IKANOS COMMUNICATIONS, INC.

Transcription

1 IKANOS COMMUNICATIONS, INC. FORM 10-K (Annual Report) Filed 02/28/14 for the Period Ending 12/29/13 Address FREMONT BLVD. FREMONT, CA, Telephone (510) CIK SIC Code Telephone and Telegraph Apparatus Industry Phones & Handheld Devices Sector Technology Fiscal Year 12/28 Copyright 2018, EDGAR Online, a division of Donnelley Financial Solutions. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, a division of Donnelley Financial Solutions, Terms of Use.

2 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 29, 2013 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR For the transition period from to Commission File Number: IKANOS COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) Title of each class Common Stock, $0.001 par value Fremont Boulevard Fremont, California (Address of principal executive offices) (Zip Code) (510) (Registrant s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None (I.R.S. Employer Identification No.) Name of each exchange on which registered The NASDAQ Stock Market LLC Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Yes No Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2013 (the last day of Registrant s second quarter of fiscal 2013), was approximately $45,514,481 based upon the June 28, 2013 closing price of the Common

3 Stock as reported on the NASDAQ Capital Market. Shares of Common Stock held by each executive officer and director and by each person who owns more than 5% of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 21, 2014, there were 98,751,256 shares of the Registrant s common stock, par value $ 0.001, outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Registrant s 2014 Annual Meeting of Stockholders.

4 Table of Contents IKANOS COMMUNICATIONS, INC. Table of Contents PART I. Item 1. Business 4 Item 1A. Risk Factors 23 Item 1B. Unresolved Staff Comments 40 Item 2. Properties 40 Item 3. Legal Proceedings 40 Item 4. Mine Safety Disclosure 40 PART II. Item 5. Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 41 Item 6. Selected Financial Data 43 Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations 45 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 59 Item 8. Financial Statements and Supplementary Data 60 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 92 Item 9A. Controls and Procedures 92 Item 9B. Other Information 92 PART III. Item 10. Directors, Executive Officers and Corporate Governance 93 Item 11. Executive Compensation 93 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 93 Item 13. Certain Relationships and Related Transactions, and Director Independence 94 Item 14. Principal Accountant Fees and Services 94 PART IV. Item 15. Exhibits, Financial Statement Schedules 95 Signatures 98 Page No.

5 Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, particularly in the sections entitled Business, Risk Factors, and Management s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and to future events with respect to our business and industry in general. Statement that include the words believe, may, estimate, continue, anticipate, intend, should, plan, expect, predict, potential, or the negative of these terms, or other similar expressions, identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, the following: our ability to raise additional capital in the future; our history of losses; our utilization of a revolving credit facility; the risk that our common stock will be delisted; the volatility of our common stock; the opinions of the securities analysts that publish reports regarding our Company; our ability to develop and achieve market acceptance of new products and technologies as we transition away from older products; our dependence on a relatively small number of customers; the intensity of the competition we face in the semiconductor industry and the broadband communications market; general macroeconomic declines could reduce demand for our products; cyclical and unpredictable decreases in demand for our semiconductors; our ability to adequately forecast demand for our products; the length of our sales cycle; that the selling prices of our products are subject to decline over time and may do so more rapidly than we anticipate; our reliance on subcontractors to manufacture, test, and assemble our products; our dependence on and qualification of foundries to manufacture our products; changes in our product sales mix; our ability to secure production capacity; our ability to recruit and retain personnel, including our senior management team; the fluctuations in our operating results and expenses; our reliance on third-party technologies in our products; the development and future growth of the broadband digital subscriber line (DSL) and communications processing markets in general; the defense of third-party claims of infringement and the protection of our own intellectual property; currency fluctuations; undetected defects, errors, or failures in our products; the significant number of shares held by a single group of investors; rapidly changing technologies, standards, and regulations; and our accounting policies and disclosure controls. The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this Annual Report on Form 10-K, including under the caption Risk Factors in Item 1A. Moreover, we operate in a very competitive and rapidly changing environment in which new risk factors emerge from time-to-time. It is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Except as required by law, we undertake no obligation to publicly update any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to actual results or to changes in our expectations. In this Annual Report on Form 10-K, references to Ikanos, we, us, our, or the Company mean Ikanos Communications, Inc. and its subsidiaries, unless otherwise indicated or the context otherwise requires. 3

6 Table of Contents ITEM 1. The following information should be read in conjunction with audited consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. Overview BUSINESS We are a leading provider of advanced semiconductor products and software for delivering high speed broadband solutions to the digital home. Our broadband multi-mode and digital subscriber line (DSL) processors and other semiconductor offerings power carrier infrastructure (referred to as Access or CO) and customer premises equipment (referred to as Gateway or CPE) for network equipment manufacturers (NEMs) supplying leading telecommunications service providers. Our products are at the core of DSL access multiplexers (DSLAMs), optical network terminals (ONTs), concentrators, modems, voice over Internet Protocol (VoIP) terminal adapters, integrated access devices (IADs), and residential gateways (RGs). Our products have been deployed by service providers globally, including in Asia, Europe, and North and South America, and are also actively being evaluated and scheduled to be evaluated by other service providers for deployment in their networks. Our products reflect advanced designs in silicon, systems, and firmware and are programmable and highly-scalable. Our expertise in the integration of our digital signal processor (DSP) algorithms with advanced digital, analog, and mixed signal semiconductors enables us to offer high-performance, high-density, and low-power asymmetric DSL (ADSL) and very-high bit rate DSL (VDSL) products. We are releasing new VDSL-based solutions to the market that offer vectoring and bonding to increase speeds over existing telecom carrier copper infrastructure. These products support high speed broadband service providers multi-play deployment plans to the digital home while keeping their capital and operating expenditures relatively low compared to competing frameworks. Our broadband DSL products consist of high performance CO and CPE chips. We have demonstrated: (1) an aggregate downstream and upstream rate of 300 megabits per second (Mbps) over a single pair copper line at a distance of up to 200 meters, and (2) 150Mbps aggregate data rate up to a distance of 500 meters. Our DSL revenue mix over the last three years has transitioned away from ADSL in favor of VDSL, in-line with global market trends. We also offer a line of multi-mode communications processors (CPs) for RGs that support a variety of wide area network (WAN) topologies for telecom carriers, wireless carriers, and cable multiple system operators (MSOs), including Ethernet and gigabit Ethernet, passive optical network (PON), DSL, and wireless broadband. In addition to our DSL and RG processors, we recently announced insight, our new suite of CPE-based software products. insight will offer carriers the ability to remotely monitor and diagnose line impairments and noise issues to facilitate fast and cost-effective discovery and resolution of service disruptions, thereby increasing their subscriber satisfaction rate and reducing operating costs. Our semiconductor customers consist primarily of NEMs, original design manufacturers (ODMs), contract manufacturers (CMs), and original equipment manufacturers (OEMs), and include vendors such as Sagemcom Tunisie (Sagemcom), Askey Computer Corporation (Askey), NEC Corporation (NEC), and AVM Computersysteme Vertriebs GmbH (AVM). Our products are deployed in the networks of telecom carriers such as AT&T Inc. (AT&T), Bell Canada, Orange S.A. (formerly, France Telecom) (Orange), KDDI Corporation (KDDI), and Nippon Telegraph and Telephone Corporation (NTT). In the last three years, we believe our products were deployed by geography as follows: the Americas, Europe, Asia, and Japan were 26%, 34%, 18%, and 22% in 2011, respectively; 9%, 38%, 26%, and 27% in 2012, respectively; and 15%, 56%, 18%, and 11% in 2013, respectively. We are a fabless semiconductor company with design, development, and sales personnel in Fremont, California, Red Bank, New Jersey, and a major research and development facility in Bangalore, India. Our headquarters are in Fremont, California and we had 263 employees globally as of December 29,

7 Table of Contents Market Opportunities for Service Providers The growth of the Internet, the proliferation of advanced digital video and multimedia websites and service offerings, and the advancement of communications infrastructure have fundamentally changed the way people work, shop, entertain themselves, and communicate. According to IHS Inc., the world s broadband subscriber base is expected to be approximately one billion users by To remain competitive, DSL service providers must deliver higher bandwidth, both downstream and upstream, to enable customers to access exciting, new, and advanced services as well as generate new revenue streams. Today, these services include access to advanced digital media, video, communications, and interactive broadband applications, including, among others: Over-the-Top (OTT) content; High definition television (HDTV); Internet protocol television (IPTV); Video on demand (VOD); Distance learning; Telemedicine/eHealth; Sending and receiving advanced digital media such as music, photos, and video; Video conferencing; Video surveillance; Smart energy and home automation; Streaming video and audio; Multi-play gateways offering multi-screen viewing in the house; Online gaming and game hosting; and VoIP. To effectively deliver these media-intensive services requires bandwidth over 100Mbps. There are two major trends contributing to the demand for increased bandwidth usage. The first is OTT streaming of premium content, by providers such as Netflix, and the transition to higher resolution content, such as 1080p and the emergence of 4K and 8K video. While this type of higher resolution content is not yet mainstream, telecom service providers understand the need to prepare their networks in advance for supporting these formats. The second trend is the rapid growth of cloud delivery and storage infrastructure for personal media. As cloud-based applications and storage continue to increase, uploads of user-generated content for access anywhere on any device becomes more important for consumers. We believe the popularity of applications such as Apple s icloud service and Google Drive are strong indicators of market direction. Additionally, users are increasingly creating, interacting with, and transmitting video from the home over multiple devices, including smart phones, tablets, and other WiFi-enabled devices. As a result, the ability to transmit information both upstream and downstream has become equally important to users. For example, use of websites like YouTube, Skype, Snapchat, and Instagram have increased bandwidth requirements for both upstream and downstream transmissions from the home as users share and view content. As data and media files increase in size and overall bandwidth demand pushes existing limits, carriers look for ways to expand their capacity and high speed service capabilities to maintain their customer bases and attract new customers. Service providers can use a variety of network architectures to address this increased demand for bandwidth. DSL connectivity continues to constitute the majority of broadband infrastructure globally. In addition, fiber-to-the-node, fiber-to-the-curb, fiber-to-the-building, and fiberto-the-distribution-point, collectively referred 5

8 Table of Contents to as FTTx, where telecommunication service providers (telcos) lay fiber deeper into the network, but not to the customer s premises, use copper infrastructure and VDSL2 to cover the last mile to connect to the customer s premises. According to Point Topic as of the third quarter of 2013, telcos had a majority share in broadband infrastructure with over 70% of all broadband connections using DSL either over copper or combination of copper and fiber. While fiber deployments are on the rise globally, many service providers have preferred a hybrid approach that combines fiber backbone networks with copper as the last mile delivery approach. FTTx architecture is chosen because replacing an existing network with fiber is costly and time-consuming, and the connection to customer premises is expensive and not scalable. According to telecom analysts quoted by Bloomberg Businessweek, the cost associated with wholesale replacement of copper with fiber and extending it all the way to the home (FTTH) can be as much as $4,000 per household. These costs do not include the full cost of CO upgrades and other necessary fiber-related infrastructure improvements. In contrast, using a combination of fiber and copper, in conjunction with VDSL technology, gives service providers a cost effective solution for delivering the required bandwidth to enable today s media-intensive applications and services in the home. AT&T has estimated that the cost per household of deploying a DSL-based solution in the last mile is approximately $300. According to the International Telecommunication Union Telecommunications Standard Sector (ITU-T), there are over one billion residential copper lines deployed worldwide today; a multi-billion dollar infrastructure investment. DSL continues its momentum allowing the world s top carriers to leverage this existing infrastructure and offer high speed internet and value-added services, particularly as the new types of FTTN technology deliver on the promise of data rates greater than 100Mbps. One of the key market trends in xdsl broadband services is the transition from ADSL to VDSL and VDSL2 with vectoring. Vectoring is the latest technology in the VDSL standard in which the crosstalk noise across adjacent copper lines is cancelled, thereby significantly increasing the data throughput supported on those lines. Broadband Competitive Landscape A key driver for telcos to adopt advanced DSL technologies, such as vectoring and bonding, is the competitive landscape driven by existing cable television infrastructure, where those services are also available locally. The following table illustrates the upstream and downstream speeds each DSL technology offers. DSL Version Max Downstream Speed Max Upstream Speed ADSL 7Mbps 800Kbps ADSL2 8Mbps 1Mbps ADSL2+ 24Mbps 1Mbps SHDSL 5.6Mbps 5.6Mbps VDSL 55Mbps 15Mbps VDSL2 100Mbps 100Mbps VDSL2 with Bonding 150Mbps* 150Mbps* Vectored VDSL2 200Mbps* 100Mbps* Vectored VDSL2 plus 2-line Bonding 400Mbps** 200Mbps** G.fast Aggregate data rate (Downstream plus Upstream) of 1Gbps** Source: Broadbandtrends LLC * Ikanos Internal Testing ** Ikanos estimates 6

9 Table of Contents Higher data rates supported by the latest Data Over Cable Service Interface Specification (DOCSIS) standard have enabled MSOs to strengthen their position and grow their subscriber base, particularly in the U.S., in parts of Europe, and in Japan. We believe this dynamic exerts pressure on the telcos to accelerate the adoption of DSL with vectoring and bonding, where available, to remain competitive in the marketplace. The technological evolution of a DSL-based solution, allowing for increasing bandwidth to deliver higher data rates over a single copper line, is expected to continue towards one gigabit per second (Gbps or 1,000Mbps). A key advantage that DSL service has over cable broadband delivery is that DSL is a dedicated point to point connection offering full bandwidth, while cable users share the available bandwidth over the entire local network medium. As a result, as residential density increases or bandwidth consumption increases, the quality of service for cable users will decline. In contrast, DSL subscribers have dedicated lines and bandwidth, and therefore are not impacted by other subscribers broadband usage. While FTTH deployments offer higher bandwidth in the Gbps range, few carriers have undertaken this deployment strategy because it is very expensive and instead rely on a hybrid strategy of fiber to the node and DSL to the home. Both the ITU-T and Cable Television Laboratories, Inc. (CableLabs) standard bodies have recently pushed forward with their standardization efforts to offer gigabit speeds for telecom and MSOs, resulting in new standards (G.fast for DSL and DOCSIS 3.1 for cable). Products associated with these new standards are expected to be introduced over the next few years. Our Target Markets We address two primary markets with our products: the broadband DSL market and the communications processor market. In these markets, we sell our products primarily to service providers through the OEMs, ODMs, and CMs that supply them, with the exception of insight, which we expect to sell directly to service providers. Carrier-focused DSL Service providers use DSL-based technology to enable the cost-effective provisioning of advanced digital media, video, communications, and interactive broadband applications including broadcast television, OTT media, HDTV, IPTV, VOD, interactive television, peer-to-peer file sharing, sending and receiving advanced digital media, video conferencing, video surveillance, streaming audio and video, online gaming, game hosting, and VoIP, as well as traditional telephony services. One of the relatively new segments of the DSL market is fiber-to-the-distribution-point (FTTdp). This configuration is typically deployed in scenarios where carriers extend the fiber line all the way to the customer premises, but are unable to carry it inside the home for various reasons. The copper loop length in these deployments is typically 200 meters or less, and as such, carriers expect to achieve higher data rates than their typical deployments. Our Vx585, which is currently in development, and our existing Vx185 families, with innovative Fusiv architecture and high performance DSL engine, are well suited for offering these higher data rates, and when combined with Velocity- Uni, which is currently scheduled for production in the second half of 2014, has been demonstrated to reach an aggregate data rate of 300Mbps up to 200 meters. The Vx185 family of A/VDSL2 processors is currently shipping, while the upcoming Vx585 family of A/VDSL2 processors is expected to reach production in the second half of Residential Gateways Consumers demand a wide array of offerings from their service providers. They want to be able to access OTT, VoIP telephony, IPTV, wireless connectivity, personal video recorder (PVR) services, security, file and photo sharing, gaming, and a host of other advanced offerings. But service providers face a significant challenge delivering those offerings to multiple devices in the home simultaneously. Not only is there a greater need for bandwidth, but service providers also need to provide an end-user device that has the processing power to handle new services while managing their operating expenses. Our communications processor products help service providers meet this need. 7

10 Table of Contents Our Fusiv communications processors enable service providers to efficiently and cost-effectively deliver multi-play services to the residential, small office/home office, and small-to-medium enterprise markets. These devices utilize our unique distributed architecture, which includes multiple accelerator processors (APs) that offload switching, routing, and other tasks from the host central processing unit (CPU). As a result, we provide high levels of processing power for combined advanced services including VoIP, PVR, multi-mode DSL, and security, while supporting best-in-class quality of service (QoS) and wire-speed performance across all local area network (LAN) and WAN interfaces. Our communications processors are designed to be the heart of the residential gateway which we believe is poised to become the centerpiece of the digital home. Whether the access infrastructure is copper, fiber, or wireless, the residential gateway and the communications processor that powers it must have robust performance to distribute bandwidth intensive services with appropriate security and other functionality. We intend to continue to adapt our product lines to address new markets and develop additional products specifically for those markets. Ikanos Solutions DSL Processors for the Central Office and Residential Gateways We have developed semiconductor products using our proprietary design techniques, specific purpose digital signal processor, and advanced mixed-signal design capabilities. Our DSL processors are used in a range of carrier solutions and devices in the digital home and offer the high performance, flexibility, and scalability needed to enable advanced services including multi-play, IPTV, security, ehealth, and home automation. Our products form the basis of communications systems that are deployed by service providers in their infrastructure, as well as in the home to enable subscribers to access data, voice, and video. We offer highly programmable products that support the multiple international standards used in broadband deployments worldwide, including ADSL, ADSL2, ADSL2+, VDSL, VDSL2, vectoring, and bonding. In addition, our products are equipped to handle gigabit Ethernet interfaces and provide wire-speed switching performance for FTTH, fixed wireless access, and cable deployments. Our gateway processors are used in IADs to offer Internet access and other features in the home. Our gateway processors are often used in IADs where multiple features are offered, including multi-screen viewing, streaming, OTT, and WiFi, making integration of these features important. Our gateway processor features also include an integrated security engine for high performance virtual private networks (VPNs), integrated DSP core for carrier grade voice processing, gigabit Ethernet MAC offload engine for line-rate processing, and WiFi offload acceleration processor for high performance WiFi support, including ac. These features and functions incorporated into our products had previously been developed by our customers as part of their own systems. By incorporating these system level features, we can enable our customers to reduce costs, accelerate time-to-market, and enhance the flexibility of their overall systems. Our Products We offer multiple product lines that are designed to address different segments of the communications processor and the high-speed broadband DSL markets. Service providers and OEMs choose our semiconductors from these multiple product lines based on a variety of factors such as the design of their networks, the distance between the fiber termination point and the customer premises, the technology that they want to deploy, the services that they want to offer, and system design constraints such as performance, density, and power consumption. By choosing our products for their hybrid fiber/xdsl networks, service providers are able to utilize their existing broadband infrastructure and maximize the return on their capital investments. 8

11 Table of Contents DSL Processors for a Range of CO and CPE Devices Our families of DSL processors are designed for a range of devices that deliver high-speed access to the digital home. We believe our endto-end solutions, while compliant with industry standards, provide a superior consumer experience and create opportunities for carrier service differentiation. Fusiv Vx185 and Vx183 family of chipsets are high performance G.Vector-compliant communications processors designed specifically for the next generation of service gateways in the home. This family of products employs a unique distributed architecture that incorporates AP engines for data path functions, which is designed to ensure the maximum host CPU processing power is available for customer applications. The Vx185/183 are our latest convergence devices that leverage the advancements from the previous Fusiv family, while adding more processing power and critical interfaces to form the foundation for next-generation residential gateways. The highest performance product in this new family, the Vx185-HP, provides leading edge processing power, high speed wireless LAN interfaces for dual-band concurrent n and ac, VoIP, multi-mode bonded DSL, and security, while supporting carrier class QoS and gigabit wire-speed performance. The entire family of Vx185/183 chipsets supports all DSL with a seventh generation single integrated front end (IFE) IFE7, including ADSL, ADSL2, ADSL2+, and all band plans of VDSL2, and further enhances IPTV and multi-play networks by being fully compliant with the ITU-T G.Vector standard. The Vx185 and Vx185-HP add support for VDSL2 bonding. This product family is currently shipping. The Vx585 family, currently in development, maintains the distributed architecture of the Vx185/183, while supporting an even higher level of performance with a dual-core CPU architecture and additional, higher performance acceleration processor engines. With a combined DMIPS equivalence of approximately 16,000 for the highest performance member of the family, the Vx585-HP is one of the most powerful DSL gateway processors in the market. In addition, the newly introduced offload engines for USB 3.0 and SATA interfaces, this new processor family offers very competitive NAS capabilities for local storage and cloud caching applications. A significant benefit for existing Fusiv customers is that the new chipset reuses the existing software for the Vx185/183, which has already been tested and successfully deployed on various carrier networks, facilitating customer time-to-market. The Vx585 family of processors is scheduled for production in the first half of Fusiv Vx180 is an integrated communications processor that features a MIPS-based CPU core, VoIP capabilities, security, and best-in-class QoS. It includes a multi-mode VDSL2 data pump that is backward compatible to ADSL2+, ADSL2, and ADSL for flexibility across a range of service provider deployments. The product easily integrates with home networking technologies such as a/b/g/n. The Fusiv Vx180 offers two IFE options. The IFE5 supports up to the 30a profile with 100Mbps upstream and 100Mbps downstream performance. The IFE6 (integrated front end and line driver) supports up to the 17a profile and fallback to ADSL, ADSL2, and ADSL2+. This product family is currently shipping. Our VDSL and ADSL chipsets for DSLAMs and other CO equipment include our Velocity family of products, including the new Velocity-3 solution with Ikanos NodeScale, which we believe is the industry s leading vectoring solution. Our CO solution includes the DSL digital signal processors and the analog front end and line drivers, as well, where appropriate, it is coupled with our vectoring engine chip. The Velocity-1 solution consists of a low-power, full-featured A/VDSL access chipset providing up to 100Mbps symmetrical bandwidth and operating at a sub-one watt per port power consumption. It supports 8a/b/c/d, 12a/b, 17a, and 30a VDSL2 profiles as well as ADSL2+, ADSL2, and ADSL standards. Compliant with the power consumption standards of the European Commission s Code of Conduct on Energy Consumption of Broadband Equipment, the Velocity-1 chipset utilizes up to 30MHz of spectrum. In addition, the chipset enables what we believe to be exceptional delivery of data-intensive multi-play applications, including multichannel HD IPTV, high-speed data transmission, VOD, and VoIP. This product family is currently shipping. 9

12 Table of Contents The Velocity-3 solution combines the rich feature set of the Velocity family with innovative Ikanos NodeScale vectoring technology. This solution is designed to provide full cancellation of crosstalk at the node level and full scalability to address various node sizes from 8 to 384 ports per node, while enabling easier deployment of vectored VDSL with key features like our Easy Vectoring and Ikanos NodeScale bonding. Velocity-3 leads the industry in rate-reach performance. We have demonstrated in carrier labs an aggregate of 150Mbps combined downstream and upstream performance, up to a distance of 500 meters in a 192-port DSLAM reference chassis. Velocity-3 is currently in carrier and OEM lab trials and is expected to reach production in the second half of Velocity- Uni completes the Ikanos FTTx portfolio by addressing single port FTTdp deployments, providing up to 300Mbps aggregate (downstream and upstream) bandwidth. Velocity- Uni enables FTTdp solutions for hybrid fiber-copper broadband access, where FTTH is not practical, perhaps due to a high installation cost or a homeowner s refusal to allow trenching or cutting through walls to extend fiber into the home. With Velocity- Uni, carriers can extend fiber to a distribution point close to the home, and then convert the optical signal to VDSL2 using a GPON ONT and our Velocity- Uni. Velocity- Uni s low power operation enables reverse powering a way to provide the power needed for the distribution point solution over the same telephone cable as used for DSL, sourcing it from the home gateway. Velocity- Uni is expected to reach production in the second half of In addition to all the products mentioned above, we also announced our Neos architecture in November of This architecture is the foundation for our next generation CO and CPE products, designed to be scalable, flexible, and capable of supporting the next node in the DSL standard evolution, called G.fast. We have already made progress on this new architecture and we expect our initial gigabit-rate G.fast demonstrations to be available later in Gateway Processors Our families of multi-mode gateway processors complement our DSL broadband products and are designed to address a wide range of devices for value-added carrier services and high-speed access to the digital home. The Fusiv Multi-core Vx175 and Fusiv Vx173, and the recently announced Fusiv Vx575 family, are built on our Fusiv family of processors and extend the range of access technologies and device types that can be supported by our products. These products support enhanced carrier services and multiple screen support in the home. With these dual-core products, MSOs, PON service providers, and manufacturers can build a wide range of devices including multi-play gateways, energy gateways, mobile broadband routers, optical networking terminals, network attached storage, and others. In the Vx175, the host cores provide 1GHz of processing power, while the Vx173 host cores support 800MHz of host processing power. This family of products can run femtocell stacks, VoIP, and a range of other computational-intensive tasks. In addition to the dual-core MIPS-based processors, the Vx175 and Vx173 also include hardware accelerator processors delivering up to an additional 4GHz of processing power to provide flexibility and improved performance. The accelerator processor implementation enables bi-directional gigabit routing performance while consuming a small fraction of the Fusiv s processing power. This processor family is currently shipping. The Vx575 family maintains the distributed architecture of the Vx175/173, while supporting an even higher level of performance with a dual-core CPU architecture and additional, higher performance AP engines. The new high performance USB 3.0 offload engines enable support for LTE performance up to Category 7 (400Mbps). In addition, the integrated SATA acceleration processor allows for high speed local storage access for NAS and cloud caching applications. The reuse of existing software of the Vx175/173, which has already been tested and successfully deployed on various carrier networks, facilitates customer time-tomarket. The Vx575 family of processors is scheduled for production in the second half

13 Table of Contents Silicon Product Families The following summarizes the product families and the associated key features: Network Node Processor Type Product Family Key Features CPE CO DSL Processor Gateway Processor DSL Processor Vx58x Vx185-HP Vx185 Vx185-SE Vx183 Vx57x Vx175 Vx173 Velocity-1 Velocity-3 Velocity-Uni insight Monitoring and Diagnostic Software Dual-core, up to combined 2.4GHz, A/VDSL 30a, VDSL2 vectoring & bonding, up to 11 GHz of Fusiv acceleration processors, USB 3.0, SATA Single-core at 600MHz, A/VDSL 30a, VDSL2 vectoring & bonding, Fusiv accelerator processors, SATA, security Single-core at 500MHz, A/VDSL 30a, VDSL2 vectoring & bonding, Fusiv accelerator processors, SATA, security Single-core at 500MHz, A/VDSL 30a, Fusiv accelerator processors, security Single-core at 400MHz, A/VDSL 30a, Fusiv accelerator processors Dual-core, up to combined 2.4GHz, up to 10 GHz of Fusiv AP, USB 3.0, SATA (expected to reach production in the second half of 2014) Dual-core at combined 1GHz, Fusiv accelerator processors, SATA, security Dual-core at combined 800 MHz, Fusiv accelerator processors 100Mbps symmetrical bandwidth, 8, 12, 17, and 30 MHz VDSL2 profiles 150/50Mbps, Ikanos NodeScale vectoring and bonding, full crosstalk cancelation across all tones and all ports, scalable architecture supporting up to 384 channels per node Single port solution for 300Mbps aggregate data rates, 30MHz VDSL2 profile support, reverse power capable insight represents an expansion of our product portfolio by offering software as a product sold directly to carriers. While competing solutions can identify customer problems and offer coarse solutions, our diagnostic tool finds the source of the problem to create actionable recommendations that reduce carrier operating expenses and improves the quality of the end customer experience. Through its unique capabilities, insight helps isolate the cause of outages and noise issues, enables customer self-service, reduces operating expenses from service calls, and locates service upgrade opportunities. insight consists of advanced DSP algorithms that leverage our underlying CPE architecture to implement two key functionalities: Line impairments A large portion of the service disruptions that result in technical support calls are a result of impairments in the subscriber s copper line. insight is able to detect these impairments, which include wire cuts (either inside or outside the house), bridge taps, corroded cables, micro filter issues, and incorrect cable types. Noise issues There are a variety of noise sources inside or near the home that could result in interference on the copper line, adversely impacting the bandwidth and therefore the consumer experience. These sources could be generated by home appliances and equipment, such as a treadmill or a power line modem. Depending on the source, the noise type could be narrow-band, wideband, or impulse. insight has the ability to detect and identify the type of noise, which is critical before the source can be identified. 11

14 Table of Contents The insight software began carrier lab trials in the fourth quarter of 2013, and is scheduled for production in the second half of We continue to invest in research and development efforts to maintain our technology leadership and innovation. Our product portfolio will continue to include new products that are aligned with major trends and evolving standards. Key Features of Our Solutions Breakthrough Ikanos NodeScale Vectoring and Bonding Technology. One of the challenges in deploying very-high-speed Internet access over existing copper infrastructure is the degradation that occurs as a result of crosstalk between coincident copper wire pairs. Each wire can intermittently interfere with neighboring wires, thereby introducing noise, severely limiting line quality, throughput, and overall VDSL performance. Our Ikanos NodeScale vectoring solution analyzes the crosstalk and interference environment in real time and creates a unique set of compensation signals that effectively eliminates both. Our Ikanos NodeScale vectoring chipset solution cancels noise across an entire network node and can scale to up to 384 ports in a single chassis, meeting the deployment requirements of the world s leading service providers. In addition, our unique architecture also enables any-port to any-port bonding configuration within the DSLAM, thereby bringing additional flexibility to carriers when it comes to provisioning ports for their subscribers. Bonding allows a carrier to use two or more pairs of copper lines, when available, to offer higher overall throughput (typically twice the bandwidth achieved with a single pair) to the subscriber and more efficient use of the DSLAM. Advanced bonding capabilities. Service providers can utilize two pairs of twisted copper wires and offer their customers bonded DSL technology. Bonding technology leverages the existing copper infrastructure and allows for increased data rates, longer loop lengths, and increased reliability. Our flexible xdsl DSP core architecture is capable of supporting 17MHz bandwidth, 2-pair bonded configurations that enable cost-optimized products for fiber-to-the-building (FTTB), FTTN, and CO deployments. This enables carriers to achieve speeds of over 200Mbps at 500 meters when vectoring with our Ikanos NodeScale solution. High-performance communications processing. The delivery of high-quality video and other services requires a high-performance processor to handle the digital data streams that travel in both the upstream and downstream directions from the subscriber s home. Common data processing functions include routing of IP-based packets, providing voice, video, and data streams with different classes of priority within the system and implementing VoIP, network security, and wireless LAN functionality. Our products include high-performance semiconductors that are designed to perform functions at rates of up to 1Gbps, which addresses both the latest generation of LAN and WAN technologies. We believe the combination of our high-performance communications processing products and our broad range of VDSL2 and ADSL2+ PHY products provides us a competitive advantage. Integrated analog technology. Our analog products used in our DSL solution perform high-precision, power-efficient analog-to-digital and digital-to-analog signal conversion as well as various other functions necessary to interface between the DSP and the physical copper transmission medium. Our integrated analog technology includes programmable transmit and receive filters, low-noise amplifiers, and a poweroptimized line driver with synthesized impedance and hybrid cancellation. Our analog technology enables systems to increase performance, adapt to noisy signal conditions, significantly reduce power consumption, and be programmed for multiple international standards. Additionally, our analog technology is highly integrated and eliminates a large number of discrete components used in other solutions. This critical feature reduces costs for our OEM customers and increases the number of connections, or ports, achievable in OEM systems. Highly programmable platform and integrated software. The broadband service delivery industry is very competitive, with every player in the ecosystem, from the ODM to the carrier, looking for ways to differentiate its products or services. Our processor software allows for increased flexibility and reuse in the design of modems, gateways, and other devices, which we believe allows our customers to expedite timeto-market for 12

15 Table of Contents their new generations of products. The advanced Linux-based software we utilize enables network equipment manufacturers to jump start their development processes. Our software incorporates routing, bridging, a complete VoIP stack, packet classification, marking, bandwidth management, and fast-path assisted QoS functions designed to deliver better performance and drivers. Our software enables manufacturers to reduce product development cycles, rapidly prototype, and quickly enter production with products ranging from simple modems to sophisticated gateways. Our flexible software architecture provides OEM customers with the ability to design this equipment with a variety of transport methodologies or multiple methodologies including Ethernet, xdsl, fixed wireless gateways, and PON. Using industry standard application programming interfaces (APIs) we enable our OEM customers and independent software design house partners to port their own unique applications to our hardware platform, without having to develop the low level operating system functions or device driver optimizations. This level of separation and hardware abstraction allows us to incorporate our expertise and know-how in the underlying architecture, while in parallel facilitating application customization and feature differentiation for our partners and customers. High-performance DSP and advanced algorithms. Communications algorithms are sophisticated techniques used to transform signals between digital data streams and specially conditioned analog signals suitable for transmission over copper lines. It is critical that the DSP execute advanced algorithms in real time in order to reliably transmit and receive signals at high-speed transmission rates. We have designed high-performance, low-power usage DSPs for high transmission rate applications that utilize our proprietary integrated firmware. Our processing algorithms enable reliable transmission and recovery of signals at high-speed transmission rates over the existing copper lines even under noisy signal conditions. We believe the combination of speed and programmability of our DSP and our advanced algorithms provides us an important competitive advantage. In addition, our high performance DSPs play a crucial role in our new insight software that assists carriers in identifying line faults and noise patterns inside or near our CPE devices. Using our high performance DSP engines and unique fault and noise detection algorithms, we are able to identify line integrity issues and noise sources locally on the CPE devices, instead of transmitting a large amount of raw data to the cloud for network-based processing. Flexible network interfaces. Service providers globally use multiple communication protocols for transmitting data, voice, and video over their networks. Such protocols include Asynchronous Transfer Mode (ATM) and Internet Protocol (IP). Our semiconductors have the capability to support multiple network protocols and interfaces, including ATM and IP, to a variety of different OEM systems. For example, service providers in Japan and Korea typically deploy IP-based line cards and platforms that use our semiconductors, while service providers in Europe and North America have historically deployed ATM-based systems and are in the process of migrating to IP-based systems. Key Benefits of Our Technology for Our Customers Enabling the delivery of a broad range of high speed broadband services. Our products provide high-speed transmission rates of up to 300Mbps and greater, downstream and upstream combined, on a single copper pair of telephone lines. These transmission rates enable service providers to deliver a broad range of enhanced services to customers, including advanced digital content delivery, communications, and interactive broadband applications, such as broadcast television, HDTV, IPTV, VOD, interactive television, peer-to-peer file sharing, sending and receiving advanced digital media, video conferencing, video surveillance, streaming audio and video, online gaming, game hosting, and VoIP, as well as traditional voice telephony services. Improving time-to-market with programmable systems-level products. Our products are programmable through our integrated firmware and standard APIs, which enables our customers to provide a single line card or residential gateway implementation to support multiple international standards. We believe our systems-level capabilities enable us to design our semiconductors to accelerate our customers time-tomarket. Because of the programmability of our products, service providers can deliver multiple service packages and offer tiered pricing for these packages. 13

16 Table of Contents High-performance transmission over existing infrastructure. We believe our semiconductor solutions reduce service providers capital expenditures and costs, because they enable transmission of signals at high-speed rates over existing copper lines. As a result, service providers can leverage their previous investments in their access network infrastructure to deliver advanced revenue-generating services to customers. Our products are also compatible with service providers existing systems, enabling these service providers to add line card upgrades without having to completely replace existing hardware networking systems, thus lowering upfront capital expenditures and installation expense, decreasing service disruption, and reducing inventory costs. Moreover, we offer broadband semiconductors with combined ADSL2+ and VDSL2 support, thereby providing our customers with a convenient single source from which to purchase a wide range of broadband access semiconductors that are upgradeable in the field. Turning technology into solutions for carriers. We strive to ensure that our current and future products and services strategy aligns with key market trends. One of the major trends in the industry today is the transition from ADSL to VDSL and VDSL with vectoring to offer higher bandwidth. As a result, carriers are focusing on deploying vectoring both in greenfield (new) and brownfield (existing) deployments. Our product portfolio encompasses a complete vectoring deployment strategy for carriers that is intended to address these practical issues. We expect that our unique Ikanos NodeScale vectoring capabilities will offer an industry-leading rate-reach performance so that carriers can maximize their return on investment. We also offer a vector-friendly software upgrade for the existing installed base of CPEs that is downloadable in the field to ensure successful brownfield deployments. In addition, we are creating our own firmware solution, Easy Vectoring, for dealing with rogue CPEs that are not able to receive vector-friendly code upgrades. With Easy Vectoring, carriers can have confidence that these rogue CPEs do not interfere with the proper operation of vectoring capable CPEs deployed in the field. A unique and differentiated aspect of our Easy Vectoring, relative to other similar products in the market, is the fact that Easy Vectoring addresses not only the downstream, but also the upstream performance. End-to-end products. We offer semiconductors for both CO and CPE to deliver seamless interoperability. Our products are compliant with industry standards, and we believe the availability of our end-to-end products offers carriers opportunities for added differentiation. Our CO and CPE products, including our Ikanos NodeScale vectoring platform, are compatible with products of other vendors. Proven technology. To date, we have shipped nearly half a billion ADSL and VDSL CPE and CO ports. Our products are deployed or are in field testing at leading service providers worldwide such as AT&T, Belgacom Group (Belgacom), Bell Canada, Orange, Koninklijke KPN N.V. (KPN), KT Corporation (formerly, Korea Telecom), NTT, Swisscom AG, Telecom Italia S.p.A., and Telefónica, S.A. Our semiconductors have been designed into systems offered by leading network OEMs including: Alcatel Lucent, Arcadyan Technology Corporation, Askey, AVM, Cisco Systems, Inc., Flextronics Manufacturing (H.K.) Ltd. (Flextronics), Motorola, Inc., Pace plc, Paltek Corporation (Paltek), Sagemcom, and Xavi Technologies Corp. Our OEM customers and their client service providers conduct extensive system-level testing and field qualification of new semiconductors (generally over a six to 18 month period) to ensure that they meet performance, standards compliance, and stability requirements before a semiconductor is approved for mass deployment. Reducing operating expense, improving consumer experience. Operational cost saving and reducing subscriber churn are two key concerns for carriers. Carriers have the opportunity to address both of these at the same time with our new insight software platform. The added visibility provided through timely and accurate reporting of service and continuity issues enables carriers to identify service problems faster and reduce resolution times, which translates into operational cost savings for the carriers and better customer experience. Competing solutions in the market today typically rely on a cloud-based view of the home to try to identify and solve line impairment and noise issues, which limits the accuracy and frequency of the information. With insight, the detection moves into the home, resulting in much higher accuracy in identifying and reporting issues, whether inside or near the home, which in turn translates to a faster time to resolution for carriers. While the specifics of cost savings vary from carrier to carrier, and region to region, we estimate that insight can create up to thirty dollars of annual cost savings per subscriber. 14

17 Table of Contents Our Strategy Our objective is to become the leading provider of semiconductor products for the universal delivery of next-generation broadband services that transform the way people work, live, and play. We intend to continue to develop highly programmable solutions that deliver multiplay and interactive services over broadband using copper telephone lines and fiber that distribute these services to the digital home. The principal elements of our strategy are: Continuous innovation. We have achieved a leadership position in deploying semiconductor solutions for the high-speed broadband market as well as the multi-play residential gateway markets. With respect to discrete multi-tone (DMT) based VDSL, we have been a leader in the development of standards for broadband over copper lines and our products are compliant with those standards. We continue to develop new technologies, such as bonding, Ikanos NodeScale vectoring, and insight, to extend and monitor our customers current broadband infrastructure as well as offer new customers cost effective products to deliver high-speed broadband. Our solutions enable speeds of up to 300Mbps aggregate throughput on a single copper pair, which will allow carriers to offer a wide variety of multi-play services. We intend to continue to drive the development of new standards for FTTB, FTTN, FTTH, and home networking through our involvement in a range of industry groups and continue to develop innovative products for these markets. Expand our product portfolio for new markets. Today, our products target all manner of broadband DSL deployments and unique services in the home, as well as software to monitor and maintain those deployments. Our communications processors support a wide range of broadband access, including cable, wireless broadband, PON, Ethernet, and gigabit Ethernet. We also have products that complement these offerings and provide enhanced voice processing, wireless networking, and other capabilities. As consumer demand for higher bandwidth continues to increase, we are aligning our product roadmap to meet these demands. As such, we have demonstrated, using our existing products, 300Mbps aggregate bandwidth on a single copper pair to address carrier interest in short-loop FTTdp deployments. This also provides a stepping stone towards our next generation G.fast products, which will be designed to support a range of speeds from 500Mbps to 1Gbps, depending on distance and line quality. We also expect to expand our product portfolio to include additional broadband technologies to address incremental market opportunities, as well as add new communications processors and broadband DSL devices to further strengthen our position in core markets. In addition, we expect to expand our capabilities in enabling improved consumer quality of experience through insight and other future similar products. Capitalize and expand on our existing service provider and OEM relationships. We believe that our close relationships with service providers and OEMs provide us with a deep understanding of their needs and enable us to continue to develop customized technology to meet their requirements. We have shipped nearly half a billion ports to date and intend to continue to capitalize on our close relationships with leading service providers and OEMs to facilitate the deployment of our products. In addition, we believe our relationships with carriers will expand as a result of selling insight directly to carriers. We believe several key geographic areas that will be important in the transition from ADSL to VDSL, and therefore, key target areas for our business include China, South America, and Australia. We are working with local carriers, as well as key ecosystem participants in these markets to establish our value proposition and work to ensure that we will be a part of the expected growth in these geographies over the next several years. In addition to our expansion efforts on the DSL side, we are also working on expanding our presence in other market segments deploying LTE networks through customers who are interested in our gateway processors. Our ability to support both DSL and non-dsl networks is very attractive to OEMs who are looking to leverage a single platform to address multiple networks for their value-added services. 15

18 Table of Contents Customers and Service Providers Customers The markets for systems utilizing our products and services are mainly served by large OEMs, ODMs, and CMs. We market our products to service providers, but we primarily sell our products to equipment suppliers, with the exception of insight, which we will sell directly to service providers. In the past, we have derived a substantial portion of our revenue from sales to a relatively small number of customers. While we expect this trend to continue in the short-term, we are working on expanding our customer base. In addition, expanding our product portfolio with new products including insight, the Vx585 family, Velocity- Uni, and Velocity-3 will also help reduce our reliance on a small number of customers. During 2013, Sagemcom, Askey, AVM, and Paltek accounted for 24%, 14%, 11%, and 10% of our revenue, respectively. During 2012, Sagemcom, Askey, and Flextronics accounted for 19%, 13%, and 12% of revenue, respectively. During 2011, Sagemcom and Paltek accounted for 20% and 10% of revenue, respectively. Historically, substantially all of our sales have been to customers outside of the United States. Sales to customers in Asia accounted for 57% of revenue in 2013, 68% of revenue in 2012, and 62% of revenue in Sales to customers in Europe and North Africa accounted for 39% of revenue in 2013, 29% of revenue in 2012, and 36% of revenue in We have a growing design win pipeline for both our CPE and CO products. We have secured our first design win for the Velocity-3 chipset, and expect to have more design wins in the future, based on the current level of customer engagements and the successfully completed carrier and OEM lab trials in recent months. There is also positive momentum on the Velocity- Uni front, with one design win already announced, and others expected in the first half of For the Vx185/3 and Vx175/3 processors, we have secured over 17 design wins, with about half going to production over the next six to nine months. We also have several alpha customers signed up for our Vx58x/Vx57x processors. Telecommunication Service Providers We work directly with various major service providers and their OEMs in connection with the optimization of our technology for trials or mass deployment into the service providers networks. Our OEM customers have sold products that include our semiconductors to major service providers, including, among others: AT&T (North America) Belgacom (Belgium) Bell Canada (Canada) Bouygues Telecom (France) Orange (France) KT Corporation (Korea) KPN (The Netherlands) Nippon Telegraph & Telephone Corporation (Japan) Swisscom (Switzerland) Telecom Italia (Italy) Telefónica (Spain) KDDI (Japan) Service and Support To accelerate the design and development of our customers systems and the qualification and mass deployment of our technology, we have a Product Applications Engineering team and a Field Application Engineering team. These teams work closely with the OEMs as well as directly with the service providers. Applications engineers have expertise in hardware and firmware and have access to a variety of expertise within our Company to ensure proper service and support for our OEM and service provider customers. Our service and support involves multiple stages, including working with service providers as they evaluate our technology through the utilization of our reference platforms and optimizing our technology to meet the individual service providers performance and other requirements. 16

19 Table of Contents In parallel, our engineers help our customers with the design and review of their system designs. Our application engineers and field application engineers help customers engineers design their systems by providing the necessary reference designs, Gerber files, schematics, datasheets, sample firmware, and other documentation. By doing this, we assist our customers and the service providers they serve in meeting their deployment requirements. Once the hardware incorporating our chipsets is built by our customers, we work closely with the customers engineers to integrate our firmware into systems through site visits and extensive field testing, which may include inter-operation with legacy equipment already deployed. This entire qualification cycle may take six to 18 months depending upon the region, service provider requirements, and deployment plans. Sales, Business Development, and Product Marketing Our sales and marketing strategy is to achieve design wins with leading suppliers and mass deployment with service providers worldwide. We consider a design win to occur when an OEM notifies us that it has selected our products to be incorporated into its system. We refer to our sales and marketing strategy as direct touch, as we have significant contact directly with the customers of our OEMs, the telecommunication service providers. We believe that applications support at the early stages of design is critical to reducing time to deployment and minimizing costly redesigns for our customers and the service providers. By simultaneously working with our customers and the service providers, we are able to use the pull of service provider network compatibility and interoperability to push design wins with our customers, which is further augmented by our support and service capabilities. We also invest in establishing partnerships with the members of the ecosystem. These partners include ODMs, independent software design houses, and other silicon vendors with complementary technology we use in our reference designs. This investment in ecosystem partners is an important part of our strategy to provide our customers with total solutions that are as close to deployment-ready as possible, which minimizes time and effort for our customers. We market and sell our products worldwide through a combination of direct sales and third-party sales representatives and distributors. We utilize sales representatives and distributors to expand the reach of our sales team. We have strategically located our sales, business development, and marketing personnel, field applications engineers, and sales representatives near our major customers in China, Europe, Japan, Korea, Taiwan, and the United States. Our product marketing teams focus on our product strategy and management, product development roadmaps, product pricing and positioning, new product introduction and transition, demand assessment, competitive analysis, and marketing communications and promotions. Our marketing teams are also responsible for ensuring that product development activities, product launches, channel marketing program activities, and ongoing demand and supply planning occur on a well-managed, timely basis in coordination with our development, operations, and sales groups, as well as our customers. Our marketing teams are also responsible for organizing and managing our participation in trade shows, conferences, and relevant thought leadership events. Competition The semiconductor industry generally and the broadband communications market specifically are intensely competitive. In the xdsl, PON, and communications processing markets, we currently compete or expect to compete with, among others, Alcatel Lucent, Broadcom Corporation, Cavium, Inc., Cortina Systems, Inc., Lantiq Deutschland GmbH, Marvell Technology Group Ltd., M/A-COM Technology Solutions Holdings, Inc., PMC-Sierra, Inc., Metanoia Communication, QUALCOMM Incorporated, Realtek Semiconductor Corp., and MediaTek Inc. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage. Our competitors may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion, and sale of their 17

20 Table of Contents products than we can. In addition, new competitors or alliances among existing competitors could emerge. Competition has resulted, and is expected to continue to result, in declining average selling prices for our products and market share. However, we believe that our products are not easily interchangeable with the products of our competitors, due to the level of collaboration in product design and development that is typically demanded by our customers from the earliest stages of development. But nevertheless, we must constantly maintain our technology developments in order to continue to achieve design wins with our customers. We also consider other companies that have access to broadband or communications processing technology as potential future competitors. In addition, we may also face competition from newly established competitors, suppliers of products based on new or emerging technologies, and customers who choose to develop their own technology. We believe that we are competing effectively with respect to the following factors: product performance; compliance with industry standards; differentiated and disruptive technology features; price and cost effectiveness; energy efficiency; physical footprint; functionality; and customer service and support. While the competitive landscape could continue to get more crowded, we believe that we are well positioned to compete favorably in the market, given our strong brand, our existing OEM and carrier relationships, our patent portfolio, our strong engineering team that continues to bring innovative and leading edge products to market, such as Velocity-3 and insight, and our customer-focused culture. In addition to performance, we believe our unique architectural and algorithmic qualities differentiate our solutions, resulting in superior scalability, robustness, and ease of deployment. In addition, through our insight diagnostic and monitoring capabilities, we believe our chipsets and software are uniquely differentiated from other silicon vendors in bringing significant operational cost savings to carriers and improved quality of experience to the subscriber. Research and Development Our research and development efforts are focused on the development of advanced semiconductors and related firmware. We employ experienced engineers who have significant expertise in interactive broadband and communications processing technologies. These areas of expertise include communication systems, system architecture, digital signal and communications processing, data networking, analog design, digital and mixed signal, very large scale integration development, firmware development, reference boards, and system design. In addition, we work closely with the research and development teams of our OEM customers and service providers. Our research and development expense was $51.1 million in 2013, $57.5 million in 2012, and $55.8 million in Manufacturing We are a fabless manufacturing company that utilizes our foundry partnerships to produce our semiconductor products, allowing us to focus our resources on value-added chip integration, intellectual property and software development, and advanced reference designs for the system level solutions we provide. This 18

21 Table of Contents manufacturing model provides us with access to the latest semiconductor processes, leveraging industry standard learning curves for cost, performance, and yields, and reduces our overall capital investment, as well as operating and support costs. Our integrated circuits use semiconductor lithography nodes from 350nm silicon germanium (SiGe) for our line drivers, to 180nm Mixed Signal Complementary Metal Oxide Semiconductors (CMOS) for our analog front end products, to 40nm CMOS for our VDSL DSP and baseband product solutions. Development efforts are underway for our 28nm products representing our next generation of CPE and CO product offerings. We have adopted a fast follower manufacturing strategy designed to ensure that each technology node is fully debugged and matured before committing our designs to production. We believe this approach reduces our cost associated with intellectual property development, test chips, design rule updates, and circuit re-spins, as well as the overall debugging efforts indicative of new process deployments. We utilize the following third party foundry partners: For our backend assembly and test, we use both turn-key as well as more traditional two-stage manufacturing business models. These business models allow us the flexibility react to market demand fluctuations, and provide a dual source capacity model for assurance of supply to our customers. Our turn-key product flows provide short manufacturing cycle times and support final manufacturing of our products from wafer sort, to assembly, test, and finishing, including both shipping and warehouse functions. Two-stage product flows allow us to optimize our cost for both assembly and test, independently, while maintaining our ability to provided capacity and flexibility for our manufacturing demands. Operations Taiwan Semiconductor Manufacturing Corporation (TSMC) in Taiwan Global Foundries, Inc. (formerly Chartered Semiconductor Manufacturing) in Singapore Tower Semiconductor Ltd. in California and Israel United Microelectronics Corporation (UMC) in Taiwan Silterra Malaysia Sdn. Bhd. in Malaysia We utilize the following third party backend manufacturing partners: Advanced Semiconductor Engineering, Inc. (ASE) in Taiwan and Singapore Amkor Technology Inc. in the Philippines King Yuan Electronics Co., Ltd. (KYEC) in Taiwan In 2012, we expanded our outsourcing model by transitioning a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions (Master Services) to esilicon Corporation (esilicon) under a Master Services and Supply Agreement (Service Agreement). Pursuant to the Service Agreement, we place orders for our finished goods with esilicon, who, in turn, contracts with wafer foundries and the assembly and test subcontractors and manages these operational functions for us on a day-to-day basis. As of the end of 2013, we have completed the transition of Master Services to esilicon and esilicon will continue to play a large role in our supply chain manufacturing for our mature products. We maintain direct foundry and backend manufacturing support for our new product development efforts, including product and test engineering, as well as supply chain management designed to ensure timely new product releases and production ramps. This direct support allows us to work not only with esilicon, but with our manufacturing partners to increase yields, lower manufacturing costs, and improve overall product quality faster than would be afforded alone. We maintain all responsibility for our manufacturing strategy, product flow, factory mix, customer quality, and capital purchasing decisions. 19

22 Table of Contents All our products are tested to ensure compliance with their respective datasheets after they are packaged or assembled. We ensure optimized test capacity and cost by purchasing some testers directly and consigning these testers to our manufacturing partners. Since these testers are industry standard platforms and complement the existing tester installed base of our manufacturing partners, there is great synergy and leverage for maintenance and support costs, keeping our overhead at a minimum. The use of consigned standard testers provides the lowest overall cost for test, while maintaining common hardware that can be used directly with our partner s non-consigned equipment as needed for extra capacity. Quality Assurance Our quality assurance program begins with the design and development processes of our integrated circuits, hardware (reference boards), and software/firmware as well as our system level verification efforts. Our integrated circuit designs are subjected to extensive circuit simulation under extreme conditions of temperature, voltage, and processing before being committed to fabrication and we follow industry standard JEDEC and customer required reliability and qualification processes to ensure compliance with industry norms. Our software/firmware goes through formal testing per specified test plans and customer requirements. We pre-qualify each of our third party manufacturing subcontractors and conduct periodic quality audits. We monitor foundry production to ensure consistent overall quality, reliability, and yield levels. All of the independent foundries and assembly and test subcontractors have been awarded ISO 9000 certification as well as being certified under other internationally accepted quality standards. In August 2006, we were certified to ISO 9001 standards and passed an ISO 9001:2008 surveillance audit in July Environmental Regulation We assess the environmental impact of our products to international standards. The manufacturing flows at all the subcontractors used by us are registered as ISO 14000, the international standard related to environmental management. We believe our products are compliant with the European Union s Restriction of Hazardous Substances Directive (RoHS) and that materials are available to meet these emerging regulations. Intellectual Property Our success and future growth will depend on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark, and trade secret laws, contractual provisions, and licenses to protect our intellectual property. We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees, and consultants, as well as through other security measures. As of December 29, 2013, we had over 285 patents issued in the United States and more than 35 companion patents issued in foreign jurisdictions, primarily in Japan, China, Taiwan, and the United Kingdom. We also have more than 50 patent applications pending in the United States and approximately 115 patent applications pending in foreign jurisdictions. Our patent and patent applications cover features, arts, and methodologies employed in each of our existing product families, including G.fast, FTTdp, VDSL with vectoring (G.Vector), VDSL2, ADSL2+, ADSL2, ADSL, and SHDSL, as well as insight. The expiration dates range from 2015 through We continue to actively pursue the filing of additional patent applications. We claim copyright protection for the documentation used in our products and for the firmware and software used in our products. Ikanos Communications, Ikanos and the Ikanos logo, the Bandwidth without boundaries tagline, Fusiv, insight, Ikanos NodeScale, Neos, and Ikanos Velocity are among the trademarks or registered trademarks of Ikanos Communications. 20

23 Table of Contents Employees As of December 29, 2013, we had a total of 263 full-time employees, of whom 202 were involved in research and development and 61 in sales, marketing, operations, finance, and administration. None of our employees is represented by a labor union. We have not experienced any work stoppages and believe that our relationship with our employees is good. Backlog Our sales are made pursuant to short-term purchase orders which, we believe, are not a reliable indicator of quarterly sales and sales trends. Executive Officers of the Registrant The following table sets forth the names, ages and positions of our executive officers as of February 20, 2014: Name Age Position Omid Tahernia 53 President and Chief Executive Officer Dennis Bencala 58 Chief Financial Officer and Vice President of Finance Debajyoti Pal 55 Chief Technology Officer and Senior Vice President Jim Murphy 59 Vice President, Worldwide Human Resources Stu Krometis 54 Vice President, Worldwide Sales There are no family relationships among any of our directors and executive officers. Omid Tahernia has served as our President and Chief Executive Officer, and a member of our Board of Directors, since June Prior to joining Ikanos, Mr. Tahernia served as President and CEO of Tilera Corporation from October 2007 to October Mr. Tahernia was with Xilinx first as Vice President and General Manager of the DSP Division from July 2004 to June 2006 and later as Vice President and General Manager of the Processing Solutions Group from June 2006 to September Mr. Tahernia was employed by the Motorola, Inc. s Semiconductor Group as Vice President and Director of Strategy and Business Development from June 2003 to July 2004 and Vice President and General Manager of the Wireless & Mobile Systems Division from December 1998 until June Mr. Tahernia holds a B.S.E.E. from Virginia Polytechnic Institute & State University, and an M.S.E.E. from Georgia Institute of Technology. Dennis Bencala has served as our Chief Financial Officer (CFO) and Vice President of Finance since June Prior to joining Ikanos, Mr. Bencala was CFO of the Renewable Energy Test Center from October 2009 to June Mr. Bencala held successive positions at SiRF Technology Holdings, Inc. (SiRF) beginning with Corporate Controller in January 2000 and becoming Senior Director, Investor Relations and Business Development, in August He became acting CFO at SiRF in August 2008 and was CFO from September 2008 until October Prior to joining SiRF Mr. Bencala served as Corporate Controller at ScanVision, Inc., a developer of image sensing semiconductor products from June 1995 to December Mr. Bencala holds a B.S. in Finance from San Diego State University. Debajyoti Pal has served as our Chief Technology Officer since August From April 2004 until August 2009, Dr. Pal was Chief Technology Officer and Executive in Residence at Tallwood Venture Capital. Prior to joining Tallwood, Dr. Pal founded Telicos Corporation in May 2002 and was President until April Dr. Pal was Vice President of Technology & Product Development of Virata Corporation and GlobespanVirata, Inc. from August 2000 until April In May 1998 he founded Excess Bandwidth Corporation and was Chief Technology Officer and Vice President Engineering until August 2000 when it was acquired by Virata. Dr. Pal received a bachelor s degree in electronics and electrical communication engineering from the Indian Institute of Technology Kharagpur, an M.S.E.E. degree from Washington State University, and a Ph.D. in electrical 21

