality of
the foregoing, Tenant shall have the right to install benches, tables, chairs,
umbrellas and other outdoor amenities, security cameras, generators, storage
sheds and other similar removable equipment and furnishings in the

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<PAGE>

Common Area to the extent Tenant determines is reasonably necessary to for the
use and operation of the Project, provided all items installed by Tenant in
the Common Areas are compatible with the design and quality of the Project.
The Premises, the Adjacent Building and the parcel on which it is situated,
the Historic Home and the Common Area shall comprise the "Project". Tenant
shall have pursuant to this Lease exclusive use of the approximately 370
parking spaces within the Parcel, and Tenant shall have pursuant to the
Adjacent Building Lease the exclusive use of all remaining parking spaces
within the Project. Unless expressly provided otherwise, the term "Premises"
as used herein shall include the Tenant Improvements (defined in Section 5.B)
constructed by Tenant pursuant to Section 5.B.

3. USE:

A. PERMITTED USES: Tenant shall use the Premises only for the following
purposes and shall not change the use of the Premises without the prior written
consent of Landlord: Office, research and development, marketing, light
manufacturing, ancillary storage and other incidental uses. Tenant shall use
only the number of parking spaces allocated to Tenant. All trucks and delivery
vehicles shall be parked at the rear of the Building. Landlord makes no
representation or warranty that any specific use of the Premises desired by
Tenant is permitted pursuant to any Laws.

B. USES PROHIBITED: Tenant shall not commit or suffer to be committed
on the Premises any waste, nuisance, nor allow any sale by auction or any other
use of the Premises for an unlawful purpose. Tenant shall not (i) damage or
overload the electrical, mechanical or plumbing systems of the Premises, (ii)
attach, hang or suspend anything from the ceiling, walls or columns of the
building or set any load on the floor in excess of the load limits for which
such items are designed, or (iii) generate dust, fumes or waste products which
create a fire or health hazard or damage the Premises or in the soils
surrounding the Building. No materials, supplies, equipment, finished products
or semi-finished products, raw materials or articles of any nature, or any waste
materials, refuse, scrap or debris, shall be stored upon or permitted to remain
on any portion of the Premises outside of the Building without Landlord's prior
approval, which approval shall not be unreasonably withheld, conditioned or
delayed, except that Tenant may store such items in storage enclosures designed
for such purpose.

C. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be
placed, in, upon or about the Premises any signs not approved by the city or
other governing authority. Any sign placed on the Premises shall be removed by
Tenant, at its sole cost, prior to the Expiration Date or promptly following the
earlier termination of this Lease, and Tenant shall repair, at its sole cost,
any damage or injury to the Premises caused thereby, and if not so removed, then
Landlord may have same so removed at Tenant's expense. Subject to the foregoing
and to Section 19.Y below, Tenant shall have the exclusive right to install and
maintain in the Project such signs as Tenant determines to be necessary or
appropriate (including, without limitation, building and

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<PAGE>

monument signs to identify occupants of the Project).

D. COVENANTS, CONDITIONS AND RESTRICTIONS: This Lease is subject to the
effect of (i) any covenants, conditions, restrictions, easements, mortgages or
deeds of trust, ground leases, rights of way of which are of record on the date
of execution set forth in Section 1 above and any other matters or documents of
record on such execution date; and (ii) any zoning laws of the city, county
and state where the Building is situated (collectively referred to herein as
"Restrictions") and Tenant will conform to and will not violate the terms of
any such Restrictions. Throughout the Lease Term, Landlord likewise shall
observe, perform and discharge all covenants and obligations imposed by the
Restrictions which are imposed on Tenant by the terms of this Lease, including
by way of illustration and not limitation, payment of all rent and other
charges required under the Ground Lease.

E. INTERFERENCE WITH TENANT'S USE: If the Premises should become
unsuitable for Tenant's use as a consequence of (i) the presence of any
Hazardous Material which does not result from Tenant's use, storage or disposal
of such material in violation of applicable Law, or (ii) as the result of a
cessation of utilities not caused by Tenant or from a casualty, which persists
for seventy two (72) consecutive hours or which is caused by Landlord,
("Interfering Event") then Tenant shall be entitled to an abatement of rent to
the extent of the interference with Tenant's use of the Premises occasioned
thereby from the date of the Interfering Event, and, if such interference cannot
be corrected or the damage resulting therefrom repaired so that the Premises
will be reasonably suitable for Tenant's intended use within one hundred eighty
(180) days following the occurrence of the Interfering Event, then Tenant shall
be entitled to terminate this Lease by delivery of written notice to the other
within five (5) days following the expiration of such one hundred eighty (180)
day period.

4. TERM AND RENTAL:

A. BASE MONTHLY RENT: The term ("Lease Term") shall be for one hundred
twenty (120) months, commencing on substantial completion of the Tenant
Improvements as finally determined pursuant to Section 5.G (the "Commencement
Date") estimated to occur on July 17, 1998, and ending one hundred twenty (120)
months thereafter ("Expiration Date"). In addition to all other sums payable by
Tenant under this Lease, Tenant shall pay as base monthly rent ("Base Monthly
Rent") for the Premises the amount of Two Hundred Sixteen Thousand Two Hundred
Seventeen and 95/100 Dollars ($216,217.95). Base Monthly Rent shall be due in
advance on or before the first day of each calendar month during the Lease Term.
All sums payable by Tenant under this Lease shall be paid to Landlord in lawful
money of the United States of America, without offset or deduction (except as
herein expressly permitted) and without prior notice or demand, at the address
specified in Section 1 of this Lease or at such place or places as may be
designated in writing by Landlord during the Lease Term. Base Monthly Rent for
any period less than a calendar month shall be a pro rata portion of the monthly
installment.

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<PAGE>

B. RENTAL ADJUSTMENT: Beginning twelve (12) months after the
Commencement Date, and every twelve (12) months, the then-payable Base Monthly
Rent shall increase by the sum of Five Thousand Five Hundred Forty-Four and
05/100 Dollars ($5,544.05).

C. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant
to Landlord of Base Monthly Rent and other sums due hereunder will cause
Landlord to incur costs not contemplated by this Lease, the exact amount of
which is extremely difficult to ascertain. Such costs include but are not
limited to: administrative, processing, accounting, and late charges which may
be imposed on Landlord by the terms of any contract, revolving credit,
mortgage, or trust deed covering the Premises. Accordingly, if any installment
of Base Monthly Rent or other sum due from Tenant shall not be received by
Landlord or its designee within five (5) days after the rent is due, Tenant
shall pay to Landlord a late charge equal to five (5%) percent of such overdue
amount, which late charge shall be due and payable on the same date that the
overdue amount was due. Landlord agrees to provide Tenant a notice to pay rent
or quit if the Base Monthly Rent is not received when due and further agrees
to waive said late charge in the event all amounts set forth in such notice
are paid in full by cashier's check within five (5) days after Landlord's
service upon Tenant of such notice. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant, excluding interest and attorneys fees and
costs. If any rent or other sum due from Tenant remains delinquent for a
period in excess of thirty (30) days then, in addition to such late charge,
Tenant shall pay to Landlord interest on any rent that is not paid when due at
the Agreed Interest Rate specified in Section 19.J following the date such
amount became due until paid. Acceptance by Landlord of such late charge shall
not constitute a waiver of Tenant's default with respect to such overdue
amount nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.

D. SECURITY DEPOSIT: Concurrently with Tenant's execution of this
Lease, Tenant has deposited with Landlord the sum of Two Hundred Sixteen
Thousand Two Hundred Seventeen and 95/100 Dollars ($216,217.95). ("Security
Deposit"). Landlord shall not be deemed a trustee of the Security Deposit, may
use the Security Deposit in business, and shall not be required to segregate it
from its general accounts. Tenant shall not be entitled to interest on the
Security Deposit. If Tenant defaults with respect to any provisions of the
Lease, including but not limited to the provisions relating to payment of Base
Monthly Rent or other charges, Landlord may, to the extent reasonably necessary
to remedy Tenant's default, use any or all of the Security Deposit towards
payment of the following: (i) Base Monthly Rent or other charges in default;
(ii) any other amount which Landlord may spend or become obligated to spend by
reason of Tenant's default including, but not limited to. Tenant's failure to
restore or clean the Premises following vacation thereof; and (iii) any other
loss or damage which Landlord may suffer by reason of Tenant's

Page 4
<PAGE>

default. If any portion of the Security Deposit is so used or applied, Tenant
shall, within ten (10) days after written demand from Landlord, deposit cash
with Landlord in an amount sufficient to restore the Security Deposit to its
full original amount, and shall pay to Landlord such other sums as necessary
to reimburse Landlord for any sums paid by Landlord. Tenant may not assign or
encumber the Security Deposit without the consent of Landlord. Any attempt to
do so shall be void and shall not be binding on Landlord. The Security Deposit
shall be returned to Tenant within thirty (30) days after the Expiration Date
and surrender of the Premises to Landlord, less any amount deducted in
accordance with this Section, together with Landlord's written notice
itemizing the amounts and purposes for such deduction. In the event of
termination of Landlord's interest in this Lease, Landlord shall deliver or
credit the Security Deposit to Landlord's successor in interest in the
Premises and thereupon be relieved of further responsibility with respect to
the Security Deposit.

At Tenant's election, in lieu of the Security Deposit, Tenant may at any
time simultaneously with, or following the execution of this Lease, deliver to
Landlord an irrevocable letter of credit payable in favor of Landlord in the
amount specified above for the cash security deposit. The letter of credit shall
provide that it is automatically renewable until the date that is not earlier
than the expiration of the term hereby demised without any action whatsoever on
the part of Landlord; provided that the issuing bank shall have the right not to
renew said letter of credit on written notice to Landlord not less than the
expiration of the then current term thereof (it being understood, however, that
the privilege of the issuing bank not to renew said letter of credit shall not,
in any event, diminish the obligation of Tenant to maintain such irrevocable
letter of credit with Landlord through the expiration of the term hereby
demised).

The form and terms of the letter of credit, and the bank issuing the same,
shall be reasonably acceptable to Landlord and the letter of credit shall
provide, among other things, in effect that: (i) Landlord, or its then managing
agent, shall have the right to draw down an amount up to the amount of the sums
then due to Landlord under this Lease upon the presentation to the issuing bank
of Landlord's (or Landlord's then managing agent's) statement that such amount
is due to Landlord under the terms and conditions of this Lease, it is being
understood that such statement shall be duly signed by a general partner of
Landlord; (ii) the letter of credit will be honored by the issuing bank without
inquiry as to the accuracy thereof and regardless of whether the Tenant disputes
the content of such statement; (iii) in the event of a transfer of Landlord's
interest in the Building, Landlord shall have the right to transfer the letter
of credit to the Transferee and the provision hereof shall apply to every
transfer or assignment of said letter of credit to a new Landlord (or it Tenant
is not able to obtain a transferable letter of credit, then Tenant shall cause
the letter of credit to be replaced or amended such that the new Landlord may
draw).

If as a result of any such application of all or any part of the proceeds
of the Letter of Credit, the amount of the letter of

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<PAGE>

credit shall be less than the amount required above, Tenant shall forthwith
provide Landlord with additional letter(s) of credit (or a cash security
deposit) in an amount equal to the deficiency. Any such cash security deposit,
and any proceeds of the letter of credit which are not applied to sums owed by
Tenant to Landlord, shall be held by Landlord as a security deposit under the
first two paragraphs of this Section 4.D.

Without limiting the generality of the foregoing, if the letter of credit
expires earlier than sixty (60) days after the expiration of the term of this
Lease, or the issuing bank notifies Landlord that it shall not renew the letter
of credit, Landlord will accept a renewal thereof or substitute letter of credit
(such renewal or substitute letter of credit to be in effect not later than the
expiration of the expiring letter of credit), irrevocable and automatically
renewable as above provided upon the same terms as the expiring letter of credit
or such other terms as may be reasonably acceptable to Landlord. However, (i) if
the letter of credit is not timely renewed or a substitute letter of credit is
not timely provided, (ii) or if Tenant fails to maintain the letter of credit in
the amount and terms set forth in this Section 4.D, Tenant must promptly deposit
with Landlord cash security in the amounts required by, and to be held subject
to and in accordance with, all of the terms and conditions set forth in the
first two paragraphs of this Section 4.D, failing which the Landlord may
present such letter of credit to the bank, in accordance with the terms of
this Section 4.D, and the entire amount of the letter of credit shall be paid
to Landlord and shall be held by Landlord as provided in the first two
paragraphs of this Section 4.D.

5. CONSTRUCTION

A. BUILDING SHELL CONSTRUCTION: Landlord shall pay for all costs and
expenses associated with the construction of the Building Shell. The Building
Shell shall include those items set forth in the attached Exhibit "C" ("Building
-----------
Shell Definition"). Landlord shall construct the Building Shell in accordance
with the Building Shell Plans identified in attached Exhibit "D" and all
-----------
Governmental Regulations (as defined in Section 7.C below) and shall correct any
violations of such Laws at no cost to Tenant, including, without limitation,
building code violations.

B. TENANT IMPROVEMENT PLANS: Tenant, at Tenant's sole cost and
expense, shall hire a licensed architect selected by Tenant and reasonably
approved by Landlord ("Architect") to prepare plans and outline specifications
which upon completion shall be attached as Exhibit "E" ("Tenant Improvement
-----------
Plans and Specifications") with respect to the construction of improvements to
the interior premises ("Tenant Improvements"). The General Contractor (as
defined below) shall assist the Architect in identifying any coordination issues
relative to the Building Shell and/or Building Shell Plans. On or before
January 19, 1998, Tenant shall deliver to Landlord specifications for the
elevator systems and controls. On or before February 16, 1998, Tenant shall
deliver to Landlord specifications for the transformer, switchgear and rooftop
HVAC units. The Tenant Improvement Plans and

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<PAGE>

Specifications shall be completed for all other aspects of the work by March
16, 1998 with sufficient detail necessary for submittal to the city and for
construction and shall include any information required by the relevant
agencies regarding Tenant's use of Hazardous Materials if applicable. The
Tenant Improvements shall consist of all items not included within the scope
of the Building Shell Definition. Except as otherwise provided in Section 5.N,
the Tenant Improvement Plans and Specifications shall provide for a minimum
buildout in all areas of the Premises consisting of: (i) fire sprinklers, (ii)
floor coverings, (iii) t-bar suspended ceiling (iv) distribution of the HVAC
system, (v) 2 x 4 drop-in florescent lighting, and (vi) any other work
required by the City of San Jose necessary to obtain a Certificate of
Occupancy, which work shall be completed by Landlord as set forth in this
Lease. Landlord shall cause Tenant Improvements to be constructed by
independent contractors to be employed by and under the supervision of
Landlord's affiliated construction company, Sobrato Construction Corporation
("General Contractor") in accordance with all Tenant Improvement Plans and
Specifications. The Tenant Improvement Plans and Specifications shall be
prepared in sufficient detail to allow General Contractor to construct the
Tenant Improvements. As an inducement to Tenant to enter into this Lease,
Landlord has agreed to provide Tenant a work allowance to be utilized by
Tenant for the construction of Tenant Improvements ("Work Allowance") in the
amount of Three Million Eight Hundred Eighty Thousand Eight Hundred Thirty-
Five and No/100 Dollars ($3,880,835.00). The Work Allowance shall be paid by
Landlord to Tenant as payments become due to General Contractor pursuant to
Section 5.G below. The Tenant Improvements shall not be removed or altered by
Tenant without the prior written consent of Landlord if required as provided
in Section 7. Tenant shall have the right to depreciate and claim and collect
any investment tax credits in the Tenant Improvements during the Lease Term.
Upon expiration of the Lease Term or any earlier termination of the Lease, the
Tenant Improvements shall become the property of Landlord and shall remain
upon and be surrendered with the Premises, and title thereto shall
automatically vest in Landlord without any payment therefor.

C. PRICING: Within ten (10) days after completion of the Tenant Improvements
Plans and Specifications, General Contractor shall submit to Tenant competitive
bids from at least three (3) subcontractors for each aspect of the work related
to the Tenant improvements. All bids shall be submitted to Landlord and Tenant
and Landlord and Tenant shall open the bids together at the General Contractor's
office. Landlord agrees to permit Tenant to assist in negotiating subcontractor
fees and bid costs for labor and materials. Tenant shall have the right to add
one (1) subcontractor for each trade to the bid list. The bids shall included an
itemized breakdown of costs. Tenant shall be provided with a copy of the General
Contractor's contracts with the subcontractors and Landlord's contract with the
General Contractor. General Contractor must utilize the low bid in each case
unless Tenant approves General Contractor's use of another subcontractor, and
the cost of the Tenant Improvements shall be based upon construction expenses
equal to (i) the bid

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<PAGE>

amounts as approved by Tenant and (ii) the General Contractor fee specified in
Section 5.H below ("Tenant Improvement Budget"). The Tenant Improvement Budget
may include a contingency of five percent (5%) to be expended by Landlord to
cover unforseen costs, provided that in each instance Tenant reasonably approves
such expenditure. Upon Tenant's written approval of the Tenant Improvement
Budget, which approval shall not be unreasonably withheld or delayed, Landlord
and Tenant shall be deemed to have given their respective approvals of the final
Tenant Improvement Plans and Specifications on which the cost estimate was made,
and General Contractor shall proceed with the construction of the Tenant
Improvements in accordance with the terms of Section 5.G below. Tenant must
specifically approve or disapprove the bids within seven (7) days of receipt of
the Tenant Improvement Budget. If disapproved, Tenant shall provide new
sufficient instruction or revised Tenant Improvement Plans to Landlord within
seven (7) days and Landlord shall thereafter rebid such work.

D. CHANGE ORDERS: Tenant shall have the right to order changes in the
manner and type of construction of the Tenant Improvements. Upon request and
prior to Tenant's submitting any binding change order, General Contractor shall
promptly provide Tenant with a written itemized breakdown of labor and materials
for the cost to implement and the time delay and increased construction costs
associated with any proposed change order, which statements shall be binding on
General Contractor. If no time delay or increased construction cost amount is
noted on the written statement, the parties agree that there shall be no
adjustment to the construction cost or the Commencement Date associated with
such change order. If ordered by Tenant, General Contractor shall implement
such change order and the cost of constructing the Tenant Improvements shall be
increased or decreased in accordance with the cost statement previously
delivered by General Contractor to Tenant for any such change order. In no
event, however, shall Tenant have the right to eliminate the minimum buildout
requirements specified in Section 5.B above. In the event that either party
believes it has caused a delay, it will notify the other and advise of the
number of days of delay. In the event that either party believes that the other
is causing a delay, it shall so notify the other stating the action or inaction
that it believes is causing the delay. Landlord agrees that Tenant shall not be
charged Base Monthly Rent and Additional Rent for each such day of Landlord
caused delay to the extent that such delays exceed any Tenant Delays. Claims of
delay by either party shall be made within seven (7) days after the occurrence
of the event giving rise to such claims.

E. BUILDING SHELL COSTS: Landlord shall pay all costs associated with the
Building Shell.

F. TENANT IMPROVEMENT COSTS: Tenant shall pay all costs associated
with the Tenant Improvements less the Work Allowance provided herein. The cost
of Tenant Improvements shall consist of only the following to the extent
actually incurred by General Contractor in connection with the construction of
Tenant Improvements: construction costs, all permit fees,

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<PAGE>

construction taxes or other costs imposed by governmental authorities related
to the Tenant Improvements, Landlord overhead as described in Section 5.H
below and all fees associated with Tenant's Architect, engineers and
consultants. During the course of construction of Tenant Improvements, General
Contractor may deliver to Tenant not more than once each calendar month a
written request for payment ("Progress Invoice") which shall include and be
accompanied by General Contractor's certified statements setting forth the
amount requested, certifying the percentage of completion of each item for
which reimbursement is requested. Tenant shall pay the amount due pursuant to
the Progress Invoice to the General Contractor, within fifteen (15) days after
Tenant's receipt of the above items. Within five (5) days following payment by
Tenant, Landlord shall pay Tenant an amount equal to the product of (i) the
Progress Invoice, and (ii) a fraction, the numerator of which is the amount of
the Work Allowance and the denominator of which is the Tenant Improvement
Budget, until such time as Landlord has expended the full amount of the Work
Allowance. All costs for Tenant Improvements shall be fully documented to and
verified by Tenant. Tenant shall have the right to review and approve the
Progress Invoice.

G. CONSTRUCTION: Landlord shall use its reasonable efforts to obtain a
building permit from the City of San Jose as soon as possible after Tenant's
approval of the Tenant Improvement Plans and Specifications and "Substantially
Complete" construction by June 1, 1998. The Building Shell and Tenant
Improvements shall be deemed substantially complete ("Substantially Complete" or
"Substantial Completion") when the Building Shell and Tenant Improvements have
been substantially completed in accordance with the Shell Plans and
Specifications and Tenant Improvement Plans and Specifications, as evidenced by
(i) the completion of a final inspection and the issuance of a temporary
certificate of occupancy or its equivalent by the appropriate governmental
authority for the Building Shell and Tenant Improvements, (ii) the issuance of a
certificate by the Architect certifying that the Building Shell and Tenant
Improvements have been completed in accordance with the plans, and (iii) the
operation of all Building systems including, but not limited to, the
mechanical, electrical and plumbing systems to the extent necessary to service
the Premises and Tenant has been provided use of substantially all parking
spaces called for under this Lease. Landlord shall obtain a final certificate
of occupancy within sixty (60) days after Substantial Completion. Installation
of (i) Tenant's data and phone cabling, (ii) Tenant's furniture, or (iii) the
exterior landscaping shall not be required in order to deem the Premises
Substantially Complete. Any prevention, delay or stoppage due to strikes,
lockouts, inclement weather, labor disputes, inability to obtain labor,
materials, fuel or reasonable substitutes therefor, governmental restrictions,
regulations, controls, action or inaction, civil commotion, fire or other act
of God, and another causes beyond the reasonable control of Landlord (except
financial inability) shall extend the dates contained in this Section 5.G by a
period equal to the period of any said prevention,

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delay or stoppage. If Landlord cannot obtain building permits or Substantially
Complete construction by the dates set forth herein, this Lease shall not be
void or voidable nor shall Landlord be liable for any loss or damage resulting
therefrom.