24 Table of Contents engineering from Stanford University. Dr. Pal is a Fellow of the Institute of Electrical and Electronics Engineers (IEEE). Jim Murphy has served as our Vice President, Worldwide Human Resources since June Prior to joining Ikanos he served as Vice President, Human Resources for North America and Asia Pacific for CSR plc from August 2009 until May From March 2006 until August 2009, Mr. Murphy was Vice President, Human Resources for SiRF. Prior to joining SiRF, Mr. Murphy was Senior Human Resources Director for North America at LSI Logic Corporation. Mr. Murphy holds a B.A. from Lawrence University and an M.B.A. from the University of Michigan. Stu Krometis has served as our Vice President, Worldwide Sales since May Prior to joining Ikanos, he was Vice President, Sales APAC for Cavium, Inc. from July 2012 until May Mr. Krometis joined Cavium in October 2005 and served as Senior Director of Global Accounts and EMEA until July Mr. Krometis was regional sales manager at Applied Micro Circuits Corporation from December 2000 until May Mr. Krometis holds a B.B.A. in Business Administration from Roanoke College. Where Can You Find Additional Information With respect to the statements contained in this Annual Report on Form 10-K regarding the contents of any agreement or any other document, in each instance, the statement is qualified in all respects by the complete text of the agreement or document. You may inspect a copy of the reports and other information we file without charge at the Public Reference Room of the Securities and Exchange Commission (SEC) at 100 F Street, N.E., Room 1580, Washington, D.C You may obtain copies of all or any part of this Annual Report on Form 10-K from such offices at prescribed rates. You may also obtain information on the operation of the Public Reference Room by calling the SEC at SEC The SEC maintains an Internet site at that contains reports, proxy, and information statements, and other information regarding issuers, including our information which we file electronically with the SEC. We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), and, in accordance therewith, file periodic reports, proxy statements, and other information with the SEC. Such periodic reports, proxy statements, and other information are available for inspection and copying at the Public Reference Room and website of the SEC referred to above. We maintain a website at You may access our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC, free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our web address does not constitute incorporation by reference of the information contained at this site. 22

25 Table of Contents Item 1A. Risk Factors Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this Annual Report on Form 10-K, and in our other filings with the SEC, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition, and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment. Risks Related to Our Financial Condition We have a history of losses, and future losses or the inability to raise additional capital in the future may adversely impact our ability to continue as a going concern. Our consolidated financial statements have been prepared on a going concern basis that assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. The report of our independent registered public accounting firm for the year fiscal ended December 29, 2013, included in this Annual Report on Form 10-K, contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations. Since our inception, we have never been profitable on an annual basis and we have incurred significant net losses leading to an accumulated deficit of $326.1 million as of December 29, To achieve profitability, we will need to generate and sustain higher revenue and improve our gross margins, while maintaining expense levels that are appropriate and necessary for our business. We may not be able to achieve profitability and, even if it were able to attain profitability, we may not be able to sustain profitability on an on-going quarterly or annual basis in the future. If we are unable to grow our revenue substantially to achieve and sustain profitability, we may not be able to continue as a going concern. We may need to raise additional capital in the future. The sale of additional shares of common stock or other securities would result in dilution to our stockholders and incurring indebtedness would result in restrictions on our operations. We may not have cash sufficient to meet our anticipated cash needs for the foreseeable future and may need to seek financing in the future. These financings could include the sale of equity securities (which would result in dilution to our stockholders) or we may incur additional indebtedness (which would result in increased debt service obligations and could result in additional operating and financial covenants that would restrict our operations). There can be no assurance, however, that any such equity or debt financing will be available in amounts or on terms acceptable to us, if at all. The failure to obtain additional equity or debt financing, if needed, could have a material adverse effect on our business, liquidity, and financial condition. We utilize a revolving credit facility to fund our operations. Should we no longer have access to the revolving line of credit, it would materially impact our business, financial condition and liquidity. On January 14, 2011, we entered into a Loan and Security Agreement (Loan Agreement) with Silicon Valley Bank (SVB), to change existing financial covenants to coincide with our then-current operating plan. Under the Loan Agreement we may borrow up to $15.0 million, subject to certain limitations. From time-to-time we draw advances under the Loan Agreement and repay the advance when required. As of December 29, 2013, the balance under the Loan Agreement was $12.0 million. The Loan Agreement is collateralized by a first priority perfected lien on, and pledge of, all of our present and future property and assets. We were in compliance with all of the covenants as of December 29, 2013 and expect to be in compliance through the first quarter of However, we anticipate that we may not be in compliance with all of the covenants contained in the Loan Agreement during certain periods of 2014 and, accordingly, have begun negotiations with SVB. If we do not remain in compliance with all of the financial covenants contained in the Loan Agreement, we may need to 23

26 Table of Contents obtain a waiver from SVB or an amendment to the Loan Agreement. There can be no assurance that we will be successful in obtaining waivers from SVB or amendments to the Loan Agreement. The failure to obtain the necessary waiver or amendment could result in any advances under the Loan Agreement being repayable immediately on demand, which would have a material adverse effect on our business, liquidity, and financial condition. Our Loan Agreement is subject to contractual and borrowing base limitations, which could adversely affect our liquidity and business. The maximum amount we can borrow under our Loan Agreement is subject to contractual and borrowing base limitations, which could significantly and negatively impact our future access to capital required to operate our business. Borrowing base limitations are based upon eligible accounts receivable. If our accounts receivable are deemed ineligible, because, for example, they are resident outside certain geographical regions or a receivable is older than 90 days, the amount we can borrow under the revolving credit facility would be reduced. These limitations could have a material adverse impact on our liquidity and business. Our Loan Agreement contains financial covenants that may limit our operating and strategic flexibility. Our Loan Agreement contains financial covenants and other restrictions that limit our ability to engage in certain types of transactions. For example, these restrictions limit our ability to, or do not permit us to, incur additional debt, pay cash dividends, make other distributions or repurchase stock, engage in certain merger and acquisition activity, and make certain capital expenditures. There can be no assurance that we will be in compliance with all covenants in the future or that SVB will agree to modify the Loan Agreement, should that become necessary. Events beyond our control could affect our ability to comply with these covenants and restrictions. Failure to comply with any of these covenants and restrictions would result in a default under the Loan Agreement. If we do not cure an event of default or obtain necessary waivers within the required time periods, SVB would be permitted to accelerate the maturity of the debt under the Loan Agreement, foreclose upon our assets securing the debt, and terminate any further commitments to lend. Under these circumstances, we may not have sufficient funds or other resources to satisfy our other obligations. In addition, the limitations imposed by the Loan Agreement may significantly impair our ability to obtain other debt or equity financing. There can be no assurance that any waivers we request will be received on a timely basis, if at all, or that any waivers obtained will extend for a sufficient period of time to avoid an acceleration event, an event of default, or other restrictions on our business. The failure to obtain the necessary waivers could have a material adverse effect on our business, liquidity, and financial condition. Our history of losses as well as future losses or inability to raise additional capital in the future, may adversely impact our relationships with customers and potential customers. Since our inception, we have never been profitable on an annual basis and we have incurred significant net losses leading to an accumulated deficit of $326.1 million as of December 29, To achieve profitability, we will need to generate and sustain higher revenue and to improve our gross margins while maintaining expense levels that are appropriate and necessary for our business. We may not be able to achieve profitability and, even if we were able to attain profitability, we may not be able to sustain profitability on an on-going quarterly or annual basis. Since we compete with companies that have greater financial stability, our customers or potential customers may be reluctant to enter into arrangements with us due to the perceived risks to our long term viability and this, in turn, may adversely affect our financial results. 24

27 Table of Contents Risks Related to Our Common Stock Our common stock is currently trading below $1.00. If our common stock continues to trade below $1.00, our stock could be delisted from The NASDAQ Capital Market, which action could adversely affect the market liquidity of our common stock and harm our business. Our common stock is currently traded on The NASDAQ Capital Market under the symbol IKAN. The NASDAQ Capital Market has a number of continued listing requirements, including the requirement contained in NASDAQ Marketplace Rule 5810(c)(3)(A), which generally requires the minimum closing bid price remain at a $1.00 or more per share. Beginning on January 31, 2014, our stock began to trade below $1.00. If our closing bid price is below $1.00 for 30 consecutive trading days, we would anticipate being notified by NASDAQ that we must regain compliance with this continued listing requirement within 180 calendar days. This occurred previously in September of 2011, when the closing bid price for our stock was consistently below $1.00. By letter dated December 16, 2011, we were notified by NASDAQ that we were being provided 180 calendar days, or until June 13, 2012, to regain compliance with this continued listing requirement. The compliance period was subsequently extended to December 10, Beginning on or about September 10, 2012, the closing bid price of our common stock was at $1.00 or more per share. Subsequently, NASDAQ provided us written notice that we had then regained compliance with Marketplace Rule 5810 (c)(3)(a). Even if our stock does not trade below $1.00 for 30 consecutive days in the immediate future, there can be no guarantee that we will be able to remain in compliance with all of NASDAQ s continued listing requirements. If we are again subject to delisting for any reason, including the failure to maintain the minimum closing bid price, such action would adversely affect the market price and liquidity of the trading market for our common stock and our ability to obtain financing for the continuation of our operations and could result in the loss of confidence by our investors, suppliers, and employees. The market price of our common stock has been and may continue to be volatile, and holders of our common stock may not be able to resell shares at or above the price paid, or at all. The market price of our common stock has fluctuated substantially since our initial public offering and is likely to continue to be highly volatile and subject to wide fluctuations. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including: quarter-to-quarter variations in our operating results; failure to comply with NASDAQ minimum bid price, as indicated above; changes in our senior management; the success or failure of our new products; the gain or loss of one or more significant customers or suppliers; announcements of technological innovations or new products by our competitors, customers, or us; the gain or loss of market share in any of our markets; general economic and political conditions; specific conditions in the semiconductor industry and broadband technology markets, including seasonality in sales of consumer products into which our products are incorporated; continuing international conflicts and acts of terrorism; changes in earnings estimates or investment recommendations by analysts; changes in investor perceptions; 25

28 Table of Contents changes in product mix; or changes in expectations relating to our products, plans, and strategic position or those of our competitors or customers. The closing sales price of our common stock for the period of January 1, 2007 to December 29, 2013 ranged from a low of $0.67 to a high of $9.34. In addition, the market prices of securities of semiconductor and other technology companies have been volatile, particularly for companies like us, with relatively low trading volumes. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, holders of our common stock may not be able to resell their shares at or above the price paid. If the securities analysts who currently publish reports on us do not continue to publish research or reports about our business, or if they issue an adverse opinion regarding our common stock, the market price of our common stock and trading volume could decline. The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us and our business. Currently, two analysts periodically publish reports about our Company. If these two analysts issue an adverse opinion regarding our common stock, the stock price would likely decline. If the analysts cease coverage of us or fail to regularly publish reports on us, we could lose further visibility to the financial markets, which in turn could cause the market price of our common stock or trading volume to decline. Takeover attempts that stockholders may consider favorable may be delayed or discouraged due to our corporate charter and bylaws which contain anti-takeover provisions, Delaware law, or the Tallwood Investors. Provisions in our certificate of incorporation may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following: the right of our Board of Directors to expand the size of our Board and to elect a director to fill such a vacancy; the establishment of a classified Board of Directors, which provides that not all members of the Board are elected at one time; the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates; the requirement for advance notice for nominations for election to the Board of Directors or for proposing matters that can be acted upon at a stockholders meeting; the ability of our Board of Directors to alter our bylaws without obtaining stockholder approval; the ability of our Board of Directors to issue, without stockholder approval, up to 1,000,000 shares of preferred stock with terms set by the Board of Directors, which rights could be senior to those of common stock; the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend, or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors, and the ability of stockholders to take action; the required approval of holders of a majority of the shares entitled to vote at an election of directors to remove directors for cause; and the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent. 26

29 Table of Contents In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation, bylaws, and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would without these provisions. Due to the significant number of shares of our common stock that the Tallwood Investors hold, as discussed below, the Tallwood Investors may have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders, including a takeover attempt, and may have interests that diverge from, or even conflict with, our interests and those of our other stockholders. Risks Related to Our Customers and Markets We are in a product transition phase and we may not be able to adequately develop, market, or sell new products. Revenues from certain existing products are decreasing as these products near end-of-life. Beginning in the third quarter of 2012, we began selling our next generation CPE product Fusiv Vx185, Vx183, Vx175, and Vx173 chipsets. Further, we are currently developing a new broadband DSL CO platform that incorporates vectoring technology. The successful customer migration to our new products is critical to our business, and there is no assurance that we are or will be able to market and or sell new products and services in a timely manner. Our newer products and services, including our Vx585 family, Velocity-3, and Velocity- Uni products, may be delayed, and new products may not be accepted by the market, may be accepted later than anticipated, or may be replaced by newer products more quickly than anticipated. Our sales and operating results may be adversely affected if we are unable to bring new products to market, if customers delay purchases, or if acceptance of new products is slower than expected or to a smaller degree than expected, if at all. Failure of future offerings to be accepted by the market could have a material adverse effect on our business, operations, financial condition, and reputation. Because we depend on a relatively small number of significant customers for a substantial portion of our revenue, the loss of any of our key customers, our inability to continue to sell existing and new products to our key customers in significant quantities, or our failure to attract significant new customers, could adversely impact our revenue and harm our business. We have in the past, and expect in the future, to derive a substantial portion of our revenue from sales to a relatively small number of significant customers. Our ten largest customers accounted for approximately 80% of our revenue in For 2013, Sagemcom Tuisie (Sagemcom), Askey Computer Corporation (a contract manufacturer for Sagemcom) (Askey), AVM Computersysteme Vertriebs GmbH (AVM), and Paltek Corporation represented 24%, 14%, 11%, and 10% of our revenue, respectively, and Sagemcom, Askey, and Flextronics Manufacturing (H.K.) Ltd. represented 19%, 13%, and 12% of our revenue in 2012, respectively. The composition and concentration of these customers has varied in the past, and we expect that it will continue to vary in the future. As a result, the loss of any significant customer or a decline in business with any significant customer would materially and adversely affect our financial condition and results of operations. In addition, we may experience pressure from significant customers to agree to customer-favorable sales terms and price reductions. Our lack of long-term agreements with our customers could have a material adverse effect on our business. We typically do not have contracts with our major customers that obligate them to purchase any minimum amount of products from us. Sales to these customers are made pursuant to purchase orders, which typically can be canceled or modified up to a specified point in time, which may be after we have incurred significant costs related to the sale. If any of our key customers significantly reduced or canceled its orders, our business and 27

30 Table of Contents operating results could be adversely affected. Because many of our semiconductor products have long product design and development cycles, it would be difficult for us to replace revenues from key customers that reduce or cancel their existing orders for these products, which may happen if they experience lower than anticipated demand for their products or cancel a program. Any of these events could have a material adverse effect on our business. We face intense competition in the semiconductor industry and the broadband communications markets, which could reduce our market share and negatively affect our revenue. The semiconductor industry and the broadband communications markets are intensely competitive. In the VDSL or VDSL-like technology and communications processing markets, we currently compete or expect to compete with, among others, Broadcom Corporation, Cavium, Inc., Freescale Semiconductor, Inc., Lantiq Deutschland GmbH, Marvell Technology Group Ltd., MediaTek Inc., PMC-Sierra, Inc., and Realtek Semiconductor Corp. Many of our competitors have stronger manufacturing subcontractor relationships than we have and longer operating histories, greater name recognition, larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical, and other resources. In addition, many of our competitors have extensive technology libraries that could enable them to incorporate broadband or communications processing technologies into a system on a chip, creating a more attractive product line than ours. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements than we are able to. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers, or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop alternative technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of semiconductor integration, or lower cost. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case we may lose market share and our revenue may fail to increase or may decline. Our success is dependent upon achieving new design wins into commercially successful systems sold by our OEM and ODM customers. Our products are generally incorporated into our OEM and ODM customers systems at the design stage. As a result, we rely on OEMs and ODMs to select our products to be designed into their systems, which we refer to as a design win. At any given time, we are competing for one or more of these design wins. We often incur significant expenditures over multiple quarters without any assurance that we will achieve a design win. Furthermore, even if we achieve a design win, we cannot be assured that the OEM or ODM equipment that we are designed into will be marketed, sold, or commercially successful and, accordingly, we may not generate any revenue from the design win. In addition, our OEM and ODM customers can choose at any time to discontinue their systems that include our products or delay deployment, which has occurred in the past from time-to-time. If we are unable to achieve design wins or if our OEM customers systems incorporating our products are not commercially successful or deployed, our operating results would suffer. Our operating results have fluctuated significantly over time and are likely to continue to do so, and as a result, we may fail to meet or exceed our revenue forecasts or the expectations of securities analysts or investors, which could cause the market price of our common stock to decline. Our industry is highly cyclical and is characterized by constant and rapid technological change, product obsolescence, price erosion, evolving standards, uncertain product life cycles, and wide fluctuations in product supply and demand. The industry has, from time-to-time, experienced significant and sometimes prolonged downturns, often connected with or in anticipation of maturing product cycles and declines in general economic 28

31 Table of Contents conditions. To respond to these downturns, some service providers have decreased their capital expenditures, changed their purchasing practices to use refurbished equipment rather than purchasing new equipment, canceled or delayed new deployments, and taken a cautious approach to acquiring new equipment and technologies from OEMs, usually with very little notice. This, in turn, has reduced the demand for new semiconductors by our direct customers which could result in significant fluctuations of revenue as the economy changes. Any future downturns may reduce our revenue and could result in our accumulating excess inventory. By contrast, any upturn in the semiconductor industry could result in increased demand and competition for limited production capacity, which may affect our ability to ship products and prevent us from benefiting from such an upturn. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor or broadband communications industry, which could cause the market price of our common stock to decline. Fluctuations in our expenses could affect our operating results. Our expenses are subject to fluctuations resulting from various factors, including, but not limited to, higher expenses associated with new product releases, addressing technical issues arising from development efforts, unanticipated tapeout costs, additional or unanticipated costs for manufacturing or components because we do not have formal pricing arrangements with our subcontractors, costs of design tools, and large upfront license fees to third parties for intellectual property integrated into our products, as well as other factors identified throughout these risk factors. Because many of our expenses are relatively fixed in the short term, or are incurred in advance of anticipated sales, we may not be able to reduce our expenses sufficiently to mitigate any reductions in revenue. Therefore, it may be necessary to take other measures to align expenses with revenue, including, implementation of a corporate restructuring plan. We last implemented a restructuring plan in Restructuring charges included expenses related to the severance for terminated employees and other exit-related costs arising from contractual and other obligations. General macroeconomic conditions could reduce demand for services based upon our products. Our business is susceptible to macroeconomic and other world market conditions. As an example, we believe that consumer-targeted broadband services, which are deployed using our technology, are part of most households discretionary spending. We believe the global financial economic downturn that began in 2008 and continued into 2013, particularly in Europe, negatively affected consumer confidence and spending. These outcomes and behaviors may adversely affect our business and financial condition. If individual consumers decide not to install or discontinue purchasing broadband services in their homes, whether to save money in an uncertain economic climate or otherwise, the resulting drop in demand could cause telecommunications service providers to reduce or stop placing orders for OEM equipment containing our products. Accordingly, the OEMs demand for our products could drop further, potentially having a materially negative effect on our revenue. Industry consolidation may lead to increased competition and may harm our operating results. There has been a trend toward consolidation in our industry. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete for customers. This could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, rapid consolidation could result in a decrease in the number of customers we serve. Loss of a major customer could have a material adverse effect on our business, financial condition, and results of operations. 29

32 Table of Contents If we are unable to develop, introduce, or achieve market acceptance of our new semiconductor products, our operating results would be adversely affected. Our industry is characterized by rapid technological innovation and intense competition. Our future success will depend on our ability to continue to predict what new products are needed to meet the demand of the broadband, communications processor, or other markets addressable by our products and then introduce, develop, and distribute such products in a timely and cost-effective manner. The development of new semiconductor products is complex, and from time-to-time we have experienced delays in completing the development and introduction of new products. In the past we have invested substantial resources in developing and purchasing emerging technologies that did not achieve the market acceptance that we had expected. Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to: successfully integrate our products with our OEM customers products; gain market acceptance of our products and our OEM customers products; accurately predict market requirements and evolving industry standards; accurately define new semiconductor products; timely complete and introduce new product designs or features; timely qualify and obtain industry interoperability certification of our products and the equipment into which our products will be incorporated; ensure that our subcontractors have sufficient foundry capacity and packaging materials and achieve acceptable manufacturing yields; and shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration. If we are unable to develop and introduce new semiconductor products successfully and in a cost-effective and timely manner, we will not be able to attract new customers or retain our existing customers, which would harm our business. If we do not successfully manage our inventory in the transition process to next generation semiconductor products, our operating results may be harmed. If we are successful in developing new semiconductor products ahead of competitors but do not cost-effectively manage our inventory levels of existing products when making the transition to the new semiconductor products, our financial results could be negatively affected by high levels of obsolete inventory and our operating results would be harmed. The average selling prices and gross margins of our products are subject to declines, which may harm our revenue and profitability. Our products are subject to rapid declines in average selling prices due to pressure from customers. We have lowered our prices significantly at times to gain or maintain market share, and we expect to do so again in the future. In addition, we may not be able to reduce our costs of goods sold as rapidly as our prices decline. Our financial results, in particular, but not limited to, our gross margins, will suffer if we are unable to maintain or increase pricing, or are unable to offset any future reductions in our average selling prices by increasing our sales volumes, reducing our manufacturing costs, or developing new or enhanced products that command higher prices or better gross margins on a timely basis. 30

33 Table of Contents Our product sales mix is subject to frequent changes, which may impact our revenue and margin. Our product margins vary widely by product and customer. As a result, a change in the sales mix of our products could have an impact on forecasted revenue and margins. For example, our Access product family generally has higher margins as compared to our Gateway product family. Furthermore, the product margins within our product families can vary based on the performance and type of deployment, as the market typically commands higher prices for higher performance. While we forecast a future product mix and make purchase decisions based on that forecast, actual results can be materially different which could negatively impact our revenue and margins. Any defects in our products could harm our reputation, customer relationships, and results of operations. Our products may contain undetected defects, errors, or failures, which may not become apparent until the products are in the hands of our customers or our customers customers. The occurrence of any defects, errors, or failures discovered after we have sold the product could result in: cancellation of orders; product returns, repairs, or replacements; monetary or other accommodations to our customers; diversion of our resources; legal actions by customers or customers end users; increased insurance and warranty costs; and other losses to us or to customers or end users. Any of these occurrences could also result in the loss of or delay in market acceptance of these or other products and loss of sales, which could negatively affect our business and results of operations. As our products become even more complex in the future, this risk may intensify over time and may result in increased expenses. The semiconductor industry is highly cyclical, which may cause our operating results to fluctuate. We operate in the highly cyclical semiconductor industry. This industry is characterized by wide fluctuations in product supply and demand. In the past, the semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, excess manufacturing capacity worldwide, maturing product cycles, and declines in general economic conditions. Even if demand for our products remains constant, a lower level of available foundry capacity could increase our costs, which would likely have an adverse impact on our results of operations. Changes in our senior management could negatively affect our operations and relationships with our customers and employees. We have recently experienced changes in our senior management team: the resignations of our Vice President of Program Management in April 2012 and our Vice President of Sales in March 2013 and the appointments of our new President and Chief Executive officer in June 2012, our new Vice President of Operations in September 2012, our new Vice President of Marketing in February 2013, and our new Vice President of Sales in May Changes in our senior management or technical personnel could affect our customer relationships, employee morale, and our ability to operate in compliance with existing internal controls and regulations and harm our business. If we are unable to maintain a consistent senior management team or successfully integrate our current and future members of senior management, our business could be negatively affected. 31

34 Table of Contents Because competition for qualified personnel is intense in our industry, we may not be able to recruit and retain necessary personnel, which could impact our product development and sales. Our future success depends on our ability to continue to attract, retain, and motivate our senior management team as well as qualified technical personnel, particularly software engineers, digital circuit designers, mixed-signal circuit designers, and systems and algorithms engineers. Competition for these employees is intense and many of our competitors may have greater name recognition and significantly greater financial resources to better compete for these employees. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our products. All of our key employees are employed on an at will basis. The loss of any of these key employees could slow our product development processes and sales efforts or harm the perception of our business. We may also incur increased operating expenses and be required to divert the attention of our senior management to recruit replacements for key employees. Also, our depressed common stock price may result in difficulty attracting and retaining personnel as stock options and other forms of incentive equity grants generally comprise a significant portion of our compensation packages for all employees, which could harm our ability to provide technologically competitive products. Further, the changes in senior management as well as the multiple restructurings and reductions in force that we have recently experienced, have had, and may continue to have, a negative effect on employee morale and the ability to attract and retain qualified personnel. Risks Related to Our Operations and Technology We rely on third-party technologies for the development of our products, and our inability to use such technologies in the future or the failure of such technology would harm our ability to remain competitive. We rely on third parties for technologies that are integrated into some of our products, including memory cells, input/output cells, hardware interfaces, and core processor logic. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. Further, if we were to seek such a license and such license were available, we could be required to make significant payments with respect to past and/or future sales of our products, and such payments may adversely affect our financial condition and operating results. If a party determines to pursue claims against us for patent infringement, we might not be able to successfully defend against such claims. In addition, the third party intellectual property could also expose us to liability and, while we have not experienced material warranty costs in any period as a result of third party intellectual property, there can be no assurance that we will not experience such costs in the future. Our service agreement with esilicon Corporation (esilicon) limits our ownership and control of raw materials and work-in-process. Should esilicon default on its contractual commitments to us or fail to timely deliver furnished goods, it would negatively impact our revenue and reputation. In 2012, we entered into an agreement with esilicon (the Service Agreement) under which esilicon handles a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions. Pursuant to the Service Agreement, we place orders for our finished goods with esilicon, which, in turn, contracts with wafer foundries and assembly and test subcontractors, managing these operational functions for us on a day-to-day basis. esilicon owns the raw materials and work-in-process until such time as the products are delivered to us as finished goods. Should esilicon default on its contractual obligation to deliver finished goods to us in a timely manner, or at all, we may be required to restart the wafer production process with a total cycle time of approximately one calendar quarter. As a result, we may be required to incur additional costs and we would experience delays in delivering products to our customers, which would result in decreased revenue, have a negative effect on operating results, and harm our reputation. 32

35 Table of Contents We are a fabless semiconductor company and failure to secure and maintain sufficient capacity with esilicon and its subcontractors could significantly disrupt shipment of our products, impair our relationships with customers, and decrease sales, which would negatively impact our market share and operating results. We are a fabless semiconductor company and are therefore dependent on and currently use multiple third-party wafer foundries and other subcontractors, located primarily in Israel, Malaysia, the Philippines, and Taiwan, to manufacture, assemble, and test all of our semiconductor devices. While we work with multiple suppliers, generally each individual product is made by one foundry and one assembly and test subcontractor. Accordingly, we have been and will continue to be greatly dependent on a limited number of suppliers to deliver quality products in a timely manner. In past periods of high demand in the semiconductor market, we have experienced delays in obtaining sufficient capacity to meet our demand and as a result were unable to deliver all of the products to our customers on a timely basis. In addition, we have experienced similar delays due to technical and quality control problems. We are dependent on esilicon and, in turn, its suppliers to deliver our products on time. If we and/or esilicon were to need to qualify a new facility to meet a need for additional capacity, or if a foundry or subcontractor ceased working with esilicon, as has happened in the past, or if production is disrupted (including an event where esilicon ceases its business operations), we may be unable to meet our customer demand on a timely basis, or at all. We may be required to incur additional costs and may need to successfully qualify an alternative facility in order to not disrupt our business. In the event that we seek to use new wafer foundries to manufacture a portion of our semiconductor products, we may not be able to bring the new foundries on-line rapidly enough and may not achieve anticipated cost reductions. As indicated above, we have used and will continue to use a limited number of independent wafer foundries to manufacture all of our semiconductor products, which could expose us to risks of delay, increased costs, and customer dissatisfaction in the event that any of these foundries are unable to meet our requirements. Additional wafer foundries may be sought to meet our future requirements but the qualification process typically requires several months or more. By the time a new foundry is qualified, the need for additional capacity may have passed or we may have lost the potential opportunity to a competitor. If qualification cannot be met in a timely manner, we would experience a significant interruption in supply of the affected products, which could in turn cause our costs of revenue to increase and our overall revenue to decrease. This would harm our customer relationships and our market share, as well as our operating results would suffer. When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which could be costly and negatively impact our operating results. Although we have purchase order commitments to supply specified levels of products to our OEM customers, neither we nor esilicon have a guaranteed level of production capacity from any of our foundries or subcontractors facilities that we depend upon to produce our semiconductors. Facility capacity may not be available when we need it or at reasonable prices. We place our orders on the basis of our OEM customers purchase orders or our forecast of customer demand, and esilicon or its foundries and subcontractors may not be able to meet our requirements in a timely manner, or at all. In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks described in the foregoing paragraphs, we may enter into various arrangements with esilicon, or directly with foundries or other subcontractors, that could be costly and negatively affect our operating results, including minimum order quantities over extended periods, and payment of premiums to secure necessary lead-times. We may not be able to make any such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, not be on terms favorable to us, and may contain financial penalties if 33

36 Table of Contents we do not use all of our allocated facility capacity. These penalties and obligations may be expensive and could harm our business. Defects and poor performance in our products could result in a loss of customers, decreased revenue, unexpected expenses, and loss of market share, and we may face warranty and product liability claims arising from defective products. We have experienced in the past, and may experience in the future, defects (commonly referred to as bugs ) in our products which may not always be detected by testing processes. Defects can result from a variety of causes, including, but not limited to, manufacturing problems or third party intellectual property that we have incorporated into our products. If defects are discovered after our products have shipped, we have experienced, and could continue to experience, warranty and consequential damage claims from our customers. If we are unable to deliver quality products, our reputation would be harmed, which could result in the loss of future orders from our customers. Further, we may experience difficulties in achieving acceptable yields on some of our products, which may result in higher per unit cost, shipment delays, and increased expenses associated with resolving yield problems. If any of these adverse risks are realized and we are not able to offset the lost opportunities, our revenue, margins, and operating results would decline. If our forecasts of our OEM customers demand are inaccurate, our financial condition and liquidity would suffer. We place some orders with our suppliers based on the forecasts of our OEM customers demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. If we do not accurately forecast customer demand, we may allocate resources to manufacturing products that we may not be able to sell. As a result, as we experienced in the past, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our cost of revenue, negatively affect gross margins, and reduce our liquidity. Similarly, if our forecast underestimates customer demand, we may forego revenue opportunities, lose market share, and damage customer relationships. Our failure to accurately manage inventory against demand would adversely affect our financial results. To remain competitive, we may need to migrate to smaller geometrical processes and our failure to do so may harm our business. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometrical processes, which are measured in microns or nanometers. We have in the past, and may in the future, experience some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which has resulted in reduced manufacturing yields, delays in product deliveries, and increased product costs and expenses. Additionally, upfront expenses associated with smaller geometrical process technologies such as for masks and tooling can be significantly higher than those for the processes that we currently use, and our migration to these newer process technologies can result in significantly higher research and development expenses. Third-party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products, or seek licenses from third parties, and harm our business. In addition, any litigation that we are required to defend regarding such claims could result in significant expenses and diversion of our resources. Other companies in the semiconductor industry and intellectual property holding companies often aggressively protect and pursue their intellectual property rights. From time-to-time, we receive, and we are likely to continue to receive in the future, notices that claim our products infringe upon other parties intellectual property rights. We may in the future be engaged in litigation with parties who claim that we have infringed their intellectual property rights or who may seek to invalidate one or more of our patents, and it is possible that we 34

37 Table of Contents would not prevail in any such lawsuit. An adverse determination in any of these types of claims could prevent us from manufacturing or selling some of our products, could increase our costs of products and could expose us to significant liability. In addition, a court could issue a preliminary or permanent injunction that could require us to stop selling certain products in that market or redesign certain products offered for sale or that are under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology and we may be liable for treble damages if infringement is found to have been willful. Even if claims against us are not valid or successfully asserted, these claims could nevertheless result in significant costs and a diversion of management and personnel resources to defend. Many companies in the semiconductor industry have significant patent portfolios. These companies and other parties may claim that our products infringe their proprietary rights. We may become involved in litigation as a result of allegations that we infringe the intellectual property rights of others. Any party asserting that our products infringe their proprietary rights could force us to defend ourselves, and possibly our customers, against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. We could also be forced to do one or more of the following: stop selling, incorporating, or using our products that utilize the challenged intellectual property; obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all, or we could be required us to make significant payments with respect to past or future sales of our products; redesign those products that use any allegedly infringing technology, which may be costly and time-consuming; or refund to our customers amounts received for allegedly infringing technology or products. Any potential dispute involving our patents or other intellectual property could also include our customers which could trigger our indemnification obligations to one or more of them and result in substantial expense to us. In any potential dispute or claim involving a third party s patents or other intellectual property, our customers could also become the target of litigation. We are aware of certain instances in which third parties have recently notified our customers that their products (incorporating our technology) may infringe on the third parties technology. We expect that our customers may receive similar notices in the future. Because we have entered into agreements whereby we have agreed to indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger indemnification obligations. Any indemnity claim could adversely affect our relationships with our OEM customers and result in substantial expense to us. Other data transmission technologies and communications processing technologies may compete effectively with the services enabled by our products, which could adversely affect our revenue and business. Our revenue currently is dependent upon the increase in demand for services that use broadband technology and integrated residential gateways. Besides xdsl and other discrete multi-tone (DMT)-based technologies, service providers can decide to deploy passive optical network or fiber and there would be reduced need for our products. If more service providers decide to extend fiber all the way to the home, commonly referred to as fiber to the home (FTTH) deployment, it could harm our xdsl business. Furthermore, residential gateways compete against a variety of different data distribution technologies, including Ethernet routers, set-top boxes provided by cable and satellite providers, wireless (WiFi and WiMax), and emerging power line and multimedia over coax alliance technologies. If any of these competing technologies proves to be more reliable, faster, less expensive, or has any other advantages over the broadband technologies we provide, the demand for our products may decrease and our business would be harmed. 35

38 Table of Contents Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and operating results to suffer. We design our products to conform to regulations established by governments and to standards set by industry standards bodies worldwide, such as the Alliance for Telecommunications Industry Solutions (ATIS) and the International Telecommunication Union Telecommunication Standard (ITU-T). Because our products are designed to conform to current specific industry standards, if competing standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, industry groups adopt new standards, or governments issue new regulations with which our products are not compatible, our existing products would become less desirable to our customers, and our revenue and operating results would suffer. If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenue, or increase our cost. Our success will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark, and trade secret laws, confidentiality agreements, and licensing arrangements to establish and protect our proprietary rights. From time-to-time we file new patent applications. These pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies or may be determined to be invalid or unenforceable. While we are not currently aware of any misappropriation of our existing technology, policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly unauthorized use in foreign countries where we have not applied for patent protection and, even if such protection was available, the laws may not protect our proprietary rights as fully as United States law. The patents we have obtained or licensed, or may obtain or license in the future, may not be adequate to protect our proprietary rights. Our competitors may independently develop or may have already developed technology similar to us, duplicate our products, or design around any patents issued to us or our other intellectual property. In addition, we have been, and may be, required to license our patents as a result of our participation in various standards organizations. If competitors appropriate our technology and it is not adequately protected, our competitive position would be harmed, our legal costs would increase, and our revenue would decrease. Changes in current or future laws or regulations or the imposition of new laws or regulations by federal or state agencies or foreign governments could impede the sale of our products or otherwise harm our business. The effects of regulation on our customers and the industries in which they operate may materially and adversely impact our business. For example, various governments around the world have considered, and it is anticipated that others may consider, regulations that would limit or prohibit sales of certain telecommunications products manufactured in China. If these rules apply to equipment containing our semiconductor products, such regulation could reduce sales of our products and have a negative effect on our operating results. In addition, the Ministry of Internal Affairs and Communications in Japan, the Ministry of Communications and Information in Korea, various national regulatory agencies in Europe, the European Commission in the European Union, and the U.S. Federal Communications Commission have broad jurisdiction over our target markets. Although the laws and regulations of these and other government agencies may not be directly applicable to our products, they do apply to much of the equipment into which our products are incorporated. Governmental regulatory agencies worldwide may affect the ability of telephone companies to offer certain services to their customers or other aspects of their business, which may in turn impede sales of our products. In addition to the laws and regulations specific to telecommunications equipment, other laws and regulations affect our business. For instance, changes in tax, employment, and import/export laws and regulations, and their enforcement, commonly occur in the countries in which we operate. If changes in those 36

39 Table of Contents laws and regulations, or in the enforcement of those laws and regulations, occur in a manner that we did not anticipate, those changes could cause us to have increased operating costs or to pay higher taxes, and thus have a negative effect on our operating results. Failure to maintain adequate internal controls as required by Section 404 of the Sarbanes-Oxley Act (SOX) could harm our operating results, our ability to operate our business, and our investors view of us. If we do not maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of SOX. Effective internal controls, particularly those related to revenue recognition, valuation of inventory, and warranty provisions, are necessary for us to produce reliable financial reports and are important in helping to prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly. We are exposed to legal, business, political, and economic risks associated with our international operations. We currently obtain substantially all of our manufacturing, assembly, and testing services from suppliers and subcontractors located outside of the United States, and have a significant portion of our research and development team located in India. In addition, 97%, 99%, and 98% of our revenue for 2013, 2012, and 2011, respectively, were derived from sales to customers outside the United States. We have expanded our international business activities and may open other design and operational centers abroad. International operations are subject to many other inherent risks, including, but not limited to: political, social, and economic instability, including war and terrorist acts; exposure to different legal standards, particularly with respect to intellectual property; trade and travel restrictions; the imposition of governmental controls and restrictions or unexpected changes in regulatory requirements; burdens of complying with a variety of foreign laws; import and export license requirements and restrictions of the United States and each other country in which we operate; foreign technical standards; changes in tariffs; difficulties in staffing and managing international operations; foreign currency exposure and fluctuations in currency exchange rates; difficulties in collecting receivables from foreign entities or delayed revenue recognition; and potentially adverse tax consequences. Because we are currently almost wholly dependent on our foreign sales, as well as our research and development facilities located offshore and operations in foreign jurisdictions, any of the factors described above could significantly harm our ability to produce quality products in a timely and cost effective manner, as well as our ability to increase or maintain our foreign sales. 37

40 Table of Contents Fluctuations in exchange rates among the U.S. dollar and other currencies in which we do business may adversely affect our operating results. We maintain extensive operations internationally. We have offices or facilities in China, France, Germany, India, Japan, Korea, and Taiwan. We incur a portion of our expenses in currencies other than the U.S. dollar, including, predominantly, the Indian rupee and the Chinese yuan. A large portion of our cash is held by our international affiliates both in U.S. dollar and local currency denominations. As a result, we may experience foreign exchange gains or losses due to the volatility of these currencies compared to the U.S. dollar. Because we report our results in U.S. dollars, the difference in exchange rates in one period compared to another directly impacts period to period comparisons of our operating results. In addition, our sales have been historically denominated in U.S. dollars. Currency exchange rates have been especially volatile in the recent past and these currency fluctuations may make it difficult for us to predict and/or provide guidance on our results. Currently, we have not implemented any strategies to mitigate risks related to the impact of fluctuations in currency exchange rates and we cannot predict future currency exchange rate changes. Several of the facilities that manufacture our products, most of our OEM customers and the service providers they serve, and our California headquarters are located in regions that are subject to earthquakes and other natural disasters. Several of our subcontractors facilities that manufacture, assemble, and test our products, and most of our wafer foundries, are located in Malaysia, the Philippines, and Taiwan. Several of our large customers are located in Japan and Korea. The Asia-Pacific region has experienced significant earthquakes and other natural disasters in the past and will be subject to additional seismic activities in the future. Any earthquake or other natural disaster in these areas could significantly disrupt these manufacturing facilities production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage of wafers, in particular, and possibly in higher wafer prices, and our production costs in general. Natural disasters could also adversely affect our customers and their demand for our products. Our headquarters in California are also located near major earthquake fault lines. If there is a major earthquake or any other natural disaster in a region where one of our facilities is located, it could significantly disrupt our operations. Changes in our tax rates could affect our future results. Our future effective tax rates could be favorably or unfavorably affected by the absolute amount and future geographic distribution of our pre-tax income, our ability to successfully shift our operating activities to foreign jurisdictions and the amount and timing of intercompany payments from our foreign operations that are subject to U.S. income taxes. In addition, our subsidiary in India is currently being audited by the tax authorities in that country. Should the audit or any subsequent appeals result in a decision adverse to us, such decision could not only result in assessments for prior periods, but also an increased tax rate in future periods. New regulations related to conflict minerals may force us to incur additional expenses, may make our supply chain more complex, and may result in damage to our reputation with customers. On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements will require companies to diligence, disclose, and report whether or not such minerals originate from the Democratic Republic of the Congo and adjoining countries. We believe some or all of these minerals are used in the manufacture of our products. The implementation of these new requirements could adversely affect the sourcing, availability, and pricing of such minerals. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we 38

41 Table of Contents implement, which may harm our reputation, could increase our costs, and could adversely affect our manufacturing operations. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products be certified as conflict mineral free. Risks Related to the Tallwood Investment Tallwood Investors may exercise significant influence over us, including through their ability to elect three members of our Board of Directors. In August 2009, we sold 24 million shares of our common stock and warrants to purchase up to an additional 7.8 million shares of our common stock (such common stock and warrants collectively referred to as the Securities) to Tallwood III, L.P., a Delaware limited partnership, Tallwood III Partners, L.P., a Delaware limited partnership, Tallwood III Associates, L.P., a Delaware limited partnership, and Tallwood III Annex, L.P., a Delaware limited partnership (collectively referred to as the Tallwood Investors). The funds raised from the sale of the Securities funded a portion of our acquisition of the Broadband Access product line from Conexant Systems, Inc. In addition, one of the Tallwood Investors participated in our public offering of our common stock in 2010 and purchased an additional 5.6 million shares of our common stock. Tallwood Partners, LLC, a Delaware limited liability company, and an entity related to the Tallwood Investors, participated in our 2013 public offering and purchased an additional 2.0 million shares of our common stock. The common stock collectively owned by Tallwood Investors and Tallwood Partners, LLC (collectively referred to as the Tallwood Entities) represented approximately 32% of the outstanding shares of our common stock (excluding the exercise of warrants) as of December 29, Assuming the full exercise of the warrants, the common stock owned by the Tallwood Entities would represent approximately 37% of the outstanding shares of our common stock as of December 29, In 2009, we entered into a stockholder agreement with the Tallwood Investors, which, among other things, contains certain governance arrangements and various provisions relating to board composition, stock ownership, transfers by the Tallwood Investors and their affiliates, voting, and other matters. Subject to certain exceptions, the Tallwood Investors are permitted under the terms of the stockholder agreement to maintain their ownership interest in us in subsequent equity offerings. Given their ownership interest in us, the Tallwood Entities may have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders. The Tallwood Entities may have interests that diverge from, or even conflict with, our interests and those of our other stockholders. In addition, the Certificate of Designation of the Series A Preferred Stock provides that the Tallwood Investors have the right to designate three directors to our Board of Directors while the Tallwood Investors (and entities related to the Tallwood Investors, such as Tallwood Partners, LLC) hold at least 35% of our outstanding common stock, including the warrants. In the event that the Tallwood Entities hold less than 35% of our common stock, the number of directors the Tallwood Entities can appoint to our Board of Directors becomes proportional to the Tallwood Entities ownership position in us at such time. As a result, the directors elected to our Board of Directors by the Tallwood Entities may exercise significant influence on matters considered by our Board of Directors. The market price of our common stock may decline as a result of future sales of our common stock by the Tallwood Entities. We are unable to predict the potential effects of the Tallwood Entities ownership of our outstanding common stock on the trading activity in and market price of our common stock. Pursuant to the stockholder agreement, we have granted the Tallwood Investors and their permitted transferees registration rights for the resale of the shares of our common stock and shares of our common stock underlying the warrants. Under the terms of the registration rights, if we file a registration statement it must permit the resale of such securities into the public market. Any such resale would increase the number of shares of our common stock available for public trading. Sales by the Tallwood Entities or their permitted transferees of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock. 39

42 Table of Contents ITEM 1B. None UNRESOLVED STAFF COMMENTS ITEM 2. Facilities Our headquarters are located in Fremont, California, where we lease approximately 73,500 square feet of space under lease agreements that expire in March The Fremont facility location is primarily utilized for research and development, sales and support, operations management, and general administrative functions. We also have other significant facility locations in the United States and India, including a 57,400 square foot research and development facility in Red Bank, New Jersey, whose lease expires on March 2018, an a 28,600 square foot research and development facility in Bangalore, India, whose lease expires in October We believe that our facilities are adequate for the next 12 months and that, if required, suitable additional space will be available on commercially reasonable terms to accommodate our operations. ITEM 3. From time-to-time, in the normal course of business, we are a party to litigation matters that have involved and may involve in the future, among other things, claims related to intellectual property infringement as well as employment-related disputes. We are subject to claims and litigation arising in the ordinary course of business, however, we do not believe, based on currently available facts and circumstances, that the final outcome of these matters, taken individually or as a whole, will have a material adverse effect on our consolidated results of operations or financial position. The results of litigation are inherently uncertain and material adverse outcomes are possible. We have not provided accruals for any legal matters in our financial statements as potential losses for such matters are not considered probable and reasonably estimable. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect our consolidated results of operations, financial position, or cash flows. ITEM 4. None. PROPERTIES Legal Proceedings Mine Safety Disclosures 40

43 Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Price Range of Common Stock Our common stock is quoted on The NASDAQ Capital Market under the symbol IKAN. The following table sets forth the high and low sales prices of our common stock as reported on The NASDAQ Capital Market for the fiscal periods indicated First quarter $ 0.93 $0.67 Second quarter $ 0.95 $0.64 Third quarter $ 1.41 $0.80 Fourth quarter $ 1.78 $ First quarter $ 2.04 $1.25 Second quarter $ 2.11 $1.15 Third quarter $ 1.48 $1.12 Fourth quarter $ 1.45 $1.02 As of February 19, there were approximately 315 holders of record of our common stock. Dividend Policy We have never declared or paid any cash dividends on our common stock or other securities. We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business and do not anticipate paying any cash dividends in the foreseeable future. We also may incur indebtedness in the future that may prohibit or effectively restrict the payment of dividends on our common stock. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors. Equity Compensation Plan Information The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 of this Annual Report on Form 10-K. Performance Graph The performance graph below is required by the SEC and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or the Securities Exchange Act except to the extent we specifically incorporate this information by reference and shall not otherwise be deemed soliciting material or filed under such acts. The following graph shows a comparison of cumulative total stockholder return, calculated as of the end of each six month period on a dividend-reinvested basis, for Ikanos Communications, the NASDAQ Stock Market (U.S.) Index, and the Philadelphia Semiconductor Index. The graph assumes that $100 was invested in Ikanos Communications common stock, the NASDAQ Stock Market (U.S.) Index, and the Philadelphia Semiconductor Index for five years from December 26, 2008 through December 29, Note that historic stock price performance is not necessarily indicative of future stock price performance. 41 High Low

44 Table of Contents Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 December 29, /26/ /31/ /31/2010 1/1/ /30/ /29/2013 Ikanos Communications, Inc NASDAQ Stock Market (US Companies) Philadelphia Semiconductor Index

45 Table of Contents ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with Management s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our fiscal years are the 52 or 53 week periods ended on the Sunday nearest the end of December. Historical results are not necessarily indicative of the results to be expected in the future. 43 Fiscal Year Ended (In thousands, except per share data) Consolidated Statements of Operations Revenue $ 130,688 $ 191,677 $136,591 $125,948 $ 79,749 Cost of revenue (1) 85, ,692 65,944 64,750 39,078 Gross profit 45,669 64,985 70,647 61,198 40,671 Operating expenses: Research and development (1) 49,805 60,769 55,796 57,543 51,075 Selling, general and administrative (1) 30,974 27,239 22,287 19,056 18,816 Asset impairments 2,460 21,378 Restructuring charges (1) 1,338 5,794 (109) 1,062 Total operating expenses 84, ,180 77,974 77,661 69,891 Loss from operations (38,908) (50,195) (7,327) (16,463) (29,220) Investment gain 1,238 1,295 Interest income and other, net (383) (108) (578) Loss before income taxes (36,943) (50,144) (6,415) (16,571) (29,798) Provision (benefit) for income taxes 158 (381) 1,082 1, Net loss (2) $ (37,101) $ (49,763) $ (7,497) $ (17,585) $(30,387 ) Basic and diluted net loss per share $ (0.97) $ (0.88) $ (0.11) $ (0.25) $ (0.41) Weighted average number of shares basic and diluted (3) 38,098 56,713 68,656 69,701 74,726 (1) Amounts include stock-based compensation as follows: Fiscal Year Ended Cost of revenue $ 313 $ 106 $ 58 $ 8 $ 8 Research and development 3,261 1,684 2,273 2,007 2,435 Selling, general and administrative 2,346 1, ,130 Restructuring 111 (2) Net loss for 2009 includes acquired company results of operations beginning on the date of acquisition. (3) The basic and diluted net loss computations exclude potential shares of common stock issuable upon the exercise of options and warrants to purchase common stock when their effect would be anti-dilutive. See Note 1. Ikanos and Summary of Significant Accounting Policies to the consolidated financial statements included in this report.