H. GENERAL CONTRACTOR OVERHEAD & PROFIT: As compensation to General
Contractor for its services related to construction of the Building Shell and
Tenant Improvements, General Contractor shall receive a fee of six and 50/100
percent (6.50%) of the cost of construction to cover all of the following:
construction supervision and administration, temporary on-site facilities, home
office administration, overhead, supervision, and coordination and construction
profit and any other direct or indirect expenses described in the General
Conditions listed in the attached Exhibit "F" to this Lease. Except as provided
-----------
therein, Landlord or General Contractor shall not receive any other fee or
payment from Tenant in connection with General Contractor's services.

I. TENANT DELAYS: A "Tenant Delay" shall mean any delay in Substantial
Completion of the Tenant Improvements as a result of any of the following: (i)
Tenant's failure to complete or approve the Tenant Improvement Plans by the
dates set forth in Section 5.B (ii) Tenant's failure to approve the bids for
construction by the dates set forth in Section 5.C(ii), (iii) changes to the
plans requested by Tenant which delay the progress of the work, (iv) Tenant's
request for materials components, or finishes which are not available in a
commercially reasonable time given the anticipated Commencement Date, (v)
Tenant's failure to pay, when due, any amounts requested to be paid by Tenant
pursuant hereto, (vi) Tenant's request for more than one (1) rebidding of the
cost of all or a portion of the work, and (vii) any errors or omissions in the
Tenant Improvement Plans provided by Tenant's architect; provided further that
Tenant is (i) allowed to review and reasonably approve the change in the General
Contractor's schedule, (ii) provided three (3) business days written notice that
it is about to suffer a Tenant Delay, and (iii) offered the ability incur
premium costs to prevent or minimize such delay if it is possible to do so.
Notwithstanding anything to the contrary set forth in this Lease, and regardless
of the actual date the Premises are Substantially Complete, the Commencement
Date shall be deemed to be the date the Commencement Date would have occurred if
no Tenant Delay had occurred as reasonable determined by Landlord. In addition,
if a Tenant Delay results in an increase in the cost of the labor or materials,
Tenant shall pay the cost of such increases.

Unless otherwise provided in the contract documents, the General Contractor
shall provide and pay for all labor, materials, equipment, tools, construction
equipment and machinery, water, heat and utilities, transportation and other
facilities and services necessary for proper execution and completion of the
Tenant Improvements. The General Contractor shall supervise and direct the
construction of the Tenant Improvements using the contractor's best skills and
attention and shall be fully responsible for and have control over construction
means, methods, techniques, sequences and procedures for coordinating

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all portions of the work under the contract. The General Contractor shall
review, approve and submit to Tenant's Architect shop drawings, product data,
samples and submittals required by the contract documents with promptness and
in sequence as to cause no delay in the construction schedule. The General
Contractor shall take reasonable precautions for safety and shall provide
reasonable protection to prevent damage, injury or loss.

J. INSURANCE: General Contractor shall procure (as a cost of the Building
Shell) a "Broad Form" liability insurance policy in the amount of Three Million
Dollars ($3,000,000.00). Landlord shall also procure (as a cost of the Building
Shell) builder's risk insurance for the full replacement cost of the Building
Shell and Tenant Improvements while the Building and Tenant Improvements are
under construction, up until the date that the fire insurance policy described
in Section 9 is in full force and effect.

K. PUNCH LIST & WARRANTY: After the Building Shell and Tenant
Improvements are Substantially Complete, Landlord shall cause the General
Contractor to immediately correct any construction defect or other "punch list"
item which Tenant brings to General Contractor's attention. All such work shall
be performed so as to reasonably minimize the interruption to Tenant and its
activities on the Premises. General Contractor shall provide a standard
contractor's warranty with respect to the Building Shell and the Tenant
Improvements for one (1) year from the Commencement Date and shall warrant the
Building Shell against defects in workmanship or materials for one (1) year from
the Commencement Date. Tenant shall have the full benefit of such contractor
warranties. Such warranty shall exclude routine maintenance, damage caused by
Tenant's negligence or misuse, and acts of God.

L. OTHER WORK BY TENANT: All work not described in the Shell Plans and
Specifications or Tenant Improvement Plans and Specifications, such as
furniture, telephone equipment, telephone wiring and office equipment work,
shall be furnished and installed by Tenant. Prior to Substantial Completion,
Tenant shall (i) arrange active phone lines to any elevators, and (ii) contract
with a firm to monitor the fire system. When the construction of the Tenant
Improvements has proceeded to the point where Tenant's work of installing its
fixtures and equipment in the Premises can be commenced, General Contractor
shall notify Tenant and shall permit Tenant and its authorized representatives
and contractors access to the Premises before the Commencement Date for the
purpose of installing Tenant's trade fixtures and equipment. Any such
installation work by Tenant or its authorized representatives and contractor
shall be undertaken upon the following conditions: (i) if the entry into the
Premises by Tenant or its representatives or contractors interferes with or
delays General Contractor's work, Tenant shall cause the party responsible for
such interference or delay to leave the Premises; and (ii) any contractor used
by Tenant in connection with such entry and installation shall not
unreasonably interfere with General Contractor's work. Subject to Landlord and
General Contractor using reasonable efforts
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to maintain harmonious labor relations, Tenant shall hold Landlord
harmless from any claim by Tenant due vandalism to construction performed by
Tenant with non-union labor.

M. LANDLORD'S FAILURE TO COMPLETE CONSTRUCTION: Notwithstanding the
foregoing, (i) if the Premises are not Substantially Complete on or before that
date which is four (4) months following the date on which Landlord obtains a
building permit from the City of San Jose allowing Landlord to begin
construction of the Tenant Improvements, Tenant shall be entitled to rental
abatement hereunder of one (1) day's rent for each day beyond said four (4)
month period in which the Premises is not Substantially Complete (i.e., the date
on which Tenant is required to commence paying rent under this Lease shall be
extended by one day for each day beyond said four month period during which the
Premises are not Substantially Complete). The above dates shall be extended one
day for every day of delay in completion caused by labor strikes, material
shortages, inclement weather, Tenant Delays or other causes beyond the
reasonable control of Landlord ("Force Majeure Delays"); provided, however, that
Landlord must notify Tenant in writing within five (5) days after the occurrence
of any such Force Majeure Delay, and if Landlord does not so notify Tenant in
writing, then the applicable Force Majeure Delay shall be deemed not to have
commenced until the date which is five (5) days prior to the date Tenant
actually receives written notice from Landlord advising Tenant of the applicable
Force Majeure Delay event. If the Premises are not Substantially Complete on or
before December 31, 1998 (the "Latest Completion Date"), then Tenant may
terminate this Lease and the Adjacent Building Lease by written notice to
Landlord given on or before January 15, 1999. The Latest Completion Date shall
be extended by Tenant Delays but not by delays in completion caused by labor
strikes, material shortages, inclement weather or any other causes beyond the
reasonable control of Landlord (other than Tenant Delays). The delay in the
commencement of rent, the abatement of rent, and termination right provided
above shall be the sole and exclusive remedies of Tenant with respect by the
failure by Landlord to achieve Substantial Completion by the Commencement Date.

N. Notwithstanding any contrary provision of this Lease, Tenant shall have the
right to defer the construction of Tenant Improvements in the Premises and to
exclude such deferred Tenant Improvements from the Tenant Improvement Plans and
Specifications initially delivered to Landlord pursuant to Section 5.B above,
provided that:

1. The Tenant Improvements deferred by Tenant ("Deferred Tenant
Improvement Work") shall be limited to partition walls, floor coverings, ceiling
grid and tile, lighting, doors, frames and hardware and other similar work
outside of the Building's core.

2. Tenant shall deposit with Landlord cash or a letter of credit for a
sum equal to the amount by which the estimated cost of the Deferred Tenant
Improvement Work (as reasonably determined by

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Landlord) will exceed the Work Allowance estimated to be available for such
Deferred Tenant Improvement Work. With each payment by Tenant to the General
of amounts owed by Tenant on account of the General Contractor's construction
of the Deferred Tenant Improvement Work, the amount of such cash or of the
letter of credit shall be reduced by a corresponding dollar amount. Such
reduction shall be accomplished by Landlord's return of the cash to Tenant or
Landlord's notifying the letter of credit issuer that the maximum amount
Landlord may draw thereunder has been reduced. Upon completion of all Deferred
Tenant Improvement Work and Tenant's payment of all amounts owed by Tenant on
amount thereof, Landlord shall return to Tenant any remaining cash or the
letter of credit deposited hereunder.

3. No delay in the Substantial Completion of the Deferred Tenant
Improvement Work shall delay the Commencement Date under Section 4.A above.

6. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER:

A. DELIVERY AND ACCEPTANCE: On the Commencement Date, Landlord
shall deliver and Tenant shall accept possession of the Premises and enter into
occupancy of the Premises on the Commencement Date. Tenant acknowledges that it
has had an opportunity to conduct, and has conducted, such inspections of the
Premises as it deems necessary to evaluate its condition. Except as otherwise
specifically provided herein, Tenant agrees to accept possession of the Premises
in its then existing condition, subject to all Restrictions and without
representation or warranty by Landlord except as provided in this Lease.
Tenant's taking possession of any part of the Premises shall be deemed to be an
acceptance of any work of improvement done by Landlord in such part as complete
and in accordance with the terms of this Lease except for "Punch List" type
items of which Tenant has given Landlord written notice prior to the time Tenant
takes possession subject to (i) a reservation of claims of latent defects, (ii)
the warranties from Landlord contained in this Lease, (iii) Landlord's
obligations to correct construction defects, and (iv) any failure of the
Premises to comply with laws in effect as of the date of completion. At the
time Landlord delivers possession of the Premises to Tenant, Landlord and Tenant
shall together execute an acceptance agreement.

B. CONDITION UPON SURRENDER: Tenant further agrees on the Expiration
Date or on the sooner termination of this Lease, to surrender the Premises to
Landlord in good condition and repair, normal wear and tear, casualty damage,
and maintenance otherwise the responsibility of Landlord pursuant to this Lease
excepted. In this regard, "normal wear and tear" shall be construed to mean
wear and tear caused to the Premises by the natural aging process which occurs
in spite of prudent application of commercially reasonable standards for
maintenance, repair replacement, and janitorial practices, and does not include
items of neglected or deferred maintenance. In any event, Tenant shall cause
the following to be done prior to the Expiration Date or sooner termination of

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this Lease: (i) all interior walls shall be painted or cleaned, (ii) all
tiled floors shall be cleaned and waxed, (iii) all carpets shall be cleaned and
shampooed, (iv) all broken, marred, stained or nonconforming acoustical ceiling
tiles shall be replaced, (v) all cabling placed above the ceiling by Tenant or
Tenant's contractors shall be removed, (vi) all windows shall be washed; (vii)
the HVAC system shall be serviced by a reputable and licensed service firm and
left in good operating condition and repair (taking into account normal wear and
tear as defined above) as so certified by such firms, and (viii) the plumbing
and electrical systems and lighting shall be placed in good order and repair
(including replacement of any burned out, discolored or broken light bulbs,
ballasts, or lenses. On or before the Expiration Date or sooner termination of
this Lease, Tenant shall remove all its personal property and trade fixtures
from the Premises. All property and fixtures not so removed shall be deemed as
abandoned by Tenant. Tenant shall ascertain from Landlord within ninety (90)
days before the Expiration Date whether Landlord desires to have the Premises or
any parts thereof restored to their condition as of the Commencement Date, or to
cause Tenant to surrender all Alterations (as defined in Section 7) in place to
Landlord, except for such Alterations Landlord has previously agreed to allow to
remain on the Premises pursuant to Section 7 below. If Landlord shall so
desire, Tenant shall, at Tenant's sole cost and expense, remove such Alterations
as Landlord requires and shall repair and restore said Premises or such parts
thereof before the Expiration Date. Such repair and restoration shall include
causing the Premises to be brought into compliance with all applicable building
codes and laws in effect at the time of the removal to extent such compliance is
necessitated by the repair and restoration work. Provided partitioned areas for
private offices do not exceed thirty-three percent (33%) of the area on each
floor, Tenant shall not be required to remove any Tenant Improvements
constructed pursuant to the Tenant Improvement Plans and Specifications (as
initially prepared by Architect and/or as supplemented for portions of the
Premises not initially occupied by Tenant), regardless of whether such
construction occurs before or after the Commencement Date.

C. FAILURE TO SURRENDER: If the Premises are not surrendered at the
Expiration Date or sooner termination of this Lease in the condition required by
this Section 6, Tenant shall be deemed in a holdover tenancy pursuant to this
Section 6.C and, if Tenant holds over without Landlord's consent, Tenant shall
indemnify, defend, and hold Landlord harmless against loss or liability
resulting from delay by Tenant in so surrendering the Premises including,
without limitation, any claims made by any succeeding tenant founded on such
delay and costs incurred by Landlord in returning the Premises to the required
condition, plus interest at the Agreed Interest Rate. As a condition to
Tenant's duty to indemnify and hold Landlord harmless under the preceding
sentence, Landlord shall give Tenant reasonable prior notice of any loss or
liability Landlord with which Landlord actually is threatened as a consequence
of Tenant's delay in surrendering the Premises, which shall include, without
limitation, both (i) written notice of Landlord's execution of a letter of

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intent with a prospective tenant and (ii) written notice of Landlord's execution
of a lease with a subsequent tenant. Any holding over after the termination or
Expiration Date with Landlord's express written consent (which consent shall not
be unreasonably withheld, conditioned or delayed), shall be construed as month-
to-month tenancy, terminable on thirty (30) days written notice from either
party, and Tenant shall pay as Base Monthly Rent to Landlord a rate equal to one
hundred thirty-three percent (133%) of the Base Monthly Rent due in the month
preceding the termination or Expiration Date, plus all other amounts payable
by Tenant under this Lease. Any holding over shall otherwise be on the terms
and conditions herein specified, except those provisions relating to the Lease
Term and any options to extend or renew, which provisions shall be of no
further force and effect following the expiration of the applicable exercise
period. If Tenant remains in possession of the Premises after expiration or
earlier termination of this Lease without Landlord's consent, Tenant's
continued possession shall be on the basis of a tenancy at sufferance and
Tenant shall pay as rent during the holdover period an amount equal to one
hundred fifty percent (150%) of the Base Monthly Rent due in the month
preceding the termination or Expiration Date, plus all other amounts payable
by Tenant under this Lease. This provision shall survive the termination or
expiration of the Lease.

7. ALTERATIONS AND ADDITIONS:

A. TENANT'S ALTERATIONS: Tenant shall be entitled, without obtaining
Landlord's consent to make alterations and additions to the Premises
("Alterations"), or any part thereof, which (i) do not affect the structure of
the Building, or (ii) cost do not exceed Fifty Thousand Dollars ($50,000.00) per
alteration nor an aggregate of One Hundred Thousand Dollars ($100,000.00) in any
twelve (12) month period. All other Alterations shall require Landlord's
consent, which consent shall not be unreasonably withheld, conditioned or
delayed. If Landlord's consent is required, Tenant shall deliver to Landlord
the proposed architectural and structural plans for all such Alterations at
least fifteen (15) days prior to the start of construction. If such Alterations
affect the structure of the Building, Tenant additionally agrees to reimburse
Landlord its reasonable out-of-pocket costs incurred in reviewing Tenant's
plans. Landlord shall indicate in writing to Tenant at the time of Tenant's
request, whether or not Landlord will require Tenant to remove such Alteration
at the Expiration Date. If, at the time Landlord consents to any Alteration,
Landlord does not require Tenant to remove such Alteration at the Expiration
Date, then Landlord shall be deemed to have waived such right to require Tenant
to remove such Alteration so consented to. After obtaining Landlord's consent,
Tenant shall not proceed to make such Alterations until Tenant has obtained all
required governmental approvals and permits, and if so requested, provides
Landlord reasonable security, in form reasonably approved by Landlord, to
protect Landlord against mechanics' lien claims (if such Alterations exceed
$1,000,000 in cost). Tenant agrees to provide Landlord written notice of the
anticipated and actual start-date of the work, and a complete set of half-size
(15" X 21") vellum as-built drawings. All Alterations

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shall be constructed in compliance with applicable buildings codes and laws.
Any Alterations, except movable furniture and trade fixtures, shall become at
once a part of the realty and belong to Landlord but shall nevertheless be
subject to removal by Tenant as provided in Section 6 above. Alterations which
are not deemed as trade fixtures include heating, lighting, electrical
systems, air conditioning, walls, carpeting, or any other installation which
has become an integral part of the Premises. All Alterations shall be
maintained, replaced or repaired by Tenant at its sole cost and expense.
Tenant shall have the right to depreciate and claim and collect any investment
tax credits in all Alterations.

B. FREE FROM LIENS: Tenant shall keep the Premises free from all liens
arising out of work performed, materials furnished, or obligations incurred by
Tenant or claimed to have been performed for Tenant. In the event Tenant fails
to discharge any such lien within twenty (20) days after receiving notice of the
filing, Landlord shall be entitled to discharge the lien at Tenant's expense and
all resulting costs incurred by Landlord, including reasonable attorney's fees
shall be due from Tenant as additional rent.

C. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: The term Governmental
Regulations shall include all federal, state, county, city or governmental
agency laws, statutes, ordinances, standards, rules, requirements, or orders now
in force or hereafter enacted, promulgated, or issued. The term also includes
government measures regulating or enforcing public access, traffic mitigation,
occupational, health, or safety standards for employers, employees, landlords,
or tenants. Except as otherwise provided in this Lease, Tenant, at Tenant's sole
expense shall make all repairs, replacements, alterations, or improvements
needed to comply with all Governmental Regulations. The judgment of any court
of competent jurisdiction or the admission of Tenant in any action or proceeding
against Tenant (whether Landlord be a party thereto or not) that Tenant has
violated any such law, regulation or other requirement in its use of the
Premises shall be conclusive of that fact as between Landlord and Tenant.

Notwithstanding the foregoing, if any improvement or alteration to the
Premises is required as a result of any future laws or regulations affecting the
Premises not related to Tenant's specific use of the Premises in a manner other
than as permitted hereunder, and provided further said improvement or alteration
is not required because of Alterations made by Tenant, the cost of such
improvements shall be allocated between Landlord and Tenant such that Tenant
shall pay to Landlord as additional rent an amount determined as follows: (i)
all costs reasonably incurred by Landlord to construct such improvement shall be
fully amortized over the useful life of such improvement with interest on the
unamortized balance at the prevailing market rate Landlord would pay if it
borrowed funds to construct such improvements from an institutional lender, and
Landlord shall inform Tenant of such monthly amortization payment required to so
amortize such costs, and shall also provide Tenant with the information upon
which such determination is made; and (ii) as additional rent, Tenant shall pay
the

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monthly amortization payment with respect to any such capital improvement
required as a result of any future law or regulation affecting the Premises
which is not related to Tenant's specific use of the Premises as stated above.
Tenant's obligation to make payments hereunder with respect to any particular
capital improvement shall commence when such improvement has been substantially
completed and shall cease upon the earlier of the expiration of the Lease term
(but not upon a termination due to any Event of Default on the part of Tenant)
or the end of the term over which the costs of constructing the particular
improvement were amortized. Payments of such additional rent required under this
Section 7.C shall be made concurrently with payments of Base Monthly Rent.

8. MAINTENANCE OF PREMISES:

A. LANDLORD'S OBLIGATIONS: Landlord at its sole cost and expense, shall
maintain in good condition, order, and repair, and replace as and when
necessary, all structural portions of the Building, including without
limitation, the foundation, exterior load bearing walls (including the curtain
wall) and roof structure of the Building Shell, and the structural elements of
the parking facilities.

B. TENANT'S OBLIGATIONS: Except as set forth in Sections 8.A, 8.C,
12.D, 15 and 16, or elsewhere in this Lease, Tenant shall clean, maintain,
repair and replace when necessary the Premises and every part thereof through
regular inspections and servicing, including but not limited to: (i) all
plumbing and sewage facilities, (ii) all heating ventilating and air
conditioning facilities and equipment, (iii) all fixtures, interior walls
floors, carpets and ceilings, (iv) all windows, door entrances, plate glass and
glazing systems including caulking, and skylights, (v) all electrical facilities
and equipment, (vi) all automatic fire extinguisher equipment, (vii) the parking
lot and all underground utility facilities servicing the Premises, (viii) all
elevator equipment, (ix) the roof membrane system, and (x) all waterscape,
landscaping and shrubbery. Notwithstanding the foregoing, Tenant shall have no
responsibility to perform any repair, maintenance or improvement (i)
necessitated by the acts or omissions of Landlord or its agents, employees or
contractors, (ii) occasioned by fire, acts of God or other casualty, whether or
not covered by insurance, or by the exercise of the power of eminent domain,
(iii) required as a consequence of any violation of laws or construction defect
in the Premises existing as of the Commencement Date, or (iv) for which Landlord
has a right of reimbursement from others. With respect to items (ii), (viii)
and (ix) above, Tenant shall provide Landlord a copy of a service contract
between Tenant and a licensed service contractor providing for periodic
maintenance of all such systems or equipment in conformance with the
manufacturer's recommendations. Tenant shall provide Landlord a copy of such
preventive maintenance contracts and paid invoices for the recommended work if
requested by Landlord.

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required by new laws, rules or regulations which are governed by Section 7.C
above), Landlord shall, within ten (10) days following receipt of written
invoices and supporting documentation evidencing the reasonable costs incurred
by Tenant in replacing the roof membrane, reimburse Tenant for the entire cost
of the replacement less that portion of the cost equal to the product of such
total cost multiplied by a fraction, the numerator of which is the number of
years remaining in the Lease Term, and the denominator of which is the useful
life (in years) of the roof membrane replacement.

9. HAZARD INSURANCE:

A. TENANT'S USE: Tenant shall not use or permit the Premises, or any
part thereof, to be used for any purpose other than that for which the Premises
are hereby leased; and no use of the Premises shall be made or permitted, nor
acts done, which will cause an increase in premiums or a cancellation of any
insurance policy covering the Premises or any part thereof, nor shall Tenant
sell or permit to be sold, kept, or used in or about the Premises, any article
prohibited by the standard form of fire insurance policies. Tenant shall, at
its sole cost, comply with all requirements of any insurance company or
organization necessary for the maintenance of reasonable fire and public
liability insurance covering the Premises and appurtenances.

B. LANDLORD'S INSURANCE: Landlord agrees to purchase and keep in
force fire, extended coverage insurance in an amount equal to the replacement
cost of the Building, including the Tenant Improvements (but not including any
Alterations by Tenant), as determined by Landlord's insurance company's
appraisers. If required by the holder of the first deed of trust on the
property, such fire and property damage insurance may be endorsed to cover loss
caused by such additional perils against which Landlord may elect to insure,
including earthquake and/or flood, and shall contain reasonable deductibles
which, in the case of earthquake and flood insurance may be up to 15% of the
replacement value of the property and which premium shall be limited to four
times the cost of the fire and extended coverage insurance. Additionally
Landlord may maintain a policy of (i) commercial general liability insurance
insuring Landlord (and such others designated by Landlord) against liability for
personal injury, bodily injury, death and damage to property occurring or
resulting from an occurrence in, on or about the Premises or Project in an
amount as Landlord determines is reasonably necessary for its protection, and
(ii) rental lost insurance covering a twelve (12) month period. Tenant agrees to
pay Landlord as additional rent, within thirty (30) days, the full cost of said
insurance as evidenced by insurance billings to Landlord, and in the event of
damage covered by said insurance, the amount of any deductible under such policy
not to exceed Twenty Five Thousand Dollars ($25,000.00). Payment shall be due
to Landlord within thirty (30) days after written invoice to Tenant. It is
understood and agreed that Tenant's obligation under this Section will be
prorated to reflect the Lease Commencement and Expiration Dates.

C. TENANT'S INSURANCE: Tenant agrees, at its sole cost, to insure its
personal

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property and Alterations for their full replacement value (without
depreciation) and to obtain worker's compensation and public liability and
property damage insurance for occurrences within the Premises with a combined
single limit of not less than Five Million Dollars ($5,000,000.00) and One
Million Dollars ($1,000,000.00) per occurrence. Tenant's liability insurance
shall be primary insurance containing a cross-liability endorsement, and shall
provide coverage on an "occurrence" rather than on a "claims made" basis.
Tenant shall name Landlord and Landlord's lender as an additional insured and
shall deliver a copy of the policies and renewal certificates to Landlord. All
such policies shall provide for thirty (30) days' prior written notice to
Landlord of any cancellation, termination, or reduction in coverage.

D. WAIVER: Landlord and Tenant hereby waive all rights each may have
against the other on account of any loss or damage sustained by Landlord or
Tenant, as the case may be, or to the Premises or its contents, which may arise
from any risk covered by their respective insurance policies (or which would
have been covered had such insurance policies been maintained in accordance with
this Lease) as set forth above. The parties shall use their reasonable efforts
to obtain from their respective insurance companies a waiver of any right of
subrogation which said insurance company may have against Landlord or Tenant, as
the case may be.

10. TAXES: Tenant shall be liable for and shall pay as additional
rental, prior to delinquency, the following: (i) all taxes and assessments
levied against Tenant's personal property and trade or business fixtures; (ii)
all real estate taxes and assessment installments or other impositions or
charges which may be levied on the Premises or upon the occupancy of the
Premises, including any substitute or additional charges which may be imposed
applicable to the Lease Term; and (iii) real estate tax increases due to an
increase in assessed value resulting from a sale, transfer or other change of
ownership of the Premises as it appears on the City and County tax bills during
the Lease Term. Tenant's obligation under this Section shall be prorated to
reflect the Lease Commencement and Expiration Dates. If, at any time during the
Lease Term a tax, excise on rents, business license tax or any other tax,
however described, is levied or assessed against Landlord as a substitute or
addition, in whole or in part, for taxes assessed or imposed on land or
Buildings, Tenant shall pay and discharge its pro rata share of such tax or
excise on rents or other tax before it becomes delinquent; except that this
provision is not intended to cover net income taxes, inheritance, gift or estate
tax imposed upon Landlord. In the event that a tax is placed, levied, or
assessed against Landlord and the taxing authority takes the position that
Tenant cannot pay and discharge its pro rata share of such tax on behalf of
Landlord, then at Landlord's sole election, Landlord may increase the Base
Monthly Rent by the exact amount of such tax and Tenant shall pay such increase.
Both Landlord and Tenant shall have the right to seek a reduction in the
assessed value of the Premises. If by virtue of any application or proceeding
brought by or on behalf of Landlord, there results a reduction in the assessed
value of the Premises during

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<PAGE>

the Lease Term, Tenant agrees to reimburse Landlord for all costs incurred by
Landlord in connection with such application or proceeding provided such costs
do not exceed the present value of the savings.

11. UTILITIES: Tenant shall pay directly to the providing utility all
water, gas, electric, telephone, and other utilities supplied to the Premises.
Except due to the negligence or willful misconduct of Landlord, Landlord shall
not be liable for loss of or injury to person or property, however occurring,
through or in connection with or incidental to furnishing or the utility
company's failure to furnish utilities to the Premises, and, except as otherwise
provided in this Lease, Tenant shall not be entitled to abatement or reduction
of any portion of Base Monthly Rent or any other amount payable under this
Lease.

12. TOXIC WASTE AND ENVIRONMENTAL DAMAGE:

A. TENANT'S RESPONSIBILITY: Without the prior written consent of
Landlord, Tenant shall not bring, use, or permit upon the Premises, or generate,
create, release, emit, or dispose (nor permit any of the same) from the Premises
any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste,
including without limitation, material or substance having characteristics of
ignitability, corrosivity, reactivity, or toxicity or substances or materials
which are listed on any of the Environmental Protection Agency's lists of
hazardous wastes or which are identified in Division 22 Title 26 of the
California Code of Regulations as the same may be amended from time to time or
any wastes, materials or substances which are or may become regulated by or
under the authority of any applicable local, state or federal laws, judgments,
ordinances, orders, rules, regulations, codes or other governmental
restrictions, guidelines or requirements. ("Hazardous Materials") unless such
Hazardous Materials are used in compliance with all applicable Laws and are
commonly used in connection with general office use. In order to obtain
consent, Tenant shall deliver to Landlord its written proposal describing the
toxic material to be brought onto the Premises, measures to be taken for
storage and disposal thereof, safety measures to be employed to prevent
pollution of the air, ground, surface and ground water. Landlord's approval
may be withheld in its reasonable judgment. In the event Landlord consents to
Tenant's use of Hazardous Materials on the Premises, Tenant represents and
warrants that it shall comply with all Governmental Regulations applicable to
Hazardous Materials including doing the following: (i) adhere to all reporting
and inspection requirements imposed by Federal, State, County or Municipal
laws, ordinances or regulations and will provide Landlord a copy of any such
reports or agency inspections; (ii) obtain and provide Landlord copies of all
necessary permits required for the use and handling Hazardous Materials on the
Premises; (iii) enforce Hazardous Materials handling and disposal practices
consistent with industry standards; (iv) surrender the Premises free from any
Hazardous Materials arising from Tenant's bringing, using, permitting,
generating, creating, releasing, emitting or disposing of Hazardous Materials;
and (v) properly close the facility with regard to Hazardous Materials

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including the removal or decontamination of any process piping, mechanical
ducting, storage tanks, containers, or trenches which have come into contact
with Hazardous Materials and obtain a closure certificate from the local
administering agency prior to the Expiration Date.

B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall, at
its sole cost and expense, comply with all laws pertaining to, and shall with
counsel reasonably acceptable to Landlord, indemnify, defend and hold harmless
Landlord and Landlord's Agents (as defined below) from, any claims, liabilities,
costs or expenses incurred or suffered by Landlord arising from the bringing,
using, permitting, generating, emitting or disposing of Hazardous Materials by
Tenant, Tenant's officers, employees, partners, affiliates, and agents
("Tenant's Agents") through the surface soils of the Premises during the Lease
Term or the violation of any Governmental Regulation or environmental law, by
Tenant or Tenant's Agents. Tenant's indemnification and hold harmless
obligations include, without limitation, the following: (i) claims, liability,
costs or expenses resulting from or based upon administrative, judicial (civil
or criminal) or other action, legal or equitable, brought by any private or
public person under common law or under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource
Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State,
County or Municipal law, ordinance or regulation; (ii) claims, liabilities,
costs or expenses pertaining to the identification, monitoring, cleanup,
containment, or removal of Hazardous Materials from soils, riverbeds or aquifers
including the provision of an alternative public drinking water source; (iii)
all costs of defending such claims; (iv) losses attributable to diminution in
the value of the Premises or the Building; (v) loss or restriction of use of
rentable space in the Building; (vi) adverse effect on the marketing of any
space in the Building; and (vi) all other liabilities, obligations, penalties,
fines, claims, actions (including remedial or enforcement actions of any kind
and administrative or judicial proceedings, orders or judgments),
damages (including consequential and punitive damages), and costs (including
reasonable attorney, consultant, and expert fees and expenses) resulting from
the release or violation. This indemnification shall survive the expiration or
termination of this Lease.

C. ACTUAL RELEASE BY TENANT: Each party agrees to notify the other of any
known lawsuits or order which relate to the remedying of or actual release of
Hazardous Materials on or into the soils or ground water at or under the
Premises. Each party shall also provide the other all notices required by
Section 25359.7(b) of the Health and Safety Code and all other notices required
by law to be given in connection with Hazardous Materials. Without limiting the
foregoing, Tenant shall also deliver to Landlord, within twenty (20) days after
receipt thereof, any written notices from any governmental agency alleging a
material violation of, or material failure to comply with, any federal, state or
local laws, regulations, ordinances or orders, the violation of which of failure
to comply with poses a foreseeable and material risk of contamination of the
ground water or injury

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<PAGE>

to humans (other than injury solely to Tenant, Tenant's Agents and employees
within the Building).

In the event of any release on or into the Premises or into the soil or
ground water under the Premises, the Building or the Project of any Hazardous
Materials used, treated, stored or disposed of by Tenant, Tenant agrees to
comply, at its sole cost, with all laws, regulations, ordinances and orders of
any federal, state or local agency relating to the monitoring or remediation of
such Hazardous Materials. In the event of any such release of Hazardous
Materials Tenant shall immediately give verbal and follow-up written notice of
the release to Landlord, and Tenant agrees to meet and confer with Landlord and
its Lender to attempt to eliminate and mitigate any financial exposure to such
Lender and resultant exposure to Landlord under California Code of Civil
Procedure Section 736(b) as a result of such release, and promptly to take
reasonable monitoring, cleanup and remedial steps given, inter alia, the
historical uses to which the Property has and continues to be used, the risks to
public health posed by the release, the then available technology and the costs
of remediation, cleanup and monitoring, consistent with acceptable customary
practices for the type and severity of such contamination and all applicable
laws. Nothing in the preceding sentence shall eliminate, modify or reduce the
obligation of Tenant under 12.B of this Lease to indemnify and hold Landlord
harmless from any claims liabilities, costs or expenses incurred or suffered by
Landlord. Tenant shall provide Landlord prompt written notice of Tenant's
monitoring, cleanup and remedial steps.

In the absence of an order of any federal, state or local governmental or
quasi-governmental agency relating to the cleanup, remediation or other response
action required by applicable law, any dispute arising between Landlord and
Tenant concerning Tenant's obligation to Landlord under this Section 12.C
concerning the level, method, and manner of cleanup, remediation or response
action required in connection with such a release of Hazardous Materials shall
be resolved by mediation and/or arbitration pursuant to the provisions of
Section 19.E of this Lease.

D. LANDLORD'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Landlord shall
indemnify and hold Tenant and Tenant's Agents harmless from any claims,
liabilities, costs or expenses incurred or suffered by Tenant related to the
removal, investigation, monitoring or remediation of Hazardous Materials which
are present on the Premises as of the Commencement Date or which come to be
present on the Premises due to the acts of Landlord, its employees, agents or
contractors ("Landlord's Agents"). Landlord's indemnification and hold harmless
obligations include, without limitation, (i) claims, liability, costs or
expenses resulting from or based upon administrative, judicial (civil or
criminal) or other action, legal or equitable, brought by any private or public
person under common law or under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and
Recovery Act of 1980 ("RCRA") or any other Federal, State,

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<PAGE>

County or Municipal law, ordinance or regulation with respect to Hazardous
Materials generated or disposed of by Landlord, its agents, employees or
contractors, (ii) claims, liabilities, costs or expenses pertaining to the
identification, monitoring, cleanup, containment, or removal of Hazardous
Materials generated or disposed of by Landlord, its agents, employees or
contractors from soils, riverbeds or aquifers including the provision of an
alternative public drinking water source, and (iii) all costs of defending
such claims. In no event shall Landlord be liable under this Lease for any
consequential damages suffered or incurred by Tenant as a result of any such
contamination.

E. ENVIRONMENTAL MONITORING: Provided Landlord gives reasonable
notice (except in the case of emergency) and minimizes interference with
Tenant's business, Landlord and its agents shall have the right to inspect,
investigate, sample and monitor the Premises including any air, soil, water,
ground water or other sampling or any other testing, digging, drilling or
analysis to determine whether Tenant is complying with the terms of this Section
12. If Landlord discovers that Tenant is not in compliance with the terms of
this Section 12, any such reasonable costs incurred by Landlord, including
attorneys' and consultants' fees, shall be due and payable by Tenant to Landlord
within thirty (30) days following Landlord's written demand therefore.

13. TENANT'S DEFAULT: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: (i) Tenant's
failure to pay any rent including additional rent or any other payment due under
this Lease by the date such rent is due which failure continues for ten (10)
days after written notice from Landlord, (ii) the abandonment of the Premises by
Tenant (with "abandonment" as used in this Lease having the meaning provided in
California Civil Code Section 1951.3 or any successor statute; (iii) Tenant's
failure to observe and perform any other required provision of this Lease, where
such failure continues for thirty (30) days after written notice from Landlord,
(provided however, that if the nature of the default is such that it cannot
reasonably be cured within the 30-day period, Tenant shall not be deemed in
default if Tenant commences within such period to cure the default and
thereafter diligently prosecutes the cure to completion); (iv) Tenant's making
of any general assignment for the benefit of creditors; (v) the filing by or
against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition
for reorganization or arrangement under any law relating to bankruptcy (unless,
in the case of a petition filed against Tenant, the same is dismissed after the
filing); (vi) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within thirty
(30) days; or (vii) the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within thirty (30)
days.

A. REMEDIES: In the event of any such default by Tenant, then in addition
to other

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remedies available to Landlord at law or in equity, Landlord shall have
the immediate option to terminate this Lease and all rights of Tenant hereunder
by giving written notice of such intention to terminate. In the event Landlord
elects to so terminate this Lease, Landlord may recover from Tenant all the
following: (i) the worth at time of award of any unpaid rent which had been
earned at the time of such termination; (ii) the worth at 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 for the same
period that Tenant proves could have been reasonably avoided; (iii) the worth at
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 be reasonably avoided; (iv) any other amount necessary to
compensate Landlord for all 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; including the following: (x)
expenses for repairing, altering or remodeling the Premises for purposes of
reletting to the extent allocable to the remainder of the Lease Term, (y)
broker's fees, advertising costs or other expenses of reletting the Premises to
the extent allocable to the remainder of the Lease Term, and (z) costs of
carrying the Premises such as taxes, insurance premiums, utilities and security
precautions. and (v) at Landlord's election, such other amounts in addition to
or in lieu of the foregoing as may be permitted by applicable California law.
The term "rent", as used herein, is defined as the minimum monthly installments
of Base Monthly Rent and all other sums required to be paid by Tenant pursuant
to this Lease, all such other sums being deemed as additional rent due
hereunder. As used in (i) and (ii) above, "worth at the time of award" shall be
computed by allowing interest at a rate equal to the discount rate of the
Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used
in (iii) above, "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 (1%) percent.

B. RIGHT TO RE-ENTER: In the event of any such default by Tenant,
Landlord shall have the right, after terminating this Lease, to re-enter the
Premises and remove all persons and property. Such property may be removed and
stored in a public warehouse or elsewhere at the cost of and for the account of
Tenant, and disposed of by Landlord in any manner permitted by law.

C. ABANDONMENT: If Landlord does not elect to terminate this Lease as
provided in Section 13.A or 13.B above, then the provisions of California Civil
Code Section 1951.4, (Landlord may continue the lease in effect after Tenant's
breach and abandonment and recover rent as it becomes due if Tenant has a right
to sublet and assign, subject only to reasonable limitations) as amended from
time to time, shall apply and Landlord may from time to time, without
terminating this Lease, either recover all rental as it becomes due or relet the
Premises or any part thereof for such term or terms and at such rental or
rentals and upon such other terms and conditions as Landlord in its sole
discretion may deem

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advisable, with the right to make alterations and repairs to the Premises. In
the event that Landlord elects to so relet, rentals received by Landlord from
such reletting shall be applied in the following order to: (i) the payment of
any indebtedness other than Base Monthly Rent due hereunder from Tenant to
Landlord; (ii) the payment of any cost of such reletting; (iii) the payment of
the cost of any alterations and repairs to the Premises; and (iv) the payment
of Base Monthly Rent due and unpaid hereunder. The residual rentals, if any,
shall be held by Landlord and applied in payment of future Base Monthly Rent
as the same may become due and payable hereunder. In the event the portion of
rentals received from such reletting which is applied to the payment of rent
hereunder during any month be less than the rent payable during that month by
Tenant hereunder, then Tenant shall pay such deficiency to Landlord
immediately upon demand. Such deficiency shall be calculated and paid monthly.
Tenant shall also pay to Landlord, as soon as ascertained, any costs and
expenses incurred by Landlord in such reletting or in making such alterations
and repairs not covered by the rentals received from such reletting.

D. NO TERMINATION: Landlord's re-entry or taking possession of the
Premises pursuant to 13.B or 13.C shall not be construed as an election to
terminate this Lease unless written notice of such intention is given to Tenant
or unless the termination is decreed by a court of competent jurisdiction.

E. NON-WAIVER: The waiver by Landlord or Tenant of any breach of any
term, covenant or condition, herein contained shall not be deemed to be a waiver
of such term, covenant or condition or any subsequent breach of the same or any
other term, covenant or condition herein contained. Landlord may accept Tenant's
payments without waiving any rights under this Lease, including rights under a
previously served notice of default. No payment by Tenant or receipt by Landlord
of a lesser amount than any installment of rent due shall be deemed as other
than payment on account of the amount due. If Landlord accepts payments after
serving a notice of default, Landlord may nevertheless commence and pursue an
action to enforce rights and remedies under the previously served notice of
default without giving Tenant any further notice or demand. Furthermore, the
Landlord's acceptance of rent from the Tenant when the Tenant is holding over
without express written consent does not convert Tenants Tenancy from a tenancy
at sufferance to a month to month tenancy. No waiver of any provision of this
Lease shall be implied by any failure of Landlord to enforce any remedy for the
violation of that provision, even if that violation continues or is repeated.
Any waiver by Landlord of any provision of this Lease must be in writing. Such
waiver shall affect only the provision specified and only for the time and in
the manner stated in the writing. No delay or omission in the exercise of any
right or remedy by Landlord shall impair such right or remedy or be construed as
a waiver thereof by Landlord. No act or conduct of Landlord, including, without
limitation, the acceptance of keys to the Premises, shall constitute acceptance
of the surrender of the Premises by Tenant before the Expiration Date. Only
written notice from Landlord to Tenant of acceptance shall

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<PAGE>

constitute such acceptance of surrender of the Premises. Landlord's consent to
or approval of any act by Tenant which requires Landlord's consent or
approvals shall not be deemed to waive or render unnecessary Landlord's
consent to or approval of any subsequent act by Tenant.

F. PERFORMANCE BY LANDLORD: If Tenant fails to perform any
obligation required under this Lease or by law or governmental regulation,
Landlord in its sole discretion may, following thirty (30) days written notice
to Tenant without waiving any rights or remedies and without releasing Tenant
from its obligations hereunder, perform such obligation, in which event Tenant
shall pay Landlord as additional rent all sums paid by Landlord in connection
with such substitute performance, including interest at the Agreed Interest Rate
within ten (10) days of Landlord's written notice for such payment.

G. CROSS-DEFAULT: Except as provided in Section 19.Y, if this Lease is
terminated as the result of a default by Landlord or Tenant or the exercise by
Landlord or Tenant of any other right to terminate given to Landlord or Tenant
under this Lease, then subject to the provisions of Section 15.C concerning the
payment by Landlord to Tenant of the unamortized cost of the Tenant Improvements
paid for by Tenant, the non-defaulting party may elect to terminate the Adjacent
Building Lease by giving written notice of such termination to the other party
concurrently with, or within ten (10) business days after, the termination of
this Lease.

14. LANDLORD'S LIABILITY:

A. LIMITATION ON LANDLORD'S LIABILITY: In the event of Landlord's
failure to perform any of its covenants or agreements under this Lease, Tenant
shall give Landlord written notice of such failure and shall give Landlord
thirty (30) days to cure or commence to cure such failure prior to any claim for
breach or resultant damages, provided, however, that if the nature of the
default is such that it cannot reasonably be cured within the 30-day period,
Landlord shall not be deemed in default if it commences within such period to
cure, and thereafter diligently prosecutes the same to completion. In addition,
upon any such failure by Landlord, Tenant shall give notice by registered or
certified mail to any person or entity with a security interest in the Premises
("Mortgagee") that has provided Tenant with notice of its interest in the
Premises. Tenant agrees that each of the Mortgagees to whom this Lease has been
assigned is an express third-party beneficiary hereof. Tenant waives any right
under California Civil Code Section 1950.7 or any other present or future law to
the collection of any payment or deposit from Mortgagee or any purchaser at a
foreclosure sale of Mortgagee's interest unless Mortgagee or such purchaser
shall have actually received and not refunded the applicable payment or deposit.

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Landlord; otherwise Mortgagee shall have twenty (20) days from the later of
the date on which it receives notice of the default from Tenant and the
expiration of Landlord's cure period). If such default cannot be cured by
Mortgagee within the cure period, Tenant may not exercise any of its remedies
so long as Mortgagee has commenced and is diligently pursuing the remedies
necessary to cure such default (including, but not limited to, commencement of
foreclosure proceedings, if necessary to effect such cure), provided that in
the event of emergency which materially adversely affects the Premises, Tenant
may exercise its right to cure Landlord's default as provided below so long as
Tenant makes reasonable good faith efforts to notify Landlord and Mortgagee
prior to commencing such emergency cure.