46 Table of Contents 44 Fiscal Year Ended Consolidated Balance Sheet Data (in thousands): Cash, cash equivalents and short-term investments $ 27,540 $ 30,950 $ 34,760 $ 31,176 $ 39,516 Working capital 56,049 50,541 48,926 36,571 35,746 Total assets 143,000 89,697 77,607 73,848 71,952 Revolving line 5,000 12,000 Total stockholders equity 97,116 65,521 60,722 46,627 45,391

47 Table of Contents ITEM 7. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. Overview MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are a leading provider of advanced semiconductor products and software for delivering high speed broadband solutions to the digital home. Our broadband multi-mode and digital subscriber line (DSL) processors and other semiconductor offerings power carrier infrastructure (referred to as Access or CO) and customer premises equipment (referred to as Gateway or CPE) for network equipment manufacturers (NEMs) supplying leading telecommunications service providers. Our products are at the core of DSL access multiplexers (DSLAMs), optical network terminals (ONTs), concentrators, modems, voice over Internet Protocol (VoIP) terminal adapters, integrated access devices (IADs), and residential gateways (RGs). Our products have been deployed by service providers globally, including in Asia, Europe, and North and South America, and are also actively being evaluated and scheduled to be evaluated by other service providers for deployment in their networks. Our products reflect advanced designs in silicon, systems, and firmware and are programmable and highly scalable. Our expertise in the integration of digital signal processor (DSP) algorithms with advanced digital, analog, and mixed signal semiconductors enables us to offer highperformance, high-density, and low-power asymmetric DSL (ADSL) and very-high bit rate DSL (VDSL) products. We are releasing new VDSL-based solutions to the market that offer vectoring and bonding to increase speeds over existing telecom carrier copper infrastructure. These products support high speed broadband service providers multi-play deployment plans to the digital home while keeping their capital and operating expenditures relatively low compared to competing frameworks. Our broadband DSL products consist of high performance CO and CPE chips. We have demonstrated: (1) an aggregate downstream and upstream rate of 300 megabits per second (Mbps) over a single pair copper line at a distance of up to 200 meters, and (2) 150Mbps aggregate data rate up to a distance of 500 meters. Our DSL revenue mix over the last three years has transitioned away from ADSL in favor of VDSL, in-line with global market trends. We also offer a line of multi-mode communications processors (CPs) for RGs that support a variety of wide area network (WAN) topologies for telecom carriers, wireless carriers, and cable multiple system operators (MSOs), including Ethernet and gigabit Ethernet, passive optical network (PON), DSL, and wireless broadband. In addition to our DSL and RG processors, we recently announced insight, our new suite of CPE-based software products. insight will offer carriers the ability to remotely monitor and diagnose line impairments and noise issues to facilitate fast and cost-effective discovery and resolution of service disruptions, thereby increasing their subscriber satisfaction rate and reducing operating costs. We outsource all of our semiconductor fabrication, assembly, and test functions, which allows us to focus on the design, development, sales, and marketing of our products and reduces the level of our capital investment. In 2012, we expanded our outsourced model by transitioning a majority of our day-to-day supply chain management, production test engineering, and production quality engineering functions (Master Services) to esilicon Corporation (esilicon) under a Master Services and Supply Agreement (Service Agreement). Pursuant to the Service Agreement, we place orders for our finished goods products with esilicon, who, in turn, contracts with wafer foundries and the assembly and test subcontractors and manages these operational functions for us on a day-to-day level. During the first half of 2012, we began to transition these Master Services to esilicon. As of the end of 2013, we have completed the transition of Master Services to esilicon. Our semiconductor customers consist primarily of NEMs, original design manufacturers (ODMs), contract manufacturers (CMs), and original equipment manufacturers (OEMs), and include vendors such as Sagemcom Tunisie (Sagemcom), Askey Computer Corporation (Askey), NEC Corporation (NEC) and AVM Computersysteme Vertriebs GmbH (AVM). Our products are deployed in the networks of telecom carriers such as AT&T Inc. (AT&T), Bell Canada, Orange S.A. (formerly, France Telecom) (Orange), KDDI Corporation (KDDI), and Nippon Telegraph and Telephone Corporation (NTT). 45

48 Table of Contents We incurred a net loss of $30.4 million in 2013 and had an accumulated deficit of $326.1 million as of December 29, To achieve consistent profitability, we will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for our business. We filed a shelf registration statement with the Securities and Exchange Commission (SEC) on October 25, 2010 (declared effective on November 1, 2010) under which we might offer and sell up to $30.0 million of common stock and warrants. On November 11, 2010 and December 7, 2010, we sold a total of 12.8 million shares of common stock in an underwritten offering for $13.5 million. After deducting underwriting fees, legal, accounting, and other costs, we realized proceeds of $12.5 million. The shelf registration expired on November 1, In January 2011, we entered into a Loan and Security Agreement (Loan Agreement) with Silicon Valley Bank (SVB), which provides us with a revolving line of credit of up to $15.0 million, as described below. From time-to-time during 2012 and 2013, we have drawn down on our line of credit for working capital purposes. As of December 29, 2013, $12.0 million was outstanding under the Loan Agreement. Interest on advances against the line is equal to 6.5% as of December 29, 2013 and is payable monthly. We may repay the advances under the Loan Agreement, in whole or in part, at any time, without premium or penalty. The Loan Agreement s original maturity date was April 14, On February 19, 2013, we amended the Loan Agreement to extend the term until April 14, We utilize the line of credit with SVB to partially fund our operations. We were in compliance with all covenants as of December 29, 2013 and expect to be in compliance through the first quarter of However, we anticipate that we may not be in compliance with all of the covenants contained in the Loan Agreement during certain periods of 2014 and, accordingly, have begun negotiations with SVB. We filed a Registration Statement on Form S-1 on August 23, 2013 and amended it thereafter (declared effective on November 6, 2013) under which we might offer and sell up to $35.0 million of common stock. On November 7, 2013 and November 22, 2013, we sold an aggregate of 26.4 million shares of common stock in an underwritten offering for $26.4 million. After deducting underwriting fees, legal, accounting, and other costs we realized net proceeds of $24.0 million. We were incorporated in April 1999 and, through December 31, 2001, we were engaged principally in research and development. We began commercial shipment of our products in the fourth quarter of Our revenue was $136.6 million in 2011, $125.9 million in 2012, and $79.7 million in Quarterly revenue fluctuations are characteristic of our industry and affect our business, especially due to the concentration of our revenue among a few customers and a limited number of products. These quarterly fluctuations can result from a variety of factors, including a mismatch of supply and demand. Specifically, service providers purchase equipment based on planned deployment. However, service providers may deploy equipment more slowly than initially planned, while OEMs continue for a time to manufacture equipment at rates higher than the rate at which equipment is deployed. As a result, periodically and usually without significant notice, service providers will reduce orders with OEMs for new equipment, and OEMs, in turn, will reduce orders for our products, which will adversely impact the quarterly demand for our products, even when deployment rates may be generally increasing. Our industry is continually transitioning to new technologies and products. Large industry transitions are unpredictable due to factors including, but not limited to, extended product trials, qualifications, and the transformation of existing platforms to new platforms. Furthermore, the environment in which we market and sell our products has become increasingly competitive and cost sensitive. Our competitors may also be able to provide higher degrees of integration due to their broader range of products. Our future revenue growth depends on the successful qualification and adoption of our new product platforms. In addition to these qualifications, our operations may be adversely affected by our customers 46

49 Table of Contents transition strategies from existing systems that use our product to systems that may not use our products. As is customary in our industry, we may elect to end-of-life certain products and, as a result, certain customers may enter into last time buy arrangements which could impact future revenues. Certain of our customers entered into last time buys of some products during 2011, 2012, and, to a lesser extent, during In some cases products may become mature or uncompetitive causing customers to transition to solutions from other manufacturers, in whole or in part. It is inherently difficult to predict if and when platforms will pass qualification, when service providers will begin to deploy the equipment, and at what rate, because we do not control the qualification criteria or process, and the systems manufacturers and service providers do not always share all of the information available to them regarding qualification and deployment criteria. Additionally, we have limited visibility into the buying patterns of our OEMs, who, in turn, are affected by changes in the buying and roll out patterns of the service provider market. To the extent that we manufacture inventory to a forecast, we may have excess inventory if the forecast differs from actual results. We have several new products in development. We believe that our team of engineers, our current products, technology, patents, and other intellectual property will allow us to create new products that could increase our market share and enable us to implement our digital home initiatives, our next generation VDSL development, and our future G.fast products. However, many of these new products may not offset the declines in revenue on our mature products during the near term. Failure to generate revenues from these new products, or delays in the timing of the release of these products, could have a material adverse effect on our revenues, results of operations, cash flows, and financial position. On February 28, 2013, Mr. Michael Kelly resigned from his position as Vice President of Worldwide Sales. On May 6, 2013, we appointed Mr. Stuart Krometis our Vice President of Worldwide Sales. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and the results of operations are based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). In preparing our consolidated financial statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments, and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting for revenue, cost of revenue, marketable securities, accounts receivable, inventories, warranty, income taxes, impairment of goodwill and related intangibles, acquisitions, and stock-based compensation expense have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies have not differed materially from actual results. Revenue Recognition We recognize revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred, 3) our price to the customer is fixed or determinable, and 4) collection is reasonably assured. Since our semiconductor products are reliant upon firmware, we defer revenue recognition until the essential firmware is delivered and when legal title and risk of ownership has transferred. In addition, we record reductions to revenue for estimated product returns and pricing adjustments, such as volume purchase incentives, in the same period that the related revenue is recorded. The amount of these reductions is based on historical 47

50 Table of Contents sales returns, analysis of credit memo data, specific criteria included in volume purchase incentives agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns exceed our estimates or if we settle any claims brought by our customers that are in excess of our standard warranty terms for cash payments. Revenue from product sales to distributors is recognized under the sell-in method when product is delivered to the distributor offset by any contractual return rights. As noted above, in multi-element arrangements that include combination of semiconductor products with firmware that is essential to the semiconductor products functionality, when certain firmware elements are not yet delivered, judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. We allocate the arrangement consideration based on each element s relative fair value using vendor-specific objective evidence, third-party evidence, or estimated selling prices, as the basis of fair value. The allocation of value to each element is derived based on management s best estimate of selling price when vendor-specific evidence or third-party evidence is unavailable. Revenue is recognized for the accounting units when the basic revenue recognition criteria are met. Accounts Receivable Allowance We perform ongoing credit evaluations of our customers and adjust credit limits, as determined by our review of current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience, our anticipation of uncollectible accounts receivable, and any specific customer collection issues that we have identified. While our credit losses have historically been low and within our expectations, we may not continue to experience the same credit loss rates that we have in the past. Our receivables are concentrated in a relatively small number of customers. Therefore, a significant change in the liquidity, financial terms, financial position, or willingness to pay timely, or at all, of any one of our significant customers would have a significant impact on our results of operations and cash flows. Inventory We value our inventory at the lower of cost or estimated market value. Cost is determined by the first-in, first-out method and estimated market value represents the estimated net realizable value. We estimate market value based on our current pricing, market conditions, and specific customer information. We write down inventory for estimated obsolescence of unmarketable inventory and quantities on hand in excess of estimated near-term demand and market conditions. If actual shipments are less favorable than expected, additional charges may be required. Additionally, we specifically reduce inventory to the lower of cost or market if pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. Once inventory is written down, a new accounting basis is established, and it is not written back up in future periods. However, if such inventory is subsequently sold, gross margins will be positively affected. Warranty We provide for the estimated cost of product warranties at the time revenue is recognized based on our historical experience of similar products. While we engage in product quality programs and processes, including monitoring and evaluating the quality of our suppliers, our warranty accrual is affected by our contractual obligations, product failure rates, and the estimated and actual cost incurred by us and our customers for replacing defective parts. Costs may include replacement parts, labor to rework, and freight charges. We monitor product returns during the warranty period and maintain an accrual for the related warranty expenses. Should actual failure rates, cost of product replacement, and inbound and outbound freight costs differ from our estimates, revisions to the estimated warranty reserve would be required. 48

51 Table of Contents Acquisitions We allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as purchased in-process research and development (IPR&D) based on the estimated fair values. We use various models to determine the fair values of the assets acquired and liabilities assumed. These models include the discounted cash flow (DCF), the royalty savings method, and the cost savings approach. The valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets. Critical estimates in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer contracts, customer lists, distribution agreements, and acquired developed technologies and patents; expected costs to develop the IPR&D into commercially viable products and estimated cash flows from the projects when completed; the acquired company s brand awareness and market position as well as assumptions about the period of time the brand will continue to be used in the combined company s product portfolio; and discount rates. We derive our discount rates from our internal rate of return based on our internal forecasts and we may adjust the discount rate giving consideration to specific risk factors of each asset. Management s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accounting for Income Taxes We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the balance sheets, as well as operating loss and tax credit carry-forwards. We have recorded a full valuation allowance against our deferred tax asset except for certain foreign tax jurisdictions. Based on our historical losses and other available objective evidence, we have determined it is more likely than not that the deferred tax asset will not be realized. While we have considered potential future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the full valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase net income in the period such determination was made. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Further, in accordance with authoritative guidance, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Prior to the fourth quarter of 2011, we did not provide for Federal income tax and withholding taxes for unremitted foreign earnings of our foreign affiliates because the unremitted earnings were deemed to be permanently reinvested. Beginning in the fourth quarter of 2011 we began to provide for Federal income tax and foreign withholding taxes for those unremitted earnings because we determined that those funds may no longer be permanently reinvested. Stock-Based Compensation Expense We account for share-based compensation related to share-based transactions in accordance with authoritative guidance. Under the fair value recognition provisions, share-based payment expense is estimated at the grant date based on the fair value of the award and is recognized as an expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility and expected life. We have estimated the expected volatility as an input into the Black-Scholes valuation formula when assessing the fair value of options granted. Our current estimate of volatility was based upon a blend of average historical volatilities of our 49

52 Table of Contents stock price and that of our peer group. To the extent volatility of our stock price increases in the future, our estimates of the fair value of options granted in the future could increase, thereby increasing share-based payment expense in future periods. In addition, we apply an expected forfeiture rate when amortizing share-based payment expense. Our estimate of the forfeiture rate was primarily based upon historical experience of employee turnover. To the extent that we revise this estimate in the future, our share-based payment expense could be materially affected in the quarter of revision, as well as in following quarters. Our expected term of options granted was derived from the average midpoint between vesting and the contractual term. In the future, we may change or refine our approach of deriving these input estimates as empirical evidence regarding these input estimates becomes available. These changes could impact our fair value of options granted in the future. The above items are not a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by authoritative guidance with no need for our management s judgment in its application. There are also areas in which our management s judgment in selecting any available alternative would not produce a materially different result. See our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K that contain accounting policies and other disclosures in accordance with authoritative guidance. Results of Operations Revenue Our revenue is primarily derived from sales of our semiconductor products. Revenue from product sales is generally recognized upon shipment, net of sales returns, rebates, and allowances and other deferrals that pertain to software delivery obligations. Revenue from product sales to distributors is generally recognized under the sell-in method when product is delivered to the distributor offset by any contractual return rights. As is typical in our industry, the selling prices of our products generally decline over time. Therefore, our ability to increase revenue is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products. The continuing effects of the worldwide recession have adversely affected the businesses of service providers, causing them to re-evaluate how they employ capital. Consequently, the rate at which broadband infrastructure is upgraded may slow and new broadband programs could be delayed. Our revenue has declined in each of the last three years as our new product revenue has not grown sufficiently to offset the decline in revenue of our legacy products. The effect of these trends resulted in lower quarterly revenue beginning in the third and fourth quarters of 2010 and continuing into Quarterly revenue was generally flat in During 2013, revenue decreased during the first and second quarters and remained relatively flat for the remainder of the year. We expect that our first quarter 2014 revenue will be lower than our fourth quarter 2013 revenue. Total revenue for 2013 declined by $46.2 million, or 37%, to $79.7 million from $125.9 in Our four largest customers accounted for approximately 60% of our revenue in Our five largest customers accounted for approximately 60% of our revenue in Revenue from Asia as a percent of total revenue decreased from 68% to 57%, while revenue in Europe increased from 29% to 39%. Revenue from the Americas (including Latin America) increased from 3% to 4% of total revenue. During 2012, we began selling our next generation CPE product chipsets (Fusiv Vx185, Vx183, Vx175, and Vx173). As noted above, even with the introduction of these new products, we continued to be adversely affected by the aging of our existing products as well as changes affecting the entire broadband industry generally. Revenue in the first quarter of 2013 declined from $31.8 million in the fourth quarter of 2012 to $26.2 million in the first quarter of Revenue continued to decline by $7.0 million to $19.1 million during the second quarter and by an additional $2.2 million to $16.9 million for the third quarter. Revenue improved by $0.7 million to $17.6 million for the fourth quarter. Two factors were primarily responsible for the decline in our 2013 revenue and this trend may continue into First, the decline we saw in our legacy products was greater than expected and outpaced the growth in 50

53 Table of Contents revenue of our new products. However, concurrent with this, we did see a continuing shift in our revenue mix in favor of our new products. Revenue from new products (Vx 183/185/180/175/173 and Velocity-1) reached approximately 58% in 2013 versus approximately 33% in Secondly, we experienced delays in the introduction of certain new products, which pushed out the ramp of these new products in some end markets. We anticipate that customer ramps of our new products will continue to gain momentum. We generally sell our products to OEMs through a combination of our direct sales force, third-party sales representatives, and distributors. Sales are generally made under short-term, non-cancelable purchase orders. We also have volume purchase agreements with certain customers who provide us with non-binding forecasts. Although certain OEM customers may provide us with rolling forecasts, our ability to predict future sales in any given period is limited and subject to change based on demand for our OEM customers systems and their supply chain decisions. Historically, a small number of OEM customers, the composition of which has varied over time, have accounted for a substantial portion of our revenue. We expect that significant customer concentration will continue for the foreseeable future, but it may diversify across more carrier end customers as we expect more service providers worldwide to begin deployments of our broadband solutions. Sales through distributors are made under the sell-in method under which we recognize revenue when product is delivered to the distributor offset by any contractual return right at the time of sale. Although revenue from distributor sales has been less than 5% annually, we anticipate that this will increase in The following direct customers each accounted for more than 10% of our revenue for the years indicated. Sales made to OEMs are based on information that we receive at the time of ordering. Our Direct Customer Sagemcom Tunisie 24% 19 % 20 % Askey Computer Corporation (a contract manufacturer for Sagemcom) * AVM Computersysteme Vertriebs GmbH 11 * * Paltek Corporation 10 * 10 Flextronics Manufacturing (H.K.) Ltd. * 12 * * Less than 10% Revenue by Country as a Percentage of Total Revenue France 25% 20% 20 % Taiwan Japan Germany China Hong Kong United States Other The table above reflects sales to our direct customers based on where they are headquartered. It does not necessarily reflect carrier deployment of our products as we do not sell directly to them. Comparing 2013 to 2012 by geography, revenue improvements as a percent of sales in France and Germany were offset by declines in revenue from China and Hong Kong. Comparing 2012 to 2011 by geography, revenue improvements in Taiwan and Hong Kong were offset by declines in revenue from Japan and the Netherlands. Revenue by Product Family as a Percentage of Total Revenue Gateway 76% 75% 65 % Access

54 Table of Contents We track our products within two product families: Gateway and Access. The Access product family consists of semiconductor and software products that power the carrier infrastructure, as well as any node in a hybrid-fiber-copper network where fiber is terminated and copper is used to reach the consumer premises. The Gateway product family includes a variety of processors and the associated software designed for devices deployed at the customer premises. Gateway products enable service providers to offer their subscribers a variety services, including internet access, voice, over-the-top content, and security, among others. Cost and Operating Expenses / /2011 (In millions) (Percent) Cost of revenue $ 39.1 $ 64.8 $ 65.9 (40)% (2)% Research and development (11) 3 Sales, general and administrative (1) (14) Restructuring charges 1.1 (0.1) nm nm nm not meaningful Operating Expenses as a Percent of Total Revenue: Cost of revenue 49% 51% 48 % Research and development Sales, general and administrative Cost of revenue. Our cost of revenue consists primarily of the cost of silicon wafers purchased from third-party foundries and third-party costs associated with assembling, testing, and shipping of our semiconductors. Because we do not have formal, long-term pricing agreements with our manufacturing partners, our wafer costs and services are subject to price fluctuations based on the cyclical demand for semiconductors, among other factors. In addition, after we purchase wafers from foundries, we may incur yield loss related to the manufacturing process that creates usable die from the wafers. Manufacturing yield is the percentage of acceptable product resulting from the manufacturing process determined at the time that the product is tested. If our manufacturing yield decreases, our cost per unit increases. This could have a significant adverse effect on our cost of revenue. In addition to raw material costs and usage, the cost of revenue also includes payments to esilicon under our Services Agreement, accruals for actual and estimated warranty obligations and write-downs of excess and obsolete inventories, payroll and related personnel costs, certain variable cost components such as gold adder, licensed third-party intellectual property, depreciation of equipment, and amortization of acquisition-related intangibles. Gross margin increased by 2% from 49% in 2012 to 51% in Gross margins improved due to lower intangible amortization costs and lower royalty costs. Intangible amortization was $1.1 million lower in 2013 compared to In 2012, charges related to the patent license agreement in 2012 and prior years amounted to $1.5 million. Costs related to this patent license agreement were $0.5 million in Gross margin decreased by 3% from 52% in 2011 to 49% in The reduction in margin was primarily due to sales of inventory in 2011 that had been previously written off in In 2012 we sold $0.4 million of inventory previously written off versus $4.1 million in Margins were also adversely affected by a charge of $1.5 million in 2012 related to a patent license agreement covering the current year and certain prior periods. These items were marginally offset by a $0.4 million reduction in the amortization of acquired intangible assets. In addition, there continued to be significant pressure on margins due to our aging product lines combined with lower margins related to the ramping of our new Fusiv product chipsets discussed above. 52 Year over Year Change

55 Table of Contents Research and development expenses. All research and development (R&D) expenses are recognized as incurred and generally consist of compensation and associated expenses of employees engaged in research and development; contractors; tapeout expenses; reference board development; development testing, evaluation kits and tools; stock-based compensation; amortization of acquisition-related intangibles; and depreciation expense. Before releasing new products, we incur charges for mask sets, prototype wafers, mask set revisions, bring-up boards, and other qualification materials, which we refer to as tapeout expenses. These tapeout expenses may cause our R&D expenses to fluctuate because they are not incurred uniformly every quarter. During 2013, R&D expenses were $51.1 million, a decrease of $6.5 million, or 11%, from $57.5 million in The decrease in R&D expenses is primarily related to lower tapeout costs, which declined from $8.7 million in 2012 to $3.0 million in Other backend and product development costs declined by $0.9 million in 2013 compared to Headcount at the end of 2013 remained flat compared to Salary and related costs increased by approximately $0.3 million. All other costs remained relatively unchanged with a net increase of $0.4 million. During 2012, R&D expenses were $57.5 million, an increase of $1.7 million, or 3%, from $55.8 million in The increase in R&D expenses is primarily related to higher tapeout costs in 2012 of $2.9 million related to product development and other backend costs of $1.7 million related to other materials, supplies, and services. Consulting costs increased by $1.0 million in 2012 compared to 2011 as we increased our product development spending. In addition, during 2011 we received a credit of $0.9 million related to qualified R&D expenditures made by a foreign subsidiary. We did not receive a similar credit in These cost increases were offset by a reduction in personnel costs of $5.1 million, in part, the result of our February 2012 restructuring. Our R&D personnel are located primarily in the United States and India. As of December 29, 2013, we had 202 engineers engaged in R&D of whom 67 were located in India, and 136 were located in the United States. This compares to 205 at the end of 2012 and 247 at the end of Selling, general, and administrative expenses. Selling, general, and administrative (SG&A) expenses generally consist of compensation and related expenses for personnel; public company expenses; legal, recruiting and auditing fees; and deprecation. For 2013, SG&A expenses were $18.8 million, a decrease of $0.3 million, or 1%, from $19.1 million in The decrease in SG&A expense is attributable to lower personnel costs of $0.3 million, attributable to lower executive bonuses; lower related travel and entertainment costs; and lower building and utility costs. Partially offsetting these cost reductions were higher stock-based compensation costs of $0.3 million. For 2012, SG&A expenses were $19.1 million, a decrease of $3.2 million, or 14%, from $22.3 million in The decrease in SG&A expense is attributable to lower personnel costs of $2.9 million, attributable to lower personnel levels following the first quarter restructuring; lower related travel and entertainment costs of $0.4 million, and lower building and utility costs. Partially offsetting these cost reductions were higher consulting costs of $0.5 million and higher depreciation of $1.3 million due to the write off of certain software assets. As of December 29, 2013 SG&A headcount was 61, effectively flat from the end of years 2012 and Restructuring charges. There was no restructuring activity or charge during In an effort to manage our operating expenses to our projected revenue forecast, on January 30, 2012 the Board of Directors approved and management initiated a corporate restructuring plan that included a reduction in force of approximately 16%. Employees were notified on February 1 and 2, 2012 of their planned termination. We incurred a total net pre-tax restructuring charge of $1.1 million in This charge included expenses related to severance for terminated employees and other exit-related costs arising from contractual and other obligations. The net restructuring charges were cash expenditures. 53

56 Table of Contents During 2011, we recognized a benefit of $0.1 million associated with our reversal of certain restructuring expense accruals (from our 2010 restructuring plan) that did not occur. As of January 1, 2012 our remaining restructuring liability consisted of $0.2 million for a software tool license. We made payments of $0.2 million under the software tool license during Gain on Sale of Marketable Securities There was no gain or loss on the sale of marketable securities in years 2013 and During 2010 we held auction rate securities with a purchase face value of $5.0 million. The carrying value of the securities was $2.0 million at the end of 2010 and was comprised of a cost basis of $0.7 million and $1.3 million unrealized gain. In early 2011 we sold these securities for $2.0 million and recognized the gain of $1.3 million. Other Expense, Net Interest income and other, net consists of interest income earned on our cash, cash equivalents, and short-term investments, other nonoperating expenses, and interest expense, primarily related to loans under our Loan Agreement with SVB. It also includes other non-operating income and expense items such as gains and losses on foreign exchange and the sales of fixed assets. Interest income and other income (expense), net was an expense of $0.6 million in 2013 compared to net expense of $0.1 million in 2012 and net expense of $0.4 million in The expense of $0.6 million in 2013 was attributable to exchange losses resulting from a decline in the Indian rupee and the euro. Interest expense related to the Loan Agreement was $0.2 million. These expenses were partially offset by interest income related to our certificates of deposit. The $0.1 million expense in 2012 resulted predominantly from foreign exchange losses of $0.3 million recognized on the Indian rupee and euro offset by interest income of $0.1 million on our certificates of deposit. The $0.4 million net expense in 2011 reflects $0.5 million of foreign exchange losses predominantly in India and France offset slightly by interest and other income. Other income of $0.1 million in 2010 reflected interest and other income of $0.3 million offset by foreign exchange losses of $0.2 million. Provision for Income Taxes Income taxes are comprised mostly of federal income tax, foreign income taxes, and state minimum taxes. The income tax provision decreased by $0.4 million to $0.6 million for 2013 compared to $1.0 million for The decrease is predominantly due to tax contingencies recorded during There was no significant tax contingency recorded during Our income tax provision primarily represents foreign taxes on certain of our international subsidiaries as well as federal taxes on unremitted earnings of foreign subsidiaries. We are subject to taxation in the U.S., various states, and certain foreign jurisdictions. We are currently undergoing an income tax audit in India and Singapore. Otherwise, there are no ongoing examinations by income taxing authorities at this time. We do not expect any material adjustments to our reserves. Our tax years from 2005 to 2013 remain open in various tax jurisdictions. Net Loss As a result of the above factors, we reported a net loss of $30.4 million in 2013 compared to net losses of $17.6 million in 2012 and $7.5 million in We have incurred net losses throughout most of our history. Over the past several years, we have taken and continue to take actions to reduce our operating expense structure such as consolidating locations, reducing capital expenditures, outsourcing our back-end physical design, reducing the number of development projects, and reducing overall headcount. In addition, we are taking steps to reduce unit manufacturing costs by working to achieve better wafer pricing based on larger volume of purchases, consolidating business with vendors, and reducing other input costs. Over the long term it is our expectation that these steps will result in operating income, excluding stock-based compensation and amortization of intangibles. 54

57 Table of Contents Liquidity, Capital Resources, and Going Concern Cash, cash equivalents, and short-term investments increased by $8.3 million to $39.5 million as of December 29, 2013, compared to $31.2 million as of December 30, We have funded our operations primarily through cash from private and public offerings of our common stock, our line of credit, cash generated from the sale of our products, proceeds from the exercise of stock options, and stock purchased under our employee stock purchase plan. Our uses of cash include payroll and payroll-related expenses, manufacturing costs, purchases of equipment, tools, and software as well as operating expenses, such as tapeouts, marketing programs, travel, professional services, facilities, and other costs. We believe that there may be additional working capital requirements needed to fund and operate our business. In the near future we expect to finance our operations primarily through existing cash balances and the Loan Agreement. However, we may require additional cash resources during 2014 as a result of changes in our business conditions or other developments. If we should need additional funds, we believe that we will secure such funds either through our line of credit, the issuance of additional equity, or other similar activities. The following table summarizes our statement of cash flows (in millions): Cash and short-term investments held by foreign subsidiaries was $6.5 million, $6.6 million, and $32.6 million as of our 2013, 2012, and 2011 year ends, respectively. When we entered into the Services Agreement with esilicon, we changed the international structure that we had established in Effectively esilicon replaced our operations activity handled by our subsidiary in Singapore. This change enabled us to reduce the cash held by our Singapore subsidiary and return the cash to the accounts in the name of the parent. We filed a Registration Statement on Form S-1 on August 23, 2013 and amended it thereafter (declared effective on November 6, 2013) under which we might offer and sell up to $35.0 million of common stock. On November 7, 2013 and November 22, 2013, we sold an aggregate of 26.4 million shares of common stock in an underwritten offering for $26.4 million. After deducting underwriting fees, legal, accounting, and other costs we realized net proceeds of $24.0 million. Our net loss was approximately $30.4 million in As of December 29, 2013, we had an accumulated deficit of approximately $326.1 million. We utilize the line of credit with SVB under the Loan Agreement to partially fund our operations, which agreement was originally entered into in January On April 12, 2012, we amended the Loan Agreement and, among other changes, extended the maturity date to April 14, 2013 and amended the financial covenants to reflect then-current business circumstances. We amended the Loan Agreement again on February 19, 2013 to update the financial covenants to coincide with our then-current operating plan. On August 8, 2013, we again amended our Loan Agreement with SVB, to change existing financial covenants to coincide with our then-current operating plan. The revised financial covenants include the following: 1) a minimum adjusted quick ratio of 1.0:1, tested on a monthly basis; 2) a minimum cash balance to be held with SVB ranging between $10.0 million and $25.0 million, tested on a monthly basis, and 3) a minimum EBITDA amount between zero and $(10.0) million, tested on a quarterly basis. Under the Loan Agreement, we may borrow up to $15.0 million limited by the borrowing base calculation. The borrowing base is calculated at 80% of eligible accounts receivable, as defined in the Loan Agreement. All cash collections will be applied to the outstanding principal balance on a daily basis, but may be borrowed immediately after pay down. Interest is fixed at SVB s prime rate plus 250 basis points, with a floor of 4.00% Statements of Cash Flows Data: Cash and cash equivalents beginning of year $ 28.4 $34.8 $28.9 Net cash provided by (used in) operating activities (20.0) (2.3) 6.8 Net cash used in investing activities (5.0) (9.7) (1.7) Net cash provided by financing activities Cash and cash equivalents end of year $ 36.0 $28.4 $34.8

58 Table of Contents We expect to be in compliance with the terms of the Loan Agreement through the first quarter of However, we anticipate that we may not be in compliance with all of the covenants contained in the Loan Agreement during certain periods in 2014 and, accordingly, have begun negotiations with SVB. We may need to take further actions to generate adequate cash flows or earnings to ensure compliance and fund our future capital requirements, including the potential need for additional financing. There can be no assurance that sufficient debt or equity financing will be available or, if available, that such financing will be on terms and conditions acceptable to us. There can be no assurance that we will be successful in revising the covenants with SVB or in raising additional debt or equity financing. If we are unsuccessful in these efforts, we will need to implement significant cost reduction strategies that could affect our long-term business plan. These efforts may include, but are not limited to: consolidating locations, reducing capital expenditures, and reducing overall headcount. As a result of our recurring losses from operations, our accumulated deficit, and the potential need to revise our covenants with SVB which may require us to raise additional capital to remain in compliance with certain debt covenants and fund our operating and capital requirements, there is uncertainty regarding our ability to maintain liquidity sufficient to operate our business effectively, which raises substantial doubt as to our ability to continue as a going concern. Notwithstanding our need to comply with certain covenants, to achieve consistent profitability and to fund our operations, we will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for our business. The amount and timing of these future capital requirements will depend upon many factors including our rate of revenue growth, our ability to develop future revenue streams, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, and the continuing market acceptance of our products. Operating Activities During 2013, we used $20.0 million in net cash from operating activities while incurring a loss of $30.4 million. Included in the net loss were non-cash charges amounting to $8.7 million that resulted from amortization of intangibles and acquired technology of $0.8 million, stockbased compensation of $3.6 million, and depreciation and amortization of $4.3 million. Favorable cash flow resulted from a decrease in inventories of $6.1 million and in prepaid expenses and other assets of $3.3 million. This improvement was offset by a decrease in accounts payable and accrued liabilities of $7.5 million and an increase in accounts receivable of $0.1 million. Prepaid expenses declined primarily due to lower prepaid wafer purchases for esilicon. Prepayment to esilicon was $0.8 million as of December 29, 2013 compared to $2.7 million as of December 30, Accounts receivable days sales outstanding have grown from 45 days as of December 30, 2012 to 86 days as of December 29, 2013 as sales declines and timing of shipments have changed from 2012 to 2013, with a higher percentage of shipments being later in our fiscal periods, resulting in higher receivables at our period end. During 2012, we used $2.3 million in net cash from operating activities while incurring a loss of $17.6 million. Included in the net loss were non-cash charges amounting to $10.2 million that resulted from amortization of intangibles and acquired technology of $2.1 million, stockbased compensation of $2.9 million, depreciation and amortization of $5.2 million. Cash flow from reductions in accounts receivable of $2.6 million and inventory of $1.4 million and increases in accounts payable and accrued liabilities of $5.2 million were partially offset by an increase in prepaid expense and other assets of $4.1 million. The decrease in accounts receivable reflects lower fourth quarter sales ($31.8 million in 2012 versus $35.4 million in 2011). Collections have been strong as days sales outstanding were 45 days as of December 30, 2012 compared to days sales outstanding of 47 days as of January 1, The lower inventory balance reflects the effect of our Services Agreement with esilicon, who is responsible for purchasing and assembling our products as discussed above. 56

59 Table of Contents Prepaid expenses increased primarily due to our arrangement with esilicon as we have been prepaying esilicon the cost of wafer purchases. Prepayment to esilicon was $2.7 million as of December 30, There were no prepayments to esilicon as of January 1, During 2011, we generated $6.8 million in net cash from operating activities while incurring a loss of $7.5 million. Included in the net loss were non-cash charges amounting to $10.4 million that resulted from amortization of intangibles and acquired technology of $2.5 million, stockbased compensation of $3.2 million, and depreciation and amortization of $4.7 million. Cash flow from reductions in accounts receivable of $5.8 million and inventory of $7.6 million were partially offset by a reductions in accounts payable and accrued liabilities of $7.0 million and increase in prepaid expense and other assets of $1.2 million. In addition, the $1.3 million gain on the sale of our auction rate securities is a reduction to cash from operation activities, but the proceeds of $2.0 million from the sale are included in cash from investing activities. The decrease in accounts receivable reflects lower fourth quarter sales ($35.4 million in 2011 versus $37.1 million in 2010) and stronger collections resulting in days sales outstanding of 47 days as of January 1, 2012 versus 59 days as of January 2, The lower inventory balance as of the end of the fourth quarter reflected our lower sales expectations for the first quarter of Investing Activities During 2013, cash flow used in investing activities was $5.0 million, which was comprised of the purchases of property and equipment of $4.3 million and the net purchases of certificates of deposit of $0.7 million. During 2012 cash flow used in investing activities was $9.7 million, which was comprised of the purchases of property and equipment of $6.9 million and the net purchases of certificates of deposit of $2.8 million. During 2011, cash flow used in investing activities was $1.8 million which was comprised of gross proceeds from the sale of our remaining auction rate securities of $2.0 million, offset by the purchases of property and equipment of $3.8 million. Our short-term investments consist of certificates of deposits. Previously, when we have had investments in marketable securities, our investment portfolio has been classified as available for sale, and our investment objectives were to preserve principal and provide liquidity, while maximizing yields without significantly increasing risk. We would sell an investment at any time if the quality rating of the investment declined, the yield on the investment was no longer attractive, or we were in need of cash. We have used cash to acquire businesses and technologies that enhance and expand our product offering and we anticipate that we will continue to do so in the future. The nature of these transactions makes it difficult to predict the amount and timing of such cash requirements. We also anticipate that we will continue to purchase necessary property and equipment in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods depend on a number of factors, including the hiring of employees, the rate of change of computer hardware and software used in our business, and our business outlook. Financing Activities During 2013 cash flow from financing activities provided $32.6 million. In November 2013 we sold an aggregate of 26.4 million shares of common stock in an underwritten offering for $26.4 million. After deducting underwriting fees, legal, accounting, and other costs, we realized net proceeds of $24.0 million. Employee purchases of our common stock under our Employee Stock Purchase Plan amounted to $1.6 million. Net proceeds under our Loan Agreement were $7.0 million as we drew down $35.3 million and repaid $28.3 million. During 2012 cash flow from financing activities provided $5.6 million. Employee purchases of our stock under the Employee Stock Purchase Plan amounted to $0.6 million. Net proceeds under our Revolving Line Loan Agreement were $5.0 million as we drew down a total of $10.0 million under the agreement during the third and fourth quarters and repaid $5.0 million in the fourth quarter. 57

60 Table of Contents During 2011 cash flow from financing activities provided $0.8 million and was comprised predominantly of purchases of our stock under our Employee Stock Purchase Plan. Contractual Commitments and Off Balance Sheet Arrangements We do not use off balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off balance sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, our liquidity and capital resources are not subject to off balance sheet risks from unconsolidated entities. We lease certain office facilities, equipment, and software under non-cancelable operating leases. The following table summarizes our contractual obligations as of December 29, 2013 and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in millions): 2015 and 2017 and For the purpose of this table, purchase obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, we have purchase orders that represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements. Non-current income tax payable represents both the tax obligation and related accrued interest. We are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to the uncertainties in the timing of tax outcomes. In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant, and we are unable to estimate the maximum potential impact of these indemnification provisions on our future consolidated results of operations. Recent Accounting Pronouncements In July 2013, the Financial Accounting Standards Board issued an amendment to the accounting guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carry-forward, a similar tax loss or a tax credit carry-forward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carry-forward exists and certain criteria are met. We are reviewing the guidance and do not expect any significant effect upon our consolidated financial position, results of operations, or cash flows. 58 Total 2014 Operating lease payments $ 8.0 $ 2.5 $ 3.7 $ 1.8 $ CAD software tools Inventory purchase obligations Non-current income tax payable Royalties $ 21.5 $12.0 $ 6.9 $ 1.8 $ Thereafter

61 Table of Contents ITEM 7A. Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our line of credit. We do not use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve principal and meet liquidity needs, while maximizing yields and without significantly increasing risk. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer, or type of investment. As of December 29, 2013, we had investments of $3.5 million in certificates of deposit. Our cash and cash equivalents consist of cash and money market accounts. As of December 29, 2013, we had cash and cash equivalents totaling $36.0 million. We do not enter into investments for trading or speculative purposes. If the return on our investments were to change by one hundred basis points, the effect would be de minimis. As of December 29, 2013, we had $12.0 million outstanding under our line of credit with SVB. The interest rate is variable and was 6.5% under the revolving line at December 29, If the rates were to change by one hundred basis points and the balance remained the same, the effect would be approximately $0.1 million. Foreign Currency Risk QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our revenue and cost of revenue are predominately denominated in U.S. dollars. An increase of the U.S. dollar relative to the currencies of the countries in which our customers operate would make our products more expensive to them and increase pricing pressure or reduce demand for our products. We also incur a portion of our expenses in currencies other than the U.S. dollar, including the euro, the Japanese yen, Korean won, Indian rupee, Singapore dollar, the Chinese yuan, and the Taiwanese dollar. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. We expect that our foreign currency exposure will increase as our operations in India and other countries expand. If exchange rates were to change by ten percent, the effect would be to increase/decrease income by approximately $1.0 million. 59

62 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA IKANOS COMMUNICATIONS, INC. INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements for the Years Ended December 29, 2013, December 30, 2012, and January 1, 2012 Report of Independent Registered Public Accounting Firm 61 Consolidated Balance Sheets 63 Consolidated Statements of Operations 64 Consolidated Statements of Comprehensive Loss 65 Consolidated Statements of Stockholders Equity 66 Consolidated Statements of Cash Flows 67 Notes to Consolidated Financial Statements Page No.

63 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Ikanos Communications, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders equity, comprehensive loss and cash flows present fairly, in all material respects, the financial position of Ikanos Communications, Inc. and its subsidiaries (the Company ) at December 29, 2013 and December 30, 2012 and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2013, based on criteria established in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, is subject to certain restrictive debt covenants and may require additional financing to fund future capital and operating requirements that raise substantial doubt about its ability to continue as a going concern. Management s plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company s assets that could have a material effect on the financial statements. 61

64 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP San Jose, California February 28,

65 Table of Contents IKANOS COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) December 29, December 30, Assets Current assets: Cash and cash equivalents $ 36,043 $ 28,391 Short-term investments 3,473 2,785 Accounts receivable, net of allowances of $126 and $207, respectively 15,892 15,748 Inventory 2,017 8,122 Prepaid expenses and other current assets 3,245 5,892 Total current assets 60,670 60,938 Property and equipment, net 8,612 8,769 Intangible assets, net 718 1,529 Other assets 1,952 2,612 $ 71,952 $ 73,848 Liabilities and Stockholders Equity Current liabilities: Revolving line $ 12,000 $ 5,000 Accounts payable 4,692 5,679 Accrued liabilities 8,232 13,688 Total current liabilities 24,924 24,367 Long-term liabilities 1,637 2,854 Total liabilities 26,561 27,221 Commitments and contingencies (Note 13) Stockholders equity: Preferred stock; $0.001 par value; 1,000 and 1,000 shares authorized, respectively; and share issued and outstanding, respectively Common stock: $0.001 par value; 150,000 and 150,000 shares authorized, respectively; 99,317 and 71,170 issued, respectively, and 98,744 and 70,314 outstanding, respectively Additional paid-in capital 363, ,688 Warrants 7,567 7,567 Accumulated other comprehensive income Accumulated deficit (326,086) (295,699) Total stockholders equity 45,391 46,627 $ 71,952 $ 73, The accompanying notes are an integral part of these consolidated financial statements. 63

66 Table of Contents IKANOS COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) December 29, 2013 Year Ended December 30, 2012 January 1, 2012 Revenue $ 79,749 $ 125,948 $136,591 Cost of revenue 39,078 64,750 65,944 Gross profit 40,671 61,198 70,647 Operating expenses: Research and development 51,075 57,543 55,796 Selling, general, and administrative 18,816 19,056 22,287 Restructuring charges (credits) 1,062 (109) Total operating expenses 69,891 77,661 77,974 Loss from operations (29,220) (16,463) (7,327) Gain on sale of marketable securities 1,295 Other expense, net (578) (108) (383) Loss before provision for income taxes (29,798) (16,571) (6,415) Provision for income taxes 589 1,014 1,082 Net loss $ (30,387) $ (17,585) $ (7,497) Basic and diluted net loss per share $ (0.41) $ (0.25) $ (0.11) Weighted average number of shares (basic and diluted) 74,726 69,701 68,656 The accompanying notes are an integral part of these consolidated financial statements. 64

67 Table of Contents IKANOS COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands, except per share data) December 29, Year Ended December 30, January 1, Net loss $ (30,387) $ (17,585) $ (7,497) Other comprehensive loss, net of tax Gain on sale of marketable securities reclassified into earnings (1,295) Comprehensive loss $ (30,387) $ (17,585) $ (8,792) The accompanying notes are an integral part of these consolidated financial statements. 65

68 Table of Contents IKANOS COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (In thousands) Common Stock Shares Amount Additional Paid in Capital Warrants Accumulated Other Comprehensive Gain (Loss) Accumulated Deficit Total Stockholders Balance at January 2, ,111 $ 68 $ 327,208 $ 7,567 $ 1,295 $ (270,617) $ 65,521 Net loss (7,497) (7,497) Realized gain on marketable securities (1,295) (1,295) Stock-based compensation 3,175 3,175 Issuance of common stock under stock option plans Vesting of restricted stock 249 Balance at January 1, , ,199 7,567 (278,114) 60,722 Net loss (17,585) (17,585) Stock-based compensation 2,892 2,892 Issuance of common stock under stock option plans Vesting of restricted stock 190 Balance at December 30, , ,688 7,567 (295,699) 46,627 Net loss (30,387) (30,387) Stock-based compensation 3,573 3,573 Common Stock Offering, net of issuance costs 26, ,943 23,969 Issuance of common stock under stock option plans 1, ,607 1,609 Vesting of restricted stock 284 Balance at December 29, ,744 $ 99 $ 363,811 $ 7,567 $ $ (326,086) $ 45,391 Equity The accompanying notes are an integral part of these consolidated financial statements. 66

69 Table of Contents IKANOS COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) December 29, Year Ended December 30, January 1, Cash flows from operating activities: Net loss $ (30,387) $ (17,585) $ (7,497) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 4,282 5,256 4,682 Stock-based compensation expense 3,573 2,892 3,175 Amortization of intangible assets and acquired technology 811 2,073 2,500 Gain on sale of marketable securities (1,295) Changes in assets and liabilities: Accounts receivable, net (144) 2,560 5,839 Inventory 6,105 1,352 7,572 Prepaid expenses and other assets 3,307 (4,077) (1,189) Accounts payable and accrued liabilities (7,516) 5,196 (6,988) Net cash provided by (used in) operating activities (19,969) (2,333) 6,799 Cash flows from investing activities: Purchases of property and equipment (4,269) (6,849) (3,807) Purchases of investments (4,668) (3,931) Maturities and sales of investments 3,980 1,146 2,000 Net cash used in investing activities (4,957) (9,634) (1,807) Cash flows from financing activities: Proceeds from issuances of common stock and exercise of stock options 1, Proceeds from Revolving Line 35,300 10,000 Repayments to Revolving Line (28,300) (5,000) Proceeds from stock offering, net of issuance costs 23,969 Net cash provided by financing activities 32,578 5, Net increase (decrease) in cash and cash equivalents 7,652 (6,369) 5,810 Cash and cash equivalents at beginning of year 28,391 34,760 28,950 Cash and cash equivalents at end of year $ 36,043 $ 28,391 $ 34,760 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 526 $ 926 $ 545 Cash paid for interest Purchases of equipment included in Accounts payable and accrued liabilities The accompanying notes are an integral part of these consolidated financial statements. 67

70 Table of Contents Note 1 Ikanos and Summary of Significant Accounting Policies The Company IKANOS COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ikanos Communications, Inc. ( Ikanos or the Company ) was incorporated in the State of California in April 1999 and reincorporated in the State of Delaware in September The Company is a provider of advanced semiconductor products and software for delivering high speed broadband solutions to the digital home. The Company s broadband multi-mode and digital subscriber line ( DSL ) processors and other semiconductor offerings power carrier infrastructure (referred to as Access or CO ) and customer premise equipment (referred to as Gateway or CPE ) for network equipment manufacturers ( NEMs ) who, in turn, serve leading telecommunications service providers. The Company has developed programmable, scalable chip architectures, which form the foundation for deploying and delivering multi-play services. This flexible communications processor architecture with wire-speed packet processing capabilities enables high-performance end user devices capable of distributing advanced services in the home. These products support telecommunications services providers multi-play deployment plans to the digital home while keeping their capital and operating expenditures low and have been deployed by service providers in Asia, Europe, and North and South America. The accompanying consolidated financial statements of the Company have been prepared on a basis that assumes that the Company will continue as a going concern and contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Liquidity The Company incurred net losses of $30.4 million, $17.6 million, and $7.5 million in 2013, 2012, and 2011, respectively, and had an accumulated deficit of $326.1 million as of December 29, The Company filed a Registration Statement on Form S-1 on August 23, 2013, as subsequently amended (and declared effective on November 6, 2013), under which it might offer and sell up to $35.0 million of common stock. On November 7, 2013 and November 22, 2013 Ikanos sold an aggregate of 26.4 million shares of common stock in an underwritten offering for $26.4 million. After deducting underwriting fees, legal, accounting, and other costs the Company realized net proceeds of $24.0 million. The Company utilizes an existing revolving line of credit under a Loan and Security Agreement ( Loan Agreement ) with Silicon Valley Bank ( SVB ) to partially fund its operations. This facility is subject to certain affirmative, negative, and financial covenants. On February 19, 2013, these covenants were amended to reflect the Company s then-current operating plan. The Company further amended the Loan Agreement effective August 8, The August 8, 2013 amendment to the Loan Agreement changed existing financial covenants relating to minimum cash held with SVB and Earnings Before Interest Taxes, Depreciation and Amortization ( EBITDA ) measurements. The Company is in compliance with all covenants as of December 29, 2013 and expects to be in compliance through the first quarter of However, the Company anticipates that it may not be in compliance with all of the covenants contained in the Loan Agreement during certain periods of 2014 and, accordingly, has begun discussions with SVB. The Company may need to take further actions to generate adequate cash flows or earnings to ensure compliance with the Loan Agreement and fund its future capital requirements, including the potential need for additional financing. There can be no assurance that sufficient debt or equity financing will be available or, if available, that such financing will be on terms and conditions acceptable to the Company. Additionally, there can be no assurance the Company will be successful in revising the covenants with SVB. If the Company is unsuccessful in these efforts, it will need to implement significant cost reduction strategies that could affect its longterm business plan. These efforts may include, but are not limited to: consolidating locations, reducing capital expenditures, and reducing overall headcount. 68

71 Table of Contents Notwithstanding the need to comply with certain covenants, to achieve consistent profitability, the Company will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for its business. The amount and timing of these future capital requirements will depend upon many factors including the Company s rate of revenue growth, its ability to develop future revenue streams, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, and the continuing market acceptance of its products. Beginning on January 31, 2014, the Company s common stock began to trade below $1.00 per share on The NASDAQ Capital Market ( NASDAQ ). NASDAQ requires a number of continued listing requirements, including the requirement that the minimum closing bid price remain at a $1.00 or more per share. If the closing bid price of the Company s common stock is below $1.00 for 30 consecutive trading days, NASDAQ could notify the Company that it must regain compliance with this continued listing requirement within 180 calendar days or be subject to delisting. In September of 2011, the price of the Company s common stock fell below NASDAQ s $1.00 closing bid price continued listing requirement. In September of 2012, the Company s common stock traded above $1.00 for more than 10 consecutive trading days and was no longer subject to delisting. As the closing bid price for the Company s common stock has again fallen below the requirement, the Company is potentially subject to delisting and, if delisted, would lose its eligibility for quotation on NASDAQ. Given this and other market conditions, there can be no assurance that, should the Company need additional funds, sufficient debt or equity financing will be available at all or, if available, that such financing will be at terms and conditions acceptable to the Company. As a result of the Company s recurring losses from operations, the need to stay in compliance with certain debt covenants, and the potential need for additional financing to fund its operating and capital requirements, there is uncertainty regarding the Company s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company s ability to continue as a going concern. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company s fiscal quarters end on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year. There are 52 weeks in fiscal year Use of Estimates The preparation of the Company s consolidated financial statements in conformity with accounting principles generally accepted in the United States ( GAAP ) requires management to make certain estimates, judgments, and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to it at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates and actual results, the Company s financial statements would have been affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management s judgment in its application. There are also areas in which management s judgment in selecting any available alternative would not produce a materially different result. 69

72 Table of Contents Summary of Significant Accounting Policies Revenue Recognition In accordance with authoritative guidance, revenue from sales of semiconductors is recognized upon shipment when persuasive evidence of an arrangement exists, the required firmware is delivered, legal title and risk of ownership has transferred, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. The Company records reductions to revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and volume purchase incentives, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in volume purchase incentive agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed its estimates. In multi-element arrangements that include combination of semiconductor products with software that is essential to the hardware products functionality and undelivered software elements, the Company allocates revenue to all deliverables based on their relative selling prices. The Company allocates the arrangement consideration based on each element s relative fair value using vendor-specific objective evidence ( VSOE ), third-party evidence, or estimated selling prices, as the basis of fair value. The allocation of value to each element is derived based on management s best estimate of selling price when VSOE or third party evidence is unavailable. Revenue is recognized for the accounting units when the basic revenue recognition criteria are met. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) VSOE of fair value, (ii) third-party evidence of selling price, and (iii) best estimate of the selling price ( ESP ). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. Cash, Cash Equivalents and Investments The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Short-term investments consist of highly liquid securities with original maturities in excess of 90 days. Non-liquid investments with original maturities in excess of one year are classified as long term. The Company classifies marketable securities as available-for-sale at the time of purchase and re-evaluates such designation as of each consolidated balance sheet date. As of December 29, 2013, the Company s short-term investments consisted solely of certificates of deposit. In prior years, marketable securities have included commercial paper, corporate bonds, government securities, and auction rate securities. Marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders equity. Realized gains or losses on the sale of marketable securities are determined using the specificidentification method. For all investments in debt and equity securities, unrealized losses are evaluated to determine if they are other than temporary. For investments in equity securities, unrealized losses that are considered to be other than temporary are considered impairment losses and recognized as a component of interest income and other, net, in the statements of operations. For investments in debt securities, if the fair value of a debt security is less than its amortized cost basis, the Company assesses whether the impairment is other than temporary. An impairment is considered other than temporary if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost of the security. If impairment is considered other than temporary based on conditions (i) and (ii), the entire difference between the amortized cost and the fair value of the security is recognized in 70

73 Table of Contents earnings. If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses, defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security, will be recognized in earnings and the amount relating to all other factors will be recognized in other comprehensive income. The Company evaluates both qualitative and quantitative factors such as duration and severity of the unrealized loss, credit ratings, repayment speeds, defaults, and loss rates of the underlying collateral, structure, and credit enhancements to determine if a credit loss may exist. Fair Value of Financial Instruments The carrying amounts of certain of the Company s financial instruments including, cash and cash equivalents, investments, accounts receivables, accounts payable, and accrued liabilities, approximate fair value due to their relatively short maturity periods. Inventory Inventory is stated at the lower of cost or market. Cost is determined by the first-in, first-out method and market represents the estimated net realizable value. The Company records inventory write-downs for estimated obsolescence of unmarketable inventory based upon assumptions about future demand and market conditions. Additionally, the Company specifically reduces inventory to the lower of cost or market if pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. Once inventory is written down, a new accounting basis is established and, accordingly, is not written back up in future periods. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the term of the lease. All repairs and maintenance costs are expensed as incurred. The depreciation and amortization periods for property and equipment categories are as follows: Computer equipment Furniture and fixtures Machinery and equipment Software 2 to 3 years 4 years 3 to 7 years 3 to 7 years Intangible Assets Intangible assets resulting from the acquisition of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. Identifiable intangible assets are comprised of existing and core technology, patents, order backlog, customer relationships, trademarks, and other intangible assets. Identifiable intangible assets that have finite useful lives are being amortized over their useful lives. Impairment of Long-Lived Assets The Company evaluates long-lived assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. There was no material impairment recorded in 2013, 2012, or

74 Table of Contents Software Development Costs Software development costs are capitalized beginning when technological feasibility has been established and ending when a product is available for general release to customers. To date, the period between achieving technological feasibility and the issuing of such software has been short and software development costs qualifying for capitalization have been insignificant. Research and Development Research and development costs consist primarily of compensation and related costs for personnel as well as costs related to software tools, mask tooling expenses, materials, supplies, and equipment depreciation. All research and development costs are expensed as incurred. Advertising Costs Advertising costs are expensed as incurred. To date, advertising costs have been insignificant. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, accounts receivable, investments. Cash and cash equivalents are held with a limited number of financial institutions. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. Management believes that the financial institutions that hold the Company s deposits are credit worthy and, accordingly, minimal credit risk exists with respect to those deposits. As of December 29, 2013 and December 30, 2012 the Company s short-term investments consisted solely of certificates of deposit. All investments were classified as available-for-sale. The Company does not hold or issue financial instruments for trading purposes. Credit risk with respect to accounts receivable is concentrated due to the number of large orders recorded in any particular reporting period. Three customers represented 35%, 10%, and 10% of accounts receivable at December 29, Two customers represented 22% and 20% of accounts receivable at December 30, Four customers represented 24%, 14%, 11%, and 10% of revenue in Three customers represented 19%, 13%, and 12% of revenue in Two customers represented 20% and 10% of revenue in Concentration of Other Risk The semiconductor industry is characterized by rapid technological change, competitive pricing pressures, and cyclical market patterns. The Company s results of operations are affected by a wide variety of factors, including general economic conditions; economic conditions specific to the semiconductor industry; demand for the Company s products; the timely introduction of new products; implementation of new manufacturing technologies; manufacturing capacity; the availability of materials and supplies; competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; reliance on assembly and wafer fabrication subcontractors; and reliance on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future periods due to the factors mentioned above or other factors. Warranty The Company generally warrants its products against defects in materials and workmanship and non-conformance to its specifications for varying lengths of time, generally one year. If there is a material increase in customer claims compared with historical experience or if costs of servicing warranty claims are greater than expected, the Company may record additional charges against cost of revenue. 72

75 Table of Contents Net Loss per Share Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. The calculation of basic and diluted net loss per common share is as follows (in thousands, except per share amounts): December 29, Year Ended December 30, January 1, Net loss $ (30,387) $ (17,585) $ (7,497) Weighted average shares outstanding 74,726 69,701 68,656 Basic and diluted net loss per share $ (0.41) $ (0.25) $ (0.11) The following potential common shares have been excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands): December 29, Year Ended December 30, January 1, Anti-dilutive securities: Warrants to purchase common stock 7,800 7,800 4,280 Weighted average restricted stock and restricted stock units Weighted average options to purchase common stock 17,891 13,777 11,333 25,691 21,782 16, Income Taxes The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In addition, the calculation of the Company s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In accordance with authoritative guidance, the Company recognizes liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Recent Accounting Pronouncements In July 2013, the Financial Accounting Standards Board ( FASB ) issued an amendment to the accounting guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carry-forward, a similar tax loss or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carry-forward exists and certain criteria are met. The Company is reviewing the guidance and does not expect any significant effect upon its consolidated financial position, results of operations, or cash flows. 73

76 Table of Contents Note 2 Cash and Cash Equivalents, Investments and Fair Value Measurements Cash and cash equivalents include cash and money market securities for which quoted active prices are available. The Company considers all highly liquid investments with a maturity of 90 or fewer days at the date of purchase to be cash equivalents. The Company held money market funds of $2.0 million as of December 30, 2012 and none as of December 29, The investments in money market funds are included in cash equivalents based on their original maturity. As of December 29, 2013 and December 30, 2012, the Company s short-term investments consisted solely of certificates of deposit. The following is a summary of the Company s investments (in thousands): December 29, 2013 Gross Unrealized Estimated Cost Gain Fair Value Certificates of deposit $3,473 $ $ 3,473 December 30, 2012 Gross Unrealized Estimated There were no unrealized losses on investments aggregated by category as of December 29, Marketable securities have been classified as available-for-sale as of the balance sheet date and have been reported at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss) in stockholders equity, net of tax. Realized gains and losses and other-than-temporary declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. Estimated fair values were determined for each individual security in the investment portfolio. The declines in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature. Fair Value Measurements Fair value is an exit price which represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets ( Level 1 ); inputs other than the quoted prices in active markets that are observable either directly or indirectly ( Level 2 ); and unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions ( Level 3 ). This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets, mainly comprised of marketable securities, at fair value. The Company s cash and investment instruments at December 29, 2013 and December 30, 2012 are classified within Levels 1 and 2 of the fair value hierarchy, respectively. The types of Level 1 instruments, valued based on quoted market prices in active markets, include money market securities. Level 2 types of instruments consist of short-term certificates of deposit. The investments are not traded on an open market, but reside within a bank. The certificates of deposit are highly liquid and have maturities of less than one year. Due 74 Cost Gain Fair Value Certificates of deposit $2,785 $ $ 2,785

77 Table of Contents to their short-term maturities, the Company has determined that the fair value of these instruments is their face value. Level 3 types of instruments are valued based on unobservable inputs in which there is little or no market data, and which require the Company to develop its own assumptions. The fair value hierarchy of the Company s marketable securities as of December 29, 2013 and December 30, 2012 was (in thousands): December 29, 2013 Level 1 Level 2 Level 3 Total Certificates of deposit $ $ 3,473 $ $ 3,473 December 30, 2012 Level 1 Level 2 Level 3 Total Money market funds $ 2,006 $ $ $ 2,006 Certificates of deposit 2,785 2,785 $ 2,006 $ 2,785 $ $ 4,791 There were no Level 3 securities as of December 29, 2013 or December 30, 2012, respectively. Note 3 Allowance for Doubtful Accounts The following table summarizes the activity related to the allowance for doubtful accounts (in thousands): Note 4 Inventory Inventory consisted of the following (in thousands): Balance at Beginning of Year Charged (Released) to Expenses Write-Offs Balance at End of Year 2013 $ 207 $ (19) $ (62) $ (105) 73 December 29, December 30, Finished goods $ 1,385 $ 5,910 Purchased parts and raw materials 632 2,212 $ 2,017 $ 8,122 The Company has an agreement with esilicon Corporation ( esilicon ) under which a majority of its day-to-day supply chain management, production test engineering, and production quality engineering functions ( Master Services ) have been transferred to esilicon under a Master Services and Supply Agreement ( Service Agreement ). Pursuant to the Service Agreement, the Company places orders for its finished goods products with esilicon, who, in turn, contracts with wafer foundries and assembly and test subcontractors and manages these operational functions for the Company on a day-to-day basis. As part of its Service Agreement, the Company transferred ownership of certain work-in-process and raw materials to esilicon as prepayment for the future delivery of finished goods. In addition, the Company has prepaid for certain wafers purchased by esilicon on behalf of the Company. Prepayments under the arrangement were $0.8 million as of December 29, 2013 and $2.7 million as of December 30, The prepayments are classified in prepaid expenses and other current assets. As of December 29, 2013, the Company has $5.1 million of noncancellable purchase obligations with esilicon