Subject to this Section 14.A, if any default hereunder by Landlord is not
cured within the applicable cure period provided herein, Tenant's remedies shall
include (but not be limited to) (i) an action for specific performance, (ii) an
action for actual damages, or (iii) Tenant may cause such default to be cured,
and Landlord shall reimburse Tenant for the reasonable cost thereof within
thirty (30) days of Landlord's receipt of demand for such amounts from Tenant,
together with paid invoices for such repairs (provided such invoices set forth
in reasonable detail the amount paid, the party to whom it was paid, the date it
was paid and the reasons giving rise to such payment), together with interest
thereon at the Interest Rate from the date of such invoice until Tenant is
reimbursed by Landlord. If Landlord disputes Tenant's right to cure Landlord's
default or the reasonableness of the costs incurred by Tenant, Landlord and
Tenant shall utilize Dispute Resolution in accordance with the provisions of
Section 19.E within thirty (30) days after Tenant's demand. If Landlord fails to
either reimburse Tenant or dispute Tenant's demand pursuant to the previous
sentence within thirty (30) days after Tenant's demand, Tenant may submit such
dispute to binding arbitration pursuant to Section 19.E. If Tenant prevails in
such arbitration, and Landlord fails to make any payment with respect to such
costs incurred by Tenant which Landlord is required to make as a result of any
binding arbitration award within thirty (30) days after the completion of such
arbitration, then notwithstanding any contrary provision of this Lease, Tenant
may thereafter offset any such sums against up to thirty percent (30%) of any
installment of Base Monthly Rent until such sums are paid.

B. LIMITATION ON TENANT'S RECOURSE: If Landlord is a corporation, trust,
partnership, joint venture, unincorporated association or other form of business
entity, the obligations of Landlord shall not constitute personal obligations of
the officers, directors, trustees, partners, joint venturers, members, owners,
stockholders, or other principals or representatives except to the extent of
their interest in the Premises. Tenant shall have recourse only to the interest
of Landlord in the Premises or for the satisfaction of the obligations of
Landlord and shall not have recourse to any other assets of Landlord for the
satisfaction of such obligations.

C. INDEMNIFICATION OF LANDLORD: As a material part of the consideration
rendered

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<PAGE>

to Landlord, Tenant hereby waives all claims against Landlord for damages to
goods, wares and merchandise, and all other personal property in, upon or
about said Premises and for injuries to persons in or about said Premises,
from any cause (other than due to the negligence or willful misconduct of
Landlord and Landlord's Agents) arising at any time to the fullest extent
permitted by law, and Tenant shall indemnify and hold Landlord exempt and
harmless from any damage or injury to any person, or to the goods, wares and
merchandise and all other personal property of any person, arising from the
use of the Premises, Building, and/or Project by Tenant and Tenant's Agents or
from the failure of Tenant to keep the Premises in good condition and repair
as herein provided, except to the extent due to the negligence or willful
misconduct of Landlord and Landlord's Agents. Further, in the event Landlord
is made party to any litigation due to the acts or omission of Tenant and
Tenant's Agents. Tenant will indemnify, defend (with counsel reasonably
acceptable to Landlord) and hold Landlord harmless from any such claim or
liability including Landlord's costs and expenses and reasonable attorney's
fees incurred in defending such claims.

15. DESTRUCTION OF PREMISES:

A. Landlord's Obligation to Restore: In the event of a destruction of
the Premises during the Lease Term Landlord shall repair the same to the
approximate condition which existed prior to such destruction. Such destruction
shall not annul or void this Lease; however, Tenant shall be entitled to a
proportionate reduction of Base Monthly Rent from the date of damage, such
proportionate reduction to be based upon the extent to which the damage
interferes with Tenant's business in the Premises. In no event shall Landlord be
required to replace or restore Alterations, Tenant Improvements paid for by
Tenant from sources other than the Work Allowance, Tenant's fixtures or personal
property. With respect to a destruction which Landlord is obligated to repair
or may elect to repair under the terms of this Section, Tenant waives the
provisions of Section 1932, and Section 1933, Subdivision 4, of the Civil Code
of the State of California, and any other similarly enacted statute, and the
provisions of this Section 15 shall govern in the case of such destruction.

B. LIMITATIONS ON LANDLORD'S RESTORATION OBLIGATION: Notwithstanding the
provisions of Section 15.A, Landlord shall have no obligation to repair, or
restore the Premises if any of the following occur: (i) if the repairs cannot
be made in 180 days from the date of receipt of all governmental approvals
necessary under the laws and regulations of State, Federal, County or Municipal
authorities, as reasonably determined by Landlord, (ii) if the holder of the
first deed of trust or mortgage encumbering the Building elects not to

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<PAGE>

permit the insurance proceeds payable upon damage or destruction to be used
for such repair or restoration, (iii) the damage or destruction is not fully
covered by the insurance maintained by Landlord (except for any deductible
amount) and provided Tenant has not elected to contribute any shortfall
amount, (iv) the damage or destruction occurs in the last twenty four (24)
months of the Lease Term, (v) Tenant is in default pursuant to the provisions
of Section 13, or (vi) Tenant has vacated the Premises for more than ninety
(90) days. In any such event Landlord may elect either to (i) complete the
repair or restoration, or (ii) terminate this Lease by providing Tenant
written notice of its election within sixty (60) days following the damage or
destruction; provided, however, that if at the time Landlord elects under the
preceding clause (iv) to terminate this Lease Tenant holds an unexercised
option to extend the Lease Term, and if Tenant exercises such option by notice
to Landlord within thirty (30) days after receipt of Landlord's notice
electing to terminate this Lease, Landlord's termination election shall be
annulled and Landlord shall be obligated to repair or restore the Premises
unless Landlord is excused from doing so under another provision of this
Lease.

Tenant shall also have the right to terminate this Lease if (i) the repairs
cannot be made in 180 days from the date of receipt of all governmental
approvals necessary under the laws and regulations of State, Federal, County or
Municipal authorities, as reasonably determined by Landlord, or (ii) the
damage or destruction occurs in the last twenty four (24) months of the Lease
Term. Landlord shall use reasonable efforts to promptly obtain all required
permits and approvals.

C. UNAMORTIZED TENANT IMPROVEMENTS: In the event that this Lease is
terminated as the result of damage or destruction and any insurance proceeds are
payable to Landlord, Landlord shall deliver to Tenant a portion of such
insurance proceeds equal to the portion of the costs of the Tenant Improvements
paid for by Tenant ("Tenant's Contribution") that remains unamortized as of the
date this Lease is terminated (calculated by amortizing Tenant's Contribution on
a straight-line basis over the initial term of this Lease, or if the termination
occurs after Tenant exercises its Option under Section 18 below, then calculated
by amortizing Tenant's Contribution on a straight-line basis over the term of
this Lease, as so extended); provided, however, that Landlord's obligation to
pay such insurance proceeds to Tenant shall be subject and subordinate to any
obligation that Landlord may have to apply such insurance proceeds to any loans
made to Landlord for the construction of the Building Shell which are secured by
the Building Shell and the Ground Lease.

16. CONDEMNATION: If any part of the Premises shall be taken for any
public or quasi-public use, under any statute or by right of eminent domain or
private purchase in lieu thereof, and only a part thereof remains which is
susceptible of occupation hereunder, this Lease shall, as to the part so taken,
terminate as of the day before title vests in the condemnor or purchaser
("Vesting Date") and Base Monthly Rent payable hereunder shall be adjusted so
that Tenant is required to pay for the remainder

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<PAGE>

of the Lease Term only such portion of Base Monthly Rent as the value of the
part remaining after such taking bears to the value of the entire Premises
prior to such taking; but in such event, Tenant shall have the option to
terminate this Lease as of the Vesting Date if the portion remaining is not
long suitable for Tenant's use. If all of the Premises or such part thereof be
taken so that there does not remain a portion susceptible for occupation
hereunder, this Lease shall terminate on the Vesting Date. If part or all of
the Premises be taken, all compensation awarded upon such taking shall go to
Landlord, and Tenant shall have no claim thereto; but Landlord shall cooperate
with Tenant, without cost to Landlord, to recover compensation for damage to
or taking of any Alterations, Tenant Improvements paid for by Tenant from
sources other than the Work Allowance, or for Tenant's moving costs. Tenant
hereby waives the provisions of California Code of Civil Procedures Section
1265.130 and any other similarly enacted statue, and the provisions of this
Section 16 shall govern in the case of such taking.

17. ASSIGNMENT OR SUBLEASE:

A. CONSENT BY LANDLORD: Except as specifically provided in this
Section 17, Tenant may not assign, sublet, hypothecate, or allow a third party
to use the Premises (except as herein provided) without the express written
consent of Landlord. In the event Tenant desires to assign this Lease or any
interest herein including, without limitation, a pledge, mortgage or other
hypothecation, or sublet the Premises or any part thereof, Tenant shall
deliver to Landlord (i) the proposed agreements and all ancillary agreements
with the proposed assignee/subtenant, (ii) current financial statements of the
transferee, (iii) the nature of the proposed transferee's business to be
carried on in the Premises, and (iv) all consideration to be given on account
of the Transfer. Landlord may condition its approval of any Transfer to a
certification from both Tenant and the proposed transferee of all
consideration to be paid to Tenant in connection with such Transfer. At
Landlord's request, Tenant shall also provide additional information
reasonably required by Landlord to determine whether it will consent to the
proposed assignment or sublease. Landlord shall have a ten (10) day period
following receipt of all the foregoing within which to notify Tenant in
writing that Landlord elects to: (i) permit Tenant to assign or sublet such
space to the named assignee/subtenant on the terms and conditions set forth in
the notice; or (ii) refuse consent. If Landlord should fail to notify Tenant
in writing of such election within the 10-day period, Landlord shall be deemed
to have elected option (i) above. Landlord's written consent to the proposed
assignment or sublease shall not be unreasonably withheld conditioned or
delayed, provided and upon the condition that: (i) the proposed assignee or
subtenant is engaged in a business that is limited to the use expressly
permitted under this Lease; (ii) the proposed assignee or subtenant is a
company with sufficient financial worth and management ability to undertake
the financial obligation of this Lease and Landlord has been furnished with
reasonable proof thereof; (iii) the proposed assignment or sublease is in form
reasonably satisfactory to Landlord; (iv) Tenant reimburses Landlord on demand
for any

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actual, out-of-pocket costs reasonably incurred by Landlord in
connection with said assignment or sublease, including the costs of making
investigations as to the acceptability of the proposed assignee or subtenant
and reasonable legal costs incurred in connection with the granting of any
requested consent (all such costs not to exceed $1,500.00 in regard to any
single transaction; and (v) Tenant shall not have advertised or publicized in
any way the availability of the Premises without prior notice to Landlord. In
connection with an assignment to which Landlord has given its consent,
Landlord and the assignee shall execute an amendment to this Lease for
purposes of both documenting and implementing the Multi-Tenant Project
Provisions set forth in Section 19.Y below. In the event all or any one of the
foregoing conditions are not reasonably satisfied, Landlord shall be
considered to have acted reasonably if it withholds its consent. Tenant shall
have the right, without Landlord's consent, to permit use of the Premises by
persons engaged in carrying on Tenant's business or with whom Tenant has
business relationships, provided that the portions of the Premises used by
such persons are not separately demised.

B. ASSIGNMENT OR SUBLETTING CONSIDERATION: During the first twenty four
(24) months of the Lease Term, all rent or other economic consideration realized
by Tenant under any sublease and assignment shall be retained by Tenant.
Thereafter, except for Permitted Transfers such excess rents shall be divided
and paid fifty percent (50%) to Landlord and fifty percent (50%) to Tenant. For
this purpose, "excess rents" shall mean the amount by which the consideration
actually received by Tenant in connection with a sublease or assignment exceeds
the sum of the following: (i) all amounts payable under this Lease as Rent
(prorated on a per square foot basis in case of a partial subletting of the
Premises), (ii) all costs of improving the Premises (or the affected portion
thereof) for occupancy by the subtenant or assignee, and (iii) leasing
commissions, marketing costs, architects' fees, attorneys' fees and other
customary expenses reasonably incurred by Tenant in consummating the
assignment or sublease and/or in enforcing Tenant's rights thereunder.
Tenant's obligation to pay over Landlord's portion of the excess rents
constitutes an obligation for additional rent hereunder. The above provisions
relating to the allocation of bonus rent are independently negotiated terms of
the Lease which constitute a material inducement for the Landlord to enter
into the Lease, and are agreed by the parties to be commercially reasonable.
No assignment or subletting by Tenant shall relieve it of any obligation under
this Lease. Any assignment or subletting which conflicts with the provisions
hereof shall be void.

C. NO RELEASE: Any assignment or sublease shall be made only if and
shall not be effective until the assignee or subtenant shall execute,
acknowledge, and deliver to Landlord an agreement, in form and substance
satisfactory to Landlord, whereby the assignee or subtenant shall assume all the
obligations of this Lease on the part of Tenant to be performed or observed and
shall be subject to all the covenants, agreements, terms, provisions and
conditions in this Lease. Notwithstanding any such sublease or assignment and
the

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acceptance of rent by Landlord from any subtenant or assignee, Tenant and
any guarantor shall remain fully liable for the payment of Base Monthly Rent and
additional rent due, and to become due hereunder, for the performance of all the
covenants, agreements, terms, provisions and conditions contained in this Lease
(except any subtenant shall only be liable to Landlord for the obligations to
the extent they related to the portion of the Premises so sublet) on the part of
Tenant to be performed and for all acts and omissions of any licensee,
subtenant, assignee or any other person claiming under or through any subtenant
or assignee that shall be in violation of any of the terms and conditions of
this Lease, and any such violation shall be deemed a violation by Tenant.
Tenant shall indemnify, defend and hold Landlord harmless from and against all
losses, liabilities, damages, costs and expenses (including reasonable attorney
fees) resulting from any claims that may be made against Landlord by the
proposed assignee or subtenant or by any real estate brokers or other persons
claiming compensation in connection with the proposed assignment or sublease.

D. REORGANIZATION OF TENANT: The provisions of this Section 17.D
shall apply if Tenant is a corporation and: (i) there is a dissolution, merger,
consolidation, or other reorganization of or affecting Tenant, where Tenant is
not the surviving corporation, or (ii) there is a sale or transfer to one person
or entity (or to any group of related persons or entities) of stock possessing
more than 50% of the total combined voting power of all classes of Tenant's
capital stock issued, outstanding and entitled to vote for the election of
directors, and after such sale or transfer of stock Tenant's stock is no longer
publicly traded. In a transaction under clause (i) the surviving corporation
shall promptly execute and deliver to Landlord an agreement in form reasonably
satisfactory to Landlord under which such corporation assumes the obligations of
Tenant hereunder, and in a transaction under clause (ii) the transferee shall
promptly execute and deliver to Landlord an agreement in form reasonably
satisfactory to Landlord under which such transferee assumes the obligations of
Tenant to the extent accruing after such transferee's acquisition of Tenant's
stock possessing more than 50% of the total combined voting of all classes of
Tenant's capital stock issued, outstanding and entitled to vote for the election
of directors.

E. PERMITTED TRANSFERS: Notwithstanding anything contained in this
Section 17, so long as Tenant otherwise complies with the provisions of this
Article, Tenant may enter into any of the following transfers (a "Permitted
Transfer") without Landlord's prior consent, and Landlord shall not be entitled
to receive any part of any subrent resulting therefrom that would otherwise be
due pursuant to Sections 17.A and 17.B. Tenant may sublease all or part of the
Premises or assign its interest in this Lease to (i) any corporation which
controls, is controlled by, or is under common control with the original Tenant
to this Lease by means of an ownership interest of more than 50%; (ii) a
corporation which results from a merger, consolidation or other reorganization
in which Tenant is not the surviving corporation, so long as the surviving
corporation has a net worth at the time of such assignment that is equal to or

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greater than the net worth of Tenant immediately prior to such transaction; and
(iii) a corporation which purchases or otherwise acquires all or substantially
all of the assets of Tenant so long as such acquiring corporation has a net
worth at the time of such assignment that is equal to or greater than the net
worth of Tenant immediately prior to such transaction.

F. EFFECT OF DEFAULT: In the event of Tenant's default (after expiration
of any applicable cure period), Tenant hereby assigns all rents due from any
assignment or subletting to Landlord as security for performance of its
obligations under this Lease, and Landlord may collect such rents as Tenant's
Attorney-in-Fact, except that Tenant may collect such rents unless a default
occurs as described in Section 13 above. A Lease termination due to Tenant's
default shall not automatically terminate an assignment or sublease then in
existence; rather at Landlord's election, such assignment or sublease shall
survive the Lease termination, the assignee or subtenant shall attorn to
Landlord, and Landlord shall undertake the obligations of Tenant under the
sublease or assignment; except that Landlord shall not be liable for prepaid
rent, security deposits or other defaults of Tenant to the subtenant or
assignee, or for any acts or omissions of Tenant and Tenant's Agents.

G. CONVEYANCE BY LANDLORD: As used in this Lease, the term
"Landlord" is defined only as the owner for the time being of the Premises, so
that in the event of any sale or other conveyance of the Premises or in the
event of a master lease of the Premises, Landlord shall be entirely freed and
relieved of all its covenants and obligations hereunder accruing after the date
of such sale or other conveyance, and it shall be deemed and construed, without
further agreement between the parties and the purchaser at any such sale or the
master tenant of the Premises, that the purchaser or master tenant of the
Premises has assumed and agreed to carry out any and all covenants and
obligations of Landlord hereunder. Such transferor shall transfer and deliver
Tenant's security deposit to the purchaser at any such sale or the master tenant
of the Premises, and thereupon the transferor shall be discharged from any
further liability in reference thereto.

H. SUCCESSORS AND ASSIGNS: Subject to the provisions this Section 17,
the covenants and conditions of this Lease shall apply to and bind the heirs,
successors, executors, administrators and assigns of all parties hereto; and
all parties hereto shall be jointly and severally liable hereunder.

I. PARTICULAR SUBLEASE PROVISIONS: To expedite Landlord's review and
approval of subleases, the parties shall cooperate to develop a standard form of
sublease which Tenant shall utilize where appropriate. In connection with any
sublease which Landlord has approved, (i) the subtenant shall be permitted to
utilize a general contractor other than Sobrato Construction Corporation for the
construction of tenant improvements and Landlord shall not impose any
supervision fee or other charge in connection with such construction, and (ii)
the subtenant may carry commercial general liability insurance having a combined
single limit of not less than Two Million Dollars ($2,000,000).

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18. OPTION TO EXTEND THE LEASE TERM:

A. GRANT AND EXERCISE OF OPTION: Landlord grants to Tenant, subject to
the terms and conditions set forth in this Section 18.A, three (3) options (the
"Options") to extend the Lease Term for an additional term (the "Option Term").
Each Option Term shall be for a period of sixty (60) months and shall be
exercised, if at all, by written notice to Landlord no earlier than twelve (12)
months prior to the Expiration Date but no later than nine (9) months prior to
the Expiration Date. So long as Tenant also is the tenant under the Adjacent
Building Lease, Tenant's exercise of the Option under this Lease shall be
conditioned upon Tenant's exercise of the corresponding extension option under
the Adjacent Building Lease. If Tenant exercises the Option, all of the terms,
covenants and conditions of this Lease except this Section shall apply during
the Option Term as though the expiration date of the Option Term was the date
originally set forth herein as the Expiration Date, provided that Base Monthly
Rent for the Premises payable by Tenant during the Option Term shall be the
greater of either the Base Monthly Rent applicable to the period immediately
prior to the commencement of the Option Term, or ninety five percent (95%) of
the Fair Market Rental as hereinafter defined. Notwithstanding anything herein
to the contrary, if Tenant is in monetary or material non-monetary default
(after expiration of any applicable cure period) under any of the terms,
covenants or conditions of this Lease either at the time Tenant exercises the
Option or at any time thereafter prior to the commencement date of the Option
Term, Landlord shall have, in addition to all of Landlord's other rights and
remedies provided in this Lease, the right to terminate the Option upon notice
to Tenant, in which event the expiration date of this Lease shall be and remain
the Expiration Date. As used herein, the term "Fair Market Rental" is defined
as the rental and all other monetary payments, including any escalations and
adjustments thereto (including without limitation Consumer Price Indexing) that
Landlord could obtain during the Option Term from a third party desiring to
lease the Premises, based upon the current use and other potential uses of the
Premises, as determined by the rents then being obtained for new leases of space
comparable in age and quality to the Premises in the locality of the Building.
The parties further agree that the appraisers shall be instructed that the
foregoing five percent (5%) discount is intended to reduce comparable rents
which include (i) brokerage commissions and (ii) vacancy costs, to account for
the fact that Landlord will not suffer such costs in the event Tenant exercises
its Option.

B. DETERMINATION OF FAIR MARKET RENTAL: If Tenant exercises the Option,
Landlord shall send Tenant a notice setting forth the Fair Market Rental for the
Option Term within thirty (30) days following the Exercise Date. If Tenant
disputes Landlord's determination of Fair Market Rental for the Option Term,
Tenant shall, within thirty (30) days after the date of Landlord's notice
setting forth Fair Market Rental for the Option Term, send to Landlord a notice
stating that Tenant either elects to terminate its exercise of the Option, in
which event the Option shall lapse and

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this Lease shall terminate on the Expiration Date, or that Tenant disagrees
with Landlord's determination of Fair Market Rental for the Option Term and
elects to resolve the disagreement as provided in Section 18.C below. If
Tenant does not send Landlord a notice as provided in the previous sentence,
Landlord's determination of Fair Market Rental shall be the basis for
determining the Base Monthly Rent payable by Tenant during the Option Term. If
Tenant elects to resolve the disagreement as provided in Section 18.C and such
procedures are not concluded prior to the commencement date of the Option
Term, Tenant shall pay to Landlord as Base Monthly Rent the Fair Market Rental
as determined by Landlord in the manner provided above. If the Fair Market
Rental as finally determined pursuant to Section 18.C is greater than
Landlord's determination, Tenant shall pay Landlord the difference between the
amount paid by Tenant and the Fair Market Rental as so determined in Section
18.C within thirty (30) days after such determination. If the Fair Market
Rental as finally determined in Section 18.C is less than Landlord's
determination, the difference between the amount paid by Tenant and the Fair
Market Rental as so determined in Section 18.C shall be credited against the
next installments of rent due from Tenant to Landlord hereunder.

C. RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any
disagreement regarding Fair Market Rental shall be resolved as follows:

1. Within thirty (30) days after Tenant's response to Landlord's notice
setting forth the Fair Market Rental, Landlord and Tenant shall meet at least
two (2) times at a mutually agreeable time and place, in an attempt to resolve
the disagreement.

2. If within the 30-day period referred to above, Landlord and Tenant
cannot reach agreement as to Fair Market Rental, each party shall select one
appraiser to determine Fair Market Rental. Each such appraiser shall arrive at
a determination of Fair Market Rental and submit their conclusions to Landlord
and Tenant within thirty (30) days after the expiration of the 30-day
consultation period described above.

3. If only one appraisal is submitted within the requisite time period, it
shall be deemed as Fair Market Rental. If both appraisals are submitted within
such time period and the two appraisals so submitted differ by less than ten
percent (10%), the average of the two shall be deemed as Fair Market Rental. If
the two appraisals differ by more than 10%, the appraisers shall immediately
select a third appraiser who shall, within thirty (30) days after his selection,
make and submit to Landlord and Tenant a determination of Fair Market Rental.
This third appraisal will then be averaged with the closer of the two previous
appraisals and the result shall be Fair Market Rental.

4. All appraisers specified pursuant to this Section shall be members of
the American Institute of Real Estate Appraisers with not less than ten (10)
years experience appraising office and industrial properties in the Santa Clara
Valley. Each party shall pay the cost of the appraiser selected by such

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party and one-half of the cost of the third appraiser.

19. GENERAL PROVISIONS:

A. ATTORNEY'S FEES: In the event a suit or alternative form of dispute
resolution is brought for the possession of the Premises, for the recovery of
any sum due hereunder, to interpret the Lease, or because of the breach of any
other covenant herein; then the losing party shall pay to the prevailing party
reasonable attorney's fees including the expense of expert witnesses,
depositions and court testimony as part of its costs which shall be deemed to
have accrued on the commencement of such action. The prevailing party shall
also be entitled to recover all costs and expenses including reasonable
attorney's fees incurred in enforcing any judgment or award against the other
party. The foregoing provision relating to post-judgment costs is severable
from all other provisions of this Lease.

B. AUTHORITY OF PARTIES: Tenant represents and warrants that it is duly
formed and in good standing, and is duly authorized to execute and deliver this
Lease on behalf of said corporation, in accordance with a duly adopted
resolution of the Board of Directors of said corporation or in accordance with
the by-laws of said corporation, and that this Lease is binding upon said
corporation in accordance with its terms. At Landlord's request, Tenant shall
provide Landlord with corporate resolutions or other proof in a form acceptable
to Landlord, authorizing the execution of the Lease.

C. BROKERS: Tenant represents it has not utilized or contacted a real
estate broker or finder with respect to this Lease other than CB Madison and
Tenant agrees to indemnify, defend and hold Landlord harmless against any claim,
cost, liability or cause of action asserted by any other broker or finder
claiming through Tenant.

D. CHOICE OF LAW: This Lease shall be governed by and construed in
accordance with California law. Venue shall be Santa Clara County.

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and practices of J. A. M. S. or other judicial mediation service selected.
In the event of any dispute subject to this provision, either party may initiate
a request for mediation and the parties shall use reasonable efforts to promptly
select a J. A. M. S. mediator and commence the mediation. In the event the
parties are not able to agree on a mediator within thirty (30) days, J. A. M. S.
or another judicial mediation service mutually acceptable to the parties shall
appoint a mediator. The mediation shall be confidential and in accordance with
California Evidence Code (S) 1152.5. The mediation shall be held in Santa Clara
County and in accordance with the existing rules and practice of J. A. M. S. (or
other judicial and mediation service selected). The parties shall use reasonable
efforts to conclude the mediation within sixty (60) days of the date of either
party's request for mediation. The mediation shall be held prior to any
arbitration or court action (other than a claim by Landlord for unlawful
detainer or any claim within the jurisdiction of the small claims court which
are not subject to this mediation/arbitration provision and may be filed
directly with a court of competent jurisdiction). Should the prevailing party in
any dispute subject to this Section 19.E attempt an arbitration or a court
action before attempting to mediate, THE PREVAILING PARTY SHALL NOT BE ENTITLED
TO ATTORNEY'S FEES THAT MIGHT OTHERWISE BE AVAILABLE TO THEM IN A COURT ACTION
OR ARBITRATION AND IN ADDITION THERETO, THE PARTY WHO IS DETERMINED BY THE
ARBITRATOR TO HAVE RESISTED MEDIATION, SHALL BE SANCTIONED BY THE ARBITRATOR OR
JUDGE.

If a mediation is conducted but is unsuccessful, it shall be followed by final
and binding arbitration administered by and in accordance with the then existing
rules and practices of J. A. M. S. or the other judicial and mediation service
selected, and judgment upon any award rendered by the arbitrator(s) may be
entered by any state or federal court having jurisdiction thereof. The parties
to the arbitration shall have those rights of discovery that the arbitrator(s)
deem necessary (after application to the arbitrator(s)) to a full and fair
hearing of the matter. However, in no event shall the parties be entitled to
propound interrogatories or request for admissions during the arbitration
process. The arbitrator shall be a retired judge or a licensed California
attorney. The venue for any such arbitration or mediation shall be in Santa
Clara County, California.

F. ENTIRE AGREEMENT: This Lease and the exhibits attached hereto
contains all of the agreements and conditions made between the parties hereto
and may not be modified orally or in any other manner other than by written
agreement signed by all parties hereto or their respective successors in
interest. This Lease supersedes and revokes all previous negotiations, letters
of intent, lease proposals, brochures, agreements, representations, promises,
warranties, and understandings, whether oral or in writing, between the
parties or their respective representatives or any other person purporting to
represent Landlord or Tenant.

G. ENTRY BY LANDLORD: Upon prior reasonable notice to Tenant, subject to

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Tenant's reasonable security regulations and provided such entry does not
unreasonable interfere with Tenant's use of the Premises, Tenant shall permit
Landlord and his agents to enter into and upon the Premises at all reasonable
times, and without any rent abatement or reduction or any liability to Tenant
for any loss of occupation or quiet enjoyment of the Premises thereby
occasioned, for the following purposes: (i) inspecting and maintaining the
Premises; (ii) making repairs, alterations or additions to the Premises; (iii)
erecting additional building(s) and improvements on the land where the Premises
are situated or on adjacent land owned by Landlord; and (iv) performing any
obligations of Landlord under the Lease including remediation of hazardous
materials if determined to be the responsibility of Landlord. Tenant shall
permit Landlord and his agents, at any time within one hundred eighty (180) days
prior to the Expiration Date (or at any time during the Lease if Tenant is in
default after expiration of the applicable cure period), to place upon the
Premises "For Lease" signs and exhibit the Premises to real estate brokers and
prospective tenants subject the provisions of this Section 19.G.

H. ESTOPPEL CERTIFICATES: At any time during the Lease Term, Landlord
or Tenant shall, within fifteen (15) days following written notice from the
other, execute and deliver a written statement certifying, if true, the
following: (i) that this Lease is unmodified and in full force and effect (or,
if modified, stating the nature of such modification); (ii) the date to which
rent and other charges are paid in advance, if any; (iii) acknowledging that
there are not, to the party's knowledge, any uncured defaults (or specifying
such defaults if they are claimed); and (iv) such other information as may be
reasonably requested. Any such statement may be conclusively relied upon by a
third party. Tenant agrees to provide, within twenty (20) days of Landlord's
request, Tenant's most recent annual report and latest quarterly reports.

I. EXHIBITS: All exhibits referred to are attached to this Lease and
incorporated by reference.

J. INTEREST: All rent due hereunder, if not paid when due, shall bear
interest at the rate of the Reference Rate published by Bank of America, San
Francisco Branch, plus two percent (2%) per annum from that date until paid in
full ("Agreed Interest Rate"). This provision shall survive the expiration or
sooner termination of the Lease. Despite any other provision of this Lease, the
total liability for interest payments shall not exceed the limits, if any,
imposed by the usury laws of the State of California. Any interest paid in
excess of those limits shall be refunded to Tenant by application of the amount
of excess interest paid against any sums outstanding in any order that Landlord
requires. If the amount of excess interest paid exceeds the sums outstanding,
the portion exceeding those sums shall be refunded in cash to Tenant by
Landlord. To ascertain whether any interest payable exceeds the limits imposed,
any non-principal payment(including late charges) shall be considered to the
extent permitted by law to be an expense or a fee, premium, or penalty rather
than interest.

K. SATELLITE ANTENNAE: During the Lease Term, Tenant shall have the
right,

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subject to relevant regulatory approvals and Landlord's consent (such
consent not to be unreasonably withheld, conditioned or delayed) to install one
or more satellite antennas (each, an "Antenna") on the roofs of the Building in
a location reasonably satisfactory to both Landlord and Tenant. Tenant shall not
be charged any rent for roof space. Prior to submitting any plans to the City
of San Jose or proceeding with any installation of an Antenna, Tenant shall
submit to Landlord elevations and specifications for the Antenna. Tenant shall
install any approved Antennae at its sole expense and shall be responsible for
any damage caused by the installation of the Antennae or related to the
Antennae. At the Expiration Date or upon earlier termination of this Lease,
Tenant shall remove the Antennas from their locations and repair any damage
caused by such removal.

L. NO PRESUMPTION AGAINST DRAFTER: Landlord and Tenant understand, agree
and acknowledge that this Lease has been freely negotiated by both parties; and
that in any controversy, dispute, or contest over the meaning, interpretation,
validity, or enforceability of this Lease or any of its terms or conditions,
there shall be no inference, presumption, or conclusion drawn whatsoever against
either party by virtue of that party having drafted this Lease or any portion
thereof.

M. NOTICES: All notices, demands, requests, or consents required to be
given under this Lease shall be sent in writing by U.S. certified mail, return
receipt requested, or by personal delivery or delivery by nationally recognized
overnight courier addressed to the party to be notified at the address for such
party specified in Section 1 of this Lease, or to such other place as the party
to be notified may from time to time designate by at least fifteen (15) days
prior notice to the notifying party. When this Lease requires service of a
notice, that notice shall replace rather than supplement any equivalent or
similar statutory notice, including any notices required by Code of Civil
Procedure Section 1161 or any similar or successor statute. when a statute
requires service of a notice in a particular manner, service of that notice (or
a similar notice required by this lease) shall replace and satisfy the statutory
service-of-notice procedures, including those required by Code of Civil
Procedure Section 1162 or any similar or successor statute.

N. PROPERTY MANAGEMENT: In addition, Tenant agrees to pay Landlord
along with the expenses to be reimbursed by Tenant a monthly fee for management
services rendered by either Landlord or a third party manager engaged by
Landlord (which may be a party affiliated with Landlord), in the amount of two
and 50/100 percent (2.5%) of the Base Monthly Rent.

O. RENT: All monetary sums due from Tenant to Landlord under this Lease,
including, without limitation those referred to as "additional rent", shall be
deemed as rent.

matter. Except as herein expressly set forth herein, Tenant relied on no
statement of Landlord or its employees or agents for that purpose.

Q. RIGHTS AND REMEDIES: All rights and remedies hereunder are cumulative
and not alternative to the extent permitted by law, and are in addition to all
other rights and remedies in law and in equity.

R. SEVERABILITY: If any term or provision of this Lease is held
unenforceable or invalid by a court of competent jurisdiction, the remainder of
the Lease shall not be invalidated thereby but shall be enforceable in
accordance with its terms, omitting the invalid or unenforceable term.

S. SUBMISSION OF LEASE: Submission of this document for examination or
signature by the parties does not constitute an option or offer to lease the
Premises on the terms in this document or a reservation of the Premises in favor
of Tenant. This document is not effective as a lease or otherwise until
executed and delivered by both Landlord and Tenant.

T. SUBORDINATION: Subject to the recognition agreement from the Ground
Lessor to be provided Tenant pursuant to Section 1, this Lease is subject and
subordinate to ground and underlying leases, mortgages and deeds of trust
(collectively "Encumbrances") which may now affect the Premises, to any
covenants, conditions or restrictions of record, and to all renewals,
modifications, consolidations, replacements and extensions thereof; provided,
however, if the holder or holders of any such Encumbrance ("Holder") require
that this Lease be prior and superior thereto, within seven (7) days after
written request of Landlord to Tenant, Tenant shall execute, have acknowledged
and deliver all documents or instruments, in the reasonable form presented to
Tenant, which Landlord or Holder deems necessary or desirable for such purposes.
Landlord shall have the right to cause this Lease to be and become and remain
subject and subordinate to any and all Encumbrances which are now or may
hereafter be executed covering the Premises or any renewals, modifications,
consolidations, replacements or extensions thereof, for the full amount of all
advances made or to be made thereunder and without regard to the time or
character of such advances, together with interest thereon and subject to all
the terms and provisions thereof; provided only, that in the event of
termination of any such lease or upon the foreclosure of any such mortgage or
deed of trust, Holder agrees to recognize Tenant's rights under this Lease as
long as Tenant is not then in default and continues to pay Base Monthly Rent and
additional rent and observes and performs all required provisions of this Lease.
Within ten (10) days after Landlord's written request, Tenant shall execute any
documents required by Landlord or the Holder to make this Lease subordinate to
any lien of the Encumbrance provided Tenant receives a recognition of Tenant's
rights in a form reasonably satisfactory to Tenant. If Tenant fails to do so,
then in addition to such failure constituting a default by Tenant, it shall be
deemed that this Lease is so subordinated to such Encumbrance. Notwithstanding
anything to the contrary in this Section, Tenant hereby attorns and agrees to
attorn to any entity purchasing or otherwise acquiring

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<PAGE>

the Premises at any sale or other proceeding or pursuant to the exercise of
any other rights, powers or remedies under such encumbrance.

U. SURVIVAL OF INDEMNITIES: All indemnification, defense, and hold harmless
obligations of Landlord and Tenant under this Lease shall survive the expiration
or sooner termination of the Lease.

V. TIME: Time is of the essence hereunder.

W. TRANSPORTATION DEMAND MANAGEMENT PROGRAMS: Should a government agency or
municipality require Landlord to institute TDM (Transportation Demand
Management) facilities and/or program, Tenant agrees that the cost of TDM
imposed facilities required on the Premises, including but not limited to
employee showers, lockers, cafeteria, or lunchroom facilities, shall be paid by
Tenant. Further, any ongoing costs or expenses associated with a government
mandated TDM program which are required for the Premises and not provided by
Tenant, such as an on-site TDM coordinator, shall be provided by Landlord with
such costs being included as additional rent and reimbursed to Landlord by
Tenant within thirty (30) days after demand.

X. WAIVER OF RIGHT TO JURY TRIAL: Landlord and Tenant waive their
respective rights to trial by jury of any contract or tort claim, counterclaim,
cross-complaint, or cause of action in any action, proceeding, or hearing
brought by either party against the other on any matter arising out of or in any
way connected with this Lease, the relationship of Landlord and Tenant, or
Tenant's use or occupancy of the Premises, including any claim of injury or
damage or the enforcement of any remedy under any current or future law,
statute, regulation, code, or ordinance.

Y. MULTI-TENANT PROJECT PROVISIONS: Where Tenant remains as the tenant
under this Lease but ceases to be the tenant under the Adjacent Building Lease,
whether by virtue of an assignment or termination of the Adjacent Building
Lease, the following provisions (the "Multi-Tenant Project Provisions") shall
apply:

1. Tenant shall have a nonexclusive right, together with other tenants of
the Project, to use the Project Common Area, including a nonexclusive right to
use fifty percent (50%) of the parking spaces in the Project. The Project
Common Area shall be controlled by Landlord pursuant to reasonable and non-
discriminatory rules and regulations adopted by Landlord and approved by Tenant
(which approval shall not be unreasonable withheld, conditioned or delayed).

2. Tenant shall have exclusive exterior signage rights only as to the
Building, and other Project signage shall be controlled by Landlord pursuant to
a reasonable and nondiscriminatory sign

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<PAGE>

program adopted by Landlord and approved by Tenant (which approval shall not
be unreasonable withheld, conditioned or delayed), which appropriately
recognizes the relative prominence of Tenant and other tenants in the Project.

3. Section 13.G of this Lease shall be of no further force or effect, and
termination of the Adjacent Building Lease shall not give rise to a right on the
part of either Landlord or Tenant to terminate this Lease.

4. Tenant's exercise of the Option to extend this Lease shall not be
conditioned upon the exercise of any extension option granted under the Adjacent
Building Lease.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and
year first above written.

LANDLORD: SOBRATO INTERESTS III TENANT: BEA SYSTEMS, INC.
a California Limited Partnership a Delaware Corporation

By: /s/ John M. Sobrato By: /s/ Willam T. Coleman III
------------------- -------------------------

Its: General Partner Its: Chief Executive Officer
-----------------------

Page 42
<PAGE>

EXHIBIT "A"
LEGAL DESCRIPTION OF PREMISES

All that certain real property situated in the City of San Jose, County of Santa
Clara, State of California, described as follows:

Parcel 1, as shown on the Parcel Map filed for records in the office of the
Recorder of the County of Santa Clara, State of California on August 11, 1989,
in Book 604 of Maps, Page(s) 14, 15 and 16.
<PAGE>

EXHIBIT "B" - PREMISES & PROJECT

[MAP]
Set forth herein is a site plan for the leased premise.
<PAGE>

EXHIBIT "C" - BUILDING SHELL DEFINITION

The Building Shell shall be a four -story steel frame structure with 90% of the
perimeter containing glass. The Building Shell shall include the following
items:

1. BUILDING STRUCTURE

(a) All foundations to include footings, piers, caissons, pilings, grade
beams, foundation walls or other building foundation components required to
support the building structure.

(b) Five inch (5") thick concrete slab on grade with below grade vapor
barrier and welded wire mesh and any other reinforcing or structural connections
that may be necessary or required as specified by structural engineer.

(c) Complete structural framing system comprised of rolled steel or pipe
columns, light weight braced-frame steel structure with corrugated metal deck
and concrete toping over and open-web bar joist and girder floor support system,
all members fireproofed as required by code. Floor support system shall provide
for a minimum of 120 pounds per square foot live load.

(d) Tinted high performance glass with Robertson composite metal panels
including required caulking and sealants. Four (4) exterior double doors, door
closers and locking devices as necessary.

(e) Four (4) ply built up roofing with cap sheet by Owens-Corning, John
Manville, or equal and all flashings over a rigid insulated corrugated metal
deck roof system.

(f) Exterior painting of any concrete with Tex-Coat or Kel-Tex textural
paint, all caulking of exterior concrete joints in preparation for painting.

(g) Two (2) steel fire stairs at perimeter of building. One ship ladder to
roof of building with roof hatch.

(h) Mechanical roof screen.

(i) Loading area with grade level access with hydraulic scissors lift
external of building.

(j) penetrations of the roof and floor for the mechanical ducting and for
the elevators (elevator penetrations to accommodate two hydraulic passenger
elevators at the core and one freight elevator near the dock area)
<PAGE>

2. SITEWORK

(a) All work outside the building perimeter walls shall be considered site
work for the Building Shell and shall include grading, asphalt concrete, paving,
landscaping, landscape irrigation, storm drainage, utility service laterals,
curbs, gutters, sidewalks, specialty paving (if required, i.e. reinforced
roadway section to truck doors), retaining walls, planters, trash enclosure,
parking lot and landscape lighting and other exterior lighting per code.
Landscape design to include screen dining patio (no furniture) and three flag
poles with bases.

(b) Paving sections for automobile and truck access shall be according to
the Geologic Soils Report.

(d) Underground site storm drainage system shall be connected to the city
storm system main.

3. PLUMBING

(a) Underground sanitary sewer laterals connected to the city sewer main in
the street and stubbed to the core of the building.

(b) Domestic water mains connected to the city water main in the street and
stubbed to the building.

(d) Gas lines connected to the city or public utility mains and run to gas
meters adjacent to, and in close proximity to the building. Meter supplied by
utility company.

4. ELECTRICAL

(a) A primary electrical raceway service from the street to the building,
including underground conduit, wire feeders, and transformer pads. Transformer
supplied by utility company. Underground conduits and secondary feeders from
transformer pads into the building.

(b) 4" Underground conduit from the street to the building for telephone
trunk lines by Pacific Telephone.

(c) An electrically operated landscape irrigation system, with controller,
that is a complete and functioning system.
<PAGE>

(e) Underground conduit from the building to the main fire protection system
post indicator valve (PIV) for installation of supervisory alarm wiring.

(f) Telephone and data conduits between the Building and the Adjacent
Building

All other costs shall be deemed Tenant Improvements.
<PAGE>

EXHIBIT D - BUILDING SHELL PLANS

ARCHITECTURAL DRAWINGS

SHEET NO. SHEET NAME

A0.1 Project Information and Note
A1.0 Site Plan
A2.0A Building One- First Level Floor Plan
A2.1A Building One- Second Level Floor Plan
A2.2A Building One- Third Level Floor Plan
A2.3A Building One- Fourth Level Floor Plan
A2.4A Building One- Roof Plan
A2.5B Building Two- First Level Floor Plan
A2.6B Building Two- Second Level Floor Plan
A2.7B Building Two- Third Level Floor Plan
A2.8B Building Two- Fourth Level Floor Plan
A2.9B Building Two- Roof Plan
A3.0A Building One- North and South Exterior Elevations
A3.1A Building One- East and West Exterior Elevations
A3.2B Building Two- East and West Exterior Elevations
A3.3B Building Two- North and South Exterior Elevations
A4.0 Wall Sections
A4.1 Wall Sections
A4.2 Wall Sections
A4.3 Wall Sections
A6.0 Detail Stair Floor Plans
A6.1 Stair Details
A6.2 Stair Sections and Details

CIVIL DRAWINGS

C-1 Topographical Survey
C-2 Preliminary Grading Plan

STRUCTURAL DRAWINGS

S1 Horn House Foundation Plans and Details
S2.0 Building One Foundation Plan
S2.1 Building One- Second Floor Framing Plan
S2.2 Building One- Third Floor Framing Plan
S2.3 Building One- Fourth Floor Framing Plan
S3.1 Building One- Braced Frame Elevations
<PAGE>

S3.2 Typical Structural Details
S6.1 Wall Sections
S6.2 Wall Sections
S6.3 Wall Sections
S6.4 Wall Sections
S3.1 Panel Elevations
S3.2 Panel Elevations
S3.3 Panel Elevations
S4.0 Foundation Details

ELECTRICAL DRAWINGS

SE.1 Site Electrical Plan
E1.a Building One- First Level Power Plan
E1.b Building Two- First Level Power Plan
E2.a Building One - Second Level Power Plan
E2.b Building Two- Second Level Power Plan

LANDSCAPE DRAWINGS

L1.1 General Landscape Notes and Legend
L1.2 Plant List and Planting Notes
L2.1 Irrigation Site Plan
L4.1 Planting Site Plan
L6.1 Landscape Details
L7.1 Fountain Plan, Notes and Details
<PAGE>

EXHIBIT "E" - TENANT IMPROVEMENT PLANS AND SPECIFICATIONS
(sheet references to be attached)
<PAGE>

EXHIBIT "F" - GENERAL CONDITIONS

Project Executive
General Superintendent
Home Offices Expenses
General Overhead
Office Supplies
Accounting Services
Computer Charges
Telephone Expenses
Fax Office/Job
Data Processing
Secretarial Services
Mail
UPS
Insurance
City Licenses
Project Engineer
Scheduling
Reconstruction Services
Superintendent
General Labor
Daily Clean Up & Final
Protection of Work
Petty Cash
Safety Enforcement & Safety Signage
Small Tools
First Aid Facilities
General Field Coordination
Project Field Office
Tenant Vendor Coordination
Blueprinting

<PAGE>

EXHIBIT 10.14

LEASE

between

SOBRATO INTERESTS III

Landlord

and

BEA SYSTEMS, INC.

Tenant
<PAGE>

TABLE OF CONTENTS
-----------------

Section Page
- --------- ----
1. PARTIES 1

2. PREMISES 1

3. USE 2
A. Permitted Uses 2
B. Uses Prohibited 2
C. Advertisements and Signs 2
D. Covenants, Conditions and Restrictions 3
E. Interference with Tenant's Use 3

4. TERM AND RENTAL 3
A. Base Monthly Rent 3
B. Rental Adjustment 4
C. Late Charges 4
D. Security Deposit 4

6. ACCEPTANCE OF POSSESSION AND COVENANTS TO
SURRENDER: 13
A. Delivery and Acceptance 13
B. Condition Upon Surrender 13
<PAGE>

C. Failure to Surrender 14

7. ALTERATIONS AND ADDITIONS 15
A. Tenant's Alterations 15
B. Free From Liens 16
C. Compliance With Governmental Regulations 16

8. MAINTENANCE OF PREMISES 17
A. Landlord's Obligations 17
B. Tenant's Obligations 17
C. Replacement of Roof Membrane 18

9. HAZARD INSURANCE 18
A. Tenant's Use 18
B. Landlord's Insurance 18
C. Tenant's Insurance 19
D. Waiver 19

10. TAXES 19

11. UTILITIES 20

13. TENANT'S DEFAULT 23
A. Remedies 24
B. Right to Re-enter 24
C. Abandonment 24
D. No Termination 25
E. Non-Waiver 25
F. Performance by Landlord 26
G. Cross-Default 26

14. LANDLORD'S LIABILITY 26
A. Limitation on Landlord's Liability 26
B. Limitation on Tenant's Recourse 27
<PAGE>

C. Indemnification of Landlord 28

15. DESTRUCTION OF PREMISES 28
A. Landlord's Obligation to Restore 28
B. Limitations on Landlord's Restoration
Obligation 28
C. Unamortized Tenant Improvements 29

16. CONDEMNATION 29

18. OPTION TO EXTEND THE LEASE TERM 33
A. Grant and Exercise of Option 34
B. Determination of Fair Market Rental 34
C. Resolution of a Disagreement Over the Fair
Market Rental 35

EXHIBIT "A" - Legal Description of Premises

EXHIBIT "B" - Premises & Project

EXHIBIT "C" - Building Shell Definition

EXHIBIT "D" - Building Shell Plans

EXHIBIT "E" - Tenant Improvement Plans and Specifications

EXHIBIT "F" - General Conditions
<PAGE>

1. PARTIES: THIS LEASE, is entered into on this 26th of December, 1997,
between SOBRATO INTERESTS III, a California Limited Partnership, whose address
is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014 and BEA
SYSTEMS, INC., a Delaware Corporation, whose address is 385 Moffett Park Drive,
Sunnyvale, CA 94089, hereinafter called respectively Landlord and Tenant. The
effectiveness of this Lease is expressed conditioned upon (i) the concurrent
execution by Landlord and Tenant of the Adjacent Building Lease (as defined
below), (ii) Tenant's receipt of a recognition and non-disturbance agreement in
a form and substance reasonably acceptable to Tenant from Ground Lessor and from
any and all other ground lessors with an interest in the Parcel (defined below)
and from any and all lenders with a lien on the Ground Lease (defined below) or
the Parcel, and (iii) issuance to Tenant, at Tenant's option and expense, of a
leasehold title insurance policy or policies insuring the leasehold estate and
interest of Tenant under this Lease and under the Adjacent Building Lease,
subject only to such recorded matters as are reasonably acceptable to Tenant.
In the event conditions (ii) and (iii) above have not been satisfied or waived
by Tenant within thirty (30) days following execution of this Lease, Tenant
shall have the option to terminate this Lease by providing written notice to
Landlord. Upon the execution of this Lease, Landlord shall deliver to Tenant a
copy of Landlord's ground lessee's title insurance policy for the Parcel and, if
in the possession or control of Landlord, a current title report for the Parcel
reflecting the state of title to the Parcel.

2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from
Landlord those certain Premises with the appurtenances, situated in the City of
San Jose, County of Santa Clara, State of California, consisting of a four-story
steel frame building of 110,881 rentable square feet located at 2345 North First
Street (the "Building") on a parcel leased by Landlord under a Ground Lease
dated as of October 18, 1996 (the "Ground Lease") between Landlord, as tenant,
and Edward Sakauye, also known as Eiichi Edward Sakauye, as Trustee under the
Will of Suzuye Sakauye, deceased, and Decree of Distribution of her estate
recorded in Book B818, Page 557 of Official Records, and Eiichi Sakauye ("Ground
Lessor"), as landlord, consisting of approximately 5.0 acres ("Parcel"), as
more particularly described in Exhibit "A" to this Lease, and an existing
-----------
historic Victorian home also located on the Parcel and consisting of
approximately 2,500 rentable square feet (the "Historic Home") as outlined in
red on Exhibit "B". Subject to Section 19.Y below, Tenant shall have the
-----------
exclusive right to use the common area consisting of all parking areas,
sidewalks and landscape areas ("Common Area") surrounding the Building and an
additional building of 110,881 square feet ("Adjacent Building") which Landlord
is concurrently leasing to Tenant on the adjacent land leased from Kenji and
Shizu Sakauye totaling approximately 5.0 acres pursuant to another lease between
the parties of even date herewith ("Adjacent Building Lease"). Without limiting
the generality of the foregoing, Tenant shall have the right to install benches,
tables, chairs, umbrellas and other outdoor amenities, security cameras,
generators, storage sheds and other similar

Page 1
<PAGE>

removable equipment and furnishings in the Common Area to the extent Tenant
determines is reasonably necessary to for the use and operation of the
Project, provided all items installed by Tenant in the Common Areas are
compatible with the design and quality of the Project. The Premises, the
Adjacent Building and the parcel on which it is situated, the Historic Home
and the Common Area shall comprise the "Project". Tenant shall have pursuant
to this Lease exclusive use of the approximately 370 parking spaces within the
Parcel, and Tenant shall have pursuant to the Adjacent Building Lease the
exclusive use of all remaining parking spaces within the Project. Unless
expressly provided otherwise, the term "Premises" as used herein shall include
the Tenant Improvements (defined in Section 5.B) constructed by Tenant
pursuant to Section 5.B.

3. USE:

Page 2
<PAGE>

(including, without limitation, building and monument signs to identify
occupants of the Project).

D. COVENANTS, CONDITIONS AND RESTRICTIONS: This Lease is subject to the
effect of (i) any covenants, conditions, restrictions, easements, mortgages or
deeds of trust, ground leases, rights of way of which are of record on the date
of execution set forth in Section 1 above and any other matters or documents of
record on such execution date; and (ii) any zoning laws of the city, county and
state where the Building is situated (collectively referred to herein as
"Restrictions") and Tenant will conform to and will not violate the terms of
any such Restrictions. Throughout the Lease Term, Landlord likewise shall
observe, perform and discharge all covenants and obligations imposed by the
Restrictions which are imposed on Tenant by the terms of this Lease, including
by way of illustration and not limitation, payment of all rent and other
charges required under the Ground Lease.

4. TERM AND RENTAL:

A. BASE MONTHLY RENT: The term ("Lease Term") shall be for one hundred
twenty (120) months, commencing on substantial completion of the Tenant
Improvements as finally determined pursuant to Section 5.G (the "Commencement
Date") estimated to occur on July 17, 1998, and ending one hundred twenty (120)
months thereafter ("Expiration Date"). In addition to all other sums payable by
Tenant under this Lease, Tenant shall pay as base monthly rent ("Base Monthly
Rent") for the Premises the amount of Two Hundred Twenty Two Thousand Ninety Two
and 95/100 Dollars ($221,092.95). Base Monthly Rent shall be due in advance on
or before the first day of each calendar month during the Lease Term. All sums
payable by Tenant under this Lease shall be paid to Landlord in lawful money of
the United States of America, without offset or deduction (except as herein
expressly permitted) and without prior notice or demand, at the address
specified in Section 1 of this Lease or at such place or places as may be
designated in writing by Landlord during the Lease Term. Base Monthly Rent for
any period less than a calendar month

Page 3
<PAGE>

shall be a pro rata portion of the monthly installment.

B. RENTAL ADJUSTMENT: Beginning twelve (12) months after the
Commencement Date, and every twelve (12) months, the then-payable Base Monthly
Rent shall increase by the sum of Five Thousand Six Hundred Sixty Nine and
05/100 Dollars ($5,669.05).

C. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant
to Landlord of Base Monthly Rent and other sums due hereunder will cause
Landlord to incur costs not contemplated by this Lease, the exact amount of
which is extremely difficult to ascertain. Such costs include but are not
limited to: administrative, processing, accounting, and late charges
which may be imposed on Landlord by the terms of any contract, revolving credit,
mortgage, or trust deed covering the Premises. Accordingly, if any installment
of Base Monthly Rent or other sum due from Tenant shall not be received by
Landlord or its designee within five (5) days after the rent is due, Tenant
shall pay to Landlord a late charge equal to five (5%) percent of such overdue
amount, which late charge shall be due and payable on the same date that the
overdue amount was due. Landlord agrees to provide Tenant a notice to pay rent
or quit if the Base Monthly Rent is not received when due and further agrees to
waive said late charge in the event all amounts set forth in such notice are
paid in full by cashier's check within five (5) days after Landlord's service
upon Tenant of such notice. The parties agree that such late charge represents
a fair and reasonable estimate of the costs Landlord will incur by reason of
late payment by Tenant, excluding interest and attorneys fees and costs. If any
rent or other sum due from Tenant remains delinquent for a period in excess of
thirty (30) days then, in addition to such late charge, Tenant shall pay to
Landlord interest on any rent that is not paid when due at the Agreed Interest
Rate specified in Section 19.J following the date such amount became due until
paid. Acceptance by Landlord of such late charge shall not constitute a waiver
of Tenant's default with respect to such overdue amount nor prevent Landlord
from exercising any of the other rights and remedies granted hereunder.

D. SECURITY DEPOSIT: Concurrently with Tenant's execution of this Lease,
Tenant has deposited with Landlord the sum of Two Hundred Thousand Ninety Two
and 95/100 Dollars ($221,092.95). ("Security Deposit"). Landlord shall not be
deemed a trustee of the Security Deposit, may use the Security Deposit in
business, and shall not be required to segregate it from its general accounts.
Tenant shall not be entitled to interest on the Security Deposit. If Tenant
defaults with respect to any provisions of the Lease, including but not
limited to the provisions relating to payment of Base Monthly Rent or other
charges, Landlord may, to the extent reasonably necessary to remedy Tenant's
default, use any or all of the Security Deposit towards payment of the
following: (i) Base Monthly Rent or other charges in default; (ii) any other
amount which Landlord may spend or become obligated to spend by reason of
Tenant's default including, but not limited to. Tenant's failure to restore or
clean the Premises following vacation thereof; and

Page 4
<PAGE>

(iii) any other loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of the Security Deposit is so used or applied, Tenant
shall, within ten (10) days after written demand from Landlord, deposit cash
with Landlord in an amount sufficient to restore the Security Deposit to its
full original amount, and shall pay to Landlord such other sums as necessary
to reimburse Landlord for any sums paid by Landlord. Tenant may not assign or
encumber the Security Deposit without the consent of Landlord. Any attempt to
do so shall be void and shall not be binding on Landlord. The Security Deposit
shall be returned to Tenant within thirty (30) days after the Expiration Date
and surrender of the Premises to Landlord, less any amount deducted in
accordance with this Section, together with Landlord's written notice
itemizing the amounts and purposes for such deduction. In the event of
termination of Landlord's interest in this Lease, Landlord shall deliver or
credit the Security Deposit to Landlord's successor in interest in the
Premises and thereupon be relieved of further responsibility with respect to
the Security Deposit.

Page 5
<PAGE>

If as a result of any such application of all or any part of the proceeds
of the Letter of Credit, the amount of the letter of credit shall be less than
the amount required above, Tenant shall forthwith provide Landlord with
additional letter(s) of credit (or a cash security deposit) in an amount equal
to the deficiency. Any such cash security deposit, and any proceeds of the
letter of credit which are not applied to sums owed by Tenant to Landlord, shall
be held by Landlord as a security deposit under the first two paragraphs of this
Section 4.D.

5. CONSTRUCTION

Page 6
<PAGE>

switchgear and rooftop HVAC units. The Tenant Improvement Plans and
Specifications shall be completed for all other aspects of the work by March
16, 1998 with sufficient detail necessary for submittal to the city and for
construction and shall include any information required by the relevant
agencies regarding Tenant's use of Hazardous Materials if applicable. The
Tenant Improvements shall consist of all items not included within the scope
of the Building Shell Definition. Except as otherwise provided in Section 5.N,
the Tenant Improvement Plans and Specifications shall provide for a minimum
buildout in all areas of the Premises consisting of: (i) fire sprinklers, (ii)
floor coverings, (iii) t-bar suspended ceiling (iv) distribution of the HVAC
system, (v) 2 x 4 drop-in florescent lighting, and (vi) any other work
required by the City of San Jose necessary to obtain a Certificate of
Occupancy, which work shall be completed by Landlord as set forth in this
Lease. Landlord shall cause Tenant Improvements to be constructed by
independent contractors to be employed by and under the supervision of
Landlord's affiliated construction company, Sobrato Construction Corporation
("General Contractor") in accordance with all Tenant Improvement Plans and
Specifications. The Tenant Improvement Plans and Specifications shall be
prepared in sufficient detail to allow General Contractor to construct the
Tenant Improvements. As an inducement to Tenant to enter into this Lease,
Landlord has agreed to provide Tenant a work allowance to be utilized by
Tenant for the construction of Tenant Improvements ("Work Allowance") in the
amount of Three Million Nine Hundred Sixty-Eight Thousand Three Hundred Thirty-
Five and No/100 Dollars ($3,968,335.00). The Work Allowance shall be paid by
Landlord to Tenant as payments become due to General Contractor pursuant to
Section 5.G below. The Tenant Improvements shall not be removed or altered by
Tenant without the prior written consent of Landlord if required as provided in
Section 7. Tenant shall have the right to depreciate and claim and collect any
investment tax credits in the Tenant Improvements during the Lease Term. Upon
expiration of the Lease Term or any earlier termination of the Lease, the Tenant
Improvements shall become the property of Landlord and shall remain upon and be
surrendered with the Premises, and title thereto shall automatically vest in
Landlord without any payment therefor.

C. PRICING: Within ten (10) days after completion of the Tenant
Improvements Plans and Specifications, General Contractor shall submit to Tenant
competitive bids from at least three (3) subcontractors for each aspect of the
work related to the Tenant improvements. All bids shall be submitted to
Landlord and Tenant and Landlord and Tenant shall open the bids together at the
General Contractor's office. Landlord agrees to permit Tenant to assist in
negotiating subcontractor fees and bid costs for labor and materials. Tenant
shall have the right to add one (1) subcontractor for each trade to the bid
list. The bids shall included an itemized breakdown of costs. Tenant shall be
provided with a copy of the General Contractor's contracts with the
subcontractors and Landlord's contract with the General Contractor. General
Contractor must utilize the low bid in each case unless Tenant approves General
Contractor's use of

Page 7
<PAGE>

another subcontractor, and the cost of the Tenant Improvements shall be based
upon construction expenses equal to (i) the bid amounts as approved by Tenant
and (ii) the General Contractor fee specified in Section 5.H below ("Tenant
Improvement Budget"). The Tenant Improvement Budget may include a contingency
of five percent (5%) to be expended by Landlord to cover unforseen costs,
provided that in each instance Tenant reasonably approves such expenditure.
Upon Tenant's written approval of the Tenant Improvement Budget, which
approval shall not be unreasonably withheld or delayed, Landlord and Tenant
shall be deemed to have given their respective approvals of the final Tenant
Improvement Plans and Specifications on which the cost estimate was made, and
General Contractor shall proceed with the construction of the Tenant
Improvements in accordance with the terms of Section 5.G below. Tenant must
specifically approve or disapprove the bids within seven (7) days of receipt
of the Tenant Improvement Budget. If disapproved, Tenant shall provide new
sufficient instruction or revised Tenant Improvement Plans to Landlord within
seven (7) days and Landlord shall thereafter rebid such work.

D. CHANGE ORDERS: Tenant shall have the right to order changes in the
manner and type of construction of the Tenant Improvements. Upon request and
prior to Tenant's submitting any binding change order, General Contractor shall
promptly provide Tenant with a written itemized breakdown of labor and materials
for the cost to implement and the time delay and increased construction costs
associated with any proposed change order, which statements shall be binding on
General Contractor. If no time delay or increased construction cost amount is
noted on the written statement, the parties agree that there shall be no
adjustment to the construction cost or the Commencement Date associated with
such change order. If ordered by Tenant, General Contractor shall implement
such change order and the cost of constructing the Tenant Improvements shall be
increased or decreased in accordance with the cost statement previously
delivered by General Contractor to Tenant for any such change order. In no
event, however, shall Tenant have the right to eliminate the minimum buildout
requirements specified in Section 5.B above. In the event that either party
believes it has caused a delay, it will notify the other and advise of the
number of days of delay. In the event that either party believes that the
other is causing a delay, it shall so notify the other stating the action or
inaction that it believes is causing the delay. Landlord agrees that Tenant
shall not be charged Base Monthly Rent and Additional Rent for each such day
of Landlord caused delay to the extent that such delays exceed any Tenant
Delays. Claims of delay by either party shall be made within seven (7) days
after the occurrence of the event giving rise to such claims.

E. BUILDING SHELL COSTS: Landlord shall pay all costs associated with the
Building Shell.

Page 8
<PAGE>

by General Contractor in connection with the construction of Tenant
Improvements: construction costs, all permit fees, construction taxes or other
costs imposed by governmental authorities related to the Tenant Improvements,
Landlord overhead as described in Section 5.H below and all fees associated
with Tenant's Architect, engineers and consultants. During the course of
construction of Tenant Improvements, General Contractor may deliver to Tenant
not more than once each calendar month a written request for payment
("Progress Invoice") which shall include and be accompanied by General
Contractor's certified statements setting forth the amount requested,
certifying the percentage of completion of each item for which reimbursement
is requested. Tenant shall pay the amount due pursuant to the Progress Invoice
to the General Contractor, within fifteen (15) days after Tenant's receipt of
the above items. Within five (5) days following payment by Tenant, Landlord
shall pay Tenant an amount equal to the product of (i) the Progress Invoice,
and (ii) a fraction, the numerator of which is the amount of the Work
Allowance and the denominator of which is the Tenant Improvement Budget, until
such time as Landlord has expended the full amount of the Work Allowance. All
costs for Tenant Improvements shall be fully documented to and verified by
Tenant. Tenant shall have the right to review and approve the Progress
Invoice.

G. CONSTRUCTION: Landlord shall use its reasonable efforts to obtain a
building permit from the City of San Jose as soon as possible after Tenant's
approval of the Tenant Improvement Plans and Specifications and "Substantially
Complete" construction by June 1, 1998. The Building Shell and Tenant
Improvements shall be deemed substantially complete ("Substantially Complete" or
"Substantial Completion") when the Building Shell and Tenant Improvements have
been substantially completed in accordance with the Shell Plans and
Specifications and Tenant Improvement Plans and Specifications, as evidenced by
(i) the completion of a final inspection and the issuance of a temporary
certificate of occupancy or its equivalent by the appropriate governmental
authority for the Building Shell and Tenant Improvements, (ii) the issuance of a
certificate by the Architect certifying that the Building Shell and Tenant
Improvements have been completed in accordance with the plans, and (iii) the
operation of all Building systems including, but not limited to, the mechanical,
electrical and plumbing systems to the extent necessary to service the
Premises and Tenant has been provided use of substantially all parking spaces
called for under this Lease. Landlord shall obtain a final certificate of
occupancy within sixty (60) days after Substantial Completion. Installation of
(i) Tenant's data and phone cabling, (ii) Tenant's furniture, or (iii) the
exterior landscaping shall not be required in order to deem the Premises
Substantially Complete. Any prevention, delay or stoppage due to strikes,
lockouts, inclement weather, labor disputes, inability to obtain labor,
materials, fuel or reasonable substitutes therefor, governmental restrictions,
regulations, controls, action or inaction, civil commotion, fire or other act
of God, and another causes beyond the reasonable control of Landlord (except

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financial inability) shall extend the dates contained in this Section 5.G by a
period equal to the period of any said prevention, delay or stoppage. If
Landlord cannot obtain building permits or Substantially Complete construction
by the dates set forth herein, this Lease shall not be void or voidable nor
shall Landlord be liable for any loss or damage resulting therefrom.