78 Table of Contents Note 5 Property and Equipment Property and equipment consisted of the following (in thousands): December 29, December 30, Machinery and equipment $ 23,053 $ 20,351 Software 11,522 10,852 Computer equipment 5,927 5,433 Furniture and fixtures 988 1,012 Leasehold improvements 1,842 1,887 Construction in progress 1, ,383 40,403 Less: Accumulated depreciation and amortization (35,771) (31,634) $ 8,612 $ 8,769 Depreciation expense for property and equipment was $4.3 million, $5.3 million, and $4.7 million for 2013, 2012, and 2011, respectively. Note 6 Purchased Intangible Assets The carrying amount of intangible assets is as follows (in thousands): Gross Carrying Amount December 29, 2013 Accumulated Amortization 2013 Net Amount 2012 Useful Life Existing technology $ 14,825 $ (14,107) $ Customer relationships 8,216 (8,216) 4 $ 23,041 $ (22,323) $ 718 (Years) The amortization of technology is charged to cost of revenue and the amortization of customer relationships is charged to selling, general and administrative. For 2013, 2012, and 2011, the amortization of intangible assets was $0.8 million, $2.1 million, and $2.5 million, respectively. As of December 29, 2013, the estimated future amortization of purchased intangible assets was $0.5 million for 2014 and $0.2 million for Note 7 Loan and Security Agreement On January 14, 2011, the Company entered into a Loan Agreement with SVB under which SVB agreed to make advances under a revolving line of credit of up to $15.0 million, subject to certain restrictions. Advances under the Loan Agreement may be used solely for working capital purposes. Borrowings, if any, under the Loan Agreement bear interest at the greater of SVB s prime rate or 4.00% plus 50 basis points. The Loan Agreement provides for a first priority perfected lien on, and pledge of, all of the Company s present and future property and assets. The Loan Agreement s original maturity date was January 14, Interest accrues at 0.50% on the average unused portion of the line of credit. The Loan Agreement contains customary negative covenants for 76 Gross Carrying Amount December 30, 2012 Accumulated Amortization Net Amount Useful Life Existing technology $ 14,825 $ (13,629) $ 1,196 3 Customer relationships 8,216 (7,883) $ 23,041 $ (21,512) $ 1,529 (Years)

79 Table of Contents facilities of this type that restrict among other things, the Company s ability to sell assets, make investments and acquisitions, make capital expenditures, grant liens, pay dividends, and make certain other restricted payments. The Loan Agreement has three financial covenants, the first requiring a minimum quarterly EBITDA amount, the second requiring a minimum monthly Adjusted Quick Ratio (cash, cash equivalents and short-term investments and accounts receivable divided by current liabilities, net of deferred revenue) and the third requiring a minimum monthly amount of cash held at SVB, all of which are defined in the Loan Agreement. On April 12, 2012, the Loan Agreement was amended and, among other changes, extended the maturity date to April 14, 2013 and changed the financial covenants to reflect then-current business conditions. On February 19, 2013, the Company and SVB agreed to extend the Loan Agreement through April 14, 2015 and change the financial covenants to coincide with the Company s then-current operating plan. The financial covenants include the following: 1) a month-end minimum Adjusted Quick Ratio of 1.0:1; 2) a minimum month-end cash balance held with SVB between $8.0 million and $10.0 million; and 3) a minimum quarterly EBITDA amount between zero and $(9.0) million. Under the Loan Agreement, the Company may borrow up to $15.0 million as limited by the borrowing base calculation. The borrowing base is equal to 80% of eligible accounts receivable. Further, when the Company achieves two quarters of positive EBITDA performance, the amount the Company may borrow increases to $20.0 million, although such limit remains subject to the borrowing base calculation with 25% of inventory eligible to be included in the borrowing base at that time. Interest, depending on the Company s Asset-Based Threshold, as defined, varies from SVB s prime rate plus 75 basis points (or LIBOR plus 325 basis points) to SVB s prime rate plus 175 basis points. The SVB prime rate and LIBOR floors are 4.00% and 1.50%, respectively. On August 8, 2013, the Company and SVB amended the Loan Agreement to change existing financial covenants to coincide with its revised operating plan. The financial covenants were amended to include the following: 1) a minimum Adjusted Quick Ratio of 1.0:1, tested on a monthly basis, 2) a minimum cash balance to be held with SVB ranging between $10.0 million and $25.0 million, tested on a monthly basis, and 3) a minimum EBITDA amount between zero and $(10.0) million, tested on a quarterly basis. Under the Loan Agreement, the Company may now borrow up to $15.0 million limited by the borrowing base calculation. The borrowing base is calculated at 80% of eligible accounts receivable, as defined in the Loan Agreement. All cash collections will be applied to the outstanding principal balance on a daily basis, but may be borrowed immediately after pay down. Interest is fixed at SVB s prime rate plus 250 basis points, with a floor of 4.00%. As of December 29, 2013, the Company was in compliance with all of the financial covenants contained in the Loan Agreement and the Company expects to be in compliance through the first quarter of However, the Company anticipates that it may not be in compliance with all of the covenants contained in the Loan Agreement during certain periods in 2014 and, accordingly, the Company has begun discussions with SVB. As of December 30, 2012, the Company had a $5.0 million advance against the line of credit. The advance was repaid during the first quarter of Subsequently, during the first quarter, the Company drew an additional advance of $5.0 million and repaid the advance during the second quarter of Later during the second quarter, the Company drew an additional advance of $7.5 million and repaid the advance during the third quarter. Later in the third quarter, the Company drew an advance of $10.8 million and repaid the advance during the fourth quarter. During the fourth quarter the Company drew an advance of $12.0 million which is outstanding as of December 29, As of December 29, 2013, interest on advances against the Loan Agreement is equal to 6.5% on the outstanding principal and is payable monthly. The Company may repay the advances under the Loan Agreement, in whole or in part, at any time, without premium or penalty. 77

80 Table of Contents Note 8 Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 29, December 30, Accrued compensation and related benefits $ 2,834 $ 3,733 Deferred revenue 391 2,926 Accrued rebates 111 1,936 Deferred rent 957 1,228 Warranty accrual Accrued royalties Other accrued liabilities 2,857 2,672 $ 8,232 $ 13,688 The following table summarizes the activity related to the warranty accrual (in thousands): December 29, December 30, January 1, Balance at beginning of year $ 272 $ 602 $ 895 Provision 34 (320) 196 Usage (68) (10) (489) Balance at end of year $ 238 $ 272 $ Note 9 Restructuring Charges There was no restructuring charge in In an effort to align the Company s operating expenses to its projected revenue forecast, on January 30, 2012 the Board of Directors approved and management initiated a corporate restructuring plan that included a reduction in force of approximately 16%. Employees were notified on February 1, and 2, 2012 of their planned terminations. As of December 30, 2012, the Company completed its restructuring activities. A summary of those restructuring activities follows (in thousands): 78 Severance and Benefits Excess Facilities Software Balance as of January 2, 2011 $ 453 $ 151 $ 437 $ 1,041 Restructuring charges Cash payments (486) (9) (219) (714) Other non-cash adjustments * (14) (142) (156) Balance as of January 1, Restructuring charges 1,092 1,092 Adjustments to provision (30) (30) Cash payments (1,062) (218) (1,280) Balance as of December 30, 2012 $ $ $ $ * Non-cash adjustments relate to stock-based compensation expense and fixed asset dispositions. Tools Total

81 Table of Contents Note 10 Tallwood Investment During 2009, in order to facilitate its acquisition of the Broadband Access product line from Conexant Systems, Inc., the Company negotiated a $42.0 million cash investment by Tallwood III, L.P., and certain of their affiliates (collectively, the Tallwood Investors ) pursuant to which the Company sold to the Tallwood Investors (i) 24.0 million shares of Ikanos common stock, par value $0.001 per share (the Common Stock ), and (ii) warrants to purchase up to 7.8 million shares of Common Stock (the Warrants ). The transaction was completed on August 24, 2009, and the purchase price of each share of Common Stock and the exercise price of each warrant to purchase a share of Common Stock under the securities purchase agreement was $1.75. In addition, the Company issued to the Tallwood Investors one share (the Voting Share ) of Series A Preferred Stock, which provides the Tallwood Investors certain voting rights solely with respect to the election of a minority of the members of the Board of Directors but does not share in the economics of Ikanos. The 24.0 million shares of Common Stock, Warrants, and the Voting Share collectively are referred to as the Tallwood Investment. The net proceeds for the Tallwood Investment were $38.8 million after capitalizing transaction-related costs of $3.2 million. The $3.2 million in transaction related costs consisted of investment banker, legal, and accounting fees. The value attributed to the Warrants was $7.6 million and was estimated as of August 24, 2009 using the Black-Scholes option pricing model with the assumptions of an expected volatility of 62.5%, expected term of five years, no expected dividends, and a risk free interest rate of 2.5%. The expected volatility is based on a blend of the volatility of the Company s peer group in the industry in which it does business and the Company s historical volatility. The expected term is five years which is equal to the life of the Warrants. The risk free interest rate is the yield on zero-coupon U.S. treasury securities for a period that is commensurate with the expected term assumption. Assuming the exercise of the Warrants and the shares outstanding as of January 3, 2010, the Tallwood Investors would own 51% of the Company s outstanding common stock post-closing. However, through the Stockholder Agreement between the Company and the Tallwood Investors dated April 21, 2009, the Tallwood Investors have agreed (a) to vote for all non-tallwood directors in the same proportion as other stockholders of the Company; (b) until August 24, 2012, that to the extent they hold shares in excess of 35% of the total outstanding common stock, they will vote the excess shares in the same proportion as shares voted by non-tallwood stockholders on all matters to be voted on by stockholders generally; and (c) other than for certain matters requiring a separate vote of the stockholders who control the single Series A Preferred share issued to the Tallwood Investors, they will delegate their proxy to vote those shares to the non-tallwood directors. In November 2010 and again in November 2013, the Tallwood Investors participated in the Company s stock issuances (see Note 11, below) and purchased an additional 5.6 million shares and 2.0 million shares, respectively. Assuming the exercise of the Warrants and the shares outstanding as of December 29, 2013, the Tallwood Investors would own approximately 37% of the Company s outstanding common stock. Note 11 Equity Plans and Related Equity Activity Common Stock Issuance On August 23, 2013, the Company filed with the Securities and Exchange Commission ( SEC ) a Registration Statement on Form S- 1which was subsequently amended and declared effective on November 6, Under this Registration Statement the Company could offer and sell in a public offering up to $35.0 million of common stock. In November 2013, the Company sold an aggregate of 26.4 million shares of its common stock resulting in net proceeds of $24.0 million after deducting underwriting discount and offering expenses of $2.4 million. 79

82 Table of Contents Common Stock Reserved As of December 29, 2013, the Company has reserved 28.9 million shares of common stock for future issuance under its various stock plans Stock Plan In September 1999, the Company adopted the 1999 Stock Plan (the 1999 Plan ). Options under the 1999 Plan were granted at a price equal to the fair market value of the stock at the date of grant, as determined by the Board of Directors, and terminated 10 years after the date of grant. Upon completion of the Company s initial public offering, the 1999 Plan was terminated and no shares were available for future issuance under the 1999 Plan. As of December 29, 2013, the Company had 29,000 options outstanding under the 1999 Plan Equity Incentive Plan In September 2005, the Company adopted the 2004 Equity Incentive Plan (the 2004 Plan ) upon the closing of its initial public offering. The 2004 Plan allows for the issuance of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, deferred stock units, performance units, and performance shares to the Company s employees, directors, and consultants. Options generally vest over four years at a rate of 25% on the first anniversary of the grant date and 6.25% quarterly thereafter. Generally, options terminate seven years after the date of grant and are non-statutory stock options. Restricted stock units represent the right to receive shares of common stock in the future, with the right to future delivery of the shares subject to a risk of forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Awards of restricted stock units generally vest over a four-year period. The Plan will terminate on June 24, 2014 and no shares will be available for future issuance. With stockholder approval, the Company intends to implement a new equity incentive plan prior to the termination of the 2004 Plan. The 2004 Plan provides for the automatic grant of non-statutory stock options to its non-employee directors. Each non-employee director appointed to the Board will receive an initial option to purchase 45,000 shares upon such appointment except for those directors who become non-employee directors by ceasing to be employee directors. Initial option grants shall vest at the rate of one third of the shares on the first anniversary of the date of grant and 1/12th of the shares each quarter thereafter, subject to the director s continuing to serve as a director as of each vesting date. Effective January 1, 2013, the Plan was amended such that non-employee directors receive a subsequent option to purchase shares and a restricted stock award on the date of each annual meeting of its stockholders as follows: For one year of service, the equity award is 8,500 stock options and a restricted stock award of 3,000 shares; For two years of service, the equity award is 12,500 stock options and a restricted stock award of 4,000 shares; and For three or more years of service, the equity award is 19,500 stock options and a restricted stock award of 7,000 shares. These subsequent stock option grants shall vest as to 1/12th of the shares each month following the date of grant, subject to the director s continuing to serve as a director on each vesting date. The restricted stock award will vest immediately on date of grant. All options granted under these automatic grant provisions have a term of seven years and an exercise price equal to the fair market value of its common stock on the date of grant. The 2004 Plan provides for an annual increase to the shares authorized under the plan on the first day of the year beginning in 2006, equal to the least of (i) 4.4% of the Company s outstanding shares of common stock on such date, (ii) 3.0 million shares, or (iii) an amount determined by the Board of the Directors. The shares may be authorized, but unissued or reacquired common stock. In addition, in August 2009, the Company s stockholders 80

83 Table of Contents approved an amendment and restatement of the 2004 Plan and increased the number of shares reserved for issuance under the 2004 Plan by 5.5 million shares in connection with the acquisition of the Broadband Access business of Conexant Systems, Inc. In June 2011, the stockholders approved an amendment and restatement of the 2004 Plan and increased the number of shares reserved under the Plan by 4.0 million shares to have a sufficient number of shares available to provide employees, consultants, and directors with equity awards. As of December 29, 2013, the Company had 17.9 million options and awards outstanding and 5.8 million options and awards available for future grant under the 2004 Plan Employee Stock Purchase Plan In September 2005, the Company adopted the 2004 Employee Stock Purchase Plan (the ESPP ), upon the closing of its initial public offering. The ESPP will expire in As of December 29, 2013, the Company had 3.0 million shares available for grant under the ESPP. All of the Company s employees, with the exception of employees located in China, are eligible to participate if they are employed by Ikanos or any participating subsidiary for at least 20 hours per week. The Company s 2004 ESPP is intended to qualify under Section 423 of the Internal Revenue Code and provides for consecutive, overlapping 24-month offering periods. Each offering period includes four 6-month purchase periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year. On the first day of 2005 and ending in 2014, the number of authorized shares under the ESPP will be increased by the lesser of (i) 2.5% of the Company s outstanding shares of common stock on such date, (ii) 1.5 million shares, or (iii) an amount determined by the Board of the Directors. Doradus 2004 Amended and Restated Stock Option Plan In August 2006, in connection with Doradus acquisition, the Company assumed Doradus 2004 Amended and Restated Stock Option Plan (the Doradus Plan ). Each unvested option to acquire shares of Doradus common stock outstanding under the Doradus Plan immediately prior to the closing date was converted into the right to acquire shares of Ikanos common stock. As of December 29, 2013, no stock options were outstanding, although the Company has reserved approximately 0.1 million shares for future issuance. Options granted under the Doradus Plan may be incentive stock options or non-statutory stock options. Options generally vest at a rate of 25% on the first anniversary of the grant date and 1/12th per quarter thereafter and terminate 10 years after the date of grant. Stock Option Agreement for Omid Tahernia In June 2012, the Company adopted a stand-alone Stock Option Agreement for Omid Tahernia, under which 2,100,000 shares of the Company s common stock have been reserved for issuance to the Company s CEO, Omid Tahernia, in connection with the commencement of his employment with the Company beginning in June The Stock Option Agreement and related stock option grant were granted outside of the Ikanos Amended and Restated 2004 Equity Incentive Plan and without stockholder approval pursuant to NASDAQ Marketplace Rule 4350 (i)(1)(a). The Company granted an option (the Option ) to purchase its common stock as an inducement to Mr. Tahernia to accept employment with the Company. The terms and conditions of the grant were included in his offer letter dated May 31, 2012 (the Offer Letter ). The grant included among other items the following terms: the option has been classified as a non-qualified stock option; has an exercise price equal to $0.89 (the fair market value on the grant date); and has a seven year term. With respect to 1,500,000 shares subject to the Option (the Time-Based Option Shares ), 25% of such Shares shall vest twelve months from June 11, 2012 (the Vesting Commencement Date ) on the same day of the month as the Vesting Commencement Date and 6.25% of the Shares subject to the Option shall vest each quarter thereafter on the same day of the month as the Vesting Commencement Date, subject to Mr. Tahernia s continuing to be an employee of the Company through each such date, such that all 1,500,000 Shares shall have completely vested on the four-year anniversary of the Vesting Commencement Date. 81

84 Table of Contents With respect to the remaining 600,000 shares subject to the Option (the Performance-Based Option Shares ), (i) 300,000 shares begin vesting when the average closing stock price of the Company s common stock on the Nasdaq Stock Market over any period of twenty (20) consecutive trading days reaches $2.50; and (ii) the remaining 300,000 shares begin vesting when the average closing stock price of the Company s common stock on the Nasdaq Stock Market over any period of twenty (20) consecutive trading days reaches $3.50. The Performance-Based Option Shares will vest in equal quarterly installments over the one year period after the respective stock price target is achieved, subject to Mr. Tahernia s continued employment. The Performance-Based Option Shares were valued using the Monte Carlo model to simulate future stock price movements in order to determine the fair values of a performance option grant. The simulations account for the vesting and exercise provisions of the grant. Vesting and price targets are subject to certain acceleration if the Company should terminate Mr. Tahernia s employment without cause or if Mr. Tahernia should terminate his employment for good reason, both as defined in the Offer Letter. Bonus Unit Award Program In September 2013, the Company adopted a standalone Bonus Unit Award Program for its executive officers. Under the terms of the program the Company has awarded the executive officers collectively 437,500 Bonus Units. Each reported Bonus Unit represents a contingent right to receive the fair market value of a share of common stock in cash (or, at the discretion of the Company, a share of common stock to the extent authorized under a stockholder-approved equity incentive plan) on the applicable vesting date. Fifty percent of the award will vest in January 2015 and the remaining 50% will vest in April During 2013, the Company charged approximately $0.1 million to earnings under the program. Stock-Based Compensation Stock-based compensation expense related to all stock-based compensation awards was $3.6 million, $2.9 million, and $3.2 million for 2013, 2012, and 2011, respectively. As of December 29, 2013, there was $8.5 million of total unrecognized stock-based compensation expense related to unvested share-based compensation arrangements. That expense is expected to be recognized over a weighted-average period of 3.0 years. Summary of Assumptions for Stock Options and ESPP The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table Option Grants: Expected volatility % % % Expected dividends Expected term of options (in years) Risk-free interest rate % % % ESPP: Expected volatility % % % Expected dividends Expected term of ESPP (in years) Risk-free interest rate % % %

85 Table of Contents Expected volatility: The expected volatility is based on a blend of the volatility of the Company s peer group in the industry in which it does business and the Company s historical volatility. Expected term: The expected term is based on several factors including historical observations of employee exercise patterns during the Company s history, peer company employee exercise behavior, and expectations of employee exercise behavior in the future giving consideration to the contractual terms of the stock-based awards. The expected term of options granted is derived from the average midpoint between vesting and the contractual term. Risk-free interest rate: The yield on zero-coupon U.S. treasury securities for a period that is commensurate with the expected term assumption for each group of employees is used as the risk-free interest rate. Pre-vesting forfeitures: Estimates of pre-vesting option forfeitures are based on Company experience and industry trends. The Company will adjust its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ. Equity Plan Activity A summary of option activity is presented below (in thousands, except per share): The weighted average grant date fair value of options granted during 2013, 2012, and 2011, was $0.71, $0.46, and $0.64, respectively. The total intrinsic value of options exercised during the years ended December 29, 2013, December 30, 2012, and January 1, 2012 was insignificant. The following table summarizes information about stock options as of December 29, 2013 (in thousands, except per share and years): 83 Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Outstanding at December 30, ,139 $ 1.33 Granted 3, Exercised (572) 1.32 Forfeited or expired (1,605) 1.34 Outstanding at December 29, ,726 $ $ 2 Exercisable at December 29, ,725 $ $ 1 Range of Exercise Prices Number of Options Options Outstanding Weighted- Average Remaining Contractual Term (Years) Weighted Average Exercise Price per Share Number of Options Options Exercisable Intrinsic Value Weighted Average Exercise Price per Share $0.72 to $1.00 4, $ ,605 $ 0.87 $1.04 to $1.27 5, , $1.30 to $1.75 5, $1.77 to $ , , , ,

86 Table of Contents Restricted Stock Units A summary of the restricted stock unit activity is presented below (in thousands, except per share): The weighted average grant date fair value per restricted stock units granted was $1.32, $1.39, and $2.54 during 2013, 2012, and 2011, respectively. The total fair value of restricted stock units that vested was $0.1 million for 2013, 2012, and 2011, respectively. The restricted stock units have one to four years vesting terms and are scheduled to vest through Tax related withholdings of restricted stock units was insignificant during 2013, 2012, and Restricted Stock A summary of restricted stock activity is presented below (in thousands): The total fair value of restricted stock that vested was $0.3 million, $0.3 million, and $0.4 million during 2013, 2012, and 2011, respectively. Disclosures Pertaining to All Stock-Based Award Plans Cash received from option exercises and ESPP contributions under all share-based payment arrangements was $1.6 million, $0.6 million, and $0.8 million for 2013, 2012, and 2011, respectively. The Company has maintained a full valuation allowance on its deferred tax assets since inception and has not been recognizing excess tax benefits from share-based awards. The Company does not anticipate recognizing excess tax benefits from stock-based payments for the foreseeable future, and the Company believes it would be reasonable to exclude such benefits from deferred tax assets and net loss per common share calculations. Accordingly, the Company did not realize any tax benefits from tax deductions related to share-based payment awards during 2013, 2012, or Shares Weighted- Average Grant Date Fair Value Per Share Restricted stock units outstanding at December 30, $ 1.52 Granted 1, Vested (53) 1.75 Forfeited (6) 1.46 Restricted stock units outstanding at December 29, , Shares Weighted- Average Grant Date Fair Value Per Share Restricted stock outstanding at December 30, $ 1.64 Vested (201) 1.64 Restricted stock outstanding at December 29, 2013

87 Table of Contents Bonus Unit Award Program Activity A summary of the Bonus Unit Award activity is presented below (in thousands, except per share): The Company values each bonus award at the market value of the Company s common stock. The fair value per Bonus Unit Award at date of grant was $1.19. Fifty percent of the award will vest in January 2015 and the remaining 50% will vest in April The Company amortizes the fair value of the awards on a straight-line basis. The value of the awards is adjusted monthly for changes in the fair market value of the Company s stock. Note 12 Employee Benefit Plans The Company has a retirement savings plan, which qualifies as a deferred savings plan under section 401(k) of the Internal Revenue Code. All U.S. employees are eligible to participate in the savings plan and allowed to contribute up to 60% of their total compensation, not to exceed the maximum amount allowed by the applicable statutory prescribed limit. The Company is not required to contribute, nor has it contributed, to the savings plan for any of the periods presented. Note 13 Commitments and Contingencies Lease Obligations The Company leases office facilities, equipment, and software under non-cancelable operating leases with various expiration dates through Rent expense for 2013, 2012, and 2011, was $2.4 million, $2.6 million, and $2.4 million, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred, but not paid. Future minimum lease payments as of December 29, 2013 under non-cancelable leases with original terms in excess of one year are $4.5 million in 2014; $4.5 million in 2015; $2.0 million in 2016; $1.4 million in 2017; and $0.4 million in Purchase Commitments As of December 29, 2013, the Company had $5.1 million of inventory purchase obligations that are expected to be paid during the first quarter of Indemnities, Commitments and Guarantees During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property indemnities to the Company s customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other parties technology based upon the Company s products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease. The duration of these indemnities, commitments, and guarantees varies, and in 85 Shares Grant Date Fair Value Per Share Restricted stock units outstanding at December 30, 2012 $ Granted Vested Forfeited Restricted stock units outstanding at December 29, $ 1.19

88 Table of Contents certain cases, is indefinite. The majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the various agreements that include indemnity provisions. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees development work to the Company. The Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount of the loss can be reasonably estimated, in accordance with authoritative guidance. In addition, the Company indemnifies its officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to its certificate of incorporation, bylaws, and applicable Delaware law. To date, the Company has not incurred any expenses related to these indemnifications. Litigation From time-to-time, in the normal course of business, the Company and its subsidiaries are parties to litigation matters and claims that have involved and may involve in the future, among other things, claims related to intellectual property infringement as well as employment-related disputes. The Company is subject to claims and litigation arising in the ordinary course of business, however, we do not believe, based on currently available facts and circumstances, that the final outcome of these matters, taken individually or as a whole, will have a material adverse effect on its consolidated results of operations or financial position. The results of litigation are inherently uncertain and material adverse outcomes are possible. The Company has not provided accruals for any legal matters in its financial statements as potential losses for such matters are not considered probable and reasonably estimable. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable and there can be no assurances that the actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect on its consolidated results of operations, financial position, or cash flows. Note 14 Income Taxes The components of loss before provisions for income taxes are as follows (in thousands): December 29, Year Ended December 30, January 1, United States $ (30,526) $ (17,501) $ 816 Foreign (7,231) $ (29,798) $ (16,571) $ (6,415)

89 Table of Contents The provision for income taxes consists of Federal, state minimum taxes and foreign taxes as follows (in thousands): December 29, Year Ended December 30, January 1, Current : Federal $ $ $ State and local Foreign Deferred Federal 607 Foreign (61) $ 589 $ 1,014 $ 1,082 The reconciliation between the provision for income taxes computed by applying the US federal tax rate to loss before income taxes and the actual provision for income taxes is as follows: December 29, Year Ended December 30, January 1, Provision (benefit) at statutory rate (35)% (35)% (35)% Difference between statutory rate and foreign effective rate Change in valuation allowance (1) Subpart F income 1 4 Stock-based compensation 2 13 Tax credits (2) (16) Non-deductible expenses 3 Withholding Tax 10 2 % 6 % 17 % Deferred income taxes reflect the effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of the deferred tax assets are as follows (in thousands): Year Ended December 29, December 30, Deferred tax assets : Net operating loss carry-forwards $ 43,045 $ 6,992 Depreciation and amortization Research and development and other credits 5,386 3,651 Accrued reserves and other 1,753 4,033 Stock-based compensation 4,309 3,360 Acquired intangibles 8,230 8,772 62,939 27,078 Valuation allowance (60,161) (24,354) Asset basis difference $ 2,778 $ 2,724 Deferred Tax Liability: Unrepatriated earnings $ (2,839) $ (2,662)

90 Table of Contents The increase of $36.0 million from $7.0 million in 2012 to $43.0 million in 2013 of net operating loss carry-forwards and deferred tax assets is attributable mainly to a significant operations loss due to the disposal of foreign operations. During the third quarter ended September 29, 2013, in association with the completion of the Company s 2012 year-ended tax return and the completion of obtaining necessary evidence to review the final treatment of the closing of the Singapore tax structure, including an assessment of the relevant tax laws and applicable deductions, the Company determined that the available net operating losses could include additional loss deductions which were included in the tax return. Realization of deferred tax assets is dependent upon future taxable earnings, the timing and amount of which are uncertain. The valuation allowance for deferred tax assets increased by $35.8 million to $60.2 million as of December 29, 2013 compared to an increase of $10.1 million to $24.4 million as of December 30, Due to cumulative losses in earlier years and a significant amount of loss in the most recent year, the Company believes that it is more likely than not that the majority of its deferred tax assets will not be realizable in future periods. Consistent with this, the Company has applied a valuation allowance to offset completely both the increase in and the total value of the net operating loss carry-forwards. Changes in the valuation allowance for deferred tax assets for 2013, 2012, and 2011, are as follows: Balance at beginning of year $24,354 $ 14,299 $14,937 Increases related to new net operating losses 35,880 10, Current decreases (73) (164) (1,135) Balance at end of year $60,161 $ 24,354 $14,299 As of December 29, 2013, the Company had net operating loss carry-forwards for federal and state of California tax purposes of $112.7 million and $32.4 million, respectively. The net operating loss carry-forwards will expire beginning in 2030 for federal and 2031 for California, if not utilized. The Company has research and development tax credits of approximately $3.5 million and $1.5 million for federal and California state income tax purposes, respectively. If not utilized, the federal credit carry-forward will begin to expire in The California credit can be carried forward indefinitely. As of December 29, 2013, the Company has federal and state capital loss carry-forwards for income tax purposes of approximately $3.6 million and $3.6 million, respectively. If not utilized, both the federal and California state capital loss carry-forwards will begin to expire in The Company, as previously discussed, completed an underwritten public offering under which it issued an additional 26.4 million shares of common stock. Utilization of net operating losses and tax credit carry-forwards may be subject to substantial annual limitations due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitations could impair the ability to utilize the net operating losses and tax credit carry-forwards before they can be utilized. The Company reviewed the ownership of shares both before and subsequent to the transactions to determine whether there had been any significant change in control. Based on the results of that review, the Company concluded that there had been no significant change in control, as defined, in However, future changes in ownership can significantly impair the Company s ability to utilize the net operating losses and tax credit carry-forwards. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Under this act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 and before January 1, As a result, the Company recorded a deferred tax asset of approximately $0.8 million that was fully offset by a valuation allowance in the first quarter of This will not have an impact on the income tax provision. The Company has elected to track the portion of its federal and state net operating loss carry-forwards attributable to stock option benefits outside of its financial statements. Therefore, these amounts are no longer 88

91 Table of Contents included in the Company s gross or net deferred tax assets. The benefit of these net operating loss carry-forwards will only be recorded to equity when they reduce cash taxes payable. The cumulative amounts as of December 29, 2013 are not material for either federal or state tax purposes. Prior to 2011, the Company did not provide for federal income tax and withholding taxes for unremitted foreign earnings because the unremitted earnings of its foreign subsidiaries were deemed to be permanently reinvested. Beginning in the fourth quarter of 2011, the Company began to provide for federal income tax and foreign withholding taxes for the unremitted earnings of foreign subsidiaries because the Company has determined that those funds may no longer be permanently reinvested. Any additional U.S. income taxes will be minimal due to the utilization of net operating loss carry-forwards and foreign tax credits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance at beginning of year $4,734 $ 183 $178 Changes for tax positions of current year Additions for tax positions of prior years 581 3,968 5 Reduction for tax position of prior years (57) Balance at end of year $5,950 $ 4,734 $183 The Company has adopted the accounting policy that interest and penalties will be classified within the provision for income taxes. The amount of accrued interest and penalty recorded was $0.1 million as of and for the fiscal year ended December 29, The Company does not anticipate any significant changes to its liability for unrecognized tax benefits within twelve months of this reporting date of its unrecognized tax benefits. The Company s operations are subject to income and transaction taxes in the U.S. and in multiple foreign jurisdictions. Significant estimates and judgments are required in determining the Company s worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result. The majority of the unrecognized tax benefit is related to gross deferred tax assets, and accordingly, if and when recognized, would not result in a change in Company s effective tax rate due to the existence of a full valuation allowance. In addition, we recorded additional long-term tax liability for certain income tax benefits related to its India subsidiary s transfer pricing policy. If such tax benefit is recognized, it would result in a change in the Company s effective tax rate. The Company does not expect any material adjustment to its reserves within the next twelve months. The Company s tax years starting from 2005 to 2013 remain open in various tax jurisdictions. There are on-going examinations by the India tax authority for India transfer pricing issues for 2009, 2010, and 2011, and there are on-going examinations by the Singapore tax authorities for Note 15 Significant Customer Information and Segment Reporting FASB establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The method for determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company s chief operating decision-maker is considered to be the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by 89

92 Table of Contents disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. On this basis, the Company is organized and operates in a single segment: the design, development, marketing, and sale of semiconductors and integrated firmware. The following table summarizes revenue by geographic region, based on the country in which the customer headquarters office is located (in thousands): The Company tracks its products within two product families: Gateway and Access. The Access product family consists of semiconductor and software products that power the carrier infrastructure for the central office ( CO ), as well as any node in a hybrid-fiber-copper network where fiber is terminated and copper is used to reach the consumer premises. The Gateway product family includes a variety of processors and the associated software designed for devices deployed at the customer premises. Gateway products enable service providers to offer their subscribers a variety services, including internet access, voice, over-the-top ( OTT ) content, and security. Revenue by product family is as follows (in thousands): December 29, 2013 December 30, 2012 The distribution of long-lived assets (excluding intangible assets and other assets) was as follows (in thousands): January 1, 2012 France $ 19, % $ 25, % $ 27, % Taiwan 18, , , Japan 14, , , Germany 9, , ,728 1 China 4, , , Hong Kong 1, , , United States 2, , ,484 2 Other 10, , , $ 79, % $125, % $ 136, % December 29, 2013 December 30, 2012 January 1, 2012 Gateway $ 60, % $ 93, % $ 88, % Access 19, , , $ 79, % $125, % $ 136, % December 29, December 30, United States $ 7,856 $ 8,039 Asia, predominantly India $ 8,612 $ 8,

93 Table of Contents SUPPLEMENTARY FINANCIAL DATA Quarterly Financial Information (Unaudited) (In thousands, except per share amounts) April 1, 2012 July 1, Sept. 30, 2012 Three Months Ended March 31, Dec. 30, Revenue $ 30,760 $32,055 $ 31,375 $ 31,758 $ 26,152 $19,115 $16,900 $ 17,582 Cost of revenue 14,653 17,001 16,620 16,476 12,196 9,813 8,263 8,806 Gross margin 16,107 15,054 14,755 15,282 13,956 9,302 8,367 8,776 Operating expenses: Research and development 14,000 12,842 16,581 14,120 13,518 12,599 12,455 12,503 Selling, general, and administrative 4,680 4,648 4,507 5,221 4,772 4,866 4,589 4,589 Restructuring charges 1,092 (30) Total operating expenses 19,772 17,460 21,088 19,341 18,290 17,465 17,044 17,092 Loss from operations (3,665) (2,406) (6,333) (4,059) (4,334) (8,163) (8,407) (8,316) Interest income and other, net 75 (387) (442) (147) (71) Loss before provision for income tax (3,590) (2,793) (6,272) (3,916) (4,252) (8,605) (8,554) (8,387) Provision for income taxes Net loss $ (3,705) $ (2,999) $ (6,357) $ (4,524) $ (4,416) $ (8,673) $ (8,665) $ (8,633) Net loss per share Basic and diluted $ (0.05) $ (0.04) $ (0.09) $ (0.06) $ (0.06) $ (0.12) $ (0.12) $ (0.10) Weighted average number of shares Basic and diluted 69,335 69,543 69,788 70,136 70,413 71,182 71,662 85,648 June 30, 2013 Sept. 29, 2013 Dec. 29, 2013

94 Table of Contents ITEM 9. None. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9A. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a- 15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded these disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting for Ikanos. Ikanos internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the fair presentation of published financial statements for external purposes in accordance with GAAP. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate, the effectiveness of internal controls may vary over time. Our management assessed the effectiveness of our internal control over financial reporting as of December 29, In making this assessment we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ( COSO ) in Internal Control Integrated Framework (1992). Based on our assessment using those criteria, we concluded that, as of December 29, 2013, our internal control over financial reporting is effective. The Company s independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an attestation report on the Company s internal control over financial reporting. The report on the audit of internal control over financial reporting appears in Part II, Item 8 of this Form 10-K. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting during the fourth quarter ended December 29, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. None. CONTROLS AND PROCEDURES OTHER INFORMATION 92

95 Table of Contents PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K but will be included in the definitive proxy statement that we will file within 120 days after the end of our fiscal year pursuant to Regulation 14A (the Proxy Statement ) for our 2014 Annual Meeting of Stockholders, and certain of the information to be included therein is incorporated by reference herein. ITEM 10. The information regarding our executive officers required by this Item is incorporated by reference from the section entitled Executive Officers of Registrant in Part I of this Annual Report on Form 10-K. The information regarding our directors, the identification of Audit Committee members and the Audit Committee Financial Expert is incorporated by reference from Proposal One Election of Directors in our Proxy Statement. The information concerning Section 16(a) reporting is incorporated by reference from Other Information Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement. Information regarding material changes, if any, to the procedures by which security holders may recommend nominees to our Board of Directors is incorporated by reference from Consideration of Stockholder Recommendations and Nominations in our Proxy Statement. We have adopted a Code of Business Conduct and Ethics applicable to all our employees. Our Code of Business Conduct and Ethics is available at our investor relations website at Any waiver or amendment to our Code of Business Conduct and Ethics that applies to our Chief Executive Officer, President, Chief Financial Officer, or any other officer providing financial information, will be disclosed on our website at or in a Current Report on Form 8-K filed with the SEC. ITEM 11. The information included under the following captions in our Proxy Statement is incorporated herein by reference: Compensation Discussion and Analysis, 2013 Summary Compensation Table, Grants of Plan-Based Awards in 2013, Outstanding Equity Awards at 2013 Fiscal Year End, Option Exercises and Stock Vested in 2013, Potential Payments upon Termination or Change in Control, Director Compensation and Compensation Committee Interlocks, and Insider Participation. The information included under the heading Compensation Committee Report in our Proxy Statement is incorporated herein by reference; however, this information shall not be deemed to be soliciting material or to be filed with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. ITEM 12. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE EXECUTIVE COMPENSATION SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information regarding stock ownership by principal stockholders and management required by this Item is incorporated by reference from Share Ownership by Principal Stockholders and Management in our Proxy Statement. Equity Compensation Plan Information The following table provides information as of December 29, 2013 with respect to common stock that may be issued upon the exercise of equity awards under our Amended and Restated 1999 Stock Option Plan (the 93

96 Table of Contents 1999 Plan ), Amended and Restated 2004 Equity Incentive Plan (the 2004 Plan ), 2004 Employee Stock Purchase Plan (the 2004 ESPP ) and the Doradus Technologies, Inc Amended and Restated Stock Option Plan (the Doradus Plan ). Plan category Doradus 2004 Amended and Restated Stock Option Plan Options granted under the Doradus Plan may be incentive stock options or non-statutory stock options. Options generally vest at a rate of 25% on the first anniversary of the grant date and 1/12th per quarter thereafter and terminate ten years after the date of grant. The Doradus Plan has a term of 10 years from the date of adoption, which was in The information required by this Item is incorporated by reference to Certain Relationships and Related Transactions in our Proxy Statement. The information regarding director independence is incorporated herein by reference from the subsection entitled Board Independence in the section entitled Proposal 1 Election of Directors in our Proxy Statement. The information regarding principal accounting fees and services is incorporated herein by reference from the section entitled Proposal 2 Ratification of Appointment of Independent Registered Public Accounting Firm in our Proxy Statement. 94 Number of securities to be issued upon exercise of outstanding options, warrants and rights Weightedaverage exercise price per share of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation Equity compensation plans approved by security holders (1)(2)(3) 19,991,885 $ ,789,045 (4) Equity compensation plans not approved by security holders 149,215 (5) Total 19,991, ,938,260 (1) Includes: (i) shares of common stock issuable upon the exercise of outstanding options grants (subject to vesting) for 17,139,339 shares (ii) shares of common stock issuable upon the vesting of restricted stock units for 1,266,239 shares. (2) No further equity awards may be granted under the 1999 Plan. (3) The 2004 Plan provides for an annual increase to the shares authorized under the plan on the first day of our fiscal year beginning in 2006, equal to the least of (i) 4.4% of our outstanding shares common stock on such date, (ii) 3.0 million shares, or (iii) an amount determined by the Board of the Directors. The 2004 ESPP provides for an annual increase of the shares authorized under the plan on the first day of our fiscal year starting in 2005 and ending in 2014, the number of authorized shares under the ESPP will be increased by the lesser of (i) 2.5 % of our outstanding shares of common stock on such date, (ii) 1.5 million shares, or (iii) an amount determined by the Board of the Directors. (4) Includes 5,831,214 shares available for future issuance under the 2004 Plan and 2,957,831 shares available for future issuance under the 2004 ESPP. (5) Shares available for future issuance under the Doradus Plan. ITEM 13. ITEM 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE PRINCIPAL ACCOUNTING FEES AND SERVICES plans

97 Table of Contents PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 1. Financial Statements: The financial statements are set forth under Part II, Item 8 of this Annual Report on Form 10-K. 2. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included. Exhibit Number The following documents are filed as part of this Report: 3. Exhibits: Description 3.1 Restated Certificate of Incorporation, as amended on June 7, Incorporated by reference to Exhibit 3.1 of the Registrant s Quarterly Report on Form 10-Q filed with the SEC on August 4, Bylaws. Incorporated by reference to Exhibit 3.1 of the Registrant s Current Report on Form 8-K filed with the SEC on January 31, Certificate of Designation of Series A Preferred Stock. Incorporated by reference to Exhibit 3.2 of the Registrant s Current Report on Form 8-K filed with the SEC on August 25, Form of Registrant s Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Amendment No. 1 of the Registrant s registration statement on Form S-1 dated August 6, 2004 (Registration No ). 10.1* Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers. Incorporated by reference to Exhibit 10.1 of the Registrant s registration statement on Form S-1 dated June 25, 2004 (Registration No ). 10.2* Amended and Restated 1999 Stock Option Plan and related form agreements thereunder. Incorporated by reference to Exhibit 10.1 of the Registrant s Quarterly Report on Form 10-Q filed with the SEC on August 16, * Amended and Restated 2004 Equity Incentive Plan. Incorporated by reference to the Registrant s Quarterly report on Form 10-Q filed with the SEC on August 4, Form of Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 10.1 of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Amended and Restated Stock Option Agreement. Incorporated by reference to Exhibit 10.2 of the Registrant s current report on Form 8-K filed with the SEC on July 11, French Sub-Plan for the Grant of Restricted Stock Units. Incorporated by reference to Exhibit 10.3 of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Restricted Stock Unit Agreement for Employees in France. Incorporated by reference to Exhibit of the Registrant s current report on Form 8-K filed with the SEC on July 11, French Sub-Plan for the Grant of Stock Options. Incorporated by reference to Exhibit 10.4 of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Stock Option Agreement for Employees in France. Incorporated by reference to Exhibit of the Registrant s current report on Form 8-K filed with the SEC on July 11,

98 Table of Contents Exhibit Number Description India Sub-Plan. Incorporated by reference to Exhibit 10.5 of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Restricted Stock Unit Agreement For Employees in India. Incorporated by reference to Exhibit of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Stock Option Agreement for Employees in India. Incorporated by reference to Exhibit of the Registrant s current report on Form 8-K filed with the SEC on July 11, * Amended and Restated 2004 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.4 to Amendment No. 6 of the Registrant s registration statement on Form S-1 dated September 1, 2005 (Registration No ) * 2004 Employee Stock Purchase Plan as amended dated as of October 22, Incorporated by reference to Exhibit 10.5 of the Registrant s Quarterly Report on 10-Q filed with the SEC on November 6, Lease Agreement for Fremont Boulevard, Fremont, California, dated as of February 7, 2006, between Registrant and ProLogis. Incorporated by reference to Exhibit 10.5 of the Registrant s Annual Report on Form 10-K filed with the SEC on February 27, First Amendment to the Lease Agreement for Fremont Boulevard, Fremont, California, dated as of June 18, 2006 between Registrant and ProLogis Second Amendment to the Lease Agreement for Fremont Boulevard, Fremont, California, dated as of December 8, 2010 between Registrant and ProLogis Lease Agreement for Fremont Boulevard, Fremont, California, dated as of February 7, 2006, between Registrant and ProLogis First Amendment to the Lease Agreement for Fremont Boulevard, Fremont, California, dated as of June 18, 2006 between Registrant and ProLogis Second Amendment to the Lease Agreement for Fremont Boulevard, Fremont, California, dated as of December 8, 2010 between Registrant and ProLogis Asset Purchase Agreement by and between Ikanos Communications, Inc. and Conexant Systems, Inc. dated as of April 21, Incorporated by reference to Exhibit 10.1 of the Registrant s Current Report on Form 8-K filed with the SEC on April 24, Entry into a Securities Purchase Agreement by and between Ikanos Communications, Inc. and Tallwood III, L.P., Tallwood III Associates, L.P., Tallwood III Partners, L.P., and Tallwood III Annex, L.P. (collectively, Tallwood ) dated as of April 21, Incorporated by reference to Exhibit 10.2 of the Registrant s Current Report on Form 8-K filed with the SEC on April 24, Entry into a Stockholder Agreement by and between Ikanos Communications, Inc. and Tallwood dated as of April 21, Incorporated by reference to Exhibit 10.3 of the Registrant s Current Report on Form 8-K filed with the SEC on April 24, Lease Agreement, dated as of March 31, 2011, between the Registrant and Alfiere-100 Schultz Associates, L.P First Amendment to the Lease Agreement between the Registrant and Alfiere-100 Schultz Associates, L.P., dated March * Offer letter dated as of May 30, 2012 with Omid Tahernia effective as of September 5, Incorporated by reference to Exhibit 10.1 of the Registrant s Current Report on Form 8-K filed with the SEC on June 11,

99 Table of Contents Exhibit Number TRADEMARKS Description 10.12* Amendment to Offer letter dated as of May 30, 2012 with Omid Tahernia effective as of September 5, Incorporated by reference to Exhibit 10.1 of the Registrant s Current Report on Form 8-K filed with the SEC on September 6, * Ikanos Communications, Inc. Executive Incentive Plan. Incorporated by reference to Exhibit 10.3 of the Registrant s Quarterly Report on Form 10-Q filed with the SEC on August 2, Subsidiaries of the Registrant Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm Power of Attorney is herein referenced to the signature page of this Annual Report on Form 10-K Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document * Indicates a management contract or compensatory plan or arrangement. Ikanos Communications, Ikanos, the Ikanos logo, the Bandwidth without boundaries tagline, Fusiv, Ikanos NodeScale, Ikanos SmartCPE, Neos, and Ikanos Velocity are among the trademarks or registered trademarks of Ikanos Communications. 97

100 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POWER OF ATTORNEY IKANOS COMMUNICATIONS, INC. February 28, 2014 / S / O MID T AHERNIA Omid Tahernia President, Chief Executive Officer and Director KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dennis Bencala and Andrew S. Hughes, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, to sign any and all amendments (including post-effective amendments) to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-facts and agents, or his substitute or substitutes, or any of them, shall 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 date indicated. Signature Title Date / S / O MID T AHERNIA Omid Tahernia / S / D ENNIS B ENCALA Dennis Bencala President, Chief Executive Officer and Director (Principal Executive Officer) Chief Financial Officer and Vice President of Finance (Principal Financial and Accounting Officer) February 28, 2014 February 28, 2014 / S / D IOSDADO B ANATAO Diosdado Banatao Jason W. Cohenour / S / D ANIAL F AIZULLABHOY Danial Faizullabhoy / S / F REDERICK M. L AX Frederick M. Lax / S / G EORGE P AVLOV George Pavlov / S / J AMES S MAHA James Smaha Chairman of the Board and Director February 28, 2014 Director Director February 28, 2014 Director February 28, 2014 Director February 28, 2014 Director February 28,

101 Table of Contents Exhibit Number Description Exhibit Index 3.1 Restated Certificate of Incorporation, as amended on June 7, Incorporated by reference to Exhibit 3.1 of the Registrant s Quarterly Report on Form 10-Q filed with the SEC on August 4, Bylaws. Incorporated by reference to Exhibit 3.1 to the Registrant s Current Report on Form 8-K filed with the SEC on January 31, Certificate of Designation of Series A Preferred Stock. Incorporated by reference to Exhibit 3.2 of the Registrant s Current Report on Form 8-K filed with the SEC on August 25, Form of Registrant s Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Amendment No. 1 of the Registrant s registration statement on Form S-1 dated August 6, 2004 (Registration No ). 10.1* Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers. Incorporated by reference to Exhibit 10.1 of the Registrant s registration statement on Form S-1 dated June 25, 2004 (Registration No ). 10.2* Amended and Restated 1999 Stock Option Plan and related form agreements thereunder. Incorporated by reference to Exhibit 10.1 of the Registrant s Quarterly Report on Form 10-Q filed with the SEC on August 16, * Amended and Restated 2004 Equity Incentive Plan. Incorporated by reference to the Registrant s Quarterly report on Form 10-Q filed with the SEC on August 4, Form of Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 10.1 of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Amended and Restated Stock Option Agreement. Incorporated by reference to Exhibit 10.2 of the Registrant s current report on Form 8-K filed with the SEC on July 11, French Sub-Plan for the Grant of Restricted Stock Units. Incorporated by reference to Exhibit 10.3 of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Restricted Stock Unit Agreement for Employees in France. Incorporated by reference to Exhibit of the Registrant s current report on Form 8-K filed with the SEC on July 11, French Sub-Plan for the Grant of Stock Options. Incorporated by reference to Exhibit 10.4 of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Stock Option Agreement for Employees in France. Incorporated by reference to Exhibit of the Registrant s current report on Form 8-K filed with the SEC on July 11, India Sub-Plan. Incorporated by reference to Exhibit 10.5 of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Restricted Stock Unit Agreement For Employees in India. Incorporated by reference to Exhibit of the Registrant s current report on Form 8-K filed with the SEC on July 11, Form of Stock Option Agreement for Employees in India. Incorporated by reference to Exhibit of the Registrant s current report on Form 8-K filed with the SEC on July 11, * Amended and Restated 2004 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.4 to Amendment No. 6 of the Registrant s registration statement on Form S-1 dated September 1, 2005 (Registration No ) * 2004 Employee Stock Purchase Plan as amended dated as of October 22, Incorporated by reference to Exhibit 10.5 of the Registrant s Quarterly Report on 10-Q filed with the SEC on November 6,

102 Table of Contents Exhibit Number Description 10.5 Lease Agreement for Fremont Boulevard, Fremont, California, dated as of February 7, 2006, between Registrant and ProLogis. Incorporated by reference to Exhibit 10.5 of the Registrant s Annual Report on Form 10-K filed with the SEC on February 27, First Amendment to the Lease Agreement for Fremont Boulevard, Fremont, California, dated as of June 18, 2006 between Registrant and ProLogis Second Amendment to the Lease Agreement for Fremont Boulevard, Fremont, California, dated as of December 8, 2010 between Registrant and ProLogis Lease Agreement for Fremont Boulevard, Fremont, California, dated as of February 7, 2006, between Registrant and ProLogis First Amendment to the Lease Agreement for Fremont Boulevard, Fremont, California, dated as of June 18, 2006 between Registrant and ProLogis Second Amendment to the Lease Agreement for Fremont Boulevard, Fremont, California, dated as of December 8, 2010 between Registrant and ProLogis Asset Purchase Agreement by and between Ikanos Communications, Inc. and Conexant Systems, Inc. dated as of April 21, Incorporated by reference to Exhibit 10.1 of the Registrant s Current Report on Form 8-K filed with the SEC on April 24, Entry into a Securities Purchase Agreement by and between Ikanos Communications, Inc. and Tallwood III, L.P., Tallwood III Associates, L.P., Tallwood III Partners, L.P., and Tallwood III Annex, L.P. (collectively, Tallwood ) dated as of April 21, Incorporated by reference to Exhibit 10.2 of the Registrant s Current Report on Form 8-K filed with the SEC on April 24, Entry into a Stockholder Agreement by and between Ikanos Communications, Inc. and Tallwood dated as of April 21, Incorporated by reference to Exhibit 10.3 of the Registrant s Current Report on Form 8-K filed with the SEC on April 24, Lease Agreement, dated as of March 31, 2011, between the Registrant and Alfiere-100 Schultz Associates, L.P First Amendment to the Lease Agreement between the Registrant and Alfiere-100 Schultz Associates, L.P., dated March * Offer letter dated as of May 30, 2012 with Omid Tahernia effective as of September 5, Incorporated by reference to Exhibit 10.1 of the Registrant s Current Report on Form 8-K filed with the SEC on June 11, * Amendment to Offer letter dated as of May 30, 2012 with Omid Tahernia effective as of September 5, Incorporated by reference to Exhibit 10.1 of the registrant s Current Report on Form 8-K filed with the SEC on September 6, * Ikanos Communications, Inc. Executive Incentive Plan. Incorporated by reference to Exhibit 10.3 of the Registrant s Quarterly Report on Form 10-Q filed with the SEC on August 2, Subsidiaries of the Registrant Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm Power of Attorney is herein referenced to the signature page of this Annual Report on Form 10-K Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of

103 Table of Contents Exhibit Number Description 32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Label Linkbase Document XBRL Taxonomy Extension Presentation Linkbase Document * Indicates a management contract or compensatory plan or arrangement. 101

104 Exhibit FIRST AMENDMENT TO LEASE AGREEMENT THIS FIRST AMENDMENT TO LEASE AGREEMENT made this 18 th day of June, 2006, by and between ProLogis, a Maryland real estate investment trust, hereinafter referred to as Landlord, and Ikanos Communications, Inc., a Delaware corporation, hereinafter referred to as Tenant. W I T N E S S E T H: WHEREAS, Landlord and Ikanos Communications, a California corporation, entered into that certain Lease (hereinafter referred to as the Lease ) dated the 7 th day of February 2006, under the terms of which Landlord leased approximately 37,266 rentable square feet (hereinafter referred to as the Premises ) located in Building #6 of Bayside Corporate Center, Fremont Boulevard, Fremont, California 94538; and WHEREAS, through a clerical error at the time the Lease was prepared, the name of the Tenant was incorrectly stated on the Lease as Ikanos Communications, a California corporation; and WHEREAS, the Tenant under the Lease, as amended hereby, is Ikanos Communications, Inc., a Delaware corporation; and WHEREAS, the parties hereto now desire to amend and modify said Lease as more fully hereinafter set forth. A G R E E M E N T: follows: NOW, THEREFORE, in consideration of the Premises and the mutual covenants hereinafter contained, the parties hereto agree as 1. The parties hereby agree that the Security Deposit as defined in the Lease is hereby amended to allow either a letter of credit or direct payment from Tenant to Landlord, in the amount of $36,242.00, as satisfaction of the Security Deposit requirement. 2. Ikanos Communications, Inc., a Delaware corporation, is the Tenant under the Lease. 3. Except as herein amended, the terms and conditions of the Lease and any amendments thereto, shall continue in full force and effect and the Lease (and any amendments thereto) as amended herein is hereby ratified and affirmed by Landlord and Tenant. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment to Lease Agreement in multiple counterparts, each of which shall have the force and effect of an original. TENANT: LANDLORD: Ikanos Communications, Inc., a Delaware Corporation ProLogis, a Maryland real estate investment trust By: /s/ Dan Atler By: /s/ W. Scott Lamson Name: Dan Atler Name: W. Scott Lamson Title: Chief Financial Officer Title: Senior Vice President Address: Address: Fremont Blvd Fremont Blvd. Fremont, CA Fremont, CA 94538

105 Exhibit SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE AGREEMENT (the Second Amendment ) is entered into as of the 8 th day of December, 2010, by and between ProLogis, a Maryland real estate investment trust, (the Landlord ) and Ikanos Communications, Inc., a Delaware corporation (the Tenant ). W I T N E S S E T H: WHEREAS, Landlord and Tenant have entered into a Lease dated February 7th, 2006, and as further amended by that certain First Amendment to Lease Agreement dated June 18th, 2006, pursuant to which Landlord leased to Tenant certain premises consisting of approximately 37,266 square feet located at Fremont Boulevard, Fremont, California (the Premises ), such lease, as heretofore modified, being herein referred to as the Lease. WHEREAS, Landlord and Tenant desire to modify the Lease on the terms and conditions set forth below. A G R E E M E N T: follows: NOW THEREFORE, in consideration of the Premises and the mutual covenants hereinafter contained, the parties hereto agree as 1. The Lease Term is extended for Sixty ( 60 ) months, such that the Lease shall terminate on March 31, 2016 (the Second Extension Term ). All of the terms and conditions of the Lease shall remain in full force and effect during such extension period except as expressly provided herein. 2. The monthly Base Rent due and payable under this Lease is hereby amended and shall be as following through the Second Extension Term: Period Monthly Base Rent January 1, 2011 through May 31, 2011 $0.00* June 1, 2011 through March 31, 2013 $18, April 1, 2013 through March 31, 2014 $20, April 1, 2014 through March 31, 2015 $21, April 1, 2015 through March 31, 2016 $21, *Tenant shall be responsible for operating expenses during free rent period. 3. Notwithstanding anything contained herein to the contrary, Landlord shall contribute a Tenant Improvement Allowance up to a maximum amount of $37, (the TI Allowance ), toward the Alterations to the Premises which includes but is not limited to paint, carpet, vinyl composition tile, and office removal/demolition, and foam based fire suppression system for the server room ( Second Amendment Alterations ), which such payment shall be made by Landlord to Tenant within 30 days following (i) completion of the Second Amendment Alterations, (ii) Landlord s receipt of Tenant s invoice substantiating the costs related thereto, and (iii) Landlord s receipt of final lien waivers from all contractors and subcontractors who did work on the Second Amendment Alterations. Landlord shall be under no obligation to pay for any Alterations to the Premises in excess of the TI Allowance. Further, such TI Allowance shall only be available for Tenant s use through December 31, 2011, and Tenant hereby waives any and all rights to any unused portion of the TI Allowance remaining as of January 1, Effective upon the full execution of the Second Amendment and in reference to Section 17, titled Assignment and Subletting, the following portion of Section 17(ii) shall be deleted in its entirety: the assignee or sublessee does not have a net worth calculated according to generally accepted accounting principles at least equal to the greater of the net worth of Tenant immediately prior to such assignment or sublease or the net worth of the Tenant at the time it executed the Lease; and is hereby replaced with the following:

106 the assignee does not have a net worth calculated according to generally accepted accounting principles at least equal to the greater of the net worth of Tenant immediately prior to such assignment or the net worth of the Tenant at the time it executed the Lease;

107 5. Effective upon the full execution of the Second Amendment and in reference to Section 17, titled Assignment and Subletting, the following portion of Section 17(vii) shall be deleted in its entirety: the assignment or sublet is to another tenant in the Project and is at rates which are below those charged by Landlord for comparable space in the Project; and is hereby replaced with the following: the assignment is to another tenant in the Project and is at rates which are below those charged by Landlord for comparable space in the Project; 6. Effective upon the full execution of the Second Amendment and in reference to Section 17, titled Assignment and Subletting, the following portion of Section 17(ix) shall be deleted in its entirety: the proposed assignee or sublessee is a governmental agency. and is hereby replaced with the following: the proposed assignee is a governmental agency. 7. Tenant shall continue to have the renewal option set forth in Addendum 3 of the original Lease, which shall be exercisable prior to the expiration of the Second Extension Term in strict compliance with the terms of such renewal option. 8. All other rights to cancel under the Cancellation Option of Addendum 4 are hereby deemed null and void and of no further force or effect. 9. Tenant agrees to keep strictly confidential and shall not disclose orally or in writing the terms and conditions of this Second Amendment, including without limitation the rental rates, or any matters related thereto, except that Tenant may disclose such terms and conditions of this Second Amendment to its bona fide legal and financial representatives who need to know such information to effectuate this Second Amendment, a future financing, sale of stock, as well as any public company requirement to disclose such information. 10. Except as otherwise expressly provided herein, all defined terms used in this Second Amendment shall have the same respective meanings as are provided for such defined terms in the Lease. Tenant shall accept the Premises in its as is condition and shall pay Operating Expenses as provided in the Lease during the Second Extension Term. 11. Insofar as the specific terms and provisions of this Second Amendment purport to amend or modify or are in conflict with the specific terms, provisions and exhibits of the Lease, the terms and provisions of this Second Amendment shall govern and control; in all other respects, the terms, provisions and exhibits of the Lease shall remain unmodified and in full force and effect. 12. Landlord and Tenant hereby agree that (i) this Second Amendment is incorporated into and made a part of the Lease, (ii) any and all references to the Lease hereinafter shall include this Second Amendment, and (iii) the Lease and all terms, conditions and provisions of the Lease are in full force and effect as of the date hereof, except as expressly modified and amended hereinabove. 13. Any obligation or liability whatsoever of ProLogis, a Maryland real estate investment trust, which may arise at any time under this Lease or any obligation or liability which may be incurred by it pursuant to any other instrument, transaction, or undertaking contemplated hereby shall not be personally binding upon, nor shall resort for the enforcement thereof be had to the property of, its trustees, directors, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort, or otherwise. IN WITNESS WHEREOF, the parties hereto have signed this Second Amendment as of the day and year first above written.

108 TENANT: Ikanos Communications, Inc., a Delaware corporation LANDLORD: ProLogis, a Maryland real estate investment trust By: /s/ Dennis Bencala By: /s/ W. Scott Lamson Name: Dennis Bencala Name: W. Scott Lamson Title: Chief Financial Officer Title: Senior Vice President

109 Exhibit 10.6 [California Net Lease] LEASE AGREEMENT THIS LEASE AGREEMENT is made this 7 th day of February, 2006, between ProLogis, a Maryland real estate investment trust ( Landlord ), and the Tenant named below. Tenant: Tenant s Representative, Address, and Telephone: Premises: Project: Building: Ikanos Communications, a California corporation Dan Atler Ikanos Communications Fremont Blvd. Fremont, CA, That portion of the Building, containing approximately 36,300 rentable square feet, as determined by Landlord, as shown on Exhibit A. Bayside Corporate Center (based upon 311,277 rentable square feet in the Project) Building 5 (sba00805), Fremont Blvd, Fremont CA (based upon 36,300 rentable square feet in the Building) Tenant s Proportionate Share of Project: 11.66% Tenant s Proportionate Share of Building: 100% Lease Term: Beginning on the Commencement Date and ending on the last day of the 62 nd full calendar month thereafter, subject to the provisions of Addendum 3 and Addendum 4, and subject further to any termination rights as granted under this Lease with respect to an event of casualty or condemnation. Commencement Date: February 6, 2006 Initial Monthly Base Rent: See Addendum 1 Initial Estimated Monthly Operating Expense Payments: (estimates only and subject to adjustment to actual costs and expenses according to the provisions of this Lease) 1. Common Area Charges: 2. Taxes: 3. Insurance: 4. Other: $2, $5, $ $67.58 Initial Estimated Monthly Operating Expense Payments: $7, Initial Monthly Base Rent and Operating Expense Payments: $ 26, Security Deposit: Letter of Credit in the amount of $35, Broker: Brad Werner CB Richard Ellis Addenda: 1. Base Rent Adjustments 2. Construction (Allowance) 3. Renewal Option (Baseball Arbitration) 4. Cancellation Option 5. Misc. Provisions 6. Move Out Conditions 7. Letter of Credit for Security Deposit Exhibits: A. Site Plan; B. Sign Criteria; C. Floor Plan 1. Granting Clause. In consideration of the obligation of Tenant to pay rent as herein provided and in consideration of the other terms, covenants, and conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord, the Premises, to have and to hold for

110 the Lease Term, subject to the terms, covenants and conditions of this Lease. 2. Acceptance of Premises. Tenant shall accept the Premises in its condition as of the Commencement Date, subject to all applicable laws, ordinances, regulations, covenants and restrictions. Except as otherwise set forth in this Lease, Landlord has made no representation or warranty as to the suitability of the Premises for the conduct of Tenant s business, and Tenant waives any implied warranty that the Premises are suitable for Tenant s intended purposes. Except as provided in this paragraph and Paragraph 10 and as otherwise

111 expressly set forth herein, in no event shall Landlord have any obligation for any defects in the Premises or any limitation on its use. The taking of possession of the Premises shall be conclusive evidence that Tenant accepts the Premises and that the Premises were in good condition at the time possession was taken except for items that are Landlord s responsibility (or for which Landlord has provided a representation or warranty) under this paragraph and/or Paragraph 10 as well as any punchlist items agreed to in writing by Landlord and Tenant; provided, however, that Tenant s acceptance of the Premises shall not be deemed a waiver of Landlord s delivery condition obligations hereunder. Landlord acknowledges and covenants that as of the Commencement Date (i) the Building s HVAC, electrical, plumbing and other mechanical systems are in good working order and Landlord warrants such systems for a period of six (6) months from the Commencement Date, and (ii) the Premises are in compliance with applicable Legal Requirements. 3. Use. The Premises shall be used only for the purpose of light manufacturing and assembly, receiving, storing, shipping and selling (but limited to wholesale sales) products, materials and merchandise made and/or distributed by Tenant, for general office use by Tenant, and for such other lawful purposes as may be incidental thereto. Tenant shall not conduct or give notice of any auction, liquidation, or going out of business sale on the Premises. Tenant will use the Premises in a careful, safe and proper manner and will not commit waste, overload the floor or structure of the Premises or subject the Premises to use that would damage the Premises. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise, or vibrations to emanate from the Premises, or take any other action that would constitute a nuisance or would disturb, unreasonably interfere with, or endanger Landlord or any tenants of the Project. Outside storage, including without limitation, storage of non-operable trucks and other non-operable vehicles, is prohibited without Landlord s prior written consent. Subject to Landlord s representation and warranty in Paragraph 2 hereof, Tenant, at its sole expense, shall use and occupy the Premises in compliance with all laws with respect to Tenant s particular use of the Premises, including, without limitation, the Americans With Disabilities Act, orders, judgments, ordinances, regulations, codes, directives, permits, licenses, covenants and restrictions (including, without limitation, any covenants, conditions, and restrictions affecting the Project) now or hereafter applicable to such use of the Premises (collectively, Legal Requirements ). Tenant shall, at its expense, make any alterations or modifications, within or without the Premises, that are required by Legal Requirements related to Tenant s particular use of the Premises. Tenant will not use or permit the Premises to be used for any purpose or in any manner that would void Tenant s or Landlord s insurance, increase the insurance risk. If any increase in the cost of any insurance on the Premises or the Project is caused by Tenant s use or occupation of the Premises beyond that cost that would normally be incurred with respect to a tenant engaging in the uses permitted herein, or because Tenant vacates the Premises, then Tenant shall pay the amount of such increase to Landlord. Landlord and Tenant agree that Tenant shall have the right to occupy the Premises upon full execution of this Lease by both parties hereto and delivery by Tenant to Landlord of the insurance certificates required hereunder for the purpose of Tenant s preparation of the Premises for occupancy (including without limitation, commencement of any tenant improvements permitted by Landlord or this Lease). Any such occupation of the Premises by Tenant occurring prior to the Commencement Date shall be subject to the terms and conditions of this Lease, other than any obligation of Tenant to pay Base Rent or Operating Expenses as defined below. Notwithstanding anything contained herein to the contrary, Tenant s obligations hereunder shall relate only to legally required changes to the interior of the Premises after Tenant s occupancy of the Premises that relate solely to the specific manner of use of the Premises by Tenant; and Landlord shall make all other additions to or modifications of the Project required from time to time by Legal Requirements. The cost of such additions or modifications made by Landlord may be included in Operating Expenses pursuant to Paragraph 6 of this Lease to the extent permitted thereunder, except for those additions or modifications which are Landlord s sole responsibility pursuant to Paragraph 10 of this Lease or due to violations of law by Landlord in existence as of the Commencement Date. 4. Base Rent. Tenant shall pay Base Rent in the amount set forth above. The first month s Base Rent, the Security Deposit, and the first monthly installment of estimated Operating Expenses (as hereafter defined) shall be due and payable on the date hereof, and, except as otherwise set forth in this Lease, Tenant promises to pay to Landlord in advance, without demand, deduction or set-off, monthly installments of Base Rent on or before the first day of each calendar month succeeding the Commencement Date. Payments of Base Rent for any fractional calendar month shall be prorated. All payments required to be made by Tenant to Landlord hereunder (or to such other party as Landlord may from time to time specify in writing) shall be made by check or Electronic Fund Transfer ( EFT ) of immediately available federal funds before 11:00 a.m., Eastern Time, at such place, within the continental United States, as Landlord may from time to time designate to Tenant in writing. Except as otherwise set forth herein, the obligation of Tenant to pay Base Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations. Tenant shall have no right at any time to abate, reduce, or set-off any rent due hereunder except as may be expressly provided in this Lease. If Tenant is delinquent in any monthly installment of Base Rent or of estimated Operating Expenses for more than 5 days, Tenant shall pay to Landlord on demand a late charge equal to 5 percent of such delinquent sum. Tenant shall not be obligated to pay the late charge until Landlord has given Tenant 5 days written notice of the delinquent payment (which may be given at any time during the delinquency); provided, however, that Landlord shall not be required to give such notices more than twice in any calendar year or 4 times over the term of the Lease. The provision for such late charge shall be in addition to all of Landlord s other rights and remedies hereunder or at law and shall not be construed as a penalty. 5. Security Deposit. The Security Deposit shall be held by Landlord as security for the performance of Tenant s obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of Landlord s damages in case of Tenant s default. Upon each occurrence of an Event of Default (hereinafter defined), Landlord may use all or part of the Security Deposit to pay delinquent payments due under this Lease, and the cost of any damage, injury, expense or liability caused by such Event of Default, without prejudice to any other remedy provided herein or provided by law. Tenant shall pay Landlord no later than ten (10) days following Landlord s

112 demand the amount that will restore the Security Deposit to its original amount. Landlord s obligation respecting the Security Deposit is that of a debtor, not a trustee; no interest shall accrue thereon. The Security Deposit shall be the property of Landlord, but shall be paid to Tenant when Tenant s obligations under this Lease have been completely fulfilled. Landlord shall be released from any obligation with respect to the Security Deposit upon transfer of this Lease, the Security Deposit ( and the Premises to a person or entity assuming Landlord s obligations under this Paragraph Operating Expense Payments. During each month of the Lease Term, on the same date that Base Rent is due, Tenant shall pay Landlord an amount equal to 1/12 of the annual cost, as reasonably estimated by Landlord from time to time, of Tenant s Proportionate Share (hereinafter defined) of Operating Expenses for the Project. Payments thereof for any fractional calendar month shall be prorated. The term Operating Expenses means all reasonable costs and expenses actually incurred by Landlord with respect to the ownership, maintenance, and operation of the Project including, but not limited to costs of: Taxes (hereinafter defined) and fees payable to tax consultants and attorneys for consultation and contesting taxes; insurance; utilities; maintenance, repair and replacement of all portions of the Project, including without limitation, paving and parking areas, roads, roofs (including the roof membrane), alleys, and driveways, mowing, landscaping, exterior painting, utility lines, heating, ventilation and air conditioning systems, lighting, electrical systems and other mechanical and building systems; amounts paid to contractors and subcontractors for work or services performed in connection with any of the foregoing; charges or assessments of any association to which the Project is subject; property management fees payable to a property manager, including any affiliate of Landlord, not to exceed 3% of gross receipts ; security services, if any; trash collection, sweeping and removal; and additions or alterations made by Landlord to the Project or the Building in order to comply with Legal Requirements enacted after the Commencement Date of this Lease (other than those expressly required herein to be made by Tenant) provided that the cost of additions or alterations that may be capitalized for federal income tax purposes in accordance with Generally Accepted Accounting Principles shall be amortized on a straight line basis over a period equal to the lesser of the useful life thereof for federal income tax purposes. Operating Expenses do not include costs, expenses, depreciation or amortization for capital repairs and capital replacements required to be made by Landlord under Paragraph 10 of this Lease, debt service under mortgages or ground rent under ground leases, or condemnation in excess of Landlord s deductible as set forth in Paragraph 15 of this Lease, leasing commissions, or the costs of renovating space for tenants. Further, Operating Expenses shall not mean or include, and Tenant shall in no event have any obligation to perform or to pay directly, or to reimburse Landlord for, all or any portion of the following: (i) costs incurred in connection with the construction or remodeling of the Project or any other improvements now or hereafter located thereon, or correction of defects in design or construction or compliance with any covenant, condition, restriction, underwriter s requirement or law applicable to the Premises or the Project on the Commencement Date; (ii) interest, principal, or other payments on account of any indebtedness that is secured by any encumbrance on any part of the Project, or rental or other payments under any ground lease, or any payments in the nature of returns on or of equity of any kind; (iii) costs of selling, syndicating, financing, mortgaging or hypothecating any part of or interest in the Project; (iv) taxes on the income of Landlord or Landlord s franchise taxes, inheritance, gift, transfer, estate or state taxes (unless any of said taxes are hereafter instituted by applicable taxing authorities in substitution for ad valorem real property taxes); (v) depreciation, reserves of any kind, including replacement reserves and reserves for bad debt or lost rent, or any other charge not involving the payment of money to third parties; (vi) Landlord s overhead costs, including equipment, supplies, accounting and legal fees, rent and other occupancy costs or any other costs associated with the operation or internal organization and function of Landlord as a business entity (but this provision does not prevent the payment of a management fee to Landlord as provided in this Paragraph 6); (vii) fees or other costs for professional services provided by space planners, architects, engineers, and other similar professional consultants, real estate commissions, and marketing and advertising expenses; (viii) costs of defending or prosecuting litigation with any party, unless a favorable judgment would reduce or avoid an increase in Operating Expenses, or unless the litigation is to enforce compliance with Rules and Regulations of the Project, or other standards or requirements for the general benefit of the tenants in the Project; (ix) costs incurred as a result of Landlord s violation of any lease, contract, law or ordinance, including fines and penalties; (x) late charges, interest or penalties of any kind for late or other improper payment of any public or private obligation, including ad valorem taxes; (xi) costs of removing Hazardous Materials or of correcting any other conditions in order to comply with any environmental law or ordinance (but this exclusion shall not constitute a release by Landlord of Tenant for any such costs for which Tenant is liable pursuant to Paragraph 30 of this Lease); (xii) costs for which Landlord is reimbursed from any other source; (xiii) costs related to any building or land not included in the Project, including any allocation of costs incurred on a shared basis, such as centralized accounting costs, unless the allocation is made on a reasonable and consistent basis that fairly reflects the share of costs actually attributable to the Project; (xiv) the part of any costs or other sum paid to any affiliate of Landlord that may exceed the fair market price or cost generally payable for substantially similar goods or services in the area of the Project; (xv) insurance deductibles, except to the extent arising from damage or injury caused by Tenant ; (xvi) costs occasioned by the act, omission or violation of any law by Landlord, any other occupant of the Project, or their respective agents, employees or contractors; (xvii) costs occasioned by casualties or by the exercise of the power of eminent domain; (xviii) costs of structural repairs to the Project; (xiv) costs which could properly be capitalized under generally accepted accounting principles, except to the extent amortized in the manner provided herein; and (xx) costs of capital improvements made for tenants other than Tenant. Landlord shall provide Tenant within 90 days following the final day of the calendar year Landlord s itemized yearend common area maintenance reconciliation reports which reference and include all applicable Operating Expenses for such year. Upon Tenant s written request (which request must be made within 60 days following Tenant s receipt of Landlord s reconciliation report as described in the preceding sentence), Landlord shall provide photocopies of invoices of major expenditures, as well as other standard Landlord reports to substantiate such costs, for the expenses as provided in such reconciliation reports. If Tenant s total payments of Operating Expenses for any year are less than Tenant s Proportionate Share of actual

113 Operating Expenses for such year, then Tenant shall pay the difference to Landlord within 30 days after demand, and if more, then Landlord shall retain such excess and credit it against Tenant s next payments. For purposes of calculating Tenant s Proportionate Share of Operating Expenses, a year shall mean a calendar year except the first year, which shall begin on the Commencement Date, and the last year, which shall end on the expiration of this Lease. With respect to Operating Expenses which Landlord allocates to the entire Project, Tenant s Proportionate Share shall be the percentage set forth on the first page of this Lease as Tenant s Proportionate Share of the Project as reasonably adjusted by Landlord in the future for changes in the physical size of the Premises or the Project; and, with respect to Operating Expenses which Landlord allocates only to the Building, Tenant s Proportionate Share shall be the percentage set forth on the first page of this Lease as Tenant s Proportionate Share of the Building as reasonably adjusted by Landlord in the future for changes in the physical size of the Premises or the Building. Landlord may equitably increase Tenant s Proportionate Share for any item of expense or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a portion of the Project or Building that includes the Premises or that varies with occupancy or use. The estimated Operating Expenses for the Premises set forth on the first page of this Lease are only estimates, and Landlord makes no guaranty or warranty that such estimates will be accurate. 7. Utilities. Tenant shall pay for all water, gas, electricity, heat, light, power, telephone, sewer, sprinkler services, refuse and trash collection, and other utilities and services used on the Premises, all maintenance charges for utilities, and any storm sewer charges or other similar charges for utilities imposed by any governmental entity or utility provider, together with any taxes, penalties, surcharges or the like pertaining to Tenant s use of the Premises. All utilities shall be separately metered or charged directly to Tenant by the provider, except for water and sewer which shall be jointly metered. Tenant shall pay its share of all charges for jointly metered utilities based upon consumption, as reasonably determined by Landlord. No interruption or failure of utilities shall result in the termination of this Lease or the abatement of rent. Tenant agrees to limit use of water and sewer for normal restroom use. Notwithstanding anything to the contrary contained in Paragraph 7 of this Lease, if an interruption or cessation of utilities results from a cause within the Landlord s reasonable control and the Premises are not usable by Tenant for the conduct of Tenant s business as a result thereof, Base Rent and applicable Operating Expenses not actually incurred by Tenant shall be abated for the period which commences five (5) business days after the date Tenant gives to Landlord notice of such interruption until such utilities are restored. 8. Taxes. Landlord shall pay all taxes, assessments and governmental charges (collectively referred to as Taxes ) that accrue against the Project during the Lease Term, which shall be included as part of the Operating Expenses charged to Tenant. Landlord may contest by appropriate legal proceedings the amount, validity, or application of any Taxes or liens thereof. All capital levies or other taxes assessed or imposed on Landlord upon the rents payable to Landlord under this Lease and any franchise tax, any excise, transaction, sales or privilege tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents from the Premises and/or the Project or any portion thereof shall be paid by Tenant to Landlord monthly in estimated installments or upon demand, at the option of Landlord, as additional rent; provided, however, in no event shall Tenant be liable for any net income taxes imposed on Landlord unless such net income taxes are in substitution for any Taxes payable hereunder or any inheritance or estate taxes of Landlord. If any such tax or excise is levied or assessed directly against Tenant, then Tenant shall be responsible for and shall pay the same at such times and in such manner as the taxing authority shall require. Tenant shall be liable for all taxes levied or assessed against any personal property or fixtures placed in the Premises, whether levied or assessed against Landlord or Tenant. 9. Insurance. Landlord shall maintain all risk property insurance covering the full replacement cost of the Building. Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary, including, but not limited to, commercial liability insurance and rent loss insurance. All such insurance shall be included as part of the Operating Expenses charged to Tenant. The Project or Building may be included in a blanket policy (in which case the cost of such insurance allocable to the Project or Building will be determined by Landlord based upon the insurer s cost calculations). Tenant shall also reimburse Landlord for any increased premiums or additional insurance which Landlord reasonably deems necessary as a result of Tenant s use of the Premises in a manner different than the permitted use hereunder. Tenant, at its expense, shall maintain during the Lease Term: all risk property insurance covering the full replacement cost of all property and improvements installed or placed in the Premises by Tenant at Tenant s expense; worker s compensation insurance with no less than the minimum limits required by law; employer s liability insurance with such limits as required by law; and commercial liability insurance, with a minimum limit of $1,000,000 per occurrence and a minimum umbrella limit of $1,000,000, for a total minimum combined general liability and umbrella limit of $2,000,000 (together with such additional umbrella coverage as Landlord may reasonably require) for property damage, personal injuries, or deaths of persons occurring in or about the Premises. The commercial liability policies shall name Landlord as an additional insured, insure on an occurrence and not a claims-made basis, be issued by insurance companies which are reasonably acceptable to Landlord, not be cancelable unless 30 days prior written notice shall have been given to Landlord, contain a hostile fire endorsement and a contractual liability endorsement and, except as provided in the waiver of subrogation language below, provide primary coverage to Landlord (any policy issued to Landlord providing duplicate or similar coverage shall be deemed excess over Tenant s policies). Such policies or certificates thereof shall be delivered to Landlord by Tenant upon commencement of the Lease Term and upon each renewal of said insurance. The all risk property insurance obtained by Landlord and Tenant shall include a waiver of subrogation by the insurers and all rights based upon an assignment from its insured, against Landlord or Tenant, their officers, directors, employees, managers, agents, invitees and contractors, in connection with any loss or damage thereby insured against. Notwithstanding anything to the contrary in this Lease, neither party hereto nor its officers, directors, employees, managers, agents, invitees or contractors shall be liable to the other for loss or

114 damage caused by any risk coverable by all risk property insurance, and each party waives any claims against the other party, and its officers, directors, employees, managers, agents, invitees and contractors for such loss or damage regardless of the negligence or willful misconduct of the party so released. The failure of a party to insure its property shall not void this waiver. Landlord and its agents, employees and contractors shall not be liable for, and Tenant hereby waives all claims against such parties for, business interruption and business interruption losses occasioned thereby (such as lost profits and the like) sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence in or upon the Premises or the Project from any cause whatsoever, including without limitation, damage caused in whole or in part, directly or indirectly, by the negligence of Landlord or its agents, employees or contractors. 10. Landlord s Repairs. Landlord shall maintain, at its expense, the structural soundness of the roof, foundation, exterior walls and interior load bearing walls of the Building, and all underground and subsurface utility piping in good repair, reasonable wear and tear and damages caused by Tenant, its agents and contractors not covered by the waiver of subrogation contained herein excluded. The term walls as used in this Paragraph 10 shall not include windows, glass or plate glass, doors or overhead doors, special store fronts, dock bumpers, dock plates or levelers, or office entries. Tenant shall promptly give Landlord written notice of any repair required by Landlord pursuant to this Paragraph 10, after which Landlord shall have a reasonable opportunity to repair. In the event of an emergency, Tenant shall have the right to make such temporary, emergency repairs (and only such temporary, emergency repairs) to the roof, foundation, exterior walls and interior load bearing walls of the Building as may be reasonably necessary to prevent material damage to Tenant s property at the Premises and/or personal injury to Tenant s employees at the Premises (provided Tenant first attempts to notify Landlord telephonically of such emergency and notifies Landlord of such circumstances in writing as soon as practicable thereafter). In such event, Landlord shall reimburse Tenant for the reasonable, out-ofpocket costs actually incurred by Tenant in making such repairs, up to but not to exceed $25,000. If Landlord fails to reimburse Tenant for the reasonable, out-of-pocket costs incurred by Tenant in making such repairs with respect to such emergency, within 30 days after demand therefor, accompanied by supporting evidence of the costs incurred by Tenant, then Tenant may bring an action for damages against Landlord to recover such costs, together with interest thereof at the rate provided for in Paragraph 37(j) of the Lease, and reasonable attorney s fees incurred by Tenant in bringing such action for damages. In no event, however, shall Tenant have a right to terminate the Lease. Landlord, at Tenant s expense as provided in Paragraph 6, shall maintain in good repair and condition the roof membrane, the parking areas and other common areas of the Building and the Project, including, but not limited to driveways, alleys, landscape and grounds surrounding the Premises. 11. Tenant s Repairs. Subject to Landlord s obligation in Paragraph 10 and subject to Paragraphs 9 and 15, Tenant, at its expense, shall repair, replace and maintain in good condition all portions of the Premises and all areas, improvements and systems exclusively serving the Premises including, without limitation, dock and loading areas, truck doors, plumbing, water and sewer lines up to points of common connection, fire sprinklers and fire protection systems, entries, doors, ceilings, windows, interior walls, and the interior side of demising walls, and heating, ventilation and air conditioning systems. Such repair and replacements include capital expenditures and repairs whose benefit may extend beyond the Term, and such capital expenditures and repairs shall be amortized in accordance with the Formula (defined hereafter) over the remainder of the Lease Term, without regard to any extension or renewal option not then exercised. The Formula shall mean that number, the numerator of which shall be the number of months of the Lease Term remaining after the replacement of any such capital expenditures, and the denominator of which shall be the maximum amortization period (in months) allowable for determining depreciation of such capital expenditures for federal income tax purposes. Landlord shall pay for such capital expenditures and repairs and Tenant shall reimburse Landlord for its amortized share of same (determined as hereinabove set forth) in equal monthly installments in the same manner as the payment by Tenant to Landlord of the Operating Expenses. Heating, ventilation and air conditioning systems and other mechanical and building systems serving the Premises shall be maintained at Tenant s expense pursuant to maintenance service contracts entered into by Tenant or, if not done so by Tenant, by Landlord. The scope of services and contractors under such maintenance contracts shall be reasonably approved by Landlord. If Tenant fails to perform any repair or replacement for which it is responsible, Landlord may perform such work and be reimbursed by Tenant within 10 days after demand therefor. Subject to Paragraphs 9 and 15, Tenant shall bear the full cost of any repair or replacement to any part of the Building or Project that results from damage caused by Tenant, its agents, contractors, or invitees and any repair that benefits only the Premises. 12. Tenant-Made Alterations and Trade Fixtures. Any alterations, additions, or improvements made by or on behalf of Tenant to the Premises ( Tenant-Made Alterations ) in excess of $10,000 shall be subject to Landlord s prior written consent, which consent shall not be unreasonably withheld or delayed, provided that such alteration does not materially affect the structure or the roof of the Building, modify the exterior of the Building, or modify the utility systems of the Project, in which case such alteration (regardless of cost) shall be subject to Landlord s written consent, which such consent shall be either approved or rejected by Landlord in Landlord s sole discretion. Tenant shall cause, at its expense, all Tenant-Made Alterations to comply with insurance requirements and with Legal Requirements and shall construct at its expense any alteration or modification required by Legal Requirements as a result of any Tenant-Made Alterations. All Tenant-Made Alterations shall be constructed in a good and workmanlike manner by contractors reasonably acceptable to Landlord and only good grades of materials shall be used. All plans and specifications for any Tenant-Made Alterations shall be submitted to Landlord for its approval. Landlord may monitor construction of the Tenant-Made Alterations. Tenant shall reimburse Landlord for its reasonable third-party, out-of-pocket costs in reviewing plans and specifications and in monitoring construction. Landlord s right to review plans and specifications and to monitor construction shall be solely for its own benefit, and Landlord shall have no duty to see that such plans and specifications or construction comply with applicable laws, codes, rules and regulations. Tenant shall provide

115 Landlord with the identities and mailing addresses of all persons performing work or supplying materials, prior to beginning such construction, and Landlord may post on and about the Premises notices of non-responsibility pursuant to applicable law. Tenant shall furnish security or make other arrangements satisfactory to Landlord to assure payment for the completion of all work free and clear of liens and shall provide certificates of insurance for worker s compensation and other coverage in amounts and from an insurance company satisfactory to Landlord protecting Landlord against liability for personal injury or property damage during construction. Upon completion of any Tenant-Made Alterations, Tenant shall deliver to Landlord sworn statements setting forth the names of all contractors and subcontractors who did work on the Tenant-Made Alterations and final lien waivers from all such contractors and subcontractors. Upon surrender of the Premises, all Tenant-Made Alterations and any leasehold improvements constructed by Landlord or Tenant shall remain on the Premises as Landlord s property, except to the extent Landlord requires removal at Tenant s expense of any such items or Landlord and Tenant have otherwise agreed in writing in connection with Landlord s consent to any Tenant-Made Alterations. At Tenant s request, Landlord shall provide Tenant, at the time of Tenant s request for approval of Tenant-Made Alterations, a list of which Tenant-Made Alterations Landlord will require Tenant to remove upon surrender of the Premises. Tenant shall repair any damage caused by such removal. Tenant, at its own cost and expense and without Landlord s prior approval, may erect such shelves, bins, machinery and trade fixtures (collectively Trade Fixtures ) in the ordinary course of its business provided that such items do not alter the basic character of the Premises, do not overload or damage the Premises, and may be removed without injury to the Premises, and the construction, erection, and installation thereof complies with all Legal Requirements and with Landlord s requirements set forth above. Tenant shall remove its Trade Fixtures and shall repair any damage caused by such removal. 13. Signs. Tenant shall not make any changes to the exterior of the Premises, install any exterior lights, decorations, balloons, flags, pennants, banners, or painting, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior of the Premises, without Landlord s prior written consent, which consent shall not be unreasonably withheld or delayed. Upon surrender or vacation of the Premises, Tenant shall have removed all signs and repair, paint, and/or replace the building facia surface to which its signs are attached. Tenant shall obtain all applicable governmental permits and approvals for sign and exterior treatments. All signs, decorations, advertising media, blinds, draperies and other window treatment or bars or other security installations visible from outside the Premises shall be subject to Landlord s approval and conform in all respects to Landlord s requirements. Tenant may, at its sole cost and expense, place its name on the two (2) existing monument signs as more fully described on Exhibit A, subject to Landlord s prior approval of Tenant s plans and specifications related to such signage and subject to Landlord s standard sign specifications for the Project. 14. Parking. Tenant shall be entitled to park in those areas as designated on Exhibit A and shall be entitled to park in common with other tenants of the Project in those areas designated for nonreserved parking. Landlord may allocate parking spaces among Tenant and other tenants in the Project if Landlord determines that such parking facilities are becoming crowded. Landlord shall not be responsible for enforcing Tenant s parking rights against any third parties, but shall reasonably cooperate with Tenant in carrying out such enforcement. 15. Restoration. If at any time during the Lease Term the Premises are damaged by a fire or other casualty, Landlord shall notify Tenant within 45 days after such damage as to the amount of time Landlord reasonably estimates it will take to restore the Premises. If the restoration time is estimated to exceed 6 months, (or actually does exceed 6 months, subject to Force Majeure events and Tenant caused delays), Tenant may elect to terminate this Lease upon notice to Landlord given no later than 30 days after Landlord s notice. If Tenant does not elect to terminate this Lease as permitted hereunder, then, Landlord shall promptly restore the Premises excluding Tenant s Tenant- Made Alterations, Trade Fixtures and/or personal property, subject to delays arising from Force Majeure events. Tenant at Tenant s expense shall promptly perform, subject to delays arising from the collection of insurance proceeds, or from Force Majeure events, all repairs or restoration to Tenant s Tenant-Made Alterations, which Landlord requires to remain as Landlord s property upon surrender of the Premises pursuant to the terms of Paragraph 12 with this Lease. Notwithstanding the foregoing, either party may terminate this Lease if the Premises are damaged during the last year of the Lease Term and Landlord reasonably estimates that it will take more than one month to repair such damage. Base Rent and Operating Expenses shall be abated for the period of repair and restoration in the proportion which the area of the Premises, if any, which is not usable by Tenant bears to the total area of the Premises. Such abatement shall be the sole remedy of Tenant, and except as provided herein, Tenant waives any right to terminate the Lease by reason of damage or casualty loss. 16. Condemnation. If any part of the Premises or the Project should be taken for any public or quasi-public use under governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof (a Taking or Taken ), and the Taking would prevent or materially interfere with Tenant s use of the Premises or in Landlord s judgment would materially interfere with or impair its ownership or operation of the Project, then upon written notice by Landlord or Tenant to the other this Lease shall terminate and Base Rent and Operating Expenses shall be apportioned as of said date. If part of the Premises shall be Taken, and this Lease is not terminated as provided above, the Base Rent and Operating Expenses payable hereunder during the unexpired Lease Term shall be reduced to such extent as may be fair and reasonable under the circumstances. In the event of any such Taking, Landlord shall be entitled to receive the entire price or award from any such Taking without any payment to Tenant. Tenant shall have the right, to the extent that same shall not diminish Landlord s award, to make a separate claim against the condemning authority (but not Landlord) for such compensation as may be separately awarded or recoverable by Tenant. 17. Assignment and Subletting. Without Landlord s prior written consent, which Landlord shall not unreasonably withhold, condition, or delay, Tenant shall not assign this Lease or sublease the Premises or any part thereof or mortgage, pledge, or hypothecate its leasehold interest or grant any concession or license within the

116 Premises and any attempt to do any of the foregoing shall be void and of no effect. In the event that Landlord fails to provide its consent of such assignment or sublet within 15 days following Tenant s request thereof, then Landlord s consent shall be deemed denied for purposes hereunder. For purposes of this paragraph, a transfer of 50% or more of the ownership interests controlling Tenant shall be deemed an assignment of this Lease unless such ownership interests are publicly traded. Notwithstanding the above, Tenant may assign or sublet the Premises, or any part thereof, to any entity controlling Tenant, controlled by Tenant or under common control with Tenant (a Tenant Affiliate ), without the prior written consent of Landlord. Tenant shall reimburse Landlord for all of Landlord s reasonable out-of-pocket expenses in connection with any assignment or sublease, not to exceed $2,000 per event of assignment or subletting. Upon Landlord s receipt of Tenant s written notice of a desire to assign or sublet substantially all of the Premises for substantially all of the remaining Lease Term (excluding any transfer permitted to be done without Landlord s consent in this Paragraph 17, and further excluding any transfer of ownership interests as set forth above which is deemed to be an assignment hereunder), Landlord may, by giving written notice to Tenant within 30 days after receipt of Tenant s notice, terminate this Lease with respect to the space described in Tenant s notice, as of the date specified in Tenant s notice for the commencement of the proposed assignment or sublease. If Landlord so terminates the Lease, Landlord may enter into a lease directly with the proposed sublessee or assignee. Tenant may withdraw its notice to sublease or assign by notifying Landlord within 10 days after Landlord has given Tenant notice of such termination, in which case the Lease shall not terminate but shall continue. Notwithstanding anything contained herein to the contrary, provided no Event of Default has occurred and is continuing under this Lease beyond any applicable cure period, upon 10 days prior written notice to Landlord, Tenant may, without Landlord s prior written consent, assign this Lease to an entity into which or with which Tenant is merged or consolidated or to an entity to which substantially all of Tenant s assets are transferred, provided (x) such merger, consolidation, or transfer of assets is for a good business purpose and not principally for the purpose of transferring Tenant s leasehold estate, and (y) the assignee or successor entity has a net worth at least equal to the net worth of Tenant immediately prior to such merger, consolidation, or transfer (collectively, a Permitted Transfer ). It shall be reasonable for the Landlord to withhold its consent to any assignment or sublease in any of the following instances: (i) an Event of Default has occurred and is continuing beyond any applicable cure period that would not be cured upon the proposed sublease or assignment; (ii) the assignee or sublessee does not have a net worth calculated according to generally accepted accounting principles at least equal to the greater of the net worth of Tenant immediately prior to such assignment or sublease or the net worth of the Tenant at the time it executed the Lease; (iii) the intended use of the Premises by the assignee or sublessee is not a permitted use hereunder ; (iv) the intended use of the Premises by the assignee or sublessee would materially increase the pedestrian or vehicular traffic to the Premises or the Project; (v) occupancy of the Premises by the assignee or sublessee would, in Landlord s opinion, violate an agreement binding upon Landlord or the Project with regard to the identity of tenants, usage in the Project, or similar matters; (vi) the identity or business reputation of the assignee or sublessee will, in the good faith judgment of Landlord, tend to damage the goodwill or reputation of the Project; (vii) the assignment or sublet is to another tenant in the Project and is at rates which are below those charged by Landlord for comparable space in the Project; (viii) in the case of a sublease, the subtenant has not acknowledged that the sublease is subject to all of the terms and conditions of the Lease; or (ix) the proposed assignee or sublessee is a governmental agency. Tenant and Landlord acknowledge that each of the foregoing criteria are reasonable as of the date of execution of this Lease. The foregoing criteria shall not exclude any other reasonable basis for Landlord to refuse its consent to such assignment or sublease. Any approved assignment or sublease shall be expressly subject to the terms and conditions of this Lease. Tenant shall provide to Landlord all information concerning the assignee or sublessee as Landlord may request. Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of Tenant s obligations under this Lease shall at all times remain fully responsible and liable for the payment of the rent and for compliance with all of Tenant s other obligations under this Lease (regardless of whether Landlord s approval has been obtained for any such assignments or sublettings. In the event that the rent due and payable by a sublessee or assignee (or a combination of the rental payable under such sublease or assignment plus any bonus received in lieu of rent therefor or incident thereto) exceeds the rental payable under this Lease, except as the same relates to an Tenant Affiliate or a Permitted Transfer or any transfer of ownership of interests as set forth above which is deemed to be an assignment hereunder, then Tenant shall be bound and obligated to pay Landlord as additional rent hereunder 50% of all such excess rental actually received by Tenant within 10 days following receipt thereof by Tenant, after deducting reasonable tenant improvements and marketing costs, reasonable brokerage fees, and reasonable attorney s fees. If this Lease be assigned or if the Premises be subleased (whether in whole or in part) or in the event of the mortgage, pledge, or hypothecation of Tenant s leasehold interest or grant of any concession or license within the Premises or if the Premises be occupied in whole or in part by anyone other than Tenant, then upon a default by Tenant hereunder beyond any applicable cure period, Landlord may collect rent from the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold interest was hypothecated, concessionee or licensee or other occupant and, except to the extent set forth in the preceding paragraph, apply the amount collected to the next rent payable hereunder; and all such rentals collected by Tenant shall be held in trust for Landlord and immediately forwarded to Landlord. No such transaction or collection of rent or application thereof by Landlord, however, shall be deemed a waiver of these provisions or a release of Tenant from the further performance by Tenant of its covenants, duties, or obligations hereunder. 18. Indemnification. Except for the negligence or willful misconduct of or breach of this Lease by Landlord, its agents, employees or contractors, and to the extent permitted by law, Tenant agrees to indemnify, defend and hold harmless Landlord, and Landlord s agents, employees and contractors, from and against any and all losses, liabilities, damages, costs and expenses (including attorneys fees) resulting from claims by third parties for

117 injuries to any person and damage to or theft or misappropriation or loss of property occurring in or about the Project and arising from the use and occupancy of the Premises or from any activity, work, or thing done, permitted or suffered by Tenant in or about the Premises or due to any other act or omission of Tenant, its subtenants, assignees, invitees, employees, contractors and agents. The furnishing of insurance required hereunder shall not be deemed to limit Tenant s obligations under this Paragraph Inspection and Access. Landlord and its agents, representatives, and contractors may enter the Premises at any reasonable time to inspect the Premises and to make such repairs as may be required or permitted pursuant to this Lease and for any other business purpose upon 24 hour advance notice (except in case of emergency, where no such notice shall be required). In any entry of the Premises, Landlord and Landlord s representatives shall not unreasonably or materially interfere with Tenant s operations in the Premises and shall abide by Tenant s reasonable security and health and safety requirements. Landlord and Landlord s representatives may enter the Premises during business hours for the purpose of showing the Premises to prospective purchasers and, during the last six (6) months of the Lease Term, to prospective tenants. Landlord may erect a suitable sign on the Premises stating the Premises are available to let during the last six (6) months of the Lease Term or at any time during the Lease Term that the Project is available for sale. Landlord may grant easements, make public dedications, designate common areas and create restrictions on or about the Premises, provided that no such easement, dedication, designation or restriction materially interferes with Tenant s use or occupancy of the Premises or materially increased Tenant s obligations or decreases Tenant s rights hereunder. At Landlord s request, Tenant shall execute such instruments as may be necessary for such easements, dedications or restrictions. 20. Quiet Enjoyment. If Tenant shall perform all of the covenants and agreements herein required to be performed by Tenant within applicable notice and cure periods, Tenant shall, subject to the terms of this Lease, at all times during the Lease Term, have peaceful and quiet enjoyment of the Premises against any person claiming by, through or under Landlord. 21. Surrender. Upon termination of the Lease Term or earlier termination of Tenant s right of possession, Tenant shall surrender the Premises to Landlord in the same condition as received, broom clean, ordinary wear and tear and casualty loss and condemnation covered by Paragraphs 15 and 16, and Hazardous Materials that are not Tenant Contamination excepted. Any Trade Fixtures, Tenant- Made Alterations and property not so removed by Tenant as permitted or required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant s expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord s retention and disposition of such property. All obligations of Tenant hereunder not fully performed as of the termination of the Lease Term shall survive the termination of the Lease Term, including without limitation, indemnity obligations, payment obligations with respect to Operating Expenses and obligations concerning the condition and repair of the Premises. 22. Holding Over. If Tenant retains possession of the Premises after the termination of the Lease Term, unless otherwise agreed in writing, such possession shall be subject to immediate termination by Landlord at any time, and all of the other terms and provisions of this Lease (excluding any expansion or renewal option or other similar right or option) shall be applicable during such holdover period, except that Tenant shall pay Landlord from time to time, upon demand, as Base Rent for the holdover period, an amount equal to 150% of the Base Rent in effect on the termination date, computed on a monthly basis for each month or part thereof during such holding over. All other payments shall continue under the terms of this Lease. In addition, Tenant shall be liable for all damages incurred by Landlord as a result of such holding over. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided, and this Paragraph 22 shall not be construed as consent for Tenant to retain possession of the Premises. Lease: 23. Events of Default. Each of the following events shall be an event of default ( Event of Default ) by Tenant under this (i) Tenant shall fail to pay any installment of Base Rent or any other payment required herein when due, and such failure shall continue for a period of 5 days after written notice from Landlord to Tenant that such payment was due; provided, however, that Landlord shall not be obligated to provide written notice of such failure more than 2 times in any consecutive 12-month period, and the failure of Tenant to pay any third or subsequent installment of Base Rent or any other payment required herein when due in any consecutive 12-month period shall constitute an Event of Default by Tenant under this Lease without the requirement of notice or opportunity to cure, and provided, further however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended. (ii) Tenant or any guarantor or surety of Tenant s obligations hereunder shall (A) make a general assignment for the benefit of creditors; (B) commence any case, proceeding or other action seeking to have an order for relief entered on its behalf as a debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or of any substantial part of its property (collectively a proceeding for relief ); (C) become the subject of any proceeding for relief which is not dismissed within 60 days of its filing or entry; or (D) die or suffer a legal disability (if Tenant, guarantor, or surety is an individual) or be dissolved or otherwise fail to maintain its legal existence (if Tenant, guarantor or surety is a corporation, partnership or other entity). (iii) Any insurance required to be maintained by Tenant pursuant to this Lease shall be cancelled or terminated or shall expire or shall be reduced or materially and adversely changed, except, in each case, as permitted in this Lease.

118 (iv) Tenant shall not occupy or shall vacate the Premises or shall fail to continuously operate its business at the Premises for the permitted use set forth herein, whether or not Tenant is in monetary or other default under this Lease. Tenant s vacating of the Premises shall not constitute an Event of Default if, prior to vacating the Premises, Tenant has made arrangements reasonably acceptable to Landlord to (a) insure that Tenant s insurance for the Premises will not be voided or cancelled with respect to the Premises as a result of such vacancy, (b) insure that the Premises are secured and not subject to vandalism, and (c) insure that the Premises will be properly maintained after such vacation. Tenant shall inspect the Premises at least once each month and report monthly in writing to Landlord on the condition of the Premises. (v) Tenant shall attempt or there shall occur any assignment, subleasing or other transfer of Tenant s interest in or with respect to this Lease except as otherwise permitted in this Lease. (vi) Tenant shall fail to discharge any lien placed upon the Premises in violation of this Lease within 30 days after any such lien or encumbrance is filed against the Premises. (vii) Tenant shall fail to comply with any provision of this Lease other than those specifically referred to in this Paragraph 23, and except as otherwise expressly provided herein, such default shall continue for more than 30 days after Landlord shall have given Tenant written notice of such default ; provided, however, that in the event that such default cannot reasonably be cured within such 30 day period, Tenant shall not be in default hereunder so long as Tenant commences to cure such default within such thirty day period and diligently prosecutes it to completion, and subject to Paragraph 33 hereof, completes such cure within 90 days. 24. Landlord s Remedies. Upon each occurrence of an Event of Default and so long as such Event of Default shall be continuing, Landlord may at any time thereafter at its election: terminate this Lease or Tenant s right of possession, (but Tenant shall remain liable as hereinafter provided) and/or pursue any other remedies at law or in equity. Upon the termination of this Lease or termination of Tenant s right of possession, it shall be lawful for Landlord, without formal demand or notice of any kind, to re-enter the Premises by summary dispossession proceedings or any other action or proceeding authorized by law and to remove Tenant and all persons and property therefrom. If Landlord re-enters the Premises, Landlord shall have the right to keep in place and use, or remove and store, all of the furniture, fixtures and equipment at the Premises. Except as otherwise provided in the next paragraph, if Tenant breaches this Lease and abandons the Premises prior to the end of the term hereof, or if Tenant s right to possession is terminated by Landlord because of an Event of Default by Tenant under this Lease, this Lease shall terminate. Upon such termination, Landlord may recover from Tenant the following, as provided in Section of the Civil Code of California: (i) the worth at the time of award of the unpaid Base Rent and other charges under this Lease that had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the reasonable value of the unpaid Base Rent and other charges under this Lease which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of the award by which the reasonable value of the unpaid Base Rent and other charges under this Lease for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant s failure to perform its obligations under this Lease or that in the ordinary course of things would be likely to result therefrom. As used herein, the following terms are defined: (a) the worth at the time of award of the amounts referred to in Sections (i) and (ii) is computed by allowing interest at the lesser of 12 percent per annum or the maximum lawful rate. The worth at the time of award of the amount referred to in Section (iii) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent; (b) the time of award as used in clauses (i), (ii), and (iii) above is the date on which judgment is entered by a court of competent jurisdiction; (c) The reasonable value of the amount referred to in clause (ii) above is computed by determining the mathematical product of (1) the reasonable annual rental value (as defined herein) and (2) the number of years, including fractional parts thereof, between the date of termination and the time of award. The reasonable value of the amount referred to in clause (iii) is computed by determining the mathematical product of (1) the annual Base Rent and other charges under this Lease and (2) the number of years including fractional parts thereof remaining in the balance of the term of this Lease after the time of award. Even though Tenant has breached this Lease and abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant s right to possession, and Landlord may enforce all its rights and remedies under this Lease, including the right to recover rent as it becomes due. This remedy is intended to be the remedy described in California Civil Code Section and the following provision from such Civil Code Section is hereby repeated: The Lessor has the remedy described in California Civil Code Section (lessor may continue lease in effect after lessee s breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations). Any such payments due Landlord shall be made upon demand therefor from time to time and Tenant agrees that Landlord may file suit to recover any sums falling due from time to time. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect in writing to terminate this Lease for such previous breach. Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance of surrender of the Premises and/or a termination of this Lease by Landlord, whether by agreement or by operation of law, it being understood that such surrender and/or termination can be effected only by the written agreement of Landlord and Tenant. Any law, usage, or custom to the contrary notwithstanding, Landlord shall have the right at all times to enforce the provisions of this Lease in strict accordance with the terms hereof; and the failure of Landlord at any time to enforce its rights under this Lease strictly in

119 accordance with same shall not be construed as having created a custom in any way or manner contrary to the specific terms, provisions, and covenants of this Lease or as having modified the same. Tenant and Landlord further agree that forbearance or waiver by Landlord to enforce its rights pursuant to this Lease or at law or in equity, shall not be a waiver of Landlord s right to enforce one or more of its rights in connection with any subsequent default. A receipt by Landlord of rent or other payment with knowledge of the breach of any covenant hereof shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. The terms enter, re-enter, entry or re-entry, as used in this Lease, are not restricted to their technical legal meanings. Any reletting of the Premises shall be on such terms and conditions as Landlord in its sole discretion may determine (including without limitation a term different than the remaining Lease Term, rental concessions, alterations and repair of the Premises, lease of less than the entire Premises to any tenant and leasing any or all other portions of the Project before reletting the Premises). Landlord shall not be liable, nor shall Tenant s obligations hereunder be diminished because of, Landlord s failure to relet the Premises or collect rent due in respect of such reletting, provided that Landlord has made commercially reasonable efforts to relet the Premises and otherwise mitigate its damages; provided, however, (a) Landlord shall not be obligated to accept any tenant proposed by Tenant, (b) Landlord shall have the right to lease any other space controlled by Landlord first, and (c) any proposed tenant shall meet all of Landlord s leasing criteria. 25. Tenant s Remedies/Limitation of Liability. Landlord shall not be in default hereunder unless Landlord fails to perform any of its obligations hereunder within 30 days after written notice from Tenant specifying such failure (unless such performance will, due to the nature of the obligation, require a period of time in excess of 30 days, then after such period of time as is reasonably necessary so long a Landlord is continuously and diligently pursuing a cure). If such default by Landlord shall occur, Tenant may pursue any legal or equitable remedy for which it is entitled. All obligations of Landlord hereunder shall be construed as covenants, not conditions; and, except as may be otherwise expressly provided in this Lease, Tenant may not terminate this Lease for breach of Landlord s obligations hereunder. All obligations of Landlord under this Lease will be binding upon Landlord only during the period of its ownership of the Premises and not thereafter so long as any successor to Landlord has assumed Landlord s obligations in writing. The term Landlord in this Lease shall mean only the owner, for the time being of the Premises, and in the event of the transfer by such owner of its interest in the Premises, such owner shall thereupon be released and discharged from all obligations of Landlord thereafter accruing, but such obligations shall be binding during the Lease Term upon each new owner for the duration of such owner s ownership. Any liability of Landlord under this Lease shall be limited solely to its interest in the Project, and in no event shall any personal liability be asserted against Landlord in connection with this Lease nor shall any recourse be had to any other property or assets of Landlord. Landlord s interest in the Project shall be deemed to include: (i) the rents or other income from the Project received by Landlord after Tenant obtains a final judgment against Landlord, (ii) the net proceeds received by Landlord from the sale or other disposition of all or any part of Landlord s right, title and interest in the Project after Tenant obtains a final judgment against Landlord, (iii) the net proceeds received by Landlord from any condemnation or conveyance in lieu of condemnation of all or any portion of the Project after Tenant obtains a final judgment against Landlord, and (iv) the net proceeds of insurance received by Landlord from any casualty loss of all or any portion of the Project after Tenant obtains a final judgment against Landlord. 26. Waiver of Jury Trial. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO. 27. Subordination. This Lease and Tenant s interest and rights hereunder are and shall be subject and subordinate at all times to the lien of any mortgage, now existing or hereafter created on or against the Project or the Premises, and all amendments, restatements, renewals, modifications, consolidations, refinancing, assignments and extensions thereof, without the necessity of any further instrument or act on the part of Tenant. Tenant agrees, at the election of the holder of any such mortgage, to attorn to any such holder. Tenant agrees upon demand to execute, acknowledge and deliver such instruments, confirming such subordination and such instruments of attornment as shall be requested by any such holder. Notwithstanding the foregoing, any such holder may at any time subordinate its mortgage to this Lease, without Tenant s consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution, delivery or recording and in that event such holder shall have the same rights with respect to this Lease as though this Lease had been executed prior to the execution, delivery and recording of such mortgage and had been assigned to such holder. The term mortgage whenever used in this Lease shall be deemed to include deeds of trust, security assignments and any other encumbrances, and any reference to the holder of a mortgage shall be deemed to include the beneficiary under a deed of trust. Notwithstanding anything contained herein to the contrary, Tenant shall not be obligated to subordinate the Lease or its interest therein to any mortgage, deed of trust or ground lease on the Project unless concurrently with such subordination the holder of such mortgage or deed of trust or the ground lessor under such ground lease agrees not to disturb Tenant s possession of the Premises under the terms of the Lease in the event such holder or ground lessor acquires title to the Premises through foreclosure, deed in lieu of foreclosure or otherwise. Tenant shall be solely responsible for any fees or expenses charged by the holder of such mortgage or deed of trust in connection with the granting of such non-disturbance agreement 28. Mechanic s Liens. Tenant has no express or implied authority to create or place any lien or encumbrance of any kind upon, or in any manner to bind the interest of Landlord or Tenant in, the Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant covenants and agrees that it will pay

120 or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises and that it will save and hold Landlord harmless from all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the interest of Landlord in the Premises or under this Lease. Tenant shall give Landlord immediate written notice of the placing of any lien or encumbrance against the Premises and cause such lien or encumbrance to be discharged within 30 days of the filing or recording thereof; provided, however, Tenant may contest such liens or encumbrances as long as such contest prevents foreclosure of the lien or encumbrance and Tenant causes such lien or encumbrance to be bonded or insured over in a manner satisfactory to Landlord within such 30 day period. 29. Estoppel Certificates. Tenant agrees, from time to time, within 10 days after request of Landlord, to execute and deliver to Landlord, or Landlord s designee, any estoppel certificate requested by Landlord, stating that this Lease is in full force and effect, the date to which rent has been paid, that Landlord is not in default hereunder (or specifying in detail the nature of Landlord s default), the termination date of this Lease and such other matters pertaining to this Lease as may be reasonably requested by Landlord. Tenant s obligation to furnish each estoppel certificate in a timely fashion is a material inducement for Landlord s execution of this Lease. No cure or grace period provided in this Lease shall apply to Tenant s obligations to timely deliver an estoppel certificate. 30. Environmental Requirements. Except for Hazardous Material contained in products used by Tenant in de minimis quantities for (i) ordinary cleaning and office purposes or (ii) Tenant s normal business operations in connection with its lab operations, Tenant shall not permit or cause any party to bring any Hazardous Material upon the Premises or transport, store, use, generate, manufacture or release any Hazardous Material in or about the Premises without Landlord s prior written consent which shall not be unreasonably withheld or delayed. Tenant, at its sole cost and expense, shall operate its business in the Premises in strict compliance with all Environmental Requirements and shall remediate in a manner satisfactory to Environmental Requirements any Hazardous Materials released on or from the Project by Tenant, its agents, employees, contractors, subtenants or invitees ( Tenant Contamination ). Tenant shall complete and certify to disclosure statements as requested by Landlord from time to time relating to Tenant s transportation, storage, use, generation, manufacture or release of Hazardous Materials on the Premises. The term Environmental Requirements means all applicable present and future statutes, regulations, ordinances, rules, codes, judgments, orders or other similar enactments of any governmental authority or agency regulating or relating to health, safety, or environmental conditions on, under, or about the Premises or the environment, including without limitation, the following: the Comprehensive Environmental Response, Compensation and Liability Act; the Resource Conservation and Recovery Act; and all state and local counterparts thereto, and any regulations or policies having the force of law promulgated or issued thereunder. The term Hazardous Materials means and includes any substance, material, waste, pollutant, or contaminant listed or defined as hazardous or toxic, under any Environmental Requirements, asbestos and petroleum, including crude oil or any fraction thereof, natural gas liquids, liquified natural gas, or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas). As defined in Environmental Requirements, Tenant is and shall be deemed to be the operator of Tenant s facility that Tenant operates in or about the Premises during the Lease Term and the owner of all Hazardous Materials brought on the Premises by Tenant, its agents, employees, contractors or invitees, and the wastes, byproducts, or residues generated, resulting, or produced therefrom. Tenant shall indemnify, defend, and hold Landlord harmless from and against any and all losses (including, without limitation, diminution in value of the Premises or the Project and loss of rental income from the Project), claims, demands, actions, suits, damages (including, without limitation, punitive damages), expenses (including, without limitation, remediation, removal, repair, corrective action, or cleanup expenses), and costs (including, without limitation, actual attorneys fees, consultant fees or expert fees and including, without limitation, removal or management of any asbestos brought into the property by Tenant, its agents, employees, contractors, subtenants, assignees or invitees or disturbed by Tenant, its agents, employees, contractors, subtenants, assignees, or invitees in breach of the requirements of this Paragraph 30, regardless of whether such removal or management is required by law) which are brought or recoverable against, or suffered or incurred by Landlord as a result of any release of Hazardous Materials for which Tenant is obligated to remediate as provided above or any other breach of the requirements under this Paragraph 30 by Tenant, its agents, employees, contractors, subtenants, assignees or invitees, regardless of whether Tenant had knowledge of such noncompliance. The obligations of Tenant under this Paragraph 30 shall survive any termination of this Lease. Landlord shall have access to, and a right to perform inspections and tests of, the Premises to determine Tenant s compliance with Environmental Requirements, its obligations under this Paragraph 30, or the environmental condition of the Premises. Access shall be granted to Landlord upon Landlord s prior notice to Tenant and at such times so as to minimize, so far as may be reasonable under the circumstances, any disturbance to Tenant s operations. Such inspections and tests shall be conducted at Landlord s expense, unless such inspections or tests reveal that Tenant has not complied with any Environmental Requirement, in which case Tenant shall reimburse Landlord for the reasonable cost of such inspection and tests. Landlord s receipt of or satisfaction with any environmental assessment in no way waives any rights that Landlord holds against Tenant. Notwithstanding anything to the contrary in this Paragraph 30, Tenant shall have no liability of any kind to Landlord as to Hazardous Materials on the Premises prior to Tenant s occupancy of the Premises or caused or permitted by (i) Landlord, its agents, employees, contractors or invitees; or (ii) any other tenants in the Project or their agents, employees, contractors, subtenants, assignees or invitees; or (iii) any other person or entity located outside of the Premises or the Project. Landlord represents and warrants that Landlord, to Landlord s knowledge and without further inquiry, is unaware of any environmental conditions affecting the Premises. 31. Rules and Regulations. Tenant shall, at all times during the Lease Term and any extension thereof, comply with all reasonable rules and regulations at any time or from time to time established by Landlord

121 covering use of the Premises and the Project. The current rules and regulations are attached hereto. In the event of any conflict between said rules and regulations and other provisions of this Lease, the other terms and provisions of this Lease shall control. Landlord shall not have any liability or obligation for the breach of any rules or regulations by other tenants in the Project. 32. Security Service. Tenant acknowledges and agrees that, while Landlord may patrol the Project, Landlord is not providing any security services with respect to the Premises and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises. 33. Force Majeure. Except for monetary obligations, neither Landlord not Tenant shall be held responsible for delays in the performance of its obligations hereunder when caused by strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, governmental regulations, governmental controls, delay in issuance of permits, enemy or hostile governmental action, civil commotion, fire or other casualty, and other causes beyond the reasonable control of Landlord or Tenant, as the case may be ( Force Majeure ). 34. Entire Agreement. This Lease constitutes the complete agreement of Landlord and Tenant with respect to the subject matter hereof. No representations, inducements, promises or agreements, oral or written, have been made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not contained herein, and any prior agreements, promises, negotiations, or representations are superseded by this Lease. This Lease may not be amended except by an instrument in writing signed by both parties hereto. 35. Severability. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby. It is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added, as a part of this Lease, a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 36. Brokers. Each party represents and warrants to the other that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, other than the broker, if any, set forth on the first page of this Lease, and each party agrees to indemnify and hold the other harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with the indemnifying party with regard to this leasing transaction. Landlord hereby acknowledges and agrees that the broker referenced on Page One of this Lease shall be entitled to a leasing commission from Landlord by virtue of this Lease, which leasing commission shall be deemed earned and shall be paid by Landlord to said broker in accordance with, and subject to the terms of, a separate written agreement. 37. Miscellaneous. (a) Any payments or charges due from Tenant to Landlord hereunder shall be considered rent for all purposes of this Lease. (b) If and when included within the term Tenant, as used in this instrument, there is more than one person, firm or corporation, each shall be jointly and severally liable for the obligations of Tenant. (c) All notices required or permitted to be given under this Lease shall be in writing and shall be sent by registered or certified mail, return receipt requested, or by a reputable national overnight courier service, postage prepaid, or by hand delivery addressed to the parties at their addresses below, and with a copy sent to Landlord at East 35th Place, Aurora, Colorado Either party may by notice given aforesaid change its address for all subsequent notices. Except where otherwise expressly provided to the contrary, notice shall be deemed given upon delivery. (d) Except as otherwise expressly provided in this Lease or as otherwise required by law, Landlord retains the absolute right to withhold any consent or approval. Whenever the Lease requires an approval, consent, determination, selection or judgment by either Landlord or Tenant, unless another standard is expressly set forth, such approval, consent, determination, selection or judgment and any conditions imposed thereby shall be reasonable and shall not be unreasonably withheld or delayed and, in exercising any right or remedy hereunder, each party shall at all times act reasonably and in good faith. (e) At Landlord s request from time to time Tenant shall furnish Landlord with true and complete copies of its most recent annual and quarterly financial statements prepared by Tenant or Tenant s accountants and any other financial information or summaries that Tenant typically provides to its lenders or shareholders. Landlord hereby agrees to keep such financial information confidential pursuant to the terms of a separate confidentiality agreement between Landlord and Tenant. (f) Neither this Lease nor a memorandum of lease shall be filed by or on behalf of Tenant in any public record. Landlord may prepare and file, and upon request by Landlord Tenant will execute, a memorandum of lease. (g) The normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Lease or any exhibits or amendments hereto.