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responsible for and have control over construction means, methods, techniques,
sequences and procedures for coordinating all portions of the work under the
contract. The General Contractor shall review, approve and submit to Tenant's
Architect shop drawings, product data, samples and submittals required by the
contract documents with promptness and in sequence as to cause no delay in the
construction schedule. The General Contractor shall take reasonable
precautions for safety and shall provide reasonable protection to prevent
damage, injury or loss.

unreasonably interfere with General Contractor's work. Subject to Landlord and
General Contractor using reasonable efforts to maintain harmonious labor
relations, Tenant shall hold Landlord harmless from any claim by Tenant due
vandalism to construction performed by Tenant with non-union labor.

N. Notwithstanding any contrary provision of this Lease, Tenant shall have the
right to defer the construction of Tenant Improvements in up to twenty thousand
square feet of the Premises and to exclude such deferred Tenant Improvements
from the Tenant Improvement Plans and Specifications initially delivered to
Landlord pursuant to Section 5.B above, provided that:

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2. Tenant shall deposit with Landlord cash or a letter of credit for a
sum equal to the amount by which the estimated cost of the Deferred Tenant
Improvement Work (as reasonably determined by Landlord) will exceed the Work
Allowance estimated to be available for such Deferred Tenant Improvement Work.
With each payment by Tenant to the General of amounts owed by Tenant on
account of the General Contractor's construction of the Deferred Tenant
Improvement Work, the amount of such cash or of the letter of credit shall be
reduced by a corresponding dollar amount. Such reduction shall be accomplished
by Landlord's return of the cash to Tenant or Landlord's notifying the letter
of credit issuer that the maximum amount Landlord may draw thereunder has been
reduced. Upon completion of all Deferred Tenant Improvement Work and Tenant's
payment of all amounts owed by Tenant on amount thereof, Landlord shall return
to Tenant any remaining cash or the letter of credit deposited hereunder.

3. No delay in the Substantial Completion of the Deferred Tenant
Improvement Work shall delay the Commencement Date under Section 4.A above.

6. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER:

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does not include items of neglected or deferred maintenance. In any event,
Tenant shall cause the following to be done prior to the Expiration Date or
sooner termination of this Lease: (i) all interior walls shall be painted or
cleaned, (ii) all tiled floors shall be cleaned and waxed, (iii) all carpets
shall be cleaned and shampooed, (iv) all broken, marred, stained or
nonconforming acoustical ceiling tiles shall be replaced, (v) all cabling
placed above the ceiling by Tenant or Tenant's contractors shall be removed,
(vi) all windows shall be washed; (vii) the HVAC system shall be serviced by a
reputable and licensed service firm and left in good operating condition and
repair (taking into account normal wear and tear as defined above) as so
certified by such firms, and (viii) the plumbing and electrical systems and
lighting shall be placed in good order and repair (including replacement of
any burned out, discolored or broken light bulbs, ballasts, or lenses. On or
before the Expiration Date or sooner termination of this Lease, Tenant shall
remove all its personal property and trade fixtures from the Premises. All
property and fixtures not so removed shall be deemed as abandoned by Tenant.
Tenant shall ascertain from Landlord within ninety (90) days before the
Expiration Date whether Landlord desires to have the Premises or any parts
thereof restored to their condition as of the Commencement Date, or to cause
Tenant to surrender all Alterations (as defined in Section 7) in place to
Landlord, except for such Alterations Landlord has previously agreed to allow
to remain on the Premises pursuant to Section 7 below. If Landlord shall so
desire, Tenant shall, at Tenant's sole cost and expense, remove such
Alterations as Landlord requires and shall repair and restore said Premises or
such parts thereof before the Expiration Date. Such repair and restoration
shall include causing the Premises to be brought into compliance with all
applicable building codes and laws in effect at the time of the removal to
extent such compliance is necessitated by the repair and restoration work.
Provided partitioned areas for private offices do not exceed thirty-three
percent (33%) of the area on each floor, Tenant shall not be required to
remove any Tenant Improvements constructed pursuant to the Tenant Improvement
Plans and Specifications (as initially prepared by Architect and/or as
supplemented for portions of the Premises not initially occupied by Tenant),
regardless of whether such construction occurs before or after the
Commencement Date.

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consequence of Tenant's delay in surrendering the Premises, which shall
include, without limitation, both (i) written notice of Landlord's execution
of a letter of intent with a prospective tenant and (ii) written notice of
Landlord's execution of a lease with a subsequent tenant. Any holding over
after the termination or Expiration Date with Landlord's express written
consent (which consent shall not be unreasonably withheld, conditioned or
delayed), shall be construed as month-to-month tenancy, terminable on thirty
(30) days written notice from either party, and Tenant shall pay as Base
Monthly Rent to Landlord a rate equal to one hundred thirty-three percent
(133%) of the Base Monthly Rent due in the month preceding the termination or
Expiration Date, plus all other amounts payable by Tenant under this Lease.
Any holding over shall otherwise be on the terms and conditions herein
specified, except those provisions relating to the Lease Term and any
options to extend or renew, which provisions shall be of no further force and
effect following the expiration of the applicable exercise period. If Tenant
remains in possession of the Premises after expiration or earlier termination of
this Lease without Landlord's consent, Tenant's continued possession shall be on
the basis of a tenancy at sufferance and Tenant shall pay as rent during the
holdover period an amount equal to one hundred fifty percent (150%) of the Base
Monthly Rent due in the month preceding the termination or Expiration Date, plus
all other amounts payable by Tenant under this Lease. This provision shall
survive the termination or expiration of the Lease.

7. ALTERATIONS AND ADDITIONS:

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provide Landlord written notice of the anticipated and actual start-date of
the work, and a complete set of half-size (15" X 21") vellum as-built
drawings. All Alterations shall be constructed in compliance with applicable
buildings codes and laws. Any Alterations, except movable furniture and trade
fixtures, shall become at once a part of the realty and belong to Landlord but
shall nevertheless be subject to removal by Tenant as provided in Section 6
above. Alterations which are not deemed as trade fixtures include heating,
lighting, electrical systems, air conditioning, walls, carpeting, or any other
installation which has become an integral part of the Premises. All
Alterations shall be maintained, replaced or repaired by Tenant at its sole
cost and expense. Tenant shall have the right to depreciate and claim and
collect any investment tax credits in all Alterations.

B. FREE FROM LIENS: Tenant shall keep the Premises free from all liens
arising out of work performed, materials furnished, or obligations incurred by
Tenant or claimed to have been performed for Tenant. In the event Tenant fails
to discharge any such lien within twenty (20) days after receiving notice of
the filing, Landlord shall be entitled to discharge the lien at Tenant's
expense and all resulting costs incurred by Landlord, including reasonable
attorney's fees shall be due from Tenant as additional rent.

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and Landlord shall inform Tenant of such monthly amortization payment required
to so amortize such costs, and shall also provide Tenant with the information
upon which such determination is made; and (ii) as additional rent, Tenant
shall pay the monthly amortization payment with respect to any such capital
improvement required as a result of any future law or regulation affecting the
Premises which is not related to Tenant's specific use of the Premises as
stated above. Tenant's obligation to make payments hereunder with respect to
any particular capital improvement shall commence when such improvement has
been substantially completed and shall cease upon the earlier of the
expiration of the Lease term (but not upon a termination due to any Event of
Default on the part of Tenant) or the end of the term over which the costs of
constructing the particular improvement were amortized. Payments of such
additional rent required under this Section 7.C shall be made concurrently
with payments of Base Monthly Rent.

8. MAINTENANCE OF PREMISES:

A. LANDLORD'S OBLIGATIONS: Landlord at its sole cost and expense, shall
maintain in good condition, order, and repair, and replace as and when
necessary, all structural portions of the Building, including without
limitation, the foundation, exterior load bearing walls (including the
curtain wall) and roof structure of the Building Shell, and the structural
elements of the parking facilities.

B. TENANT'S OBLIGATIONS: Except as set forth in Sections 8.A, 8.C,
12.D, 15 and 16, or elsewhere in this Lease, Tenant shall clean, maintain,
repair and replace when necessary the Premises and every part thereof through
regular inspections and servicing, including but not limited to: (i) all
plumbing and sewage facilities, (ii) all heating ventilating and air
conditioning facilities and equipment, (iii) all fixtures, interior walls
floors, carpets and ceilings, (iv) all windows, door entrances, plate glass and
glazing systems including caulking, and skylights, (v) all electrical facilities
and equipment, (vi) all automatic fire extinguisher equipment, (vii) the parking
lot and all underground utility facilities servicing the Premises, (viii) all
elevator equipment, (ix) the roof membrane system, and (x) all waterscape,
landscaping and shrubbery. Notwithstanding the foregoing, Tenant shall have no
responsibility to perform any repair, maintenance or improvement (i)
necessitated by the acts or omissions of Landlord or its agents, employees or
contractors, (ii) occasioned by fire, acts of God or other casualty, whether
or not covered by insurance, or by the exercise of the power of eminent
domain, (iii) required as a consequence of any violation of laws or
construction defect in the Premises existing as of the Commencement Date, or
(iv) for which Landlord has a right of reimbursement from others. With respect
to items (ii), (viii) and (ix) above, Tenant shall provide Landlord a copy of
a service contract between Tenant and a licensed service contractor providing
for periodic maintenance of all such systems or equipment in conformance with
the manufacturer's recommendations. Tenant shall provide Landlord a copy of
such preventive maintenance contracts and paid invoices for the recommended
work if requested by Landlord.

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C. REPLACEMENT OF ROOF MEMBRANE: If as a part of Tenant's fulfillment of
its obligations under Section 8.B above, Tenant is required to replace the roof
membrane on the Building, (but such replacement is not required by new laws,
rules or regulations which are governed by Section 7.C above), Landlord shall,
within ten (10) days following receipt of written invoices and supporting
documentation evidencing the reasonable costs incurred by Tenant in replacing
the roof membrane, reimburse Tenant for the entire cost of the replacement less
that portion of the cost equal to the product of such total cost multiplied by a
fraction, the numerator of which is the number of years remaining in the Lease
Term, and the denominator of which is the useful life (in years) of the roof
membrane replacement.

9. HAZARD INSURANCE:

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and agreed that Tenant's obligation under this Section will be prorated to
reflect the Lease Commencement and Expiration Dates.

C. TENANT'S INSURANCE: Tenant agrees, at its sole cost, to insure its
personal property and Alterations for their full replacement value (without
depreciation) and to obtain worker's compensation and public liability and
property damage insurance for occurrences within the Premises with a combined
single limit of not less than Five Million Dollars ($5,000,000.00) and One
Million Dollars ($1,000,000.00) per occurrence. Tenant's liability insurance
shall be primary insurance containing a cross-liability endorsement, and shall
provide coverage on an "occurrence" rather than on a "claims made" basis.
Tenant shall name Landlord and Landlord's lender as an additional insured and
shall deliver a copy of the policies and renewal certificates to Landlord. All
such policies shall provide for thirty (30) days' prior written notice to
Landlord of any cancellation, termination, or reduction in coverage.

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Monthly Rent by the exact amount of such tax and Tenant shall pay such increase.
Both Landlord and Tenant shall have the right to seek a reduction in the
assessed value of the Premises. If by virtue of any application or proceeding
brought by or on behalf of Landlord, there results a reduction in the assessed
value of the Premises during the Lease Term, Tenant agrees to reimburse Landlord
for all costs incurred by Landlord in connection with such application or
proceeding provided such costs do not exceed the present value of the savings.

12. TOXIC WASTE AND ENVIRONMENTAL DAMAGE:

A. TENANT'S RESPONSIBILITY: Without the prior written consent of
Landlord, Tenant shall not bring, use, or permit upon the Premises, or generate,
create, release, emit, or dispose (nor permit any of the same) from the Premises
any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste,
including without limitation, material or substance having characteristics of
ignitability, corrosivity, reactivity, or toxicity or substances or materials
which are listed on any of the Environmental Protection Agency's lists of
hazardous wastes or which are identified in Division 22 Title 26 of the
California Code of Regulations as the same may be amended from time to time or
any wastes, materials or substances which are or may become regulated by or
under the authority of any applicable local, state or federal laws, judgments,
ordinances, orders, rules, regulations, codes or other governmental
restrictions, guidelines or requirements. ("Hazardous Materials") unless such
Hazardous Materials are used in compliance with all applicable Laws and are
commonly used in connection with general office use. In order to obtain
consent, Tenant shall deliver to Landlord its written proposal describing the
toxic material to be brought onto the Premises, measures to be taken for storage
and disposal thereof, safety measures to be employed to prevent pollution of the
air, ground, surface and ground water. Landlord's approval may be withheld in
its reasonable judgment. In the event Landlord consents to Tenant's use of
Hazardous Materials on the Premises, Tenant represents and warrants that it
shall comply with all Governmental Regulations applicable to Hazardous Materials
including doing the following: (i) adhere to all reporting and inspection
requirements imposed by Federal, State, County or Municipal laws, ordinances or
regulations and will provide Landlord a copy of any such reports or agency
inspections; (ii) obtain and provide Landlord copies of all necessary permits
required for the use and handling Hazardous Materials on the Premises; (iii)
enforce Hazardous Materials

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handling and disposal practices consistent with industry standards; (iv)
surrender the Premises free from any Hazardous Materials arising from Tenant's
bringing, using, permitting, generating, creating, releasing, emitting or
disposing of Hazardous Materials; and (v) properly close the facility with
regard to Hazardous Materials including the removal or decontamination of any
process piping, mechanical ducting, storage tanks, containers, or trenches
which have come into contact with Hazardous Materials and obtain a closure
certificate from the local administering agency prior to the Expiration Date.

B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall, at
its sole cost and expense, comply with all laws pertaining to, and shall with
counsel reasonably acceptable to Landlord, indemnify, defend and hold harmless
Landlord and Landlord's Agents (as defined below) from, any claims, liabilities,
costs or expenses incurred or suffered by Landlord arising from the bringing,
using, permitting, generating, emitting or disposing of Hazardous Materials by
Tenant, Tenant's officers, employees, partners, affiliates, and agents
("Tenant's Agents") through the surface soils of the Premises during the Lease
Term or the violation of any Governmental Regulation or environmental law, by
Tenant or Tenant's Agents. Tenant's indemnification and hold harmless
obligations include, without limitation, the following: (i) claims, liability,
costs or expenses resulting from or based upon administrative, judicial (civil
or criminal) or other action, legal or equitable, brought by any private or
public person under common law or under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource
Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State,
County or Municipal law, ordinance or regulation; (ii) claims, liabilities,
costs or expenses pertaining to the identification, monitoring, cleanup,
containment, or removal of Hazardous Materials from soils, riverbeds or aquifers
including the provision of an alternative public drinking water source; (iii)
all costs of defending such claims; (iv) losses attributable to diminution in
the value of the Premises or the Building; (v) loss or restriction of use of
rentable space in the Building; (vi) adverse effect on the marketing of any
space in the Building; and (vi) all other liabilities, obligations, penalties,
fines, claims, actions (including remedial or enforcement actions of any kind
and administrative or judicial proceedings, orders or judgments), damages
(including consequential and punitive damages), and costs (including reasonable
attorney, consultant, and expert fees and expenses) resulting from the release
or violation. This indemnification shall survive the expiration or termination
o this Lease.

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receipt thereof, any written notices from any governmental agency alleging a
material violation of, or material failure to comply with, any federal, state or
local laws, regulations, ordinances or orders, the violation of which of failure
to comply with poses a foreseeable and material risk of contamination of the
ground water or injury to humans (other than injury solely to Tenant, Tenant's
Agents and employees within the Building).

D. LANDLORD'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Landlord shall
indemnify and hold Tenant and Tenant's Agents harmless from any claims,
liabilities, costs or expenses incurred or suffered by Tenant related to the
removal, investigation, monitoring or remediation of Hazardous Materials which
are present on the Premises as of the Commencement Date or which
come to be present on the Premises due to the acts of Landlord, its employees,
agents or contractors ("Landlord's Agents"). Landlord's indemnification and
hold harmless obligations include, without limitation, (i) claims, liability,
costs or expenses resulting from or based upon administrative, judicial (civil
or criminal) or other action, legal or equitable, brought by

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any private or public person under common law or under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the
Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal,
State, County or Municipal law, ordinance or regulation with respect to
Hazardous Materials generated or disposed of by Landlord, its agents,
employees or contractors, (ii) claims, liabilities, costs or expenses
pertaining to the identification, monitoring, cleanup, containment, or removal
of Hazardous Materials generated or disposed of by Landlord, its agents,
employees or contractors from soils, riverbeds or aquifers including the
provision of an alternative public drinking water source, and (iii) all costs
of defending such claims. In no event shall Landlord be liable under this
Lease for any consequential damages suffered or incurred by Tenant as a result
of any such contamination.

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Tenant's assets located at the Premises or of Tenant's interest in this Lease,
where such seizure is not discharged within thirty (30) days.

A. REMEDIES: In the event of any such default by Tenant, then in addition
to other remedies available to Landlord at law or in equity, Landlord shall have
the immediate option to terminate this Lease and all rights of Tenant hereunder
by giving written notice of such intention to terminate. In the event Landlord
elects to so terminate this Lease, Landlord may recover from Tenant all the
following: (i) the worth at time of award of any unpaid rent which had been
earned at the time of such termination; (ii) the worth at 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 for the same
period that Tenant proves could have been reasonably avoided; (iii) the worth at
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 be reasonably avoided; (iv) any other amount necessary to
compensate Landlord for all 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; including the following: (x)
expenses for repairing, altering or remodeling the Premises for purposes of
reletting to the extent allocable to the remainder of the Lease Term, (y)
broker's fees, advertising costs or other expenses of reletting the Premises to
the extent allocable to the remainder of the Lease Term, and (z) costs of
carrying the Premises such as taxes, insurance premiums, utilities and security
precautions. and (v) at Landlord's election, such other amounts in addition to
or in lieu of the foregoing as may be permitted by applicable California law.
The term "rent", as used herein, is defined as the minimum monthly installments
of Base Monthly Rent and all other sums required to be paid by Tenant pursuant
to this Lease, all such other sums being deemed as additional rent due
hereunder. As used in (i) and (ii) above, "worth at the time of award" shall be
computed by allowing interest at a rate equal to the discount rate of the
Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used
in (iii) above, "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 (1%) percent.

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shall apply and Landlord may from time to time, without terminating this
Lease, either recover all rental as it becomes due or relet the Premises or
any part thereof for such term or terms and at such rental or rentals and upon
such other terms and conditions as Landlord in its sole discretion may deem
advisable, with the right to make alterations and repairs to the Premises. In
the event that Landlord elects to so relet, rentals received by Landlord from
such reletting shall be applied in the following order to: (i) the payment of
any indebtedness other than Base Monthly Rent due hereunder from Tenant to
Landlord; (ii) the payment of any cost of such reletting; (iii) the payment of
the cost of any alterations and repairs to the Premises; and (iv) the payment
of Base Monthly Rent due and unpaid hereunder. The residual rentals, if any,
shall be held by Landlord and applied in payment of future Base Monthly Rent
as the same may become due and payable hereunder. In the event the portion of
rentals received from such reletting which is applied to the payment of rent
hereunder during any month be less than the rent payable during that month by
Tenant hereunder, then Tenant shall pay such deficiency to Landlord
immediately upon demand. Such deficiency shall be calculated and paid monthly.
Tenant shall also pay to Landlord, as soon as ascertained, any costs and
expenses incurred by Landlord in such reletting or in making such alterations
and repairs not covered by the rentals received from such reletting.

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as a waiver thereof by Landlord. No act or conduct of Landlord, including,
without limitation, the acceptance of keys to the Premises, shall constitute
acceptance of the surrender of the Premises by Tenant before the Expiration
Date. Only written notice from Landlord to Tenant of acceptance shall
constitute such acceptance of surrender of the Premises. Landlord's consent to
or approval of any act by Tenant which requires Landlord's consent or
approvals shall not be deemed to waive or render unnecessary Landlord's
consent to or approval of any subsequent act by Tenant.

F. PERFORMANCE BY LANDLORD: If Tenant fails to perform any
obligation required under this Lease or by law or governmental regulation,
Landlord in its sole discretion may, following thirty (30) days written notice
to Tenant without waiving any rights or remedies and without releasing Tenant
from its obligations hereunder, perform such obligation, in which event Tenant
shall pay Landlord as additional rent all sums paid by Landlord in connection
with such substitute performance, including interest at the Agreed Interest
Rate within ten (10) days of Landlord's written notice for such payment.

14. LANDLORD'S LIABILITY:

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If Landlord fails to cure such default within the time provided for in this
Lease, then the Mortgagee shall have an additional twenty (20) days after the
expiration of such cure period within which to cure such default (provided that
Tenant notifies Mortgagee concurrently with Tenant's delivery of the Landlord's
Default Notice to Landlord; otherwise Mortgagee shall have twenty (20) days from
the later of the date on which it receives notice of the default from Tenant and
the expiration of Landlord's cure period). If such default cannot be cured by
Mortgagee within the cure period, Tenant may not exercise any of its remedies so
long as Mortgagee has commenced and is diligently pursuing the remedies
necessary to cure such default (including, but not limited to, commencement of
foreclosure proceedings, if necessary to effect such cure), provided that in the
event of emergency which materially adversely affects the Premises, Tenant may
exercise its right to cure Landlord's default as provided below so long as
Tenant makes reasonable good faith efforts to notify Landlord and Mortgagee
prior to commencing such emergency cure.

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interest of Landlord in the Premises or for the satisfaction of the
obligations of Landlord and shall not have recourse to any other assets of
Landlord for the satisfaction of such obligations.

C. INDEMNIFICATION OF LANDLORD: As a material part of the consideration
rendered to Landlord, Tenant hereby waives all claims against Landlord for
damages to goods, wares and merchandise, and all other personal property in,
upon or about said Premises and for injuries to persons in or about said
Premises, from any cause (other than due to the negligence or willful misconduct
of Landlord and Landlord's Agents) arising at any time to the fullest extent
permitted by law, and Tenant shall indemnify and hold Landlord exempt and
harmless from any damage or injury to any person, or to the goods, wares and
merchandise and all other personal property of any person, arising from the use
of the Premises, Building, and/or Project by Tenant and Tenant's Agents or from
the failure of Tenant to keep the Premises in good condition and repair as
herein provided, except to the extent due to the negligence or willful
misconduct of Landlord and Landlord's Agents. Further, in the event Landlord is
made party to any litigation due to the acts or omission of Tenant and Tenant's
Agents. Tenant will indemnify, defend (with counsel reasonably acceptable to
Landlord) and hold Landlord harmless from any such claim or liability
including Landlord's costs and expenses and reasonable attorney's fees
incurred in defending such claims.