122 (h) The submission by Landlord to Tenant of this Lease shall have no binding force or effect, shall not constitute an option for the leasing of the Premises, nor confer any right or impose any obligations upon either party until execution of this Lease by both parties. (i) Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease. (j) Any amount not paid by Tenant within 5 days after its due date in accordance with the terms of this Lease shall bear interest from such due date until paid in full at the lesser of the highest rate permitted by applicable law or 15 percent per year. It is expressly the intent of Landlord and Tenant at all times to comply with applicable law governing the maximum rate or amount of any interest payable on or in connection with this Lease. If applicable law is ever judicially interpreted so as to render usurious any interest called for under this Lease, or contracted for, charged, taken, reserved, or received with respect to this Lease, then it is Landlord s and Tenant s express intent that all excess amounts theretofore collected by Landlord be credited on the applicable obligation (or, if the obligation has been or would thereby be paid in full, refunded to Tenant), and the provisions of this Lease immediately shall be deemed reformed and the amounts thereafter collectible hereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder. (k) Construction and interpretation of this Lease shall be governed by the laws of the state in which the Project is located, excluding any principles of conflicts of laws. (l) Time is of the essence as to the performance of Tenant s obligations under this Lease. (m) All exhibits and addenda attached hereto are hereby incorporated into this Lease and made a part hereof. In the event of any conflict between such exhibits or addenda and the terms of this Lease, such exhibits or addenda shall control. (n) In the event either party hereto initiates litigation to enforce the terms and provisions of this Lease, the non-prevailing party in such action shall reimburse the prevailing party for its reasonable attorney s fees, filing fees, and court costs. 38. Landlord s Lien/Security Interest. Intentionally deleted. 39. Limitation of Liability of Trustees, Shareholders, and Officers of ProLogis. Any obligation or liability whatsoever of ProLogis, a Maryland real estate investment trust, which may arise at any time under this Lease or any obligation or liability which may be incurred by it pursuant to any other instrument, transaction, or undertaking contemplated hereby shall not be personally binding upon, nor shall resort for the enforcement thereof be had to the property of, its trustees, directors, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort, or otherwise. TENANT: IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. Ikanos Communications, a California corporation LANDLORD: ProLogis, a Maryland real estate investment trust By: /s/ Dan Atler By: /s/ W. Scott Lamson Name: Dan Atler Name: W. Scott Lamson Title: Chief Financial Officer Title: Senior Vice President Address: Address: Fremont Blvd Fremont Blvd. Fremont, CA Fremont, CA 94538

123 Rules and Regulations 1. The sidewalk, entries, and driveways of the Project shall not be obstructed by Tenant, or its agents, or used by them for any purpose other than ingress and egress to and from the Premises. 2. Tenant shall not place any objects, including antennas, outdoor furniture, etc., in the parking areas, landscaped areas or other areas outside of its Premises, or on the roof of the Project. 3. Except for seeing-eye dogs, no animals shall be allowed in the offices, halls, or corridors in the Project. 4. Tenant shall not disturb the occupants of the Project or adjoining buildings by the use of any radio or musical instrument or by the making of loud or improper noises. 5. If Tenant desires telegraphic, telephonic or other electric connections in the Premises, Landlord or its agent will direct the electrician as to where and how the wires may be introduced; and, without such direction, no boring or cutting of wires will be permitted. Any such installation or connection shall be made at Tenant s expense. 6. Tenant shall not install or operate any steam or gas engine or boiler, or other mechanical apparatus in the Premises, except as specifically approved in the Lease. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Project. 7. Parking any type of recreational vehicles is specifically prohibited on or about the Project. Except for the overnight parking of operative vehicles, no vehicle of any type shall be stored in the parking areas at any time. In the event that a vehicle is disabled, it shall be removed within 48 hours. There shall be no For Sale or other advertising signs on or about any parked vehicle. All vehicles shall be parked in the designated parking areas in conformity with all signs and other markings. All parking will be open parking, and no reserved parking, numbering or lettering of individual spaces will be permitted except as specified by Landlord. 8. Tenant shall maintain the Premises free from rodents, insects and other pests. 9. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs or who shall in any manner do any act in violation of the Rules and Regulations of the Project. 10. Tenant shall not cause any unnecessary labor by reason of Tenant s carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of Tenant by the janitors or any other employee or person. 11. Tenant shall give Landlord prompt notice of any defects in the water, lawn sprinkler, sewage, gas pipes, electrical lights and fixtures, heating apparatus, or any other service equipment affecting the Premises. 12. Tenant shall not permit storage outside the Premises, including without limitation, outside storage of trucks and other vehicles, or dumping of waste or refuse or permit any harmful materials to be placed in any drainage system or sanitary system in or about the Premises. 13. All moveable trash receptacles provided by the trash disposal firm for the Premises must be kept in the trash enclosure areas, if any, provided for that purpose. 14. No auction, public or private, will be permitted on the Premises or the Project. 15. No awnings shall be placed over the windows in the Premises except with the prior written consent of Landlord. 16. The Premises shall not be used for lodging, sleeping or cooking or for any immoral or illegal purposes or for any purpose other than that specified in the Lease. No gaming devices shall be operated in the Premises. 17. Tenant shall ascertain from Landlord the maximum amount of electrical current which can safely be used in the Premises, taking into account the capacity of the electrical wiring in the Project and the Premises and the needs of other tenants, and shall not use more than such safe capacity. Landlord s consent to the installation of electric equipment shall not relieve Tenant from the obligation not to use more electricity than such safe capacity. 18. Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage. 19. Tenant shall not install or operate on the Premises any machinery or mechanical devices of a nature not directly related to Tenant s ordinary use of the Premises and shall keep all such machinery free of vibration, noise and air waves which may be transmitted beyond the Premises.

124 ADDENDUM 1 BASE RENT ADJUSTMENTS ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED 2/7/06, BETWEEN ProLogis, a Maryland real estate investment trust and Ikanos Communications, a California corporation Base Rent shall equal the following amounts for the respective periods set forth below: Period Monthly Base Rent February 6 th, 2006 to June 30, 2006 $00.00* July 1 st, 2006 to January 31 st, 2007 $18, February 1 st, 2007 to January 31 st, 2008 $22, February 1 st, 2008 to January 31 st, 2009 $23, February 1 st, 2009 to January 31 st, 2010 $25, February 1 st, 2010 to March 31 st, 2011 $27, *Operating expenses will be abated during period of free rent (February 6, 2006-June 30, 2006) for Fremont Blvd. only.

125 ADDENDUM 2 CONSTRUCTION (ALLOWANCE) ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED 2/7/06, BETWEEN ProLogis, a Maryland real estate investment trust and Ikanos Communications, a California corporation a. Initial Tenant Improvements; Allowance. The leasehold improvements to be constructed by Tenant (the Initial Tenant Improvements), at Tenant s sole cost and expense (except for the hereinbelow described Allowance, are generally described in the preliminary plans and specifications (the Preliminary Plans ) identified on Attachment 1 to this Addendum and shall be constructed in accordance with the Final Plans to be submitted by Tenant and reviewed and approved by Landlord in accordance with the provisions of Paragraph (b) of this Addendum. Landlord shall pay for the Initial Improvements up to a maximum amount of $170,000.00, and in no event shall Landlord have any obligation to pay for any costs of the Initial Improvements in excess of such amount. If the cost of the Initial Improvements exceeds such amount, such overage shall be borne by Tenant, and repaid to Landlord, in equal monthly installments over the Lease Term; provided that Landlord increases the monthly base rent by $0.01 per square foot for every dollar expended by Tenant. In no event shall the excess overage exceed $74, Landlord s payment of the Allowance, or such portion thereof as Tenant may be entitled to, shall be made within thirty (30) days of invoice. If Landlord claims any credits against the Allowance for any costs paid directly by Landlord to third parties, Landlord shall provide Tenant with evidence of payment of such costs. b. Preparation and Review of Plans for Initial Tenant Improvements. The Preliminary Plans identified on Attachment 1 to this Addendum 2 have been approved by Landlord and signed by Landlord and Tenant for identification. However, such Preliminary Plans shall not be used by Tenant for the purposes of constructing or installing the Initial Tenant Improvements. Tenant, using licensed architectural and engineering firms selected by Tenant and approved by Landlord (which approval shall not be unreasonably withheld or delayed), shall prepare or cause to be prepared and submitted, concurrently, and in each case by receipted courier or delivery service, to (i) Landlord s construction representative, (i) Lisa Hooton/Brian Erlanson, Fremont Boulevard, Fremont, California, 94538, and (ii) Landlord s offices at East 35th Place, Aurora, Colorado 80011, for Landlord s review, complete and final architectural and engineering drawings and specifications (hereinafter collectively referred to as the Final Plans ), consistent with the description of the Initial Tenant Improvements set forth on the Preliminary Plans. Subject to the provisions of Paragraph (c) of this Addendum 2, Landlord agrees that Tenant may commence construction of the Initial Tenant Improvements prior to finalization of the Final Plans and Landlord agrees that it shall cooperate with Tenant to review and approve portions of the Final Plans for different stages or elements of the work, or proposed Final Plans submitted at less than 100% completion, so that construction can proceed on a fast track basis. The approval process for all such portions of the Final Plans shall be substantially as set forth below, but any objection by Landlord to Final Plans submitted to Landlord may not be inconsistent with previously approved portions of the Final Plans. However, in no event shall any portion of the Initial Tenant Improvements be constructed or installed unless and until Landlord has approved (or id deemed to have approved) Final Plans at 100% completion for such portion of the work. Each set of proposed Final Plans furnished by Tenant shall include at least two (2) sets of prints. The Final Plans shall be compatible with the design, construction, and equipment of the building, and shall be capable of logical measurement and construction. Unless Landlord shall otherwise agree in writing, the Final Plans shall be signed/stamped by Tenant s architect or engineer, as applicable, and shall include (to the extent relevant or applicable to the portion of the work for which Tenant is seeking Final Plan approval) each and all of the following: (i) a Partition (Floor) 1/8 = 1-0 minimum scale, including partition types, partition construction sections and details, and door/frame/hardware schedules; (ii) a Reflected Ceiling 1/8 = 1-0 minimum scale, including ceiling construction and specifications for ceiling lighting fixtures; (iii) a Telephone/Electrical/Communications 1/8 = 1-0 minimum scale, including a complete schedule, cross-referenced to said plan, of Tenant s telephone/electrical/communications equipment and providing said equipment s electrical power specifications, requirements and heat output: (iv) a Final Plan, including all finish specifications and U.L. and/or County approval numbers where required; (v) 1/2 = 1 0 minimum scale, interior, of all walls, with detail/section cross- references where appropriate; exterior, of Tenant s portion of the permitted Buildingfront wall, clearly indicating the appearance of Tenant s space, including its signage, at/through Tenant s permitted Building window wall (if any); (vi) details and sections, scale as required, for all partition types, structural elements and connections, and custom installations where they occur (HVAC, lighting, etc); (vii) details and sections, scale as required, for all signage and graphics; (viii) a Structural Engineering plan, locating and detailing any modifications to the Building required to attach and/or support the Initial Tenant Improvements or Tenant s trade fixtures or equipment (this plan must be signed/stamped by a structural engineer licensed in the State in which the Premises are situated); (ix) Electrical Engineering Plans, for

126 both electrical power and for lighting, including but not limited to: circulating diagrams; panel schedules; electrical equipment and lighting fixture schedules and sections; and electrical equipment and lighting fixture electrical load tabulations (these plans and calculations must be signed/stamped by an electrical engineer licensed in the State in which the Premises are situated); (x) Mechanical Engineering Plans, for both plumbing and for HVAC, including but not limited to: plumbing water and waste line plans; HVAC supply, return and exhaust plans; and HVAC tabulations for electrical equipment and lighting heat loads, cooling loads and air supply (these plans and calculations must be signed/stamped by a mechanical engineer licenses in the State in which the Premises are situated); (xi) a Fire Protection Plan, locating and detailing any fire protection/fire suppression system as may be required by code or other regulations governing Tenant s operations in the Premises (this plan must be signed/stamped by a fire protection engineer licensed in the State in with the Premises are situated); and (xii) any other or additional plans as may be related to Tenant s specific use of the Premises, such as plans for rooms enclosures, equipment or devices related to Tenant s permitted storage or use of Hazardous materials at the Premises (if any), or as may be required by local city ordinance or building code. Tenant shall submit all Final Plans (or portions thereof) concurrently to Landlord s construction representative and offices, as designated above, for Landlord s review and approval. Landlord shall have five (5) business days after Landlord s receipt of the proposed Final Plans (or each such portion thereof) to review the same and notify Tenant in writing of any comments or required changes, or to otherwise give its approval or disapproval of such proposed Final Plans (or the portion thereof submitted to Landlord). If Landlord fails to give written comments to or disapprove the Final Plans (or the portion thereof submitted to Landlord) within such five (5) business day period, then Landlord shall be deemed to have approved the Final Plans (or portion thereof) as submitted. Tenant shall have five (5) business days following its receipt for Landlord s comments and objections to redraw the proposed Final Plans (or portion thereof submitted to Landlord) in compliance with Landlord s request and to resubmit the same for Landlord s final review and approval or comment within three (3) business days of Landlord s receipt of such revised plans. Such process shall be repeated as necessary until final approval or deemed approval by Landlord of the proposed Final Plans (or each portion thereof), at 100% completion, has been obtained. Landlord may at any time by written notice given in accordance with the notice provisions of the Lease change the name and/or address of the designated Landlord s construction representative to receive plans delivered by Tenant to Landlord. In the event that Tenant disagrees with any of the changes to the proposed Final Plans (or portion thereof) required by Landlord, then Landlord and Tenant shall consult with respect thereto and each party shall use all reasonable efforts to promptly resolve any disputed elements of such proposed Final Plans (or portion thereof). Landlord and Tenant agree that if after consultation with each other and their respective architects they are unable to resolve any disputed items within three (3) business days of Landlord s written objection, then within three (3) business days thereafter (i) Landlord s architect shall select an architect who is unaffiliated with Landlord or Tenant to resolve the dispute (the Arbitrator )., and (ii) each party shall state to the Arbitrator its final position in writing as respects the disputed matter(s) The Arbitrator shall decide on each disputed matter within three (3) business days of submission of such matter, based solely on such written submissions and the consistency of the parties submissions with the Preliminary Plans or previously approved portion of the Final Plans, as applicable, the Tenant s permitted use of the Premises and the general nature and design of the Project and adjacent properties. The parties consent to the jurisdiction of any appropriate court to enforce and enter judgments upon the decision of the Arbitrator. The losing party shall pay the cost of the Arbitrator, but each party shall otherwise bear its own costs and expenses in connection with the dispute. For purposes here, business days shall be all calendar days except Saturdays, Sundays and holidays observed by national banks in Alameda County, California. Notwithstanding the preceding provisions of this Paragraph (b), under no circumstances whatsoever shall (i) any combustible materials be utilized above finished ceiling or in any concealed space, (ii) any structural load, temporary or permanent, be exerted on any part of the Building without the prior written approval of Landlord, or (iii) any holes be cut or drilled in any part of the roof or other portion of the Building shell without the prior written approval of Landlord. In the event that Tenant proposes any changes to the Final Plans (or any portion thereof) after the same have been approved by Landlord, Landlord shall not unreasonably withhold its consent to any such changes, provided the changes do not, in Landlord s reasonable opinion, adversely affect the Building structure, systems, or equipment, or the external appearance of the Premises. As soon as the Final Plans (or a portion thereof sufficient to permit commencement of construction or installation of the Initial Tenant Improvements, if Tenant elects to proceed with a fast track construction) are mutually agreed upon, Tenant shall use diligent efforts to obtain all required permits authorizations, and licenses from appropriate governmental authorities for construction of the Initial Tenant Improvements (or such portion thereof, as applicable). Tenant shall be solely responsible for obtaining any business or other license or permit required for the conduct of its business at the Premises. c. Construction of the Initial Tenant Improvements. Construction or installation of the Initial Tenant Improvements shall be performed by a licensed general contractor or contractors selected by Tenant and approved by Landlord, such approval not to be unreasonably withheld or delayed (the Tenant s Contractor, whether one or more), pursuant to a written construction contract negotiated and entered into by and between the Tenant s Contractor and Tenant and approved by Landlord (such approval not to be unreasonably withheld or delayed). Each such contract shall (i) obligate Tenant s Contractor to work in harmony with the employees, contractors and suppliers of Landlord involved in the construction work

127 being performed by Landlord pursuant to Addendum 2 to the Lease, and to comply with all rules and regulations of Landlord of general applicability relating to construction activities in the Project, (ii) name Landlord as an additional indemnitee under the provisions of the contract whereby the Tenant s Contractor holds Tenant harmless form and against any and all claims, damages, losses, liabilities and expenses arising out of or resulting form the performance of such work, (iii) name Landlord as an additional beneficiary of (and a party entitled to enforce) all of the warranties for the Tenant s Contractor with respect to the work performed thereunder and the obligation of the Tenant s Contractor to replace defective materials and correct defective ownership for a period of not less than one (1) year following substantial completion of the work under such contract, (iv) evidence the agreement of the Tenant s Contractor that the provisions of the Lease shall control over the provisions of the Contract with respect to distribution or use of insurance proceed, in the event of a casualty during construction, and (v) evidence with waiver and release by the Tenant s Contractor of any lien or right to assert a lien on all or any portion of the fee estate of Landlord in and to the Project as a result for the work performed or to be performed hereunder (and obligating the Tenant s Contractor to include a substantially similar release and waiver provision in all subcontracts and purchase orders entered under or pursuant to the contract). Tenant acknowledges and understands that all roof penetrations involved in eh construction of the Initial Tenant Improvements must be performed by the Building shell roofing contractor. All costs, fees and expenses incurred with such contractor in performing such work shall be a cost for the Initial Tenant Improvements, payable in accordance with the provisions of this Addendum. Tenant or Tenant s Contractor shall be responsible for all water, gas, electricity, sewer or other utilities used or consumed at the Premises during the construction of the Initial Tenant Improvements. Tenant specifically agrees to carry, or cause the Tenant s Contractor to carry, during all such items as the Tenant s work is being performed, (a) builder s risk completed value insurance on the Initial Tenant Improvements, in an amount not less than Four Million Dollars ($4,000,000.00), (b)a policy of insurance covering commercial general liability, in an amount not less than One Million Dollars ($1,000,000.00), combined single limit for bodily injury and property damage per occurrence (and combined single limit coverage of $2,000, in the aggregate), and automobile liability coverage (including owned, non-owned and hired vehicles) in an amount not less than One Million Dollars ($1,000,000.00) combined single limit (each person, each accident), and endorsed to show Landlord as an additional insured, and (c) workers compensation insurance as required by law, endorsed to show a waiver of subrogation by the insurer to any claim the Tenant s Contractor may have against Landlord. Tenant shall not commence construction of the Initial Tenant Improvements (or any portion thereof) until Landlord has issued to Tenant a written authorization to proceed with construction, which Landlord agrees to issue to Tenant within one (1) business day after Tenant has delivered to Landlord s construction representative (i) certificates for the insurance policies described above, (ii) copies of all permits required for construction of the Initial Tenant Improvements (or applicable portion thereof, if Tenant elects to proceed with a fast track construction) and a copy of the permitted Final Plans (or applicable portion thereof) as approved by the appropriate governmental agency, (iii) a copy of each signed construction contract for the Initial Tenant Improvements (a copy of each subsequently signed contract shall be forwarded to Landlord s construction representative without request or demand, promptly after execution thereof and prior to the performance of any work thereunder), and (iv) list of names, addresses and phone numbers of all subcontractors, contractors and suppliers involved in performing the Initial Tenant Improvements. All of the construction shall be the responsibility of and supervised by Tenant.

128 d. Requirements for Tenant s Work. All of Tenant s construction with respect to the Premises shall be performed in substantial compliance with this Addendum and the Final Plans therefor previously approved in writing by Landlord (and any changes thereto approved by Landlord as herein provided), and in a good and workmanlike manner, utilizing only new materials. All such work shall be performed by Tenant in strict compliance with all applicable building codes, regulations and all other legal requirements. All materials utilized in the construction of Tenant s work must be confined to within the Premises. All trash and construction debris not located wholly within the Premises must be removed each day form the Project at the sole cost and expense of Tenant. Landlord shall have the right at all times to monitor the work for compliance with the requirements of this Addendum. If Landlord determines that any such requirements are not being strictly complied with, Landlord may immediately require the cessation of all work being performed in or around the Premises or the Project until such time as Landlord is satisfied that the applicable requirements will be observed. Any approval given by Landlord with respect to Tenant s construction of the Preliminary plans or Final Plans therefor, and/or any monitoring of Tenant s work by Landlord, shall not make Landlord liable or responsible in any way for the condition, quality or function of such matters or constitute any undertaking, warranty or representation by Landlord with respect to any of such matters. So long as Landlord reviews and responds to the plan submissions to Landlord as provided in this Addendum, no delays in plan approval, and no delays in construction of the Initial Tenant Improvements, shall delay the Commencement Date of this Lease. e. No Liens; Indemnification. Tenant shall have no authority to place any lien upon the Premises or the Project or any portion thereof or interest therein, nor shall Tenant have any authority in any way to bind Landlord, and any attempt to do so shall be void and of no effect. If, because of any actual or alleged act or omission of Tenant, or Tenant s Contractor, or any subcontractors or materialmen, any lien, affidavit, charge or other for the payment of money shall be filed against Landlord, the Premises, the Project, or any portion thereof, or interest herein, whether or not such lien, affidavit, charge or order is valid or enforceable, Tenant shall, at its sole cost and expense, cause the same to be discharged of record by payment, bonding or otherwise no later than fifteen (15) days after notice to Tenant of the filing hereof, but in any event prior to the foreclosure thereof. With respect to the contract for labor or materials for construction of the Initial Tenant Improvements, Tenant acts as principal and not as the agent of Landlord. Landlord expressly disclaims liability of the cost of labor preformed for or supplies or materials furnished to Tenant. Landlord may post one or more notices of non-responsibility for Tenant s work on the Project. No contractor of Tenant is intended to be a third-party beneficiary with respect to the costs for construction of the Initial Tenant Improvements. Tenant agrees to indemnify, defend and hold Landlord, the Premises and the Project, harmless form all claims (including all costs and expenses of defending against such claims) arising or alleged to arise from any act or omission of Tenant or Tenant s agents, employees, contractor, subcontractors, suppliers, materialmen, architects, designers, surveyors, engineers, consultants, laborers, or invitees, or arising from any bodily injury or property damage occurring or alleged to have occurred incident to any of the work to be performed by Tenant or its contractors or subcontractors with respect to the Premises. Default by Tenant under this Addendum 2 shall constitute a default by Tenant under the Lease for all purposes

129 ADDENDUM 3 RENEWAL OPTION (BASEBALL ARBITRATION) ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED 2/7/06, BETWEEN ProLogis, a Maryland real estate investment trust and Ikanos Communications, a California corporation (a) Provided that as of the time of the giving of the Extension Notice and the Commencement Date of the Extension Term, (x) Tenant is the Tenant originally named herein (or a Tenant Affiliate or a party to a Permitted Transfer), (y) Tenant (or a Tenant Affiliate or a party to a Permitted Transfer) actually occupies all of the Premises initially demised under this Lease and any space added to the Premises, and (z) no Event of Default exists or would exist but for the passage of time or the giving of notice, or both; then Tenant shall have the right to extend the Lease Term for an additional term of 3 years (such additional term is hereinafter called the Extension Term ) commencing on the day following the expiration of the Lease Term (hereinafter referred to as the Commencement Date of the Extension Term ). Tenant shall give Landlord notice (hereinafter called the Extension Notice ) of its election to extend the term of the Lease Term at least 9 months prior to the scheduled expiration date of the Lease Term. (b) The Base Rent payable by Tenant to Landlord during the Extension Term shall be the greater of: (i) the Base Rent in effect on the expiration of the Lease Term (if the Base Rent is stated as an annual or other periodic rate, adjusted for the length of the Lease Term), and (ii) 95% of the Fair Market Rent, as defined and determined pursuant to Paragraphs (c), (d), and (e) below. (c) The term Fair Market Rent shall mean the Base Rent, expressed as an annual rent per square foot of floor area, which Landlord would have received from leasing the Premises for the Extension Term to an unaffiliated person which is not then a tenant in the Project, assuming that such space were to be delivered in as-is condition, and taking into account the rental which such other tenant would most likely have paid for such premises, including market escalations but excluding improvements installed in the Premises at the sole cost and expense of Tenant, provided that Fair Market Rent shall not in any event be less than the Base Rent for the Premises as of the expiration of the Lease Term. Fair Market Rent shall not be reduced by reason of any costs or expenses saved by Landlord by reason of Landlord s not having to find a new tenant for the Premises (including without limitation brokerage commissions, cost of improvements necessary to prepare the space for such tenant s occupancy, rent concession, or lost rental income during any vacancy period). Fair Market Rent means only the rent component defined as Base Rent in the Lease and does not include reimbursements and payments by Tenant to Landlord with respect to Operating Expenses and other items payable or reimbursable by Tenant under the Lease. In addition to its obligation to pay Base Rent (as determined herein), Tenant shall continue to pay and reimburse Landlord as set forth in the Lease with respect to such operating expenses and other items with respect to the Premises during the Extension Term. The arbitration process described below shall be limited to the determination of the Base Rent and shall not affect or otherwise reduce or modify the Tenant s obligation to pay or reimburse Landlord for such operating expenses and other reimbursable items. (d) Landlord shall notify Tenant of its determination of the Fair Market Rent (which shall be made in Landlord s sole discretion and shall in any event be not less than the Base Rent in effect as of the expiration of the Lease Term) for the Extension Term, and Tenant shall advise Landlord of any objection within 10 days of receipt of Landlord s notice. Failure to respond within the 10-day period shall constitute Tenant s acceptance of such Fair Market Rent. If Tenant objects, Landlord and Tenant shall commence negotiations to attempt to agree upon the Fair Market Rent within 30 days of Landlord s receipt of Tenant s notice. If the parties cannot agree, each acting in good faith but without any obligation to agree, then the Lease Term shall not be extended and shall terminate on its scheduled termination date and Tenant shall have no further right hereunder or any remedy by reason of the parties failure to agree unless Tenant or Landlord invokes the arbitration procedure provided below to determine the Fair Market Rent. (e) Arbitration to determine the Fair Market Rent shall be in accordance with the Real Estate Valuation Arbitration Rules of the American Arbitration Association. Unless otherwise required by state law, arbitration shall be conducted in the metropolitan area where the Project is located by a single arbitrator unaffiliated with either party. Either party may elect to arbitrate by sending written notice to the other party and the Regional Office of the American Arbitration Association within 5 days after the 30-day negotiating period provided in Paragraph (d), invoking the binding arbitration provisions of this paragraph. Landlord and Tenant shall each submit to the arbitrator their respective proposal of Fair Market Rent. The arbitrator must choose between the Landlord s proposal and the Tenant s proposal and may not compromise between the two or select some other amount. Notwithstanding any other provision herein, the Fair Market Rent determined by the arbitrator shall not be less than, and the arbitrator shall have no authority to determine a Fair Market Rent less than, the Base Rent in effect as of the scheduled expiration of the Lease Term. The cost of the arbitration shall be paid by Landlord if the Fair Market Rent is that proposed by Landlord and by Tenant if the Fair Market Rent is that proposed by Tenant; and shall be borne equally otherwise. If the arbitrator has not determined the Fair Market Rent as of the end of the Lease Term,

130 Tenant shall pay 105 percent of the Base Rent in effect under the Lease as of the end of the Lease Term until the Fair Market Rent is determined as provided herein. Upon such determination, Landlord and Tenant shall make the appropriate adjustments to the payments between them. (f) The parties consent to the jurisdiction of any appropriate court to enforce the arbitration provisions of this Addendum and to enter judgment upon the decision of the arbitrator. (g) Except for the Base Rent as determined above, Tenant s occupancy of the Premises during the Extension Term shall be on the same terms and conditions as are in effect immediately prior to the expiration of the initial Lease Term; provided, however, Tenant shall have no further right to extend the Lease Term pursuant to this addendum or to any allowances, credits or abatements or options to expand, contract, renew or extend the Lease. (h) If Tenant does not send the Extension Notice within the period set forth in Paragraph (a), Tenant s right to extend the Lease Term shall automatically terminate. Time is of the essence as to the giving of the Extension Notice and the notice of Tenant s objection under Paragraph (d). (i) Landlord shall have no obligation to refurbish or otherwise improve the Premises for the Extension Term. The Premises shall be tendered on the Commencement Date of the Extension Term in as-is condition. (j) If the Lease is extended for the Extension Term, then Landlord shall prepare and Tenant shall execute an amendment to the Lease confirming the extension of the Lease Term and the other provisions applicable thereto. (k) If Tenant exercises its right to extend the term of the Lease for the Extension Term pursuant to this Addendum, the term Lease Term as used in the Lease, shall be construed to include, when practicable, the Extension Term except as provided in (g) above

131 ADDENDUM 4 CANCELLATION OPTION ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED 2/7/06, BETWEEN ProLogis, a Maryland real estate investment trust and Ikanos Communications, a California corporation Provided no Event of Default shall then exist and no condition shall then exist which with the passage of time or giving of notice, or both, would constitute an Event of Default, Tenant shall have the right with no less than nine (9) months prior written notice (the Termination Notice ) to elect to terminate this Lease effective on the last day of the 38 th full calendar month of the Lease Term. If Tenant elects to terminate this Lease pursuant to the immediately preceding sentence, the effectiveness of such termination shall be conditioned upon Tenant paying to Landlord $327, contemporaneously with Tenant s delivery of the Termination Notice to Landlord. Such amount is consideration for Tenant s option to terminate and shall not be applied to rent or any other obligation of Tenant. Landlord and Tenant shall be relieved of all obligations accruing under this Lease after the effective date of such termination but not any obligations accruing under the Lease prior to the effective date of such termination

132 ADDENDUM 5 MISCELLANEOUS PROVISIONS ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED 2/7/06, BETWEEN ProLogis, a Maryland real estate investment trust and Ikanos Communications, a California corporation Refund of Past Termination Fee: Upon full execution of the Lease Agreement, Landlord agrees to refund the amount of $150, to Tenant. Said refund represents the termination fee paid by Tenant and received by Landlord on September 30 th,

133 ADDENDUM 6 LETTER OF CREDIT FOR SECURITY DEPOSIT ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED 2/7/06, 2006 BETWEEN ProLogis, a Maryland real estate investment trust and Ikanos Communications, a California corporation The Security Deposit may be in the form of an unconditional, irrevocable letter of credit from a bank reasonably acceptable to Landlord. The letter of credit shall either provide that it does not expire until the 61 st day following the end of the Lease Term or, if it is for less than the full term of the Lease, shall be renewed by Tenant at least 60 days prior to its expiration during the term of the Lease. The letter of credit shall provide that it may be drawn down upon by Landlord upon Tenant s default of the Lease beyond applicable notice and cure periods and only to the extent required to cure such default. If Landlord sells or conveys the Premises, Tenant shall, at Landlord s request, cooperate in having the letter of credit transferred to the purchaser. If the letter of credit is ever drawn upon by Landlord pursuant to the terms of the Lease and this Addendum, Tenant shall within ten (10) days thereafter cause the letter of credit to be restored to its original amount. Notwithstanding anything contained herein to the contrary, in the event Tenant fails to renew the letter of credit in accordance with the terms and conditions as set forth in this Addendum, or in the event that Tenant shall commence any proceeding for relief, as defined in Paragraph 23 (ii) of the Lease, an immediate Event of Default shall be deemed to have occurred, without the requirement of notice or opportunity to cure, in which case Landlord may immediately draw down on the letter of credit

134 Exhibit A Site Plan Bayside Corporate Center

135 Exhibit B Floor Plan Fremont Blvd. Approximately 36,300 square feet

136 Exhibit C Sign Criteria BAYSIDE CORPORATE CENTER WINDOW IDENTIFICATION SIGNS : Each Tenant will be allowed one window sign placed either to the left or the right of the entrance door, whichever provides the best visibility. Company names, logos or symbols will be allowed in this area-color and size to be determined by the Tenant. All other copy in this area except for logos or symbols will be mat white vinyl pressure sensitive letters. Copy must start at 5 from grade, working down to no more than 3 1/2 from grade. Sign layout including copy, sizes and color must be approved by the building management. Management reserves the right to deny any copy or color it considers unsuitable. One security decal only may be applied to the front door glass in the lower comer if the Tenant so desires. All exterior alarm bells are to be mounted to the rear of the building only. DIRECTORY SIGN IDENTIFICATION : A monument directory sign has been provided for each building. If only one Tenant occupies an entire building, that Tenant shall be allowed to utilize the entire directory sign area for their pressure sensitive, Pearl Gray vinyl letters with a letter height suitable for the area allowed, and logo if so desired, also in Pearl Gray. If two or more Tenants occupy a building, signs shall be shared equally by the number of tenants within the building, utilizing pressure sensitive, matte, Pearl Gray vinyl letters with a letter height suitable for the area allowed. A logo will be allowed if so desired, to the left of the company name also in Pearl Gray. A thin line will divide the areas between tenants. REAR LOADING SIGNS: Each Tenant will be allowed to identify its rear door for shipping and receiving purposes. The company name shall be placed on a 36 x 24 aluminum panel adjacent to the rear doors. Copy shall consist of medium gray vinyl capital letters only in Futura Bold style. Company names and logos only are allowed. Management reserves the right to deny any copy it considers unsuitable. Layout is to be approved by building management. The cost of all lettering and logos will be the responsibility of the Tenant. No other signs are allowed in the windows or doors.

137 Exhibit FIRST AMENDMENT TO LEASE AGREEMENT THIS FIRST AMENDMENT TO LEASE AGREEMENT made this 18 th day of June, 2006, by and between ProLogis, a Maryland real estate investment trust, hereinafter referred to as Landlord, and Ikanos Communications, Inc., a Delaware corporation, hereinafter referred to as Tenant. W I T N E S S E T H: WHEREAS, Landlord and Ikanos Communications, a California corporation, entered into that certain Lease (hereinafter referred to as the Lease ) dated the 7 th day of February 2006, under the terms of which Landlord leased approximately 36,300 rentable square feet (hereinafter referred to as the Premises ) located in Building #5 of Bayside Corporate Center, Fremont Boulevard, Fremont, California 94538; and WHEREAS, through a clerical error at the time the Lease was prepared, the name of the Tenant was incorrectly stated on the Lease as Ikanos Communications, a California corporation; and WHEREAS, the Tenant under the Lease, as amended hereby, is Ikanos Communications, Inc., a Delaware corporation; and WHEREAS, the parties hereto now desire to amend and modify said Lease as more fully hereinafter set forth. A G R E E M E N T: follows: NOW, THEREFORE, in consideration of the Premises and the mutual covenants hereinafter contained, the parties hereto agree as 1. The parties hereby agree that the Security Deposit as defined in the Lease is hereby amended to allow either a letter of credit or direct payment from Tenant to Landlord, in the amount of $35,301.75, as satisfaction of the Security Deposit requirement. 2. Ikanos Communications, Inc., a Delaware corporation, is the Tenant under the Lease. 3. Except as herein amended, the terms and conditions of the Lease and any amendments thereto, shall continue in full force and effect and the Lease (and any amendments thereto) as amended herein is hereby ratified and affirmed by Landlord and Tenant. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment to Lease Agreement in multiple counterparts, each of which shall have the force and effect of an original. TENANT: LANDLORD: Ikanos Communications, Inc., a Delaware Corporation ProLogis, a Maryland real estate investment trust By: /s/ Dan Atler By: /s/ W. Scott Lamson Name: Dan Atler Name: W. Scott Lamson Title: Chief Financial Officer Title: Senior Vice President Address: Fremont Blvd. Fremont, CA Address: Fremont Blvd. Fremont, CA 94538

138 Exhibit SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE AGREEMENT (the Second Amendment ) is entered into as of the 8 th day of December, 2010, by and between ProLogis, a Maryland real estate investment trust, (the Landlord ) and Ikanos Communications, Inc., a Delaware corporation (the Tenant ). W I T N E S S E T H: WHEREAS, Landlord and Tenant have entered into a Lease dated February 7th, 2006, and as further amended by that certain First Amendment to Lease Agreement dated June 18th, 2006, pursuant to which Landlord leased to Tenant certain premises consisting of approximately 36,300 square feet located at Fremont Boulevard, Fremont, California (the Premises ), such lease, as heretofore modified, being herein referred to as the Lease. WHEREAS, Landlord and Tenant desire to modify the Lease on the terms and conditions set forth below. A G R E E M E N T: follows: NOW THEREFORE, in consideration of the Premises and the mutual covenants hereinafter contained, the parties hereto agree as 1. The Lease Term is extended for Sixty ( 60 ) months, such that the Lease shall terminate on March 31, 2016 (the Second Extension Term ). All of the terms and conditions of the Lease shall remain in full force and effect during such extension period except as expressly provided herein. 2. The monthly Base Rent due and payable under this Lease is hereby amended and shall be as following through the Second Extension Term: Period Monthly Base Rent January 1, 2011 through May 31, 2011 $0.00* June 1, 2011 through March 31, 2013 $18, April 1, 2013 through March 31, 2014 $19, April 1, 2014 through March 31, 2015 $20, April 1, 2015 through March 31, 2016 $21, *Tenant shall be responsible for operating expenses during free rent period. 3. Notwithstanding anything contained herein to the contrary, Landlord shall contribute up to a maximum amount of $36, (the TI Allowance ), toward the Alterations to the Premises which includes but is not limited to paint, carpet, vinyl composition tile, and office removal/demolition, and foam based fire suppression system for the server room ( Second Amendment Alterations ), which such payment shall be made by Landlord to Tenant within 30 days following (i) completion of the Second Amendment Alterations, (ii) Landlord s receipt of Tenant s invoice substantiating the costs related thereto, and (iii) Landlord s receipt of final lien waivers from all contractors and subcontractors who did work on the Second Amendment Alterations. Landlord shall be under no obligation to pay for any Alterations to the Premises in excess of the TI Allowance. Further, such TI Allowance shall only be available for Tenant s use through December 31, 2011, and Tenant hereby waives any and all rights to any unused portion of the TI Allowance remaining as of January 1, Effective upon the full execution of the Second Amendment and in reference to Section 17, titled Assignment and Subletting, the following portion of Section 17(ii) shall be deleted in its entirety: the assignee or sublessee does not have a net worth calculated according to generally accepted accounting principles at least equal to the greater of the net worth of Tenant immediately prior to such assignment or sublease or the net worth of the Tenant at the time it executed the Lease;

139 and is hereby replaced with the following: the assignee does not have a net worth calculated according to generally accepted accounting principles at least equal to the greater of the net worth of Tenant immediately prior to such assignment or the net worth of the Tenant at the time it executed the Lease;

140 5. Effective upon the full execution of the Second Amendment and in reference to Section 17, titled Assignment and Subletting, the following portion of Section 17(vii) shall be deleted in its entirety: the assignment or sublet is to another tenant in the Project and is at rates which are below those charged by Landlord for comparable space in the Project; and is hereby replaced with the following: the assignment is to another tenant in the Project and is at rates which are below those charged by Landlord for comparable space in the Project; 6. Effective upon the full execution of the Second Amendment and in reference to Section 17, titled Assignment and Subletting, the following portion of Section 17(ix) shall be deleted in its entirety: the proposed assignee or sublessee is a governmental agency. and is hereby replaced with the following: the proposed assignee is a governmental agency. 7. Tenant shall continue to have the renewal option set forth in Addendum 3 of the original Lease, which shall be exercisable prior to the expiration of the Second Extension Term in strict compliance with the terms of such renewal option. 8. Tenant agrees to keep strictly confidential and shall not disclose orally or in writing the terms and conditions of this Second Amendment, including without limitation the rental rates, or any matters related thereto, except that Tenant may disclose such terms and conditions of this Second Amendment to its bona fide legal and financial representatives who need to know such information to effectuate this Second Amendment, a future financing, sale of stock, as well as any public company requirement to disclose such information. 9. All other rights to cancel under the Cancellation Option of Addendum 4 are hereby deemed null and void and of no further force or effect. 10. Except as otherwise expressly provided herein, all defined terms used in this Second Amendment shall have the same respective meanings as are provided for such defined terms in the Lease. Tenant shall accept the Premises in its as is condition and shall pay Operating Expenses as provided in the Lease during the Second Extension Term. 11. Insofar as the specific terms and provisions of this Second Amendment purport to amend or modify or are in conflict with the specific terms, provisions and exhibits of the Lease, the terms and provisions of this Second Amendment shall govern and control; in all other respects, the terms, provisions and exhibits of the Lease shall remain unmodified and in full force and effect. 12. Landlord and Tenant hereby agree that (i) this Second Amendment is incorporated into and made a part of the Lease, (ii) any and all references to the Lease hereinafter shall include this Second Amendment, and (iii) the Lease and all terms, conditions and provisions of the Lease are in full force and effect as of the date hereof, except as expressly modified and amended hereinabove. 13. Any obligation or liability whatsoever of ProLogis, a Maryland real estate investment trust, which may arise at any time under this Lease or any obligation or liability which may be incurred by it pursuant to any other instrument, transaction, or undertaking contemplated hereby shall not be personally binding upon, nor shall resort for the enforcement thereof be had to the property of, its trustees, directors, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort, or otherwise. IN WITNESS WHEREOF, the parties hereto have signed this Second Amendment as of the day and year first above written. TENANT: Ikanos Communications, Inc., a Delaware corporation LANDLORD: ProLogis, a Maryland real estate investment trust By: /s/ Dennis Bencala By: /s/ W. Scott Lamson Name: W. Scott Lamson Name: Dennis Bencala Title: Senior Vice President Title: Chief Financial Officer

141 Exhibit LEASE AGREEMENT BETWEEN ALFIERI-100 SCHULTZ ASSOCIATES, L.P. AS LANDLORD -AND- IKANOS COMMUNICATIONS, INC. AS TENANT PREMISES: 100 Schultz Drive, Red Bank, New Jersey Portion of 1 st Floor 3 rd and 4 th Floors DATED: March 31, 2011

142 INDEX ARTICLE CAPTION PAGE 1 Demised Premises, Term, Rent 2 2 Use 5 3 Preparation of the Demised Premises 6 4 When Demised Premises Ready for Occupancy 7 5 Additional Rent 7 6 Subordination to Mortgagees 13 7 Quiet Enjoyment 13 8 Assignment, Mortgaging, Subletting 14 9 Compliance with Laws and Requirements of Public Authorities Insurance Rules and Regulations Tenant s Changes Tenant s Property Repairs and Maintenance Electricity Heating, Ventilation and Air-Conditioning Landlord s Other Services Access, Changes in Building Facilities, Name Notice of Accidents Non-Liability and Indemnification Destruction or Damage Eminent Domain Surrender Conditions of Limitation 38 -i-

143 ARTICLE CAPTION PAGE 25 Re-Entry by Landlord Damages Waivers No Other Waivers or Modifications Curing Tenant s Defaults Broker Notices Estoppel Certificate Arbitration No Other Representations, Construction, Governing Law Security Parties Bound Consents Mortgage Financing Tenant Cooperation Environmental Compliance Holding Over Certain Definitions and Constructions Relocation of Tenant Option to Renew Right of First Negotiation 52 EXHIBIT A Description of Land EXHIBIT B Floor Plan EXHIBIT C Landlord s Work EXHIBIT D Cleaning and Maintenance Specifications EXHIBIT E Rules and Regulations EXHIBIT F Definitions EXHIBIT G Sample Form of Letter of Credit EXHIBIT H Service Level Criteria Schedule 3.02 Restoration Items for building exterior, roof and site Schedule 6.01 Form of Wells Fargo SNDA Schedule 8 Milestone Schedule

144 LEASE, dated March 31, 2011 between ALFIERI-100 SCHULTZ ASSOCIATES, L.P., a New Jersey Limited Partnership, c/o Alfieri Property Management, having its principal office located at 399 Thornall Street, Edison, New Jersey ( Landlord ), and IKANOS COMMUNICATIONS, INC., a Delaware Corporation, having its principal office located at Fremont Boulevard, Fremont, California 94538, Attn: Vice President, Worldwide Human Resources, with a copy to Pillsbury Winthrop Shaw Pittman LLP, 2475 Hanover Street, Palo Alto, California 94304, Attn: Allison Leopold Tilley, Esq. ( Tenant ). PREAMBLE: BASIC LEASE PROVISIONS AND DEFINITIONS In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have the meanings set forth in this section, unless such meanings are expressly modified, limited or expanded elsewhere herein. 1. ADDITIONAL RENT shall mean all sums in addition to Fixed Rent payable by Tenant to Landlord pursuant to the provisions of this Lease. 2. BUILDING shall mean 100 Schultz Drive, Red Bank, New Jersey 3. BUILDING HOURS shall be Monday through Friday, 7:30 am to 7:00 pm, and Saturday, 7:00 am to 1:00 pm, but excluding those Building holidays as established by Landlord (it being understood that Landlord shall not establish any Building holidays that are not federal or New Jersey holidays), except that common area lighting in the Building and Land shall be maintained for such additional hours as, in Landlord s reasonable judgment, is necessary or desirable to insure proper operation of the Building and Land. 4. COMMENCEMENT DATE is August 1, DEMISED PREMISES OR PREMISES shall be deemed to be 57,364 rentable square feet. 6. EXHIBITS shall be the following, attached to this Lease and incorporated herein and made a part hereof. Exhibit A Exhibit B Exhibit C Exhibit D Exhibit E Exhibit F Exhibit G Exhibit H Description of Land Floor Plan Landlord s Work Cleaning and Maintenance Specifications Rules and Regulations Definitions Sample Form of Letter of Credit Service Level Criteria 1

145 Schedule 3.02 Restoration Items for building exterior, roof and site Schedule 6.01 Form of Wells Fargo SNDA Schedule 8 Milestone Schedule 7. FIXED RENT shall mean $9,560, for the Term, subject to the rent concession set forth in Section 1.08, below, payable as follows: A. Yearly Rate: Year(s) Yearly Rate 1-6 2/3 $1,434, B. Monthly Installment: Months Monthly Installment 1-80 $119, BROKER shall mean Jones Lang LaSalle. 9. TENANT S PERCENTAGE shall be %. 10. PERMITTED USE shall be executive and general office use, sales use (but not walk-in retail sales to the general public), research use and dry laboratory use and for no other purpose. 11. PRIME RATE shall mean the rate as published in the Wall Street Journal. 12. SECURITY DEPOSIT shall mean Two Hundred Thirty Nine Thousand Seventeen ($239,017.00) Dollars. 13. TERM shall mean six (6) years and eight (8) months beginning on the Commencement Date of August 1, 2011 and ending on March 31, 2018 (the Expiration Date ), unless extended pursuant to the option contained herein. WITNESSETH: ARTICLE 1 DEMISED PREMISES, TERM, RENT Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the premises hereinafter described, in the building located at 100 Schultz Drive, Red Bank, New Jersey ( Building ) on the parcel of land more particularly described in Exhibit A ( Land ), for the Term hereinafter stated, for the rents hereinafter reserved and upon and subject to the conditions (including limitations, restrictions and reservations) and covenants hereinafter provided. Each party hereby expressly covenants and agrees to observe and perform all of the conditions and covenants herein contained on its part to be observed and performed. 2

146 1.02. The premises hereby leased to Tenant is a portion of the 1 st floor and the whole of the 3 rd and 4 th floors of the Building, as shown on the floor plans annexed hereto as Exhibit B. Landlord and Tenant have mutually agreed that the premises leased has a rentable area of 57,364 square feet which includes Tenant s allocable share of the common area (hereinafter Rentable Area ). Said premises, together with all fixtures and equipment which at the commencement, or during the Term of this Lease are thereto attached (except items not deemed to be included therein and removable by Tenant as provided in Article 13) constitute the Demised Premises The Term of this Lease, for which the Demised Premises are hereby leased, shall commence on the Commencement Date and shall end at 11:59 P.M. on the Expiration Date or shall end on such earlier date upon which said Term may expire or be canceled or terminated pursuant to any of the provisions of this Lease or pursuant to law, unless extended as set forth herein The rents reserved under this Lease, for the Term thereof, shall be and consist of: (a) Fixed rent of $1,434, per year (calculated on the basis of $25.00 per sq. ft. of the Rentable Area) which shall be payable in equal monthly installments of $119, in advance on the first day of each and every calendar month during the Term of this Lease, and; (b) Additional rent consisting of all such other sums of money as shall become due from and payable by Tenant to Landlord hereunder (for default in payment of which Landlord shall have the same remedies as for a default in payment of fixed rent), all to be paid to Landlord at its office, or such other place, or to such agent at such place, as Landlord may designate by notice to Tenant, in lawful money of the United States of America. All payments of fixed rent and additional rent shall be paid electronically pursuant to the following instructions: Account Name Account No. ABA Routing No. Name of Bank Bank Address Bank Phone Number Type of Account instructions for each wire payment are to be sent to arwires@alfieri.net Tenant shall pay the fixed rent and additional rent herein reserved promptly as and when the same shall become due and payable, without demand therefor and without any abatement, deduction, counterclaim or setoff whatsoever, except as set forth in this Lease Late payments of any payment of rent, including monthly rent or any portion thereof, and any additional rent which is not received within five (5) days after it is due, will be subject to a late charge equal to five percent (5%) of the unpaid payment, or $100.00, whichever is greater, but shall in no event exceed $ This amount is in compensation of Landlord s 3

147 additional cost of processing late payments. In addition, any rent which is not paid within five (5) days after it is due, including monthly rent, will accrue interest at a late rate charge of Prime Rate as defined herein, as said rate is reasonably determined by Landlord from published reports, (but in no event in an amount in excess of the maximum rate allowed by applicable law) from the date on which it was due until the date on which it is paid in full with accrued interest. Notwithstanding the foregoing, Landlord agrees that in every twelve (12) month period calculated from the Commencement Date, Tenant shall be entitled to one instance of late payment in which it shall not incur a late charge or interest provided it makes payment as required within five (5) business days of written notice from Landlord The parties recognize that Tenant currently leases the entire Building pursuant to a Lease dated March 20, 2001 between Landlord s predecessor in interest, Shav Associates, a New and Globespan, Inc. ( Globespan ), as amended by a First Amendment to Lease dated as of June 1, 2001, which was assigned by Globespan s successor in interest Conexant Systems, Inc. to Tenant, and then further amended by a Second Amendment to Lease between Landlord and Tenant dated November 23, 2009 (collectively, the Existing Lease ). On the Commencement Date Tenant shall surrender to Landlord the 2 nd floor of the Building and that portion of the first floor that is not part of the Demised Premises under this Lease (collectively, the Give-back Space ), provided, however that Tenant may continue to use and occupy that portion of the Give-back Space on the 1 st floor of the Building that is presently used for laboratory and/or office purposes and that portion of the Give-back Space on the 2 n d floor of the Building (collectively, the Temporary Use Space ) until the date (the Temporary Use Surrender Date ) that is the later of (a) July 31, 2012, or (b) the date that is ten (10) business days after the date on which Landlord s Work and Tenant s Work (both as hereinafter defined) are substantially complete (or would have been substantially complete but for Tenant Delay (as defined in Exhibit C)). Tenant shall not be required to pay any fixed or additional rent for the Temporary Use Space other than Tenant Electric, it being understood and agreed that until such time (if at all) as submeters are installed to measure the electricity consumed in the Temporary Use Space, Tenant Electric with respect to the Temporary Use Space shall be determined in accordance with Section 15.02, below. If Tenant fails to surrender the Temporary Use Space by the Temporary Use Surrender Date, then Tenant shall be required to pay holdover fixed rent thereon in accordance with Article 40 below ($37.50 per rentable foot) until such surrender occurs. Notwithstanding anything to the contrary contained in the Existing Lease, Tenant shall not be under any obligation to perform any restoration work, except that Tenant shall remove from the Give-back Space all equipment comprising Tenant s Voice, Data and Security Systems, including associated outlets, wires, wiring trays and other equipment, materials and facilities, whether located in the ceiling, floor and/or walls, which in any way relates, pertains to, constitutes or is connected with Tenant s Voice, Data and/or Security Systems and regardless of whether Landlord or Tenant installed and/or paid for the installation of such systems (except, in each case, to the extent the same is reasonably necessary to serve the Demised Premises) as well as all supplemental HVAC and supplemental electrical installations (i.e., submeters, transformers, subpanels, disconnects and switches) that serviced the Give-back Space; provided, however, that Tenant shall not be responsible for any damage to ceiling tiles or the ceiling grid in performing such removal nor shall Tenant be responsible for the removal of any supplemental HVAC or electrical installations that serviced the existing cafeteria. Until the new cafeteria referenced in Exhibit C is in operation, Tenant may continue to use the existing cafeteria in the 4

148 Give-back Space and shall not be responsible for the payment of any rent or additional rent with respect thereto. Should Tenant fail to surrender any of the Give-back Space in a timely manner in accordance with this Lease, it shall be deemed to be a holdover tenant as to such space and the terms of Article 40 of the Existing Lease shall apply Provided Tenant is not in default in any of the terms, covenants or provisions of the Lease, as herein amended, beyond any applicable notice or cure period, and notwithstanding anything contained herein to the contrary, Tenant shall be entitled to an abatement in monthly fixed rent in the amount of $956, (the Abatement ), said concession to be applied against the monthly fixed rent payments due for the months of August 2011 through March 2012, inclusive (herein the Concession Period ); provided, however, that Tenant shall have the right, at its option, to apply all or any portion of the Abatement to defray the costs of Tenant s Work by written notice to Landlord, in which event the Concession Period shall be shortened as applicable Provided Tenant is not in default in any of the terms, covenants or provisions of the Existing Lease beyond any applicable notice or cure period, and notwithstanding anything contained in the Existing Lease to the contrary, Tenant shall be entitled to an abatement in monthly fixed rent under the Existing Lease in the amount of $370,833.34, said concession to be applied against the monthly fixed rent payments due under the Existing Lease for the months of April 2011 and May ARTICLE Tenant shall use and occupy the Demised Premises for Permitted Use and for no other purpose. USE The use of the Demised Premises for the purposes specified in Section 2.01 shall not include, and Tenant shall not use or permit the use of the Demised Premises or any part thereof, for: (a) A school of any kind other than for the training of Tenant s employees; (b) An employment agency; (c) An office for any governmental or quasi governmental bureau, department, agency, foreign or domestic, including any autonomous governmental corporation or diplomatic or trade mission; (d) Any telemarketing activities or other direct selling activities; (e) Medical or psychiatric offices; or (f) Any use, including executive and general office use which results in a density of a population of more than one person for every 200 square feet. 5

149 2.03. If any governmental license or permit, other than a Certificate of Occupancy, shall be required for the proper and lawful conduct of Tenant s business in the Demised Premises or any part thereof, and if failure to secure such license or permit would adversely affect Landlord, Tenant shall obtain the same at its sole cost and expense and, if requested by Landlord, shall submit the same to inspection by Landlord. Tenant shall at all times comply with the terms and conditions of each such license or permit Tenant shall not at any time use or occupy, or do or permit anything to be done in the Demised Premises, in violation of the Certificate of Occupancy or any other law, ordinance or regulation governing the use and occupation of the Demised Premises or for the Building. ARTICLE 3 PREPARATION OF THE DEMISED PREMISES The Demised Premises shall be completed and prepared for Tenant s occupancy in the manner, and subject to the terms, conditions and covenants, set forth in Exhibit C. The facilities, materials, and work so to be furnished, installed, and performed in the Demised Premises by Landlord (other than the portions of Landlord s Work to be performed within the Demised Premises) are hereinafter and in Exhibit C referred to as Tenant s Work. Such other installations, materials, and work which may be undertaken by or for the account of Tenant (i.e., which are performed by contractors retained by Tenant and excluded from Tenant s Work) to equip, decorate, and furnish the Demised Premises for Tenant s occupancy, commonly called finishing trades work, are hereinafter and in Exhibit C called Tenant s Finish Work. Tenant shall not be responsible for any restoration of the Demised Premises upon the expiration or earlier termination of this Lease, except that Tenant shall remove from the Demised Premises (a) all equipment comprising Tenant s Voice, Data and Security Systems, including associated outlets, wires, wiring trays and other equipment, materials and facilities, whether located in the ceiling, floor and/or walls, which in any way relates, pertains to, constitutes or is connected with Tenant s Voice, Data and/or Security Systems and regardless of whether Landlord or Tenant installed and/or paid for the installation of such systems; provided, however, that Tenant shall not be responsible for any damage to ceiling tiles or the ceiling grid in performing such removal; and (b) all supplemental HVAC and supplemental electrical installations made pursuant to this Lease or which were made pursuant to the Existing Lease Upon the expiration or earlier termination of this Lease, Tenant shall also remove the building exterior, roof and site items described on Schedule 3.02, attached hereto that exist as of the date of this Lease. 6

150 ARTICLE 4 WHEN DEMISED PREMISES READY FOR OCCUPANCY The Demised Premises are presently occupied by Tenant. Landlord shall at its own cost and expense construct the demising walls for the 1 st floor of the Building in a good and workmanlike manner and in accordance with all Laws (as hereinafter defined) For the purpose of Sections 5.01 through ARTICLE 5 ADDITIONAL RENT (a) Taxes shall mean real estate taxes, special and extraordinary assessments and governmental levies against the Land and Building of which the Demised Premises (but excluding therefrom that portion of the real estate taxes directly attributable to improvements made by other tenants in the Building beyond Landlord s allowances) are a part provided, however, if at any time during the Term of this Lease the method of taxation prevailing at the date of this Lease shall be altered so that in lieu of, or as an addition to, or as a substitute for any or all of the above there shall be assessed, levied or imposed (i) a tax, assessment, levy, imposition or charge based on the gross income or gross rents received therefrom whether or not wholly or partially as a capital levy or otherwise; or (ii) a tax, assessment, levy, imposition or charge measured by or based in whole or in part upon all or any part of the Land and/or Building and imposed upon Landlord; or (iii) a license fee measured by the gross rents; or (iv) any other tax, assessment, levy, imposition, charge or license fee however described or imposed, then all such taxes, assessments, levies, impositions, charges or license fees or the part thereof so measured or based shall be included in the definition of Taxes. Taxes shall not include any inheritance, estate, gift, franchise, corporation, net income or net profits tax, any interest or charges for late payment, or any assessment or levies on any additional buildings constructed on the Land or any enlargement of the Building. Tenant shall pay to Landlord directly that portion of any real estate taxes directly attributable to improvements made by Tenant beyond Landlord s allowances, but only if such improvements are separately assessed (hereinafter referred to as Tenant s Direct Tax Payment ). At Tenant s request from time to time, Landlord shall appeal or challenge the assessment of the Building and, if Tenant requests such an appeal or challenge, the reasonable out-of-pocket costs thereof shall be included in Taxes for the year to which such appeal or challenge relates. (b) Base Taxes shall mean the product of (i) the assessed valuation of the Land and Building as finally determined following completion of construction and issuance of an initial Certificate of Occupancy for any portion of the Building (or such equivalent certification if Certificates of Occupancy are not to be used), multiplied by (ii) the tax rate for the Tax Year 2012; provided, however, that if clause (i) does not equal a full assessment for the Building, then clause (i) shall be increased so that it reflects a fully assessed Building. (c) Tax Year shall mean each calendar year for which Taxes are levied by any governmental authority. 7

151 (d) Operational Year shall mean each calendar year commencing with calendar year (e) Tenant s Proportionate Share of Increase shall mean Tenant s Percentage (as herein defined) multiplied by the increase in Taxes in any Operational Year in excess of the Base Taxes. Tenant s Proportionate Share of Increase for the first Operational Year shall be prorated to reflect the actual occupancy by Tenant for said Operational Year. (f) Tenant s Projected Share of Increase shall mean Tenant s Proportionate Share of Increase in Taxes for the projected Operational Year divided by twelve (12) and payable monthly by Tenant to Landlord as additional rent Commencing with the first Operational Year and thereafter, Tenant shall pay to Landlord as additional rent for the then Operational Year, Tenant s Projected Share of Increase in Taxes in equal monthly installments After the expiration of each Operational Year, Landlord shall furnish to Tenant a written statement of the Taxes incurred for such Operational Year as well as Tenant s Proportionate Share of Increase, if any. If the statement furnished by Landlord to Tenant pursuant to this Section shall indicate that Tenant s Projected Share of Increase exceeded Tenant s Proportionate Share of Increase, Landlord shall either forthwith pay the amount of excess directly to Tenant concurrently with the statement or credit same against Tenant s next monthly installment of rent. If such statement furnished by Landlord to Tenant shall indicate that the Tenant s Proportionate Share of Increase exceeded Tenant s Projected Share of Increase for the then Operational Year, Tenant shall forthwith pay the amount of such excess to Landlord. If Landlord has not provided Tenant a written statement for Tenant s Projected Share of Increase as of the commencement of any Operational Year, Tenant shall be obligated to continue to pay additional rent each month at the same rate as reflected in the previous estimate furnished by Landlord until such time as Landlord has sent the statement, whereupon appropriate adjustments will be made. Commencing with the first Operational Year, Tenant shall pay to Landlord in equal monthly installments together with its payment of fixed rent, one-twelfth (1/12) of Tenant s Direct Tax Payment As used in Sections 5.04 through 5.06: (a) Operating Expenses shall mean any or all reasonable and customary expenses incurred by Landlord in connection with the operation of the Land and Building of which the Demised Premises are a part, including all expenses incurred as a result of Landlord s compliance with any of its obligations hereunder other than Landlord s Work, and such expenses shall include by way of example and not by way of limitation: (i) salaries, wages, medical, surgical and general welfare benefits, (including group life insurance) and pension payments of employees of Landlord engaged in the operation and maintenance of the Building; (ii) social security, unemployment, and payroll taxes, workers compensation, disability coverage, uniforms, and dry cleaning for the employees referred to in Subsection (i); (iii) the cost for the Building and common areas of all charges for oil, gas, electricity (including, but not limited to, 8

152 fuel cost adjustments), steam, heat, ventilation, air-conditioning, heating, and water, including any taxes on any such utilities, but excluding from Operating Expenses the Landlord s cost, including taxes thereon, of electric energy, other than for heating and air-conditioning, furnished to the Demised Premises (which electric energy so furnished shall be paid for by Tenant pursuant to the provisions of Article 15 hereof); (iv) the cost of all premiums and charges for insurance for the Building and Land, including but not limited to: rent, casualty, liability, fidelity and war risk (if obtainable from the United States Government); (v) the cost of all building and cleaning supplies for the Building and common areas and charges for telephone and data service for the Building; (vi) the cost of all charges for management, window cleaning, security services, if any, and janitorial services, and any independent contractor performing work included within the definition of operating expenses; (vii) legal and accounting services and other professional fees and disbursements incurred in connection with the operation and management of the Land and Building (other than as related to new leases, enforcing Landlord s rights under existing leases, or sales of the Building); (viii) general maintenance of the Building and Land, including but not limited to, the cost of maintaining, repairing or replacing the landscaping, sidewalks, driveways and other improvements and facilities serving the Building; (ix) maintenance of the common area; (x) the cost of capital expenditures, including the purchase of any item of capital equipment or the leasing of capital equipment, which have the effect of reducing the expenses which would otherwise be included in Operating Expenses, which costs shall be included in Operating Expenses for the Operational Year in which the costs are incurred and subsequent Operational Years on a straight-line basis, to the extent that such items are amortized over such period of time as Landlord reasonably estimates, with an interest factor equal to the interest rate at the time of Landlord s having made said expenditure; and (xi) that portion of the cost of any capital expenditures incurred for the installation of (A) labor cost saving devices amortized over their life as determined by Internal Revenue Code of 1986 and the regulations promulgated thereunder, with an interest factor equal to the interest rate being paid by Landlord at the time of Landlord s having made said expenditure, except that under no circumstances shall the amortization of the same exceed the amount actually saved; and (B) capital expenditures incurred in order to comply with any applicable Laws enacted after the Commencement Date, amortized as aforesaid. If during all or part of the Base Year or any Operational Year, Landlord shall not furnish any particular item(s) of work or service (which would otherwise constitute an Operating Expense hereunder) to portions of the Building due to the fact that (i) such portions are not occupied or leased; (ii) such items of work or service is not required or desired by the tenant of such portion; (iii) such tenant is itself obtaining and providing such item of work or service; or (iv) for other reasons, then, for the purposes of computing Operating Expenses, the amount for such item and for such period shall be deemed to be increased by an amount equal to the additional costs and expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such item of work or services to such portion of the Building or such tenant. Notwithstanding the foregoing, the following costs and expenses shall not be included in Operating Expenses: (1) Executives salaries above the grade of building manager; 9

153 (2) Cost of repairs or replacements incurred by reason of fire or other casualty (other than a commercially reasonable deductible) or condemnation; (3) Advertising and promotional expenditures; (4) Costs incurred in performing work or furnishing services for any tenant (including Tenant), whether at such tenant s or Landlord s expense, to the extent that such work or service is in excess of any work or service that Landlord is obligated to furnish to Tenant at Landlord s expense; (5) Depreciation, except as provided above; (6) Brokerage commissions; (7) Taxes (as hereinbefore defined); (8) The cost of electricity (for other than heating and air-conditioning) furnished to the Demised Premises or any other space leased to tenants as reasonably estimated by Landlord; (9) Refinancing costs and mortgage interest and amortization payments; (10) Reserves; (11) Repair and/or replacement of the roof; (12) Leasehold improvements, including painting, made for tenants of the Building or made in order to prepare any portion of the Building for occupancy by a new tenant; (13) The cost of repairs or restoration necessitated by condemnation; (14) The cost of any items for which Landlord is reimbursed by insurance, reimbursed by other tenants of the building, or otherwise compensated; (15) Rent under any ground lease and/or underlying leases; (16) Any cost stated in operating expenses representing an amount paid to a corporation or entity which is controlled by or under common control with Landlord which is in excess of the amount which would be paid in the absence of such relationship; (17) The cost of installing, operating, and maintaining any specialty such as an observatory, broadcasting facility, luncheon club, athletic or recreational club, theatre or cafeteria; except as set forth below; (18) The cost of correcting defects in construction of the Building, parking areas, or other part of the Demised Premises or in the Building equipment; 10

154 (19) Any insurance premium to the extent that Landlord is entitled to be reimbursed therefor by Tenant pursuant to this Lease or by any other occupant of the Building; (20) The cost of any architectural additions to the Building that result in a larger Building; (21) Capital expenditures, except as expressly set forth in clause (xi) above; (22) Artwork; (23) The cost of litigation or landlord-tenant proceedings; and (24) Interest or charges for late payment. Notwithstanding the foregoing to the contrary, if the management fee for the Building (expressed as a percentage of the gross income derived from the Building) is increased or decreased, a corresponding adjustment shall be made to the management fee line item for the Base Year, and if the types or amounts of insurance maintained by Landlord are increased or decreased, a corresponding adjustment shall be made to the insurance line item for the Base Year. Further (A) costs for repair of the roof shall not be included in Operating Expenses if such costs are covered by the existing 20 year roof warranty, or are paid for by insurance proceeds or are the result of the act or omission of another tenant or third party that has legal responsibility therefor; and (B) the cost of repair and maintenance of the Cafeteria and Fitness Center shall be ratably apportioned over the Building, 200 Schultz Drive and 230 Half Mile Road and shall be offset by any revenues derived therefrom by Landlord. (b) Operational Year shall mean each calendar year commencing with calendar year (c) Base Year shall mean calendar year (d) Tenant s Proportionate Share of Increase shall mean Tenant s Percentage (as herein defined) multiplied by the increase in Operating Expenses for the Operational Year over Operating Expenses for the Base Year. For purposes hereof, the Tenant s Proportionate Share of Increase has been computed based upon a total square footage of the Building equal to 100,000 square feet, and a total square footage of the Demised Premises equal to 57,364 square feet. (e) Tenant s Projected Share of Increase shall mean Tenant s Proportionate Share of Increase for the projected Operational Year. Tenant shall pay to Landlord in equal monthly installments together with its payment of fixed rent one-twelfth (1/12) of Tenant s Projected Share of Increase Commencing with the first Operational Year after Landlord shall be entitled to receive Tenant s Proportionate Share of Increase, Tenant shall pay to Landlord as additional rent for the then Operational Year, Tenant s Projected Share of Increase. 11

155 5.06. After the expiration of the first Operational Year and for each Operational Year thereafter, Landlord shall furnish to Tenant a written detailed statement of the Operating Expenses incurred for such Operational Year which statement shall set forth Tenant s Proportionate Share of Increase, if any. If the statement furnished by Landlord to Tenant, pursuant to this Section, at the end of the then Operational Year shall indicate that Tenant s Projected Share of Increase exceeded Tenant s Proportionate Share of Increase, Landlord shall either forthwith pay the amount of excess directly to Tenant concurrently with the statement or credit same against Tenant s next monthly installment of rent. If such statement furnished by Landlord to Tenant hereunder shall indicate that the Tenant s Proportionate Share of Increase exceeded Tenant s Projected Share of Increase for the then Operational Year, Tenant shall forthwith pay the amount of such excess to Landlord. If Landlord has not provided Tenant a written statement for Tenant s projected share of increase as of the commencement of any operational year, Tenant shall be obligated to continue to pay additional rent each month at the same rate as reflected in the previous estimate furnished by Landlord until such time as Landlord has sent the statement whereupon appropriate adjustments will be made For a period of one hundred eighty (180) days after Tenant s receipt of a statement furnished by Landlord to Tenant under Sections 5.03 and 5.06 above, Tenant shall have the right to review, examine, copy and audit Landlord s books and records for the applicable calendar year as well as for the Base Taxes and/or the Base Year (but only on one occasion as to the Base Taxes and on one occasion as to the Base Year). Every statement given by Landlord pursuant to Sections 5.03 and 5.06 shall be conclusive and binding upon Tenant unless (i) within one hundred eighty (180) days after the receipt of such statement Tenant shall notify Landlord that it disputes the correctness of the statement, specifying the particular respects in which the statement is claimed to be incorrect; and (ii) if such dispute shall not have been settled by agreement, shall submit the dispute to judicial proceedings (or, at Tenant s election, by arbitration in the manner provided in Article 33) within ninety (90) days after receipt of the statement. Tenant agrees that it and its representatives shall conduct a review with complete confidentiality and shall enter into a reasonable confidentiality agreement with Landlord respecting the review, examination and audit. Pending the determination of such dispute by agreement, judicial proceedings or arbitration as aforesaid, Tenant shall, within thirty (30) days after receipt of such statement, pay additional rent in accordance with Landlord s statement and such payment shall be without prejudice to Tenant s position. If the dispute shall be determined in Tenant s favor, Landlord shall forthwith pay Tenant the amount of Tenant s overpayment of rents resulting from compliance with Landlord s statement. If the dispute shall be determined in Tenant s favor and the applicable statement overstated Taxes or Operating Expenses (or understated Base Taxes or Operating Expenses for the Base Year) by more than three percent (3%), then Landlord shall forthwith reimburse Tenant for all reasonable, out-of-pocket costs and expenses incurred by Tenant in connection with such review, examination, copying, audit and judicial proceedings or arbitration Landlord shall provide the statements contemplated by Sections 5.03 and 5.06 within two hundred seventy (270) days after the expiration of the applicable Operational Year. Following the expiration of such two hundred seventy (270) day period, Landlord shall not have any right to bill additional amounts for the applicable Operational Year. 12

156 ARTICLE 6 SUBORDINATION TO MORTGAGEES (A) The mortgage to which this Lease is on the date hereof subject and subordinate is hereinafter called the Existing Mortgage and the holder of a superior mortgage or its successor in interest at the time referred to is sometimes hereinafter called a Existing Mortgagee. The Existing Mortgage is held by Wells Fargo Bank. Landlord represents and warrants to Tenant that, as of the date of Landlord s execution of this Lease, Landlord is the fee simple owner of the Land and the Building and, other than the Existing Mortgage, no mortgage, other security instrument, ground lease or master lease encumbers or otherwise affects the Land and/or the Building. This Lease, and all rights of Tenant hereunder are and shall be subject and subordinate in all respects to the Existing Mortgage which now affects the Land and/or the Building, to each and every advance made or hereafter to be made under such mortgage, and to all renewals, modifications, replacements, and extensions of such mortgages and spreaders and consolidations of such mortgages. As a condition to this Lease and the foregoing subordination becoming effective, Landlord shall obtain from the Existing Mortgagee a Subordination, Non-Disturbance and Attornment Agreement ( SNDA ) in favor of Tenant in the form annexed hereto as Schedule For the avoidance of doubt, until the date on which a fully executed SNDA in such form is delivered to Tenant, Tenant shall have the right to rescind its execution of this Lease by written notice to Landlord. (B) Furthermore, this Lease will be subject and subordinated to all future first mortgages or deeds of trust or ground lessors ( Superior Instruments ) affecting the Land and Building, provided that Landlord obtains a commercially reasonable nondisturbance agreement in favor of Tenant from the holder of said Superior Instrument that is reasonably acceptable to Tenant. Tenant shall execute, at no expense to the Tenant, any commercially reasonable instrument reasonably acceptable to Tenant which may be deemed necessary or desirable by the Landlord to further effect or to evidence such subordination, nondisturbance and attornment. Landlord may assign this Lease to the holder of any Superior Instrument, and the Tenant shall execute, at no expense to the Tenant, any commercially reasonable instrument reasonably acceptable to Tenant which may be necessary or desirable by the Landlord or the holder of said Superior Instrument in connection with said assignment. ARTICLE 7 QUIET ENJOYMENT Landlord covenants that if and so long as Tenant pays fixed rent and any additional rent as herein provided and performs Tenant s covenants hereof prior to the expiration of any applicable notice and/or cure period, Landlord shall do nothing to affect Tenant s right to peacefully and quietly have, hold and enjoy the Demised Premises for the Term herein defined, subject to all provisions of this Lease and the SNDA referenced in Section 6.01(A), above. 13

157 ARTICLE 8 ASSIGNMENT, MORTGAGING, SUBLETTING Neither this Lease, nor the Term and estate hereby granted, nor any part hereof or thereof, nor the interest of Tenant in any sublease, or the rentals thereunder, shall be assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant, and neither the Demised Premises, nor any part thereof shall be encumbered in any manner by reason of any act or omission on the part of Tenant or anyone claiming under or through Tenant or shall be sublet, or be used or occupied or permitted to be used or occupied, or utilized for desk space or for mailing privileges, by anyone other than Tenant or for any purpose other than as permitted by this Lease without the prior written consent of Landlord in every case, except as expressly otherwise provided in this Article If this Lease be assigned, whether or not in violation of the provisions of this Lease, Landlord may collect rent from the assignee. If the Demised Premises or any part thereof be sublet or be used or occupied by anybody other than Tenant, whether or not in violation of this Lease, Landlord may, after default by Tenant and expiration of Tenant s time to cure such default, collect rent from the undertenant or occupant. In either event, Landlord may apply the net amount collected to the rents herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of any of the provisions of Section 8.01, or the acceptance of the assignee, undertenant or occupants as Tenant, or a release of Tenant from the further performance by Tenant of Tenant s obligations under this Lease. The consent by Landlord to assignment, mortgaging, underletting or use or occupancy by others shall not in any way be considered to relieve Tenant from obtaining the express written consent of Landlord to any other or further assignment, mortgaging or underletting or use or occupancy by others not expressly permitted by this Article The following provisions shall govern in connection with the subletting of all or a portion of the Demised Premises: (a) No sublease shall be permitted if at the time of Tenant s request for consent under this Article 8 Tenant is in default under this Lease beyond any applicable notice and/or cure period; (b) Tenant shall submit in writing to Landlord (i) the name and address of the proposed subtenant; (ii) the nature and character of the proposed subtenant s business, and the intended use to be made of the Demised Premises by the proposed subtenant; (iii) the major business terms and conditions of the proposed sublease; and (iv) such reasonable financial information regarding the proposed subtenant to enable Landlord to determine the proposed sublessee s financial responsibility; and (v) a general description of any and all work proposed to be done in the Demised Premises to be sublet; (c) Within fifteen twenty (20) days of Landlord s receipt of the information described in (b) above and the fee due Landlord in accordance with Section 8.07 herein, Landlord, at Landlord s election may (i) cancel this Lease as to that portion of the Demised Premises which Tenant desires to sublease, in which event Tenant agrees to surrender all of its 14

158 right, title, and interest hereunder in and to such portion and Landlord may thereafter enter into a direct Lease with the proposed subtenant or with any other persons as Landlord may desire, in which event Landlord at its sole cost and expense shall install any required demising wall between such recaptured space and the balance of the Demised Premises (provided, however, that Landlord may not elect this clause (i) unless the proposed sublease is for substantially all of the then-remaining Term); or (ii) consent to the subletting; or (iii) advise Tenant that Landlord does not consent to the request and the reasons not consenting to the proposed sublease. Landlord shall not unreasonably withhold its consent to a proposed sublease or assignment. Landlord shall not be deemed unreasonable for the purposes of consent for a sublease or an assignment if Landlord withholds its consent for any of the following: (i) in Landlord s reasonable belief the sublessee or assignee is known as a nonperforming or litigious tenant; (ii) the sublessee s or assignee s use will unreasonably burden the parking facilities of the Building; (iii) the sublessee s or assignee s use will violate any provision of this Lease; (iv) if such sublessee or assignee is an environmental nuisance; (v) if in Landlord s reasonable discretion the Landlord does not find that the financial capacity of the assignee is adequate to perform the tenant s obligations under this Lease; or (vi) if in Landlord s reasonable judgment, the presence of the subtenant or assignee will have a material adverse effect upon the use and enjoyment of the Building by other tenants. Notwithstanding clause (i) to the contrary, if Tenant desires to engage in a subletting for substantially all of the then-remaining Term, then Tenant shall have the right to notify Landlord thereof and the portion of the Demised Premises that Tenant desires to sublet (i.e., without having identified a potential subtenant). By written notice to Tenant within fifteen (15) days after Landlord s receipt of such notice, Landlord shall have the right to exercise its rights under clause (i) above; however, if Landlord fails timely to elect such right, then Landlord shall not have any right to elect clause (i) once Tenant has identified a potential subtenant for such portion of the Demised Premises and provides the notice contemplated by subsection (b) above. (d) As a condition to Landlord s consent, if given under (c) above, Landlord shall have obtained consent to such proposed subletting by a superior mortgagee, provided such superior mortgagee requires consent to the subletting. Landlord shall make a good faith effort to obtain any such required consent within the time limit set forth above. (e) In connection with any subletting, Tenant shall not offer the Demised Premises, or any part thereof, to any other tenant or occupant of the Building or their subsidiaries or affiliates at any time that Landlord has comparable space in the Building available for lease. (f) The term of the sublease shall not extend beyond a date which is one day prior to the Expiration Date. (g) Tenant acknowledges that its sole remedy with respect to any assertion that Landlord s failure to consent to any sublet or assignment shall be to submit the dispute to arbitration in accordance with Section 33.06, below, and Tenant shall have no other claim or course of action against Landlord as a result of Landlord s actions in refusing to consent thereto Tenant shall remain fully liable for the performance of all Tenant s obligations hereunder notwithstanding any subletting provided for herein (except to Landlord), and without limiting the generality of the foregoing, shall remain fully responsible and liable to Landlord for all acts and omissions of any subtenant or anyone claiming under or through any subtenant which shall be in violation of any of the obligations of this Lease and any such violation shall be deemed to be a violation by Tenant. 15

159 8.05. (a) Tenant shall not, without the prior written consent of Landlord, assign this Lease, and the provisions of Section 8.03 with respect to subletting shall equally apply to any assignment of this Lease. Tenant herein named, or any immediate or remote successor in interest of Tenant herein named, shall remain liable jointly and severally (as a primary obligor) with its assignee and all subsequent assignees for the performance of Tenant s obligations hereunder. (b) If Tenant is a corporation other than a corporation whose stock is listed and traded on a nationally recognized stock exchange, the provisions of Section 8.05(a) shall apply to a transfer (however accomplished, whether in a single transaction or in a series of related or unrelated transactions) of stock (or any other mechanism such as, by way of example, the issuance of additional stock, a stock voting agreement or change in class(es) of stock) which results in a change of control of Tenant as if such transfer of stock (or other mechanism) which results in a change of control of Tenant were an assignment of this Lease, and if Tenant is a partnership or joint venture, said provisions shall apply with respect to a transfer (by one or more transfers) of Tenant s general partner s interest in the distributions of profit and losses of such partnership or joint venture (or other mechanism, such as, by way of example, the creation of additional general partnership or limited partnership interests) which results in a fifty (50%) percent or greater change of control of such a partnership or joint venture, as if such transfer of an interest in the distributions of profits and losses of such partnership or joint venture which results in a fifty (50%) percent or greater change of control of such partnership or joint venture were an assignment of this Lease; but said provisions shall not apply to transactions between Tenant s general partner and Tenant s employees or with a corporation into or with which Tenant is merged or consolidated or to which all or substantially all of Tenant s assets are transferred or to any corporation which controls or is controlled by Tenant or is under common control with Tenant, provided that in the event of such merger, consolidation or transfer of all or substantially all of Tenant s assets (i) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the net worth of Tenant immediately prior to such merger, consolidation or transfer, and (ii) proof reasonably satisfactory to Landlord of such net worth shall have been delivered to Landlord at least 10 days prior to the effective date of any such transaction. (c) In the event that any or all of Tenant s interest in the Premises and/or this Lease is transferred by operation of law to any trustee, receiver or other representative or agent of Tenant, or to Tenant as a debtor in possession, and subsequently any or all of Tenant s interest in the Premises and/or this Lease is offered or to be offered by Tenant or any trustee, receiver, or other representative or agent of Tenant as to its estate or property (such person, firm or entity being hereinafter referred to as the Grantor ), for assignment, conveyance, lease or other disposition to a person, firm or entity other than Landlord (each such transaction being hereinafter referred to as a Disposition ), it is agreed that Landlord has and shall have a right of first refusal to purchase, take, or otherwise acquire, the same upon the same terms and conditions as the Grantor thereof shall accept upon such Disposition to such other person, firm or entity, and as to each such Disposition, the Grantor shall give written notice to Landlord in reasonable 16

160 detail of all of the terms and conditions of such Disposition within twenty (20) days next following its determination to accept the same but prior to accepting the same, and Grantor shall not make the Disposition until and unless Landlord has failed or refused to accept such right of first refusal as to the Disposition, as set forth herein. Landlord shall have sixty (60) days next following its receipt of the written notice as to such Disposition in which to exercise the option to acquire Tenant s interest by such Disposition, and the exercise of the option by Landlord shall be effected by notice to that effect sent to the Grantor; but nothing herein shall require Landlord to accept a particular Disposition or any Disposition, nor does the rejection of any one such offer of first refusal constitute a waiver or release of the obligation of the Grantor to submit other offers hereunder to Landlord. In the event Landlord accepts such offer of first refusal, the transaction shall be consummated pursuant to the terms and conditions of the Disposition described in the notice to Landlord. In the event Landlord rejects such offer of first refusal, Grantor may consummate the Disposition with such other person, firm or entity; but any decrease in price of more than two percent (2%) of the price sought from Landlord or any change in the terms of payment for such Disposition shall constitute a new transaction requiring a further option of first refusal to be given to Landlord hereunder. (d) Without limiting any of the provisions of Articles 24 and 25, if pursuant to the Federal Bankruptcy code (hereinafter referred to as the Code ), or any similar law hereafter enacted having the same general purpose, Tenant is permitted to assign this Lease notwithstanding the restrictions contained in this Lease, adequate assurance of future performance by an assignee expressly permitted under such Code shall be deemed to mean the deposit of cash security in an amount equal to the sum of one year s Fixed Rent plus an amount equal to the Additional Rent for the calendar year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Landlord for the balance of the Term, without interest, as security for the full performance of all of Tenant s obligations under this Lease, to be held and applied in the manner specified for security in Article Notwithstanding anything to the contrary contained in this Article with respect to assignment or subletting, Landlord s consent shall not be required with respect to any assignment and/or subletting (i) to any parent, affiliate or wholly-owned subsidiary of Tenant (as defined in Rule b-2 under the Securities Exchange Act of 1934) or (ii) to any corporation or other entity which succeeds to all or substantially all of the assets and business of Tenant; however Tenant shall give Landlord prompt notice of the occurrence of any such assignment and/or subletting Tenant agrees that in connection with each separate request for a Landlord s consent to a subletting or assignment, Tenant shall pay to Landlord the sum of $1, representing a reasonable compensation to Landlord for the administration costs of evaluating and responding to the request Tenant further agrees that it shall not place any signs on the Land or on the windows located in the Demised Premises indicating that all or any portion of the Demised Premises are available for subleasing or assignment. 17

161 8.09. Notwithstanding anything to the contrary contained in this Lease, Tenant shall have the right to permit the personnel of Tenant s suppliers, Tenant s customers and Tenant s teaming partners to occupy portions of the Demised Premises in furtherance of their business relationship, provided that the portions of the Demised Premises occupied by such personnel are not separately demised. ARTICLE 9 COMPLIANCE WITH LAWS AND REQUIREMENTS OF PUBLIC AUTHORITIES Tenant covenants to comply with all present and future laws, orders and regulations of the federal, state and municipal governments or any of their departments (collectively, Laws ) affecting the Demised Premises, this covenant to survive the expiration or sooner termination of this Lease; provided, however, that Tenant shall not be required to perform any Tenant s Changes to comply with Laws until Landlord s Work and Tenant s Work have been completed in accordance with all Laws. Tenant shall give prompt notice to Landlord of any notice it receives of the violation of any law or requirement of public authority, and, subject to the balance of this Section 9.01, at its expense shall comply with all laws and requirements of public authorities which shall, with respect to the Demised Premises or the use and occupation thereof, or the abatement of any nuisance, impose any violation, order or duty on Landlord or Tenant, arising from (i) Tenant s use of the Demised Premises; (ii) the manner of conduct of Tenant s business or operation of its installation, equipment or other property therein; (iii) any cause or condition created by or at the instance of Tenant, other than by Landlord s performance of any work for or on behalf of Tenant; or (iv) the breach of any of Tenant s obligations hereunder. Furthermore, Tenant need not comply with any such law or requirement of public authority so long as Tenant shall be contesting the validity thereof, or the applicability thereof to the Demised Premises, in accordance with Section Nothing contained herein shall be construed to require Tenant to make any Tenant s Changes except to the extent that same are required by reason of Tenant s specific manner of use of the Demised Premises Tenant may, at its expense (and if necessary, in the name of but without expense to Landlord) contest, by appropriate proceedings prosecuted diligently and in good faith, the validity, or applicability to the Demised Premises, of any law or requirement of public authority, and Landlord shall reasonably cooperate with Tenant at no cost to Landlord in such proceedings provided that: (a) Tenant shall defend, indemnify, and hold harmless Landlord against all liability, loss or damage which Landlord shall suffer by reason of such non-compliance or contest, including reasonable attorney s fees and other expenses reasonably incurred by Landlord; (b) Such non-compliance or contest shall not constitute or result in any violation of any superior mortgage, or, if such superior mortgage shall permit such non-compliance or contest on condition of the taking of action or furnishing of security by Landlord, such action shall be taken and such security shall be furnished at the expense of Tenant; 18

162 and (c) Tenant shall keep Landlord advised as to the status of such proceedings; (d) Tenant, by its acts or omissions, does not place Landlord or other tenants in jeopardy or subject to any form of penalty or fine; (e) Any such proceedings shall not affect the payment of fixed rent or additional rent or other sums payable hereunder or prevent Tenant from using the Demised Premises for its intended purpose. ARTICLE 10 INSURANCE Tenant shall not violate, or knowingly permit the violation of, any condition imposed by the all-risk casualty policy issued for the Building and shall not do anything, or knowingly permit anything to be kept in the Demised Premises which would increase the fire or other casualty insurance rate on the Building or the property therein over the rate which would otherwise then be in effect, (unless Tenant pays the resulting increased amount of premium as provided in Section 10.02) or which would result in insurance companies of good standing refusing to insure the Building or any of such property in amounts and at normal rates reasonably satisfactory to Landlord. However, Tenant shall not be subject to any liability or obligation under this Article by reason of the proper use of the Demised Premises for the purposes permitted by Article If, by reason of any act or omission on the part of Tenant (other than proper use of the Demised Premises for the purposes permitted by Article 2), the rate of fire insurance with extended all-risk coverage on the Building or equipment or other property of Landlord or other tenants shall be higher than it otherwise would be, Tenant shall reimburse Landlord, on demand, for that part of the premiums for fire insurance and extended all-risk coverage paid by Landlord because of such act or omission on the part of Tenant, which sum shall be deemed to be additional rent and collectible as such In the event that any dispute should arise between Landlord and Tenant concerning insurance rates, a schedule or make up of rates for the Building or the Demised Premises, as the case may be, issued by the Fire Insurance Rating Organization of New Jersey or other similar body making rates for fire insurance and extended coverage for the premises concerned, shall be presumptive evidence of the facts therein stated and of the several items and charges in the fire insurance rates with extended coverage then applicable to such premises Tenant shall obtain and keep in full force and effect at all times during the Term of this Lease, at its own cost and expense: (a) All Risk property insurance against fire, theft, vandalism, malicious mischief, sprinkler leakage and such additional perils as are now, or hereafter may be, included in a standard extended coverage endorsement from time to time in general use in the State of New Jersey (but expressly excluding earthquake and flood) upon 19

163 property of every description and kind owned by Tenant and or under Tenant s care, custody or control located in the Building or for which Tenant is legally liable or installed by or on behalf of Tenant, including by way of example and not by way of limitation, furniture, fixtures, installation and any other personal property (but excluding the work done by Landlord in connection with Exhibit C which is owned by Landlord) in an amount equal to the full replacement costs thereof; (b) Commercial General Liability Insurance Coverage to include personal injury, bodily injury, broad form property damage, operations hazard, owner s protective coverage, blanket contractual liability, products and completed operations liability naming Landlord, Alfieri Property Management and (provided Tenant has been notified of the identity thereof) Landlord s mortgagee or trust deed holder and ground lessor (if any) as additional insureds in an amount per occurrence of not less than Five Million and 00/100 ($5,000,000) Dollars combined single limit bodily injury and property damage occurring in, upon, adjacent, or connected with the Demised Premises and any part thereof. Such liability insurance may be carried in the form of two or more policies, one for primary coverage and one or more for excess coverage over and above such primary coverage. Tenant shall name such other additional insureds associated with the Building as Landlord reasonably requests. Tenant shall pay all premiums and charges therefor and upon failure to do so within ten (10) business days following written notice to Tenant, Landlord may, but shall not be obligated to, make payments, and in such latter event the Tenant agrees to pay the reasonable, out-of-pocket amount thereof to Landlord on demand and said sum shall be deemed to be additional rent, and in each instance collectible on the first day of any month following the date of notice to Tenant in the same manner as though it were rent originally reserved hereunder, together with interest thereon at the rate of three points in excess of Prime Rate. Appropriate certificates shall be deposited with Landlord together with any renewals, replacements or endorsements at all times to the end that said insurance shall be in full force and effect for the benefit of the Landlord during the Term of this Lease. In the event Tenant shall fail to procure and place such insurance and such failure continues for ten (10) business days following written notice to Tenant, the Landlord may, but shall not be obligated to, procure and place same, in which event the reasonable, out-of-pocket amount of the premium paid shall be refunded by Tenant to Landlord upon demand and shall in each instance be collectible on the first day of the month or any subsequent month following the date of payment by Landlord, in the same manner as though said sums were additional rent reserved hereunder together with interest thereon at the rate of three points in excess of the Prime Rate; (c) Business interruption insurance in such amounts as will reimburse Tenant for direct loss of earnings attributable to all perils, commonly insured against by prudent tenants or assumed by Tenant pursuant to this Lease or attributable to prevention or denial of access to the demised Premises or the Building as a result of such perils; and (d) Worker s Compensation insurance in form and amount as required by law All insurance policies required pursuant to this Article shall be taken out with insurers rated A-:X by A.M. Best Company, Oldwick, New Jersey who are licensed to do business in the State of New Jersey. A certificate evidencing such insurance shall be delivered to Landlord upon the commencement of the Term hereof. If Tenant receives written notice from its insurer of any material change, reduction in coverage, cancellation or other termination of insurance then Tenant shall notify Landlord and (provided Tenant has been notified of the identity thereof) Landlord s mortgagee or trust deed holder thereof within ten (10) business days thereafter. The aforesaid insurance shall not be written with any deductible that is not commercially reasonable. 20

164 Notwithstanding anything to the contrary contained in Sections 10.1 and 10.2 above, Landlord and Tenant agree to include in each of its property (including rental value or business interruption) insurance policies a waiver of the insurer s right of subrogation against the other party. If such waiver shall not be obtainable, the insured party must immediately so notify the other party. In that event, neither party nor its respective insurance company shall be deemed to have waived subrogation Notwithstanding anything to the contrary contained in Sections 10.1 and 10.2 above: Each party hereby releases the other party with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damage, or destruction with respect to its property (including rental value or business interruption) occurring during the Term of this Lease to the extent to which it is insured under a policy or policies containing a waiver of subrogation or naming the other party as an additional insured, as provided in Sections and If notwithstanding the recovery of insurance proceeds by either party for loss, damage or destruction of its property (or rental value or business interruption) the other party is liable to the first party with respect thereto or is obligated under this Lease to make replacement, repair, or restoration or payment, then provided that the first party s right of full recovery under its insurance policies is not thereby prejudiced or otherwise adversely affected, the amount of the net proceeds of the first party s insurance against such loss, damage or destruction shall be offset against the second party s liability to the first party thereof, or shall be made available to the second party to pay for replacement, repair, or restoration, as the case may be The waiver of subrogation or permission for release referred to in Section shall extend to the agents of each party and their employees and, in the case of Tenant, shall also extend to all other persons and entities occupying, using or visiting the Demised Premises in accordance with the terms of this Lease, but only if and to the extent that such waiver or permission can be obtained without additional charge (unless such party shall pay such charge). The releases provided for in Section shall likewise extend to such agents, employees and other persons and entities, if and to the extent that such waiver or permission is effective as to them. Nothing contained in Section shall be deemed to relieve either party of any duty imposed elsewhere in this Lease to repair, restore or rebuild or to nullify any abatement of rents provided for elsewhere in this Lease. Except as otherwise provided in Section 10.04, nothing contained in Sections and shall be deemed to impose upon either party any duty to procure or maintain any of the kinds of insurance referred to therein or any particular amounts or limits of any such kinds of insurance. However, each party shall advise the other, upon request, from time to time (but not more often than once a year) of all of the policies of insurance it is carrying of any of the kinds referred to in Sections and 10.04, and if it shall discontinue any such policy or allow it to lapse, shall notify the other party thereof with reasonable promptness. The insurance policies referred to in Sections and shall be deemed to include policies procured and maintained by a party for the benefit of its mortgagee or pledgee. 21

165 Tenant acknowledges that it has no right to receive any proceeds from any such insurance policies carried by Landlord. Tenant further acknowledges that the provisions of this Lease as set forth in Article 20 and the provisions of Section as to Tenant s insurance are designed to insure adequate coverage as to Tenant s property and business without regard to fault and to avoid Landlord obtaining similar coverage for said loss for its negligence or that of its agents, servants or employees which could result in additional costs includable as part of Operating Expenses, which are payable by Tenant. Landlord will not carry insurance of any kind on Tenant s furniture or furnishings, or on any fixtures, equipment, appurtenances or improvements (other than those enumerated in Exhibit C which belong to Landlord) of Tenant under this Lease and Landlord shall not, except as to the aforesaid Exhibit C items owned by Landlord, be obligated to repair any damage thereto or replace the same Landlord shall maintain the following insurance coverage with carriers licensed to do business in the State of New Jersey during the term of this Lease: (a) All-Risk Insurance for the full replacement value of the Building and all improvements, machinery, and fixtures therein, including, but not limited to, the Demised Premises, except that such insurance shall not apply to property that Tenant is expressly required to maintain property insurance for pursuant to another provision of this Article 10, and (b) Commercial General Liability Insurance (including property damage and fire legal liability) with limits of not less than those required of Tenant. ARTICLE 11 RULES AND REGULATIONS Tenant and its employees and agent shall faithfully observe and comply with the Rules and Regulations annexed hereto as Exhibit E, and such reasonable changes therein (whether by modification, elimination, or addition) as Landlord at any time or times hereafter may make and communicate in writing to Tenant, which do not unreasonably affect the conduct of Tenant s business in the Demised Premises; provided, however, that in case of any conflict or inconsistency between the provisions of this Lease and any of the Rules and Regulations as originally promulgated or as changed, the provisions of this Lease shall control Nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to Tenant to enforce the Rules and Regulations or the terms, covenants, or conditions in any other lease, as against any other tenant and Landlord shall not be liable to Tenant for violation of the same by any other tenant or its employees, agents or visitors. However, Landlord shall not enforce any of the Rules and Regulations in such manner as to discriminate against Tenant or anyone claiming under or through Tenant. ARTICLE 12 TENANT S CHANGES Tenant shall make no changes, alterations, additions, installations, substitutions, or improvements (hereinafter collectively called changes, and, as applied to changes provided for in this Article, Tenant s Changes ) in and to the Demised Premises without the express prior written consent of Landlord, which shall not be unreasonably withheld. 22

166 All proposed Tenant s Changes shall be submitted to Landlord for written consent at least thirty (30) days prior to the date Tenant intends to commence such changes, such submission to include all plans and specifications for the work to be done, proposed scheduling, and the estimated cost of completion of Tenant s Changes. If Landlord consents to Tenant s Changes, Tenant may commence and diligently prosecute to completion Tenant s Changes, under the direct supervision of Landlord. Notwithstanding the foregoing to the contrary: Landlord s consent shall not be required for painting of the Demised Premises provided Tenant gives Landlord written notice of its intent to paint the Demised Premises, the manufacturer of the paint and the color of the paint. Landlord s consent shall not be required for carpeting the Demised Premises provided Tenant gives Landlord written notice of specifically how the carpet is going to be installed. Landlord s consent shall not be required for wall covering provided Tenant provides Landlord with the manufacturer and type of wall covering and such wall covering is properly sized to the walls when installed. Tenant shall pay to Landlord a supervision fee (which shall include the cost of review of the proposed Tenant s Changes) equal to five percent (5%) of the certified hard cost of completion of Tenant s Changes; provided, however, that no supervision fee shall be applicable to Tenant s Work (other than the construction management fee set forth in Exhibit C) or to painting, carpeting and/or the installation of wall coverings (collectively, Cosmetic Changes ). Prior to the commencement of Tenant s Changes (other than Tenant s Work and Cosmetic Changes), Tenant shall pay to Landlord five percent (5%) of the estimated hard cost of completion (the Estimated Payment ) as additional rent. Within fifteen (15) days after completion of Tenant s Changes (other than Tenant s Work and Cosmetic Changes), Tenant shall furnish Landlord with a statement, certified by an officer or a principal of Tenant to be accurate and true, of the total hard cost of completion of Tenant s Changes (the Total Cost ). If such certified statement furnished by Tenant shall indicate that the Estimated Payment exceeded five percent (5%) of the Total Cost, Landlord shall pay the amount of excess directly to Tenant within thirty (30) days of Tenant s delivery of the certified statement. If such certified statement furnished by Tenant shall indicate that five percent (5%) of the Total Cost exceeded Tenant s Estimated Payment, Tenant shall, simultaneously with the delivery to Landlord of the certified statement, pay the amount of such excess to Landlord as additional rent Notwithstanding the provisions of Section 12.01, any and all proposed Tenant s Changes which shall materially affect or materially alter the following items shall require Landlord s express written consent, which may be denied in Landlord s sole and absolute discretion: (a) The outside appearance or the strength of the Building or any of its structural parts; or (b) Any other tenant s premises; or (c) The base building mechanical, electrical, sanitary and other service systems of the Building, or materially increase the usage of such system (i.e., supplemental or back-up facilities). 23

167 If Landlord shall provide its express written consent, then all such work shall be performed only by the Landlord, at a reasonable cost to be mutually agreed upon between Landlord and Tenant Tenant, at its expense, shall obtain all necessary governmental permits and certificates for the commencement and prosecution of Tenant s Changes and for final approval thereof upon completion, and shall cause Tenant s Changes to be performed in compliance therewith and with all applicable laws and requirements of public authorities, and with all applicable requirements of insurance bodies, and in good and workmanlike manner, using new materials and equipment at least equal in quality and class to the original installations in the Building. Tenant s Changes shall be performed in such manner as not to unreasonably interfere with, delay, or impose any additional expense upon Landlord in the construction, maintenance or operation of the Building unless Tenant shall indemnify Landlord therefore to the latter s reasonable satisfaction. Throughout the performance of Tenant s Changes, Tenant, at its expense, shall carry, or cause to be carried, worker s compensation insurance in required statutory limits, and general liability insurance for any occurrence in or about the Building, in which Landlord and its agents shall be named as additional insureds in such limits as Landlord may reasonably prescribe, with insurers reasonably satisfactory to Landlord. Tenant shall furnish Landlord with reasonably satisfactory evidence that such insurance is in effect at or before the commencement of Tenant s Changes and, on request, at reasonable intervals thereafter during the continuance of Tenant s Changes. If any of Tenant s Changes shall involve the removal of any fixtures, equipment or other property in the Demised Premises which are not Tenant s Property (as defined in Article 13), such fixtures, equipment or other property shall be promptly replaced, at Tenant s expense, with new fixtures, equipment or other property (as the case may be) of like utility and at least equal value, which shall become the property of Landlord upon installation. In addition, unless Landlord shall otherwise expressly consent in writing, the Tenant shall deliver such removed fixtures to Landlord Tenant, shall not do any act, or make any contract, which may create or be the foundation for any lien or other encumbrance upon any interest of Landlord or any ground or underlying lessor in any portion of the Demised Premises. If, because of any act or omission (or alleged act or omission) of Tenant, any Construction Lien Claim or other lien (collectively Lien ), charge, or order for the payment of money or other encumbrances shall be filed against Landlord and/or any ground or underlying lessor and/or any portion of the Demised Premises (whether or not such Lien, charge, order or encumbrance is valid or enforceable as such), Tenant shall, at its own cost and expense, cause same to be discharged of record or bonded within fifteen (15) days after the filing thereof, and Tenant shall indemnify and save harmless Landlord and all ground and underlying lessor(s) against and from all costs, liabilities, suits, penalties, claims, and demands, including reasonable counsel fees, resulting therefrom. If Tenant fails to comply with the foregoing provisions, Landlord shall have the option of discharging or bonding any such Lien, charge, order or encumbrance, and Tenant agrees to reimburse Landlord for other sums of money in connection therewith (as additional rental) with interest at the maximum rate permitted by law promptly upon demand. All materialmen, contractors, artisans, mechanics, laborers, and any other persons now or hereafter contracting with Tenant or any contractor or subcontractor of Tenant for the furnishing of any labor services, materials, supplies, or equipment with respect to any portion of the Demised Premises at any time from the date hereof 24

168 until the end of the Term of this Lease are hereby charged with notice that they look exclusively to Tenant to obtain payment for same. However, nothing herein contained shall prevent Tenant from contesting, in good faith and at its own expense, any such Lien by bonding same and otherwise complying with the provisions of Section Tenant agrees that the exercise of its rights pursuant to the provisions of this Article 12 shall not be done in a manner which would create any work stoppage, picketing, labor disruption or dispute, nor interference with the business of Landlord or any tenant or occupant of the Building. In the event of a labor dispute including a strike, picketing, informational or associational activities directed at Tenant or any other tenant, Landlord reserves the right unilaterally to alter Tenant s ingress and egress to the Building or make any other changes in operating conditions to restrict pedestrian, vehicular or delivery ingress and egress to a particular location. Landlord represents, warrants and covenants that no union contracts presently affect the Land and/or the Building; provided, however, that Landlord is obligated to use union cleaning contractors. The foregoing provisions of this Section shall not be construed to require Tenant or its contractors to use union labor. ARTICLE 13 TENANT S PROPERTY All fixtures, equipment, improvements, and appurtenances attached to or built into the Demised Premises at the commencement of or during the Term of this Lease, whether or not by or at the expense of Tenant, shall be and remain a part of the Demised Premises, shall be deemed the property of Landlord and shall not be removed by Tenant, except as hereinafter in this Article expressly provided All business and trade fixtures, machinery and equipment, communications equipment and office equipment, whether or not attached to or built into the Demised Premises, which are installed in the Demised Premises by or for the account of Tenant, without expense to Landlord, and can be removed without permanent structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Demised Premises (all of which are sometimes called Tenant s Property ), shall be and shall remain the property of Tenant and may be removed by it at any time during the Term of this Lease; provided that if any of Tenant s Property is removed, Tenant shall repair or pay the cost of repairing any damage to the Demised Premises or to the Building resulting from such removal. Any equipment or other property for which Landlord shall have granted any allowance or credit to Tenant shall not be deemed to have been installed by or for the account of Tenant, without expense to Landlord, and shall not be considered Tenant s Property At or before the Expiration Date, or the date of an earlier termination of this Lease, or as promptly as practicable after such an earlier termination date, Tenant at its expense, shall remove from the Demised Premises all of Tenant s Property except such items thereof as Tenant shall have expressly agreed in writing with Landlord were to remain and to become the property of Landlord, and, if requested by Landlord, all items of work done by or on behalf of Tenant after the Commencement Date shall be removed by Tenant and Tenant shall repair any damage to the Demised Premises or the Building resulting from such removal. If Tenant fails to remove its Property, then Tenant may at Landlord s sole discretion, be deemed a hold-over Tenant as contemplated in Article

169 Any other items of Tenant s Property (except money, securities, and other like valuables) which shall remain in the Demised Premises after the Expiration Date or after a period of fifteen (15) days following an earlier termination date, may, at the option of the Landlord, be deemed to have been abandoned, and in such case either may be retained by Landlord as its property or may be disposed of, without accountability, in such manner as Landlord may see fit, at Tenant s expense Landlord hereby expressly waives any and all rights granted by or under any present or future laws to levy or distrain for rent, in arrears, in advance or both, on any of Tenant s Property, or of any subtenant or licensee of Tenant except after Landlord has instituted a legal action which permits the Landlord to levy or distrain on Tenant s Property. In no event shall Landlord be permitted to distrain upon Tenant s files and/or its proprietary documentation. ARTICLE 14 REPAIRS AND MAINTENANCE Tenant shall take good care of the interior of the Demised Premises (other than (a) elements of the base building structure and systems located therein and (b) with respect to floors of the Building on which the Demised Premises occupy all of the rentable area, restrooms, elevator lobbies and other elements that would constitute common areas or Landlord-controlled areas on multi-tenant floors ( Full-Floor Common Areas )). Subject to Article 10, Tenant, at its expense, shall promptly make all repairs, ordinary or extraordinary, interior or exterior, structural or otherwise in and about the Demised Premises and the Building, as shall be required by reason of (i) the performance of Tenant s Finish Work or Tenant s Changes; (ii) the installation, use or operation of Tenant s Property in the Demised Premises by Tenant, its agents or employees; (iii) the moving of Tenant s Property in or out of the Building; or (iv) the misuse or neglect of Tenant or any of its employees, agents, contractors or invitees; but Tenant shall not be responsible, and Landlord shall be responsible, for any of such repairs as are required by reason of Landlord s neglect or other fault in the manner of performing any of Tenant s Finish Work or Tenant s Changes which may be undertaken by Landlord for Tenant s account or are otherwise required by reason of neglect or other fault of Landlord or its employees, agents, or contractors, except if required by the neglect or other fault of Tenant or its employees, agents, or contractors. Subject to Article 10, Tenant, at its expense, shall replace all scratched, damaged or broken doors or other glass in the Demised Premises and shall be responsible for all repairs, maintenance, and replacement of wall and floor coverings in the Demised Premises and, for the repair, maintenance and replacement of all non- Building standard lighting fixtures therein Landlord, subject to the provisions of Section 5.04, shall keep and maintain the Building and its fixtures, appurtenances, systems and facilities serving the Demised Premises (including, without limitation, common areas and Full-Floor Common Areas), in good working order, condition, and repair and shall make with all due diligence all repairs, structural and otherwise, interior and exterior, as and when needed in or about the Demised Premises and the Building so as to maintain the same in a manner commensurate with first-class office buildings in the Market Area (as hereinafter defined) and in compliance with all Laws, except for those repairs for which Tenant is expressly responsible pursuant to any other provisions of this Lease. 26

170 Landlord shall have no liability to Tenant by reason of any inconvenience, annoyance, interruption, or injury to Tenant s business arising from Landlord s making any repairs or changes which Landlord is required or permitted by this Lease or required by law, to make in or to any portion of the Building or the Demised Premises, or in or to the fixtures, equipment or appurtenances of the Building or the Demised Premises, provided that Landlord shall use due diligence with respect thereto and shall perform such work, except in case of emergency, at a time reasonably convenient to Tenant and otherwise in such a manner as will not materially interfere with Tenant s use of the Demised Premises. Provided, however, nothing contained herein shall require Landlord to make such repairs or changes on an overtime basis. ARTICLE 15 ELECTRICITY Landlord shall furnish the electric energy that Tenant shall require in the Demised Premises. Prior to the Commencement Date, submeters shall be installed by Landlord in accordance with Exhibit C to measure Tenant s use of electricity at the Demised Premises (other than for Building standard heat and air conditioning as described in Exhibit C). Tenant shall pay the cost of such use to Landlord as additional rent, based upon the actual electrical energy usage as measured by the sub-meters as if Tenant was a direct independent customer of the utility company. At the termination of this Lease, Tenant, at its sole cost and expense, shall be responsible for removing the sub-meters and restoring the Demised Premises to the condition prior to the meters installation Tenant shall pay Landlord as additional rent, the costs and charges for all electric energy furnished to Tenant for use in the Temporary Use Space during the period commencing on the Commencement Date and expiring on the date on which Tenant surrenders the Temporary Use Space, as reasonably determined by a survey to be made by a reputable independent electrical engineer or similar agency using prevailing retail rates. The cost of such survey shall be borne by Tenant. If Tenant disagrees with the determination of such engineer or agency, Tenant shall have the right to submit such matter to arbitration in the manner provided in Article Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished to the Demised Premises by reason of any requirement, act, or omission of the public utility serving the Building with electricity or for any other reason. Landlord shall furnish and install all replacement lighting tubes, lamps, bulbs, and ballasts required in the Demised Premises at Tenant s reasonable expense Tenant s use of electric energy in the Demised Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Demised Premises. Landlord represents and warrants that the capacity of such electrical conductors and equipment is 2000 amp 480 volt service. In order to insure that such capacity is not exceeded and to avert possible adverse effect upon the Building electric service, Tenant shall 27

171 not, without Landlord s prior written consent in each instance (which shall not be unreasonably withheld), connect any additional fixtures, appliances, or equipment to the Building electrical distribution system or make any alteration or addition to the electric system of the Demised Premises existing on the Commencement Date in a manner that would cause the load to exceed 8.6 watts per rentable square foot. Should Landlord grant such consent, all additional risers, HVAC equipment or other electrical equipment required therefor shall be provided by Landlord and the cost of installation and maintenance thereof shall be paid by Tenant upon Landlord s demand. As a condition to granting such consent, Landlord, at Tenant s sole expense, may cause a new survey to be made of the use of electric energy (other than for Building standard heating and air-conditioning as described in Exhibit C) in order to calculate the potential additional electric energy to be made available to Tenant based upon the estimated additional capacity of such additional risers or other equipment. When the amount of such increase is so determined, and the estimated cost thereof is calculated, the amount of monthly additional rent payable pursuant to Section hereof shall be adjusted to reflect the additional cost, and shall be payable as therein provided If the public utility rate schedule for the supply of electric current to the Building shall be increased during the Term of this Lease, the additional rent payable pursuant to Section hereof shall be equitably adjusted to reflect the resulting increase in Landlord s cost of furnishing electric service to the Demised Premises effective as of the date of any increase. Landlord and Tenant agree that the rate charged to Tenant for electricity shall not be greater than the rate Tenant would have paid had the Demised Premises been separately metered. ARTICLE 16 HEATING, VENTILATION AND AIR-CONDITIONING Landlord, subject to the provisions of Section 5.04, shall maintain and operate the heating, ventilating, and air-conditioning systems (hereinafter called the systems ) and shall furnish heat, ventilating, and air conditioning (hereinafter collectively called air conditioning service ) in the Demised Premises through the systems, in a manner commensurate with first-class office buildings in the Market Area and in compliance with all Laws and the performance specifications set forth in Exhibit C, as may be required for comfortable occupancy of the Demised Premises from 7:30 A.M. to 7:00 P.M. Monday through Friday and 7:00 A.M. to 1:00 P.M. on Saturday ( Regular Hours ) except days observed by the Federal or the state government as legal holidays ( Holiday Hours ) throughout the year. If Tenant shall require air-conditioning service at any other time (hereinafter called after hours ), Landlord shall furnish such after hours air-conditioning service upon reasonable advance notice from Tenant, and Tenant shall pay Landlord s then established charges therefor on Landlord s demand. As of the Commencement Date the charge for after hours HVAC shall be $75.00, subject to change by Landlord (which shall only be based on actual increases in Landlord s cost of providing such service) upon notice to Tenant Use of the Demised Premises, or any part thereof, in a manner exceeding the design conditions (including occupancy and connected electrical load) specified in Exhibit C for air-conditioning service in the Demised Premises or rearrangement of partitioning which interferes with normal operation of the air-conditioning in the Demised Premises, may require changes in the air-conditioning system servicing the Demised Premises. Such changes, so occasioned, shall be made by Landlord, at Tenant s reasonable expense, as Tenant s Changes pursuant to Article

172 ARTICLE 17 LANDLORD S OTHER SERVICES Landlord, subject to the provisions of Section 5.04, shall provide public elevator service, passenger and service, in a manner commensurate with first-class office buildings in the Market Area and in compliance with all Laws by elevators serving the floors on which the Demised Premises are situated during Regular Hours, and shall have at least one passenger elevator subject to call at all other times Landlord, subject to the provisions of Section 5.04, shall cause the Demised Premises, the common areas and the Full-Floor Common Areas, including the exterior and the interior of the windows thereof, to be cleaned in a manner commensurate with first-class office buildings in the Market Area and in compliance with all Laws. Tenant shall pay to Landlord on demand the reasonable out-of-pocket costs incurred by Landlord for (a) extra cleaning work in the Demised Premises required because of (i) misuse or neglect on the part of Tenant or its employees or visitors; (ii) use of portions of the Demised Premises for preparation, serving or consumption of food or beverages, data processing, or reproducing operations, private lavatories or toilets or other special purpose areas requiring greater or more difficult cleaning work than office areas; (iii) unusual quantity of interior glass surfaces; (iv) non-building standard materials or finishes installed by Tenant or at its request; and (b) removal from the Demised Premises and the Building of so much of any refuse and rubbish of Tenant as shall exceed that ordinarily accumulated daily in the routine of business office occupancy; provided, in each case, that Tenant has provided its prior written approval of such costs. Landlord, its cleaning contractor, and their employees shall have after-hours access to the Demised Premises and the free use of light, power, and water in the Demised Premises as reasonably required for the purpose of cleaning the Demised Premises in accordance with Landlord s obligations hereunder Landlord, subject to the provisions of Section 5.04, shall furnish hot and cold water to each floor of the Building for drinking, lavatory, and cleaning purposes, together with soap, towels, and toilet tissue for each lavatory in a manner commensurate with first-class office buildings in the Market Area and in compliance with all Laws. If Tenant uses water for any other purpose, Landlord, at Tenant s expense, may install meters to measure Tenant s consumption of cold water and/or hot water for such other purposes and/or steam, as the case may be. Tenant shall pay for the quantities of cold water and hot water shown on such meters, at Landlord s cost thereof, on the rendition of Landlord s bills therefor Landlord, at its expense, and at Tenant s request, shall insert initial listings on the Building directory of the names of Tenant, and the names of any of their officers and employees, provided that the names so listed shall not take up more than Tenant s proportionate share of the space on the Building directory. All Building directory changes made at Tenant s request after the Tenant s initial listings have been placed on the Building directory shall be made by Landlord at the expense of Tenant, and Tenant agrees to promptly pay to Landlord as additional rent the cost of such changes within ten (10) days after Landlord has submitted an invoice therefor. 29

173 Landlord reserves the right, without any liability to Tenant, to stop service of any of the heating, ventilating, air conditioning, electric, sanitary, elevator, or other Building systems serving the Demised Premises, or the rendition of any of the other services required of Landlord under this Lease, whenever and for so long as may be necessary, by reason of accidents, emergencies, strikes, or the making of repairs or changes which Landlord is required by this Lease or by law to make or in good faith deems necessary, by reason of difficulty in securing proper supplies of fuel, steam, water, electricity, labor or supplies, or by reason of any other cause beyond Landlord s reasonable control Landlord shall make available for Tenant s use four (4) parking spaces per one thousand (1,000) rentable square feet contained within the Demised Premises ( Tenant s Proportionate Share of parking spaces ) in common with other tenants of the Building in the parking area adjacent to the Building. In the event Landlord grants any person or entity any reserved parking rights with respect to the parking areas on or serving the Land, then upon request of Tenant, Landlord shall grant to Tenant reserved parking rights on the same proportionate basis as was granted to such third party; it being understood and agreed, however, that in no event shall the number of reserved parking spaces for the Building exceed forty (40) The Building and the Demised Premises shall be cleaned (including trash and recyclables removal; provided, however, that Tenant shall make separate arrangements, at its expense, for the removal of non-office trash and recyclables from the dry laboratory portion of the Demised Premises) in a manner commensurate with first-class office buildings in the Market Area, in compliance with all Laws and in accordance with the Cleaning and Maintenance Schedule set forth on Exhibit D annexed hereto and made a part hereof Tenant acknowledges that as part of the consideration for this Lease, and in order not to interfere with the rights of other tenants or other tenants quiet enjoyment of the common areas of the Building and otherwise prevent Landlord from performing its services without causing increases to the cost of such services, Tenant agrees that it shall not permit its employees to congregate in hallways or elevators, shall not permit its employees to create an unsightly condition in or about any passageway from the Building or the common areas or to the parking lot/deck, with regard to smoking, including the disposal of cigarettes, in the courtyard and/or outer areas adjacent to the Building and will otherwise require its employees to act and conduct themselves in the common areas in such a manner as will not disturb other tenants or the use and enjoyment by other tenants of the Building Landlord agrees to maintain the Building and the Land (including, without limitation, landscaping, parking lot maintenance, exterior lighting and snow and ice removal) in a manner commensurate with first-class office buildings in the Market Area, in compliance with all Laws and in order with the standards set forth on Exhibit G, attached hereto Notwithstanding any provision of this Lease to the contrary, if any portion of the Demised Premises cannot be occupied by Tenant for the normal conduct of Tenant s business for five (5) consecutive business days as the result of any interruption of any Landlord service 30

174 (heating, ventilating, air conditioning, electric, sanitary, elevator, or other Building systems serving the Demised Premises) due to any default by Landlord under this Lease, or any act or omission of Landlord (including any work performed by Landlord in or at the Building, except for work necessitated by the misuse or neglect of Tenant or of Tenant s agents, servants, visitors or licensees), then in any such event, commencing on the sixth (6 th ) consecutive business day after such interruption, the fixed rent and additional rent shall abate in proportion to the portion of the Premises which cannot be so occupied until the date such portion may again be occupied by Tenant for the normal conduct of Tenant s business. If, however, any portion of the Demised Premises cannot be occupied by Tenant for the normal conduct of Tenant s business as the result of any interruption of any Landlord service (heating, ventilating, air conditioning, electric, sanitary, elevator, or other Building systems serving the Demised Premises) due to any Force Majeure event, then the fixed rent and additional rent shall not abate unless such interruption continues for fifteen (15) consecutive business days, in which case Rent shall abate commencing on the sixteenth (16 th ) consecutive business day in proportion to the portion of the Demised Premises which cannot be so occupied until the date such portion may again be occupied by Tenant for the normal conduct of Tenant s business. For the avoidance of doubt, any commercially reasonable, out-of-pocket costs incurred by Landlord in exercising its commercially reasonable efforts to restore any interrupted Landlord service in accordance with this Section may be included in Operating Expenses to the extent permitted by Article 5. The foregoing shall apply to each and every provision of this Lease, even if this Section is not specifically cross-referenced. The remedies provided for in this Section shall be Tenant s sole remedies for any interruption of Landlord services as described above, subject to the provisions of Section 17.11, below. The term Force Majeure event shall mean and include all those situations beyond Landlord s control, including but not limited to, acts of God; accidents; casualties to Landlord s Work; strikes; shortages of labor, materials or supplies; inclement weather; and, where applicable, the passage of time while awaiting for an adjustment of insurance proceeds If Landlord shall fail at any time to make any payment or to perform any act which the Landlord is obligated to make or perform under this Lease, then, after Tenant gives notice thereof to Landlord and thirty (30) days has expired, Tenant may, but shall not be obligated to, without waiving or releasing the Landlord from any of its obligations under this Lease, make any payment or perform any act in such manner and to such extent as shall be reasonably necessary, and in exercising any such rights Tenant may pay ordinary and necessary expenses incidental thereto, including but not limited to reasonable attorneys fees. All reasonable sums so paid by Tenant and all necessary and incidental costs and expenses in connection with the performance of any such act by the Tenant, together with interest thereon at the rate of three (3) percent per annum in excess of Prime Rate, shall be due and payable by Landlord to Tenant promptly after demand therefor is made by the Tenant. In the event that Landlord shall dispute Tenant s claim, Landlord shall provide a detailed statement setting forth the reasons for such dispute, as well as the basis therefor. Tenant shall have the right, at its election, to resolve any such dispute by arbitration in the manner provided in Article 33 (but not Section 33.06). However, prior to entry and execution of a judgment (or, as applicable, arbitration award) against Landlord in favor of Tenant for any such amounts which are not paid by Landlord as aforesaid, Tenant may not deduct such amounts from, or off-set such amounts against, any fixed rent and/or any additional rent due from Tenant under this Lease. 31

175 During the Term, including any renewal thereof, Landlord shall continuously operate and maintain the Cafeteria and Fitness Center (both as hereinafter defined) in a first-class manner; it being understood and agreed that the Cafeteria, at a minimum, shall be operated Monday through Friday for lunch. In the event the Cafeteria is not open for sixty (60) days (or, in the event of a casualty, condemnation or Force Majeure event, such longer period as is reasonably necessary to overcome such casualty, condemnation or Force Majeure event, up to an additional one hundred twenty (120) days) in any twelve (12) month period (Saturday, Sunday and federal and New Jersey holidays excluded), then as its sole and exclusive remedy, Tenant shall receive a reduction in fixed rent at the daily rate of $ for each business day that the Cafeteria is not open for business. In no event shall the floor space of the Cafeteria be converted to a different use During the Term, including any renewal thereof, Tenant shall have the right, at its expense, to continue use of the backup generator and fuel tank (and the related wiring, cabling, conduit and other appurtenances) that exist and are being used by Tenant as of the date of this Lease and, as reasonably necessary, repair, maintain and/or replace the same During the Term, including any renewal thereof, Tenant shall have the right, at its expense, to continue use of the satellite dish (and the related wiring, cabling, conduit and other appurtenances) that exists and is being used by Tenant as of the date of this Lease and, as reasonably necessary, repair, maintain and/or replace the same. ARTICLE 18 ACCESS, CHANGES IN BUILDING FACILITIES, NAME All walls, windows, and doors bounding the Demised Premises (including exterior Building walls, core corridor walls and doors, and any core corridor entrance), except the inside surfaces thereof, any terraces or roofs adjacent to the Demised Premises, and any space in or adjacent to the Demised Premises used for shafts, stacks, pipes, conduits, fan room, ducts, electric or other utilities, sinks or other Building facilities, and the use thereof, as well as access thereto through the Demised Premises for the purposes of operation, maintenance, decoration, and repair are reserved to Landlord Tenant shall permit Landlord to install, use, and maintain pipes, ducts, and conduits within the demising walls, bearing columns, and ceilings of the Demised Premises Landlord or Landlord s agent shall have the right upon request (except in emergency under clause (ii) hereof) to enter and/or pass through the Demised Premises or any part thereof, at reasonable times during reasonable hours, (i) to examine the Demised Premises and to show them to the holders of superior mortgages, prospective purchasers or mortgagees of the Building as an entirety; and (ii) for the purpose of making such repairs or changes or doing such repainting in or to the Demised Premises or its facilities, as may be provided for by this Lease or as may be mutually agreed upon by the parties or as Landlord may be required to make by law or in order to repair and maintain said structure or its fixtures or facilities. Landlord shall be allowed to take all materials into and upon the Demised Premises that may be required for 32

176 such repairs, changes, repainting, or maintenance, without liability to Tenant but Landlord shall not unreasonably interfere with Tenant s use of the Demised Premises. Landlord shall also have the right to enter on and/or pass through the Demised Premises, or any part thereof, at such times as such entry shall be required by circumstances of emergency affecting the Demised Premises or the Building During the period of six (6) months prior to the Expiration Date, Landlord may exhibit the Demised Premises to prospective tenants Landlord reserves the right, at any time after completion of the Building, without incurring any liability to Tenant therefor, to make such changes in or to the Building and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages, elevators, escalators, and stairways thereof, as it may deem necessary or desirable, provided, however, that such changes shall not reduce the size of the Demised Premises or materially adversely affect the access to the Demised Premises Landlord may adopt any name for the Building other than the name of one of Tenant s competitors. Landlord reserves the right to change the name or address of the Building at any time; provided, however, that if Landlord voluntarily changes the name or address of the Building, then Landlord shall reimburse Tenant for the reasonable out-of-pocket costs incurred by Tenant in updating its business materials Landlord at its sole cost and expense shall provide pylon signage for the Building which shall include Tenant s name and logos on the uppermost listing strip. If another tenant leases the balance of the Building, its name can be placed on the bottom half of the pylon sign During the Term, including any renewal thereof, (a) Tenant shall have the right, at its expense, to continue use of Tenant s exterior Building signage existing as of the date of this Lease and, as reasonably necessary, repair, maintain and/or replace the same (including, without limitation, to reflect any changes in Tenant s legal or trade name, logo or standard identity signage) and (b) Landlord shall not grant any other person or entity exterior Building signage or ground floor lobby signage (other than Building standard directional and/or directory signage). In the event Tenant leases less than one half of the floor space in the Building, the foregoing provisions of this Section shall lapse and be of no further force of effect; however, in such event, Landlord shall not grant exterior Building façade signage or ground floor lobby signage (other than Building standard directional and/or directory signage) to any person or entity that leases less rentable area in the Building than Tenant Subject to applicable law, the Building shall be accessible to Tenant and its invitees twenty-four (24) hours a day, seven (7) days a week, three hundred sixty five (365) days per year. 33

177 ARTICLE 19 NOTICE OF ACCIDENTS Tenant shall give notice to Landlord, promptly after Tenant learns thereof, of (i) any accident in or about the Demised Premises; (ii) all fires in the Demised Premises; (iii) all damage to or defects in the Demised Premises, including the fixtures, equipment, and appurtenances thereof, for the repair of which Landlord might be responsible; and (iv) all damage to or defects in any parts or appurtenances of the Building s sanitary, electrical, heating, ventilating, air-conditioning, elevator, and other systems located in or passing through the Demised Premises or any part thereof or any part of the Building. ARTICLE 20 NON-LIABILITY AND INDEMNIFICATION Neither Landlord nor Tenant nor any agent or employee of Landlord or Tenant shall be liable to the other for any injury or damage to the other or to any other person or for any damage to, or loss (by theft or otherwise) of, any property of the other or of any other person, irrespective of the cause of such injury, damage, or loss Subject to Article 10, and except to the extent caused by the negligence or willful misconduct of Landlord, its employees, agents and contractors, Tenant shall indemnify, defend and save Landlord harmless against and from all third-party liabilities, claims, suits, fines, penalties, damages (other than indirect, consequential and punitive damages), losses, fees, costs and expenses (including reasonable attorneys fees) which may be imposed upon, incurred by or asserted against Landlord by reason of (a) Any work or thing done in, on or about the Demised Premises or any part thereof by or on behalf of Tenant (other than by or through Landlord); (b) Any use, occupation, condition, operation of the Demised Premises or any part thereof; (c) Any negligence or willful misconduct on the part of Tenant or any subtenant or any employees, licenses or invitees; and (d) Any accident, injury (including death) or damage to any third party or property owned by someone other than Tenant and not under the care, custody or control of Tenant occurring in or about the Demised Premises or any part thereof, unless caused by Landlord, its agents or employees. The provisions of this Section shall survive the expiration or earlier termination of this Lease Subject to Article 10, and except to the extent caused by the negligence or willful misconduct of Tenant, its employees, agents and contractors, Landlord shall indemnify, defend and save Tenant harmless against and from all third-party liabilities, claims, suits, fines, penalties, damages (other than indirect, consequential and punitive damages), losses, fees, costs and expenses (including reasonable attorneys fees) which may be imposed upon, incurred by or asserted against Tenant by reason of (a) Any work or thing done in, on or about the Building or any part thereof by or on behalf of Landlord; (b) Any use, occupation, condition, operation of the common areas of the Building or any part thereof or of any parking lot, street, alley, sidewalk, curb, vault, passageway or space adjacent thereto or any occurrence on any of the same on the 34

178 part of Landlord; (c) Any negligence or willful misconduct on the part of Landlord or any employees, agents and contractors; (d) Any accident, injury (including death) or damage to any third party or property owned by someone other than Landlord and not under the care, custody or control of Landlord occurring in or about the common areas of the Building or any part thereof or in, on or about any street, alley, sidewalk, curb, vault, passageway or space adjacent thereto, unless caused by Tenant, its agents or employees. The provisions of this Section shall survive the expiration or earlier termination of this Lease Except as otherwise expressly provided in this Lease, this Lease and the obligations of Landlord or Tenant hereunder shall be in no way affected, impaired or excused because the other party is unable to fulfill, or is delayed in fulfilling, any of its obligations under this Lease (other than any monetary obligations) by reason of strike, other labor trouble, governmental pre-emption or priorities or other controls in connection with a national or other public emergency or shortages of fuel supplies or labor resulting therefrom, or other like cause beyond the other party s reasonable control. ARTICLE 21 DESTRUCTION OR DAMAGE If the Building or the Demised Premises shall be partially or totally damaged or destroyed by fire or other cause, then whether or not the damage or destruction shall have resulted from the fault or neglect of Tenant, or its employees, agents or visitors (and if this Lease shall not have been terminated as in this Article hereinafter provided), Landlord shall repair the damage and restore and rebuild the Building and/or the Demised Premises, at its expense, with reasonable dispatch after notice to it of the damage or destruction; provided, however, that Landlord shall not be required to repair or replace any of the Tenant s Property If the Building or the Demised Premises shall be partially damaged or partially destroyed by fire or other cause the rents payable hereunder shall be abated to the extent that the Demised Premises shall have been rendered untenantable and for the period from the date of such damage or destruction to the date the damage shall be repaired or restored. If the Demised Premises or a major part thereof shall be totally (which shall be deemed to include substantially totally) damaged or destroyed or rendered completely (which shall be deemed to include substantially completely) untenantable on account of fire or other cause, the rents shall abate as of the date of the damage or destruction and until Landlord shall repair, restore, and rebuild the Building and the Demised Premises, provided, however, that should Tenant reoccupy a portion of the Demised Premises during the period of restoration work is taking place and prior to the date that the same are made completely tenantable, rents allocable to such portion shall be payable by Tenant from the date of such occupancy If the Building or the Demised Premises shall be damaged or destroyed by fire or other cause, then, within thirty (30) days after the occurrence of the fire or other casualty, Landlord shall notify Tenant of the date on which Landlord in good faith believes the repair and restoration of the Building will be complete (the Estimated Restoration Date ). 35

179 Notwithstanding anything to the contrary expressed in this Article 21, if the Building or the Demised Premises shall be totally damaged or destroyed by fire or other cause, or if the Building shall be so damaged or destroyed by fire or other cause (whether or not the Demised Premises are damaged or destroyed) as to require a reasonably estimated expenditure of more than twenty-five percent (25%) of the full insurable value of the Building immediately prior to the casualty, then in either such case, Landlord may terminate this Lease by giving Tenant notice to such effect within one hundred eighty (180) days after the date of the casualty. In case of any damage or destruction mentioned in this Article, Tenant may terminate this Lease by notice to Landlord if the Estimated Restoration Date is later than one hundred eighty (180) days after the occurrence of the fire or other casualty. In addition, if Landlord has not completed the making of the required repairs and restored and rebuilt the Building and the Demised Premises prior to the Estimated Restoration Date, or within such period after such date (not exceeding three (3) months) as shall equal the aggregate period Landlord may have been delayed in doing so by labor trouble, governmental controls, act of God, or any other unforeseeable cause beyond Landlord s reasonable control, Tenant may terminate this Lease by notice to Landlord No damages, compensation, or claim shall be payable by Landlord for inconvenience, loss of business, or annoyance arising from any repair or restoration of any portion of the Demised Premises or of the Building pursuant to this Article. Landlord shall use commercially reasonable efforts to perform such repair or restoration promptly and in such manner as not unreasonably to interfere with Tenant s use and occupancy during such time that Tenant is able to use the Demised Premises during Landlord s restoration Landlord will not carry insurance of any kind on Tenant s Property, and shall not be obligated to repair any damage thereto or replace the same The provisions of this Article shall be considered an express agreement governing any case of damage or destruction of the Demised Premises by fire or other casualty, and any law of the State of New Jersey providing for such a contingency in the absence of an express agreement, and any other law of like import, now or hereafter in force, shall have no application in such case. ARTICLE 22 EMINENT DOMAIN If the whole of the Building or access thereto or the parking areas thereof shall be lawfully taken by condemnation or in any other manner for any public or quasi-public use of purpose, this Lease and the Term and estate hereby granted shall forthwith terminate as of the date of vesting of title on such taking (which date is herein after also referred to as the date of the taking ), and the rents shall be prorated and adjusted as of such date If any part of the Building or access thereto or the parking areas thereof shall be so taken, this Lease shall be unaffected by such taking, except that Tenant may elect to terminate this Lease in the event of a partial taking, if the area of the Demised Premises or access thereto or the parking areas serving the same shall not be reasonably sufficient for Tenant to continue feasible operation of its business. Tenant shall give notice of such election to Landlord not later 36

180 than thirty (30) days after the date of such taking. Upon the giving of such notice to Landlord, this Lease shall terminate on the date of service of notice and the rents apportioned to the part of the Demised Premises so taken shall be prorated and adjusted as of the date of the taking and the rents apportioned to the remainder of the Demised Premises shall be prorated and adjusted as of such termination date. Upon such partial taking and this Lease continuing in force as to any part of the Demised Premises, the rents apportioned to the part taken shall be prorated and adjusted as of the date of taking and from such date the fixed rent shall be reduced to the amount apportioned to the remainder of the Demised Premises and additional rent shall be payable pursuant to Article 5 according to the Rentable Area remaining Except as specifically set forth in Section hereof, Landlord shall be entitled to receive the entire award in any proceeding with respect to any taking provided for in this Article without deduction therefrom for any estate vested in Tenant by this Lease, and Tenant shall receive no part of such award. Tenant hereby expressly assigns to Landlord all of its right, title, and interest in or to every such award. Notwithstanding the foregoing, Tenant may claim a condemnation award for the unamortized portion of the cost incurred by Tenant in connection with any of Tenant s Property installed pursuant to this Lease and severance damages. In addition, Tenant may sue the appropriate, agency for relocation expenses pursuant to the Relocation Assistance Act, N.J.S.A. 20:4-1 et seq If the temporary use or occupancy of all or any part of the Demised Premises shall be lawfully taken by condemnation or in any other manner for any public or quasi-public use or purpose during the Term of this Lease, Tenant shall be entitled, except as hereinafter set forth, to receive any award which does not serve to diminish Landlord s award in any respect and, if so awarded, for the taking of Tenant s Property and for moving expenses, and Landlord shall be entitled to receive that portion which represents reimbursement for the cost of restoration of the Demised Premises. This Lease shall be and remain unaffected by such taking and Tenant shall remain responsible for all of its obligations hereunder insofar as such obligations are not affected by such taking and shall continue to pay in full the fixed rent and additional rent when due. If the period of temporary use or occupancy of the Demised Premises (or a part thereof) shall be divided between Landlord and Tenant, Tenant shall receive so much thereof as represents the period prior to the Expiration Date and Landlord shall receive so much thereof as represents the period subsequent to the Expiration Date. All moneys received by Tenant as, or as part of, an award for temporary use and occupancy for a period beyond the date to which the rents hereunder have been paid by Tenant shall be received, held, and applied by Tenant as a trust fund for payment of the rents falling due hereunder In the event of any taking of less than the whole of the Building which does not result in a termination of this Lease, or in the event of a taking for a temporary use or occupancy of all or any part of the Demised Premises, Landlord, at its expense, shall proceed with reasonable diligence to repair, alter, and restore the remaining parts of the Building and the Demised Premises to substantially their former condition to the extent that the same may be feasible and so as to constitute a complete and tenantable Building and Demised Premises provided that Landlord s liability under this Section shall be limited to the net amount (after deducting all costs and expenses, including, but not limited to, legal expenses incurred in connection with the eminent domain proceeding) received by Landlord as an award arising out 37

181 of such taking. If such taking occurs within the last three (3) years of the Term of this Lease, Landlord shall have the right to terminate this Lease by giving the Tenant written notice to such effect within ninety (90) days after such taking, and this Lease shall then expire on that effective date stated in the notice as if that were the Expiration Date, but the fixed rent and the additional rent shall be prorated and adjusted as of the date of such taking Any dispute which may arise between the parties with respect to the meaning or application of any of the provisions of this Article shall be determined by arbitration in the manner provided in Article 33. ARTICLE 23 SURRENDER On the last day of the Term of this Lease, or upon any earlier termination of this Lease, or upon any re-entry by Landlord upon the Demised Premises, Tenant shall quit and surrender the Demised Premises to Landlord in good order, condition, and repair, except for ordinary wear and tear and such damage or destructions as Landlord is required to repair or restore under this Lease, and Tenant shall remove all of Tenant s Property therefrom except as otherwise expressly provided in this Lease. The provisions of this Article 23 shall survive the expiration or sooner termination of this Lease. ARTICLE 24 CONDITIONS OF LIMITATION This Lease and the Term and estate hereby granted are subject to the limitation that whenever Tenant shall make an assignment of the property of Tenant for the benefit of creditors, or shall file a voluntary petition under any bankruptcy or insolvency law, or an involuntary petition alleging an act of bankruptcy or insolvency shall be filed against Tenant under any bankruptcy or insolvency law, or whenever a petition shall be filed by or against Tenant under the reorganization provisions of the United States Bankruptcy Act or under the provisions of any law of like imports or whenever a petition shall be filed by Tenant under the arrangement provisions of any law of like import, whenever a permanent receiver of Tenant or of or for the property of Tenant shall be appointed, then Landlord, (a) at any time of receipt of notice of the occurrence of any such event, or (b) if such event occurs without the acquiescence of Tenant, at any time after the event continues for sixty (60) days, Landlord may give Tenant a notice of intention to end the Term of this Lease at the expiration of five (5) days from the date of service of such notice of intention, and upon the expiration of said five (5) day period this Lease and the Term and estate hereby granted, whether or not the Term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article

182 This Lease and the Term and estate hereby granted are subject to the further limitation that: (a) Whenever Tenant shall default in the payment of installment of fixed rent, or in the payment of any additional rent or any other charge payable by Tenant to Landlord, or any day upon which the same ought to be paid, and such default shall continue for twenty (20) days after written notice thereof; or (b) Whenever Tenant shall do or knowingly permit anything to be done, whether by action or inaction, contrary to any of Tenant s obligations hereunder, and if such situation shall continue and shall not be remedied by Tenant within thirty (30) days after Landlord shall have given to Tenant a written notice specifying the same, or, in the case of a happening or default which cannot with due diligence be cured within a period of thirty (30) days and the continuance of which for the period required for cure will not subject Landlord to risk of criminal liability or foreclosure of any superior mortgage if Tenant shall not, (i) within said thirty (30) day period advise Landlord of Tenant s intention to duly institute all steps necessary to remedy such situation; (ii) duly institute within said thirty (30) day period, and thereafter diligently prosecute to completion all steps necessary to remedy the same; (iii) complete such remedy within such time after the date of giving of said notice to Landlord as shall reasonably be necessary; or (c) Whenever any event shall occur or any contingency shall arise whereby this Lease or the estate hereby granted or the unexpired balance of the Term hereof would, by operation of law or otherwise, devolve upon or pass to any person, firm, or corporation other than Tenant, except as expressly permitted by Article 8; or (d) If Tenant shall default in the timely payment of rent or additional rent and any such default shall continue to be repeated for two (2) consecutive months or for a total of four (4) months in any period of twelve (12) months, or more than three (3) times in any six (6) month period, then, notwithstanding that such defaults shall have each been cured within the applicable period, any similar default shall be deemed to be deliberate and Landlord may thereafter serve a notice of termination upon Tenant without affording to Tenant opportunity to cure such default; then, and in any of the foregoing cases, this Lease and the Term and estate hereby granted, whether or not the Term shall theretofore have commenced, shall, if the Landlord so elects, terminate upon ten (10) days written notice by Landlord to Tenant of Landlord s election to terminate this Lease and the Term hereof shall expire and come to an end on the date fixed in such notice, with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for the rent and additional rent which subsequently accrues and for damages as provided in Article 26. ARTICLE 25 RE-ENTRY BY LANDLORD If this Lease shall expire as provided in Article 24, Landlord or Landlord s agents and employees may immediately or at any time thereafter re-enter the Demised Premises, or any part thereof, either by summary dispossess proceedings or by any suitable action or proceeding at law (but not by force or other self-help), without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any persons therefrom, to the end that Landlord may have, hold, and enjoy the Demised Premises again as and of its first estate 39

183 and interest therein. The word re-enter, as herein used, is not restricted to its technical legal meaning. In the event of any termination of this Lease under the provisions of Article 24 or if Landlord shall re-enter the Demised Premises under the provisions of this Article or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord the fixed rent and additional rent payable by Tenant to Landlord up to the time of such termination of this Lease, or of such recovery of possession of the Demised Premises by Landlord, as the case may be, and shall also pay to Landlord damages as provided in Article In the event of a breach or threatened breach by Landlord or Tenant of any of their respective obligations under this Lease, either Landlord or Tenant, as the case may be, shall also have the right of injunction. The special remedies hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which the parties may lawfully be entitled at any time If this Lease shall terminate under the provisions of Article 24, or if Landlord shall re-enter the Demised Premises under the provisions of this Article, or in the event of any termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Landlord shall be entitled to retain all moneys, if any, paid by Tenant to Landlord, whether as advance rent, security, or otherwise, but such moneys shall be credited by Landlord against any fixed rent or additional rent due from Tenant at the time of such termination or re-entry or, at Landlord s option, against any damages payable by Tenant under Article 26 or pursuant to law. ARTICLE 26 DAMAGES If this Lease is terminated under the provisions of Article 24, or if Landlord shall re-enter the Demised Premises under the provisions of Article 25, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action of any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay to Landlord as damages, at the election of Landlord, either; (a) A sum which at the time of such termination of this Lease or at the time of any such re-entry by Landlord, as the case may be, represents the then value of the excess, if any, of (i) the aggregate of the fixed rent and the additional rent payable hereunder which would have been payable by Tenant (conclusively presuming the additional rent to be the same as was payable for the year immediately preceding such termination) for the period commencing with such earlier termination of this Lease or the date of any such re-entry, as the case may be, and ending with the Expiration Date, had this Lease not so terminated or had Landlord not so re-entered the Demised Premises, over (ii) the aggregate rental value of the Demised Premises for the same period, or 40

184 (b) Sums equal to the fixed rent and the additional rent (as above presumed) payable hereunder which would have been payable by Tenant had this Lease not so terminated, or had Landlord not so re-entered the Demised Premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the Expiration Date, provided, however, that if Landlord shall relet the Demised Premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting, the expenses incurred or paid by Landlord in terminating this Lease or in re-entering the Demised Premises and in securing possession thereof, as well as the expenses of reletting, including altering and preparing the Demised Premises for new tenants, brokers commissions, and all other expenses properly chargeable against the Demised Premises and the rental therefrom; it being understood that any such reletting may be for a period shorter or longer than the remaining Term of this Lease; but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, nor shall Tenant be entitled in any suit for the collection of damages pursuant to this Subsection to a credit in respect of any net rents from a reletting, except to the extent that such net rents are actually received by Landlord. Damages shall also include the unamortized portion of the cost of Landlord s Work and any brokerage fees or commissions paid by Landlord. If the Demised Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such reletting and of the expenses of reletting. If the Demised Premises or any part thereof to be relet by Landlord for the unexpired portion of the Term of this Lease, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall, prima facie, be the fair and reasonable rental value for the Demised Premises, or part thereof, so relet during the term of the reletting. If this Lease or Tenant s right to possession of the Demised Premises is terminated, then Landlord shall use commercially reasonable efforts to relet the Demised Premises and otherwise mitigate its damages Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Term of this Lease would have expired if it had not been so terminated under the provisions of Article 24, or under any provision of law, or had Landlord not re-entered the Demised Premises. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Nothing herein contained shall be construed to limit or prejudice the right of Landlord to seek and obtain as liquidated damages by reason of the termination of this Lease or re-entry on the Demised Premises for the default of Tenant under this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved whether or not such amount be greater, equal to, or less than any of the sums referred to in Section

185 In the event Landlord or Tenant is required or elects to take legal action against the other party to enforce the provisions of this Lease, then the prevailing party in such action shall be entitled to collect from the other party its costs and expenses incurred in connection with the legal action (including, without limitation, reasonable attorneys fees and court costs). ARTICLE 27 WAIVERS Tenant, for Tenant, and on behalf of any and all persons claiming through or under Tenant, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Demised Premises or to have a continuance of this Lease for the Term hereby demised after being dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as herein provided In the event that Tenant is in arrears in payment of fixed rent or additional rent hereunder, Tenant waives Tenant s right, if any, to designate the items against which any payments made by Tenant are to be credited, and Tenant agrees that Landlord may apply any payments made by Tenant to any items it sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payments shall be credited Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant s use or occupancy of the Demised Premises, including any claim of injury or damage, or any emergency or other statutory remedy with respect thereto The provisions in Articles 16 and 17 shall be considered express agreements governing the services to be furnished by Landlord, and Tenant agrees that any laws and/or requirements of public authorities, now or hereafter in force, shall have no application in connection with any enlargement of Landlord s obligations with respect to such services. ARTICLE 28 NO OTHER WAIVERS OR MODIFICATIONS The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the obligations of this Lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or of the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act, or omission. No executory agreement hereafter made between Landlord and Tenant shall be effective to change, modify, waive, release, discharge, terminate or effect an abandonment of this Lease, in whole or in part, unless such executory agreement is in writing, refers expressly to this Lease and is signed by the party against whom enforcement of the change, modification, waiver, release, discharge, or termination of effectuation of the abandonment is sought. 42

186 Without limiting Section 28.01, the following provisions shall also apply: (a) No agreement to accept a surrender of all or any part of the Demised Premises shall be valid unless in writing and signed by Landlord. The delivery of keys to an employee of Landlord or of its agent shall not operate as a termination of this Lease or a surrender of the Demised Premises. If Tenant shall at any time request Landlord to sublet the Demised Premises for Tenant s account, Landlord or its agent is authorized to receive said keys for such purposes without releasing Tenant from any of its obligations under this Lease, and Tenant hereby releases Landlord from any liability for loss or damage to any of Tenant s property in connection with such subletting. breach. (b) The receipt by Landlord of rent with knowledge of breach of any obligation of this Lease shall not be deemed a waiver of such (c) No payment by Tenant or receipt by Landlord of a lesser amount than the correct fixed rent or additional rent due hereunder shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord s right to recover the balance or pursue any other remedy in this Lease or at law provided. ARTICLE 29 CURING TENANT S DEFAULTS If Tenant shall default in the performance of any of Tenant s obligations under this Lease, Landlord, without thereby waiving such default, may (but shall not be obligated to) perform the same for the account and at the expense of Tenant, without notice, in a case of emergency, and in any other case, only if such default continues after the expiration of (i) ten (10) days from the date Landlord gives Tenant notice of intention so to do, or (ii) the applicable grace period provided in Section or elsewhere in this Lease for cure of such default, whichever occurs later Bills, invoices and purchase orders for any and all reasonable out-of-pocket costs, charges, and expenses incurred by Landlord in connection with any such performance by it for the account of Tenant, including reasonable counsel fees involved in collecting or endeavoring to collect the fixed rent or additional rent or any part thereof, or enforcing or endeavoring to enforce any rights against Tenant, under or in connection with this Lease, or pursuant to law, including any such cost, expense, and disbursement involved in instituting and prosecuting summary proceedings, may be sent by Landlord to Tenant monthly, or immediately, at Landlord s option, and, shall be due and payable in accordance with the terms of such bills. 43

187 ARTICLE 30 BROKER Tenant covenants, warrants, and represents that there was no broker except Jones Lang LaSalle ( Broker ) instrumental in consummating this Lease and that no conversations or negotiations were had with any broker except Broker concerning the renting of the Demised Premises. Landlord and Tenant each agrees to hold the other harmless against any claims for a brokerage commission arising out of any conversations or negotiations had by it with any broker except Broker. Landlord agrees to pay Broker pursuant to a separate agreement. ARTICLE 31 NOTICES Any notice, statement, demand, or other communications required or permitted to be given, rendered, or made by either party to the other, pursuant to this Lease or pursuant to any applicable law or requirement of public authority, shall be in writing (whether or not so stated elsewhere in this Lease) and shall be deemed to have been properly given, rendered or made, if sent by registered or certified mail, return receipt requested, addressed to the other party at the address hereinabove set forth. Notice may also be given by overnight mail. Either party may, by notice as aforesaid, designate a different address or addresses for notices, statements, demands, or other communications intended for it. In the event of the cessation of any mail delivery for any reason, personal delivery shall be substituted for the aforedescribed method of serving notices. ARTICLE 32 ESTOPPEL CERTIFICATE Tenant agrees, when requested by Landlord, to execute and deliver to Landlord a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), certifying the dates to which the fixed rent and additional rent have been paid, whether any dispute exists with respect thereto and stating whether or not, to Tenant s best knowledge, Landlord is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which Tenant may have knowledge and any other information which Landlord shall reasonably require, it being intended that any such statement delivered pursuant hereto may be relied upon by others. Such statement shall be served upon Landlord by Tenant within ten (10) business days of Landlord s request. 44

188 ARTICLE 33 ARBITRATION The parties hereto shall not be deemed to have agreed to determination of any dispute arising out of this Lease by arbitration unless determination in such manner shall have been specifically provided for in this Lease The party desiring arbitration shall give notice to that effect to the other party and shall in such notice appoint a person as arbitrator on its behalf. Within ten (10) days, the other party by notice to the original party shall appoint a second person as arbitrator on its behalf. The arbitrators thus appointed shall appoint a third person, and such three arbitrators shall as promptly as possible determine such matter, provided, however that: (a) If the second arbitrator shall not have been appointed as aforesaid, the first arbitrator shall proceed to determine such matter; and (b) If the two arbitrators appointed by the parties shall be unable to agree, within ten (10) days after the appointment of the second arbitrator, upon the appointment of a third arbitrator, they shall give written notice to the parties of such failure to agree, and, if the parties fail to agree upon the selection of such third arbitrator within ten (10) days after the arbitrators appointed by the parties give notice as aforesaid, then within five (5) days thereafter either of the parties upon notice to the other party may request such appointment by the American Arbitration Association (or any organization successor thereto), or in it absence, refusal, failure, or inability to act, may apply for a court appointment of such arbitrator Each arbitrator shall be a fit and impartial person who shall have had at least five years experience in a calling connected with the matter of dispute The arbitration shall be conducted, to the extent consistent with this Article, in accordance with the then prevailing rules of the American Arbitration Association (or any organization successor thereto). The arbitrators shall render their decision and award, upon the concurrence of at least two of their number, within thirty (30) days after the appointment of the third arbitrator. Such decision and award shall be in writing and shall be final and conclusive on the parties, and counterpart copies thereof shall be delivered to each of the parties. In rendering such decision and award, the arbitrators shall not add to, subtract from, or otherwise modify the provisions of this Lease. Judgment may be had on the decision and award of the arbitrator(s) so rendered in any court of competent jurisdiction Each party shall pay the fees and expenses of the one of the two original arbitrators appointed by or for such party and the fees and expenses of the third arbitrator and all other expenses of the arbitration (other than the fees and disbursement of attorneys or witnesses for each party) shall be borne by the parties equally The provisions of this Section shall apply to any dispute in which Tenant alleges that Landlord has wrongfully withheld its consent hereunder, including a proposed assignment or subletting. If Landlord and Tenant are unable to resolve their dispute within three 45

189 (3) business days then the dispute shall be resolved by a retired judge of the Superior Court or Federal District Court of New Jersey that conducts arbitrations and is reasonably acceptable to both parties (the Single Arbitrator ). Within two (2) business days after the expiration of said three (3) business day period, the parties shall agree upon the Single Arbitrator. In reaching such agreement, due consideration shall be given to the availability of the Single Arbitrator to act within the time frames set forth in this Section In the absence of such agreement, either party may, upon telephonic notice to the other, make application to the Assignment Judge of the Superior Court of Monmouth County to appoint the Single Arbitrator. Within three (3) business days after the Single Arbitrator is chosen, each party shall submit to the Single Arbitrator a statement setting forth its position as to why the Landlord has reasonably or unreasonably withheld its consent. Within five (5) business days after the Single Arbitrator is chosen, a hearing shall be held by him/her in Red Bank, New Jersey to decide the controversy. The matter shall be determined in accordance with the Commercial Arbitration Rules (Expedited Procedures) of the American Arbitration Association. The prevailing party shall be entitled to recover from the other party the costs and fees incurred by the prevailing party pursuant this Section including reasonably attorney s fees and arbitrator s fees. Position papers, copies of exhibits intended to be produced at the hearing, and a list of witnesses intended to be called to testify at the hearing shall be exchanged by the parties and submitted to the Single Arbitrator, all by facsimile or electronic transmission. The Single Arbitrator s award shall be limited to determining whether the Landlord has been reasonable or unreasonable in withholding its consent, and in the case of a proposed sublease or assignment, whether such transaction can proceed. Thereafter the Single Arbitrator shall determine the amount of fees to be awarded to the prevailing party, which shall be paid within ten (10) days after the parties receipt of the determination. The Single Arbitrator shall not have the latitude to make any other determinations. The award need not make any findings of fact or determinations of law, and shall be binding upon the parties, without any right of appeal. ARTICLE 34 NO OTHER REPRESENTATIONS, CONSTRUCTION, GOVERNING LAW Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease. It is understood and agreed that all understandings and agreements heretofore had between the parties with respect to the subject matter hereof are merged in this Lease, which alone fully and completely express their agreements with respect to the subject matter hereof and that the same are entered into after full investigation, neither party relying upon any statement or representation not embodied in this Lease made by the other If any of the provisions of this Lease, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 46

190 This Lease shall be governed in all respects by the laws of the State of New Jersey. ARTICLE 35 SECURITY Tenant shall deposit with Landlord the sum of $239, within one (1) business day after the execution of this Lease. Said deposit (sometimes referred to as the Security Deposit ) shall be held by Landlord as security for the faithful performance by Tenant of all the terms of this Lease by said Tenant to be observed and performed. Upon receipt of the Security Deposit, Landlord shall return to Tenant the Security Deposit (the Silicon Valley Bank letter of credit) that has been posted pursuant to the Existing Lease and the Security Deposit paid under this Lease shall also serve as the Security Deposit under the Existing Lease. The Security Deposit shall not and may not be mortgaged, assigned, transferred, or encumbered by Tenant, without the written consent of Landlord, and any such act on the part of Tenant shall be without force and effect and shall not be binding upon Landlord. If Tenant shall default under this Lease beyond the expiration of any applicable notice and/or cure period, then Landlord may, at its option and without prejudice to any other remedy which Landlord may have on account thereof, following written notice to Tenant appropriate and apply the entire Security Deposit or so much thereof as may be necessary to compensate Landlord toward the payment of fixed or additional rent and any loss or damage sustained by Landlord due to such breach on the part of Tenant, plus expenses; and Tenant shall forthwith upon demand restore the Security Deposit to the original sum deposited. The issuance of a warrant and/or the re-entering of the Demised Premises by Landlord for any default on the part of Tenant or for any other reason prior to the expiration of the Term shall not be deemed such a termination of this Lease as to entitle Tenant to the recovery of the Security Deposit. The Security Deposit shall be promptly returned in full to Tenant (less any amounts previously applied in accordance with this Article 35 and not restored) after the expiration of the Term of this Lease and Tenant s satisfaction of all its obligations accruing prior to expiration date of this Lease. In the event of bankruptcy or other creditor-debtor proceedings against Tenant, the Security Deposit and all other securities shall be deemed to be applied first to the payment of fixed and additional rent and other charges due Landlord for all periods prior to the filing of such proceedings. In the event of sale by Landlord of the Building, Landlord shall deliver the then balance of the Security Deposit to the transferee of Landlord s interest in the Demised Premises and Landlord shall thereupon be discharged from any further liability with respect to the Security Deposit and this provision shall also apply to any subsequent transferees. No holder of a superior mortgage to which this Lease is subordinate shall be responsible in connection with the Security Deposit, by way of credit or payment of any fixed or additional rent, or otherwise, unless such mortgagee actually shall have received the entire Security Deposit. At Tenant s option, the Security Deposit may be posted as a letter of credit in the form of Exhibit G, attached hereto (with such commercially reasonable modifications as may be required by the issuer thereof), issued by a bank that is acceptable to Landlord in its sole but reasonable business judgment. 47

191 Notwithstanding anything to the contrary contained in this Lease, if, as of November 30, 2014, Tenant is not in default under this Lease beyond the expiration of any applicable notice and/or cure period, then the Security Deposit shall be reduced so as to equal $119, If the Security Deposit is so reduced, then the excess Security Deposit held by Landlord shall be applied against the monthly installment of Fixed Rent for December 2014 or Landlord shall reasonably cooperate to reduce the amount of the letter of credit so as to equal $119,508.33, as applicable. ARTICLE 36 PARTIES BOUND The obligation of this Lease shall bind and benefit the successors and assigns of the parties with the same effect as if mentioned in each instance where a party is named or referred to, except that no violation of the provisions of Article 8 shall operate to vest any rights in any successor or assignee of Tenant and that the provisions of this Article shall not be construed as modifying the conditions of limitation contained in Article 24. No landlord hereunder shall be liable for any obligation or liability based on or arising out of any event or condition occurring during the period that such landlord was not the owner of the Building or a landlord s interest therein If Landlord shall be an individual, joint venture, tenancy in common, partnership, trust, unincorporated association, or other unincorporated aggregate of individuals and/or entities or a corporation, Tenant shall look only to such Landlord s estate and property in the Building and the Land and proceeds therefrom and, where expressly so provided in this Lease, to offset against the rents payable under this Lease for the collection of a judgment (or other judicial process) which requires the payment of money by Landlord in the event of any default by Landlord hereunder. No other property or assets of such Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant s remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant s use or occupancy of the Demised Premises. Further, Landlord and Tenant each agree that the other shall not be liable to it for any special, indirect, or consequential damages arising out of the other s breach of this Lease. ARTICLE 37 CONSENTS Wherever it is specifically provided in this Lease that a party s consent is not to be unreasonably withheld, a response to a request for such consent shall also not be unreasonably conditioned or delayed. If either Landlord or Tenant considers that the other had unreasonably withheld or delayed a consent, it shall so notify the other party within ten (10) days after receipt of notice of denial of the requested consent or, in case notice of denial is not received, within twenty (20) days after making its request for the consent Tenant hereby waives any claim against Landlord which it may have based upon any assertion that Landlord has unreasonably withheld or unreasonably delayed any such consent, and Tenant agrees that its sole remedy shall be to submit the dispute to arbitration in accordance with Section 33.06, above. Landlord shall have no liability to Tenant for its refusal or failure to give such consent. 48

192 ARTICLE 38 MORTGAGE FINANCING TENANT COOPERATION In the event that Landlord desires to seek mortgage financing secured by the Demised Premises, Tenant agrees reasonably to cooperate with Landlord in the making of any application(s) by Landlord for such financing including the delivery to Landlord s mortgage broker or mortgagee, of such information as they shall reasonably require with respect to Tenant s occupancy of the Demised Premises, including, but not limited to the current financial statement of Tenant, but Tenant shall not be required to deliver such information directly to Landlord, all of the above to be at no cost and expense of Tenant. ARTICLE 39 ENVIRONMENTAL COMPLIANCE Tenant shall, at Tenant s sole cost and expense, comply with the New Jersey Industrial Site Recovery Act and the regulations promulgated thereunder (referred to as ISRA ) as same relate to Tenant s occupancy of the Demised Premises, as well as all other state, federal or local environmental law, ordinance, rule, or regulation either in existence as of the date hereof or enacted or promulgated after the date of this Lease, that concern the management, control, discharge, treatment and/or removal of hazardous discharges or otherwise affecting or affected by Tenant s use and occupancy of the Demised Premises. Tenant represents that Tenant s North American Industry Classification System ( NAICS ) number does not subject it to ISRA. Tenant shall, at Tenant s own expense, make all submissions to, provide all information to, and comply with all requirements of the New Jersey Department of Environmental Protection ( NJDEP ). Should the NJDEP, pursuant to any environmental law, rule, or regulation, determine that a investigation and/or cleanup plan be prepared and that a cleanup be undertaken because of any spills or discharge of hazardous substances or wastes at the Demised Premises which occur during the Term of this Lease and were caused by Tenant or its agents or contractors, then Tenant shall, at Tenant s own expense, prepare and submit the required plans and financial assurances, and carry out the approved plans so as to cause issuance of an unconditional No Further Action Letter; provided, however, that in no event shall Tenant pursue or implement any institutional or engineering controls affecting the Demised Premises, Building or Land unless Tenant has first obtained Landlord s express written consent, which shall be granted at Landlord s reasonable discretion. In the event that Landlord shall have to comply with ISRA by reason of Landlord s actions, Tenant shall promptly provide all information requested by Landlord for preparation of non-applicability affidavits, a Negative Declaration, No Further Action Letter or other ISRA application and shall promptly sign such affidavits when requested by Landlord. Tenant shall indemnify, defend, and save harmless Landlord from all 49

193 fines, natural resource and other damages, suits, procedures, claims, and actions of any kind arising out of or in any way connected with any spills or discharges of hazardous substances or wastes at the Demised Premises which occur during the Term of this Lease and were caused by Tenant or its agents or contractors, and from all fines, suits, procedures, claims, and actions of any kind arising out of Tenant s failure to provide all information, make all submissions and take all actions required by the NJDEP or any other governmental entity. Tenant s obligations and liabilities under this Paragraph shall continue so long as Landlord remains responsible for any spills or discharges of hazardous substances or wastes at the Demised Premises which occur during the Term of this Lease and were caused by Tenant or its agents or contractors. Tenant s failure to abide by the terms of this paragraph shall be restrainable by injunction. Tenant shall have no responsibility to obtain an ISRA Negative Declaration/No Further Action Letter or Letter of Non-Applicability from the NJDEP if the sole reason for obtaining same is in connection with a sale or other disposition of the real estate by Landlord, but Tenant agrees to cooperate with Landlord in Landlord s effort to obtain same and shall perform at Tenant s expense any clean up required by reason of Tenant s use and occupancy of the Demised Premises Landlord represents and warrants to the best of its knowledge, that the Building, Demised Premises and Land and their existing and prior uses shall, as of the Commencement Date comply with, and Landlord has, to the best of its knowledge, not been in violation of, and has not violated, in connection with the ownership, use and maintenance or operation of the Building, Demised Premises or Land and the conduct of the business related thereto, any applicable Laws. In the event that the Building, the Demised Premises and Land are not in compliance with any Laws as of the Commencement Date (provided that such noncompliance is not attributable to any act or omission of the Tenant or any of its employees or agents), then Landlord shall at its expense promptly comply with any such Law. If Landlord shall default in its obligations under this Section 39.02, Tenant may proceed in accordance with Section Landlord shall indemnify, defend, and save harmless Tenant from all fines, suits, procedures, claims, and actions of any kind arising out of or in any way connected with any spills or discharges of hazardous substances or wastes at the Demised Premises which occurred or were on the Land, Building and/or Demised Premises prior to the term of the Existing Lease, or which occur during the term of the Existing Lease or this Lease and were caused by Landlord or its agents