15. DESTRUCTION OF PREMISES:

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17. ASSIGNMENT OR SUBLEASE:

A. CONSENT BY LANDLORD: Except as specifically provided in this
Section 17, Tenant may not assign, sublet, hypothecate, or allow a third party
to use the Premises (except as herein provided) without the express written
consent of Landlord. In the event Tenant desires to assign this Lease or any
interest herein including, without limitation, a pledge, mortgage or other
hypothecation, or sublet the Premises or any part thereof, Tenant shall deliver
to Landlord (i) the proposed agreements and all ancillary agreements with the
proposed assignee/subtenant, (ii) current financial statements of the
transferee, (iii) the nature of the proposed transferee's business to be
carried on in the Premises, and (iv) all consideration to be given on account
of the Transfer. Landlord may condition its approval of any Transfer to a
certification from both Tenant and the proposed transferee of all
consideration to be paid to Tenant in connection with such Transfer. At
Landlord's request, Tenant shall also provide additional information
reasonably required by Landlord to determine whether it will consent to the
proposed assignment or sublease. Landlord shall have a ten (10) day period
following receipt of all the foregoing within which to notify Tenant in
writing that Landlord elects to: (i) permit Tenant to assign or sublet such
space to the named assignee/subtenant on the terms and conditions set forth in
the notice; or (ii) refuse consent. If Landlord should fail to notify Tenant
in writing of such election within the 10-day period, Landlord shall be deemed
to have elected option (i) above. Landlord's written consent to the proposed
assignment or sublease shall not be unreasonably withheld conditioned or
delayed, provided and upon the condition that: (i) the proposed assignee or
subtenant is engaged in a business that is limited to the use expressly
permitted under this Lease; (ii) the proposed assignee or subtenant is a
company with sufficient financial worth and management ability to undertake
the financial obligation of this Lease and Landlord has been furnished with
reasonable proof thereof; (iii) the proposed assignment or sublease is in form
reasonably satisfactory to Landlord; (iv) Tenant reimburses Landlord on demand
for any

Page 30
<PAGE>

actual, out-of-pocket costs reasonably incurred by Landlord in connection with
said assignment or sublease, including the costs of making investigations as
to the acceptability of the proposed assignee or subtenant and reasonable
legal costs incurred in connection with the granting of any requested consent
(all such costs not to exceed $1,500.00 in regard to any single transaction;
and (v) Tenant shall not have advertised or publicized in any way the
availability of the Premises without prior notice to Landlord. In connection
with an assignment to which Landlord has given its consent, Landlord and the
assignee shall execute an amendment to this Lease for purposes of both
documenting and implementing the Multi-Tenant Project Provisions set forth in
Section 19.Y below. In the event all or any one of the foregoing conditions
are not reasonably satisfied, Landlord shall be considered to have acted
reasonably if it withholds its consent. Tenant shall have the right, without
Landlord's consent, to permit use of the Premises by persons engaged in
carrying on Tenant's business or with whom Tenant has business relationships,
provided that the portions of the Premises used by such persons are not
separately demised.

B. ASSIGNMENT OR SUBLETTING CONSIDERATION: Except for Permitted Transfers,
all rent or other economic consideration realized by Tenant under any sublease
and assignment shall be divided and paid fifty percent (50%) to Landlord and
fifty percent (50%) to Tenant. For this purpose, "excess rents" shall mean the
amount by which the consideration actually received by Tenant in connection with
a sublease or assignment exceeds the sum of the following: (i) all amounts
payable under this Lease as Rent (prorated on a per square foot basis in case of
a partial subletting of the Premises), (ii) all costs of improving the Premises
(or the affected portion thereof) for occupancy by the subtenant or assignee,
and (iii) leasing commissions, marketing costs, architects' fees, attorneys'
fees and other customary expenses reasonably incurred by Tenant in consummating
the assignment or sublease and/or in enforcing Tenant's rights thereunder.
Tenant's obligation to pay over Landlord's portion of the excess rents
constitutes an obligation for additional rent hereunder. The above provisions
relating to the allocation of bonus rent are independently negotiated terms of
the Lease which constitute a material inducement for the Landlord to enter
into the Lease, and are agreed by the parties to be commercially reasonable.
No assignment or subletting by Tenant shall relieve it of any obligation under
this Lease. Any assignment or subletting which conflicts with the provisions
hereof shall be void.

Page 31
<PAGE>

payment of Base Monthly Rent and additional rent due, and to become due
hereunder, for the performance of all the covenants, agreements, terms,
provisions and conditions contained in this Lease (except any subtenant shall
only be liable to Landlord for the obligations to the extent they related to
the portion of the Premises so sublet) on the part of Tenant to be performed
and for all acts and omissions of any licensee, subtenant, assignee or any
other person claiming under or through any subtenant or assignee that shall be
in violation of any of the terms and conditions of this Lease, and any such
violation shall be deemed a violation by Tenant. Tenant shall indemnify,
defend and hold Landlord harmless from and against all losses, liabilities,
damages, costs and expenses (including reasonable attorney fees) resulting
from any claims that may be made against Landlord by the proposed assignee or
subtenant or by any real estate brokers or other persons claiming compensation
in connection with the proposed assignment or sublease.

Page 32
<PAGE>

otherwise acquires all or substantially all of the assets of Tenant so long as
such acquiring corporation has a net worth at the time of such assignment that
is equal to or greater than the net worth of Tenant immediately prior to such
transaction.

H. SUCCESSORS AND ASSIGNS: Subject to the provisions this Section 17,
the covenants and conditions of this Lease shall apply to and bind the heirs,
successors, executors, administrators and assigns of all parties hereto; and all
parties hereto shall be jointly and severally liable hereunder.

18. OPTION TO EXTEND THE LEASE TERM:

Page 33
<PAGE>

Page 34
<PAGE>

Landlord's determination of Fair Market Rental for the Option Term and elects
to resolve the disagreement as provided in Section 18.C below. If Tenant does
not send Landlord a notice as provided in the previous sentence, Landlord's
determination of Fair Market Rental shall be the basis for determining the
Base Monthly Rent payable by Tenant during the Option Term. If Tenant elects
to resolve the disagreement as provided in Section 18.C and such procedures
are not concluded prior to the commencement date of the Option Term, Tenant
shall pay to Landlord as Base Monthly Rent the Fair Market Rental as
determined by Landlord in the manner provided above. If the Fair Market Rental
as finally determined pursuant to Section 18.C is greater than Landlord's
determination, Tenant shall pay Landlord the difference between the amount
paid by Tenant and the Fair Market Rental as so determined in Section 18.C
within thirty (30) days after such determination. If the Fair Market Rental as
finally determined in Section 18.C is less than Landlord's determination, the
difference between the amount paid by Tenant and the Fair Market Rental as so
determined in Section 18.C shall be credited against the next installments of
rent due from Tenant to Landlord hereunder.

C. RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any
disagreement regarding Fair Market Rental shall be resolved as follows:

Page 35
<PAGE>

19. GENERAL PROVISIONS:

A. Attorney's Fees: In the event a suit or alternative form of dispute
resolution is brought for the possession of the Premises, for the recovery of
any sum due hereunder, to interpret the Lease, or because of the breach of any
other covenant herein; then the losing party shall pay to the prevailing party
reasonable attorney's fees including the expense of expert witnesses,
depositions and court testimony as part of its costs which shall be deemed to
have accrued on the commencement of such action. The prevailing party shall
also be entitled to recover all costs and expenses including reasonable
attorney's fees incurred in enforcing any judgment or award against the other
party. The foregoing provision relating to post-judgment costs is severable
from all other provisions of this Lease.

D. CHOICE OF LAW: This Lease shall be governed by and construed in
accordance with California law. Venue shall be Santa Clara County.

E. DISPUTE RESOLUTION: Landlord and Tenant and any other party that may
become a party to this Lease or be deemed a party to this Lease including any
subtenants agree that, except for (i) any claim by Landlord for unlawful
detainer or (ii) any claim within the jurisdiction of the small claims court
(which for such claims the parties agree shall be the sole court of competent
jurisdiction) or (iii) any claim in which persons who are necessary to the
resolution thereof are neither obligated nor willing to submit to the dispute
resolution procedure set forth herein, any controversy, dispute, or claim of
whatever nature arising out of, in connection with or in relation to the
interpretation, performance or breach of this Lease, including any claim based
on contract, tort, or statute, shall be resolved at the request of any party
to this agreement through a two-step dispute resolution process administered
by J. A. M. S. or another judicial mediation service mutually acceptable to the
parties located in Santa Clara County. The dispute resolution process shall
involve first, mediation, followed, if necessary, by final and binding
arbitration administered by and in accordance with the then existing rules and
practices of J. A. M. S. or other judicial mediation service selected. In the
event of any dispute subject to this provision, either party may initiate a
request for mediation service mutually acceptable to the parties located in
Santa Clara County. The dispute resolution process shall involve first,
mediation, followed, if necessary, by final and binding arbitration administered
by and in accordance with the then existing rules and practices of J. A. M. S.
or other judicial mediation service selected. In the event of any dispute
subject to this provision, either party may initiate a request for mediation

Page 36
<PAGE>

and the parties shall use reasonable efforts to promptly select a J. A. M. S.
mediator and commence the mediation. In the event the parties are not able to
agree on a mediator within thirty (30) days, J. A. M. S. or another judicial
mediation service mutually acceptable to the parties shall appoint a mediator.
The mediation shall be confidential and in accordance with California Evidence
Code (S) 1152.5. The mediation shall be held in Santa Clara County and in
accordance with the existing rules and practice of J. A. M. S. (or other
judicial and mediation service selected). The parties shall use reasonable
efforts to conclude the mediation within sixty (60) days of the date of either
party's request for mediation. The mediation shall be held prior to any
arbitration or court action (other than a claim by Landlord for unlawful
detainer or any claim within the jurisdiction of the small claims court which
are not subject to this mediation/arbitration provision and may be filed
directly with a court of competent jurisdiction). Should the prevailing party in
any dispute subject to this Section 19.E attempt an arbitration or a court
action before attempting to mediate, THE PREVAILING PARTY SHALL NOT BE ENTITLED
TO ATTORNEY'S FEES THAT MIGHT OTHERWISE BE AVAILABLE TO THEM IN A COURT ACTION
OR ARBITRATION AND IN ADDITION THERETO, THE PARTY WHO IS DETERMINED BY THE
ARBITRATOR TO HAVE RESISTED MEDIATION, SHALL BE SANCTIONED BY THE ARBITRATOR OR
JUDGE.

F. ENTIRE AGREEMENT: This Lease and the exhibits attached hereto
contains all of the agreements and conditions made between the parties hereto
and may not be modified orally or in any other manner other than by written
agreement signed by all parties hereto or their respective successors in
interest. This Lease supersedes and revokes all previous negotiations, letters
of intent, lease proposals, brochures, agreements, representations, promises,
warranties, and understandings, whether oral or in writing, between the parties
or their respective representatives or any other person purporting to represent
Landlord or Tenant.

G. ENTRY BY LANDLORD: Upon prior reasonable notice to Tenant, subject to
Tenant's reasonable security regulations and provided such entry does not
unreasonable interfere with Tenant's use of the Premises, Tenant shall permit
Landlord and his agents

Page 37
<PAGE>

to enter into and upon the Premises at all reasonable times, and
without any rent abatement or reduction or any liability to Tenant for any
loss of occupation or quiet enjoyment of the Premises thereby occasioned, for
the following purposes: (i) inspecting and maintaining the Premises; (ii)
making repairs, alterations or additions to the Premises; (iii) erecting
additional building(s) and improvements on the land where the Premises are
situated or on adjacent land owned by Landlord; and (iv) performing any
obligations of Landlord under the Lease including remediation of hazardous
materials if determined to be the responsibility of Landlord. Tenant shall
permit Landlord and his agents, at any time within one hundred eighty (180)
days prior to the Expiration Date (or at any time during the Lease if Tenant
is in default after expiration of the applicable cure period), to place upon
the Premises "For Lease" signs and exhibit the Premises to real estate brokers
and prospective tenants subject the provisions of this Section 19.G.

I. EXHIBITS: All exhibits referred to are attached to this Lease and
incorporated by reference.

K. SATELLITE ANTENNAE: During the Lease Term, Tenant shall have the
right, subject to relevant regulatory approvals and Landlord's consent (such
consent not to be unreasonably withheld, conditioned or delayed) to install
one or more satellite

Page 38
<PAGE>

antennas (each, an "Antenna") on the roofs of the Building in a location
reasonably satisfactory to both Landlord and Tenant. Tenant shall not be
charged any rent for roof space. Prior to submitting any plans to the City of
San Jose or proceeding with any installation of an Antenna, Tenant shall
submit to Landlord elevations and specifications for the Antenna. Tenant shall
install any approved Antennae at its sole expense and shall be responsible for
any damage caused by the installation of the Antennae or related to the
Antennae. At the Expiration Date or upon earlier termination of this Lease,
Tenant shall remove the Antennas from their locations and repair any damage
caused by such removal.

O. RENT: All monetary sums due from Tenant to Landlord under this Lease,
including, without limitation those referred to as "additional rent", shall be
deemed as rent.

P. REPRESENTATIONS: Tenant acknowledges that neither Landlord nor any
of its employees or agents have made any agreements, representations, warranties
or promises with respect to the Premises or with respect to present or future
rents, expenses, operations, tenancies or any other matter. Except as herein
expressly set forth herein, Tenant relied on no statement of Landlord or its
employees or agents for that purpose.
Page 39
<PAGE>

Q. RIGHTS AND REMEDIES: All rights and remedies hereunder are cumulative
and not alternative to the extent permitted by law, and are in addition to all
other rights and remedies in law and in equity.

Page 40
<PAGE>

U. SURVIVAL OF INDEMNITIES: All indemnification, defense, and hold harmless
obligations of Landlord and Tenant under this Lease shall survive the expiration
or sooner termination of the Lease.

V. TIME: Time is of the essence hereunder.

2. Tenant shall have exclusive exterior signage rights only as to the
Building, and other Project signage shall be controlled by Landlord pursuant to
a reasonable and nondiscriminatory sign program adopted by Landlord and approved
by Tenant (which approval shall not be unreasonable withheld, conditioned or
delayed), which appropriately recognizes the relative prominence of Tenant and
other tenants in the Project.

3. Section 13.G of this Lease shall be of no further force or effect, and
termination of the Adjacent Building Lease

Page 41
<PAGE>

shall not give rise to a right on the part of either Landlord or Tenant to
terminate this Lease.

4. Tenant's exercise of the Option to extend this Lease shall not be
conditioned upon the exercise of any extension option granted under the Adjacent
Building Lease.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and
year first above written.

LANDLORD: SOBRATO INTERESTS III TENANT: BEA SYSTEMS, INC.
a California Limited Partnership a Delaware Corporation

By: /s/ John M. Sobrato By: /s/ William T. Coleman III
------------------- --------------------------

Its: General Partner Its: Chief Executive Officer
--------------- -----------------------

Page 42
<PAGE>

EXHIBIT "A"
LEGAL DESCRIPTION OF PREMISES

All that certain real property situated in the City of San Jose, County of Santa
Clara, State of California, described as follows:

Parcel 2, as shown on the Parcel Map filed for records in the office of the
Recorder of the County of Santa Clara, State of California on August 11, 1989,
in Book 604 of Maps, Page(s) 14, 15 and 16.
<PAGE>

EXHIBIT "B" - PREMISES & PROJECT""

[MAP]
Set forth herein is a site plan for the leased premise.
<PAGE>

EXHIBIT "C" - BUILDING SHELL DEFINITION

The Building Shell shall be a four-story steel frame structure with 90% of the
perimeter containing glass. The Building Shell shall include the following
items:

1. BUILDING STRUCTURE

(a) All foundations to include footings, piers, caissons, pilings, grade
beams, foundation walls or other building foundation components required to
support the building structure.

(d) Tinted high performance glass with Robertson composite metal panels
including required caulking and sealants. Four (4) exterior double doors, door
closers and locking devices as necessary.

(e) Four (4) ply built up roofing with cap sheet by Owens-Corning, John
Manville, or equal and all flashings over a rigid insulated corrugated metal
deck roof system.

(f) Exterior painting of any concrete with Tex-Coat or Kel-Tex textural paint,
all caulking of exterior concrete joints in preparation for painting.

(g) Two (2) steel fire stairs at perimeter of building. One ship ladder to
roof of building with roof hatch.

(h) Mechanical roof screen.

(i) Loading area with grade level access with hydraulic scissors lift external
of building.

(j) penetrations of the roof and floor for the mechanical ducting and for the
elevators (elevator penetrations to accommodate two hydraulic passenger
elevators at the core and one freight elevator near the dock area)
<PAGE>

2. SITEWORK

(b) Paving sections for automobile and truck access shall be according to the
Geologic Soils Report.

(d) Underground site storm drainage system shall be connected to the city
storm system main.

3. PLUMBING

(a) Underground sanitary sewer laterals connected to the city sewer main in
the street and stubbed to the core of the building.

(b) Domestic water mains connected to the city water main in the street and
stubbed to the building.

(d) Gas lines connected to the city or public utility mains and run to gas
meters adjacent to, and in close proximity to the building. Meter supplied by
utility company.

4. ELECTRICAL

(b) 4" Underground conduit from the street to the building for telephone trunk
lines by Pacific Telephone.

(c) An electrically operated landscape irrigation system, with controller,
that is a complete and functioning system.
<PAGE>

(e) Underground conduit from the building to the main fire protection system
post indicator valve (PIV) for installation of supervisory alarm wiring.

(f) Telephone and data conduits between the Building and the Adjacent Building

All other costs shall be deemed Tenant Improvements.
<PAGE>

EXHIBIT "D" - BUILDING SHELL PLANS

ARCHITECTURAL DRAWINGS

SHEET NO. SHEET NAME

CIVIL DRAWINGS

C-1 Topographical Survey
C-2 Preliminary Grading Plan

STRUCTURAL DRAWINGS

S3.2 Typical Structural Details
S6.1 Wall Sections
S6.2 Wall Sections
S6.3 Wall Sections
S6.4 Wall Sections
S3.1 Panel Elevations
S3.2 Panel Elevations
S3.3 Panel Elevations
S4.0 Foundation Details

ELECTRICAL DRAWINGS

SE.1 Site Electrical Plan
E1.a Building One- First Level Power Plan
E1.b Building Two- First Level Power Plan
E2.a Building One - Second Level Power Plan
E2.b Building Two- Second Level Power Plan

LANDSCAPE DRAWINGS

L1.1 General Landscape Notes and Legend
L1.2 Plant List and Planting Notes
L2.1 Irrigation Site Plan
L4.1 Planting Site Plan
L6.1 Landscape Details
L7.1 Fountain Plan, Notes and Details
<PAGE>

EXHIBIT "E" - TENANT IMPROVEMENT PLANS AND SPECIFICATIONS
(sheet references to be attached)
<PAGE>

EXHIBIT "F" - GENERAL CONDITIONS

<PAGE>

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

1. BEA Systems (FSC), Inc., Barbados

2. BEA International, Cayman Islands

3. BEA Systems, Ltd., Canada

4. BEA Systems Limitada, Brazil

5. BEA Systems SA de CV, Mexico

6. BEA Systems Europe GmbH, Germany

7. BEA Systems Europe N.V., Belgium

8. BEA Systems Pty Ltd., South Africa

9. BEA Systems AB, Sweden

10. BEA Systems, Ltd., United Kingdom

11. BEA Systems OY, Finland

12. BEA Systems S.A., France

13. BEA Systems (Switzerland) Ltd., Switzerland

14. BEA Systems Japan Ltd., Japan

15. BEA Systems Korea, Korea

16. BEA Systems Pty Ltd, Australia

17. BEA Systems HK Ltd., Hong Kong

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-37385, and 333-24941) pertaining to the 1995 Flexible Stock
Incentive Plan, the 1997 Stock Incentive Plan and the 1997 Employee Stock
Purchase Plan of BEA Systems, Inc. of our report dated February 24, 1998, with
respect to the consolidated financial statements of BEA Systems, Inc. included
in this Annual Report (Form 10-KSB) for the year ended January 31, 1998.

/s/ ERNST & YOUNG LLP

Palo Alto, California
April 24, 1998

<PAGE>

EXHIBIT 24.1

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William T. Coleman III and Steve L. Brown,
jointly and severally, as his or her attorney-in-fact, with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-KSB and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.

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

SIGNATURE TITLE DATE

/s/ WILLIAM T. COLEMAN III President, Chief Executive April 25, 1998
- --------------------------- Officer, Chairman of the
William T. Coleman III Board and Director

/s/ EDWARD W. SCOTT, JR. Executive Vice President of April 25, 1998
- --------------------------- Worldwide Field Operations,
Edward W. Scott, Jr. Assistant Secretary and
Director

/s/ STEVE L. BROWN Executive Vice President, April 25, 1998
- --------------------------- Chief Financial Officer and
Steve L. Brown Secretary

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS FORM
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1997
<PERIOD-START> JAN-30-1997 JAN-30-1996
<PERIOD-END> JAN-31-1998 JAN-31-1997
<CASH> 89,702 3,283
<SECURITIES> 8,708 0
<RECEIVABLES> 48,805 25,873
<ALLOWANCES> (1,895) (1,095)
<INVENTORY> 0 0
<CURRENT-ASSETS> 148,290 31,144
<PP&E> 11,738 8,177
<DEPRECIATION> (3,923) (1,529)
<TOTAL-ASSETS> 171,317 57,973
<CURRENT-LIABILITIES> 91,789 63,942
<BONDS> 0 0
0 20,780
0 17
<COMMON> 65 11
<OTHER-SE> 78,772 (76,317)
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 118,906 46,839
<TOTAL-REVENUES> 157,189 61,598
<CGS> 2,429 1,591
<TOTAL-COSTS> 172,024 142,740
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,201 1,321
<INTEREST-EXPENSE> 6,054 6,727
<INCOME-PRETAX> (19,152) (87,865)
<INCOME-TAX> 2,843 800
<INCOME-CONTINUING> (21,995) (88,665)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (21,995) (88,665)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (0.43) (9.48)

</TABLE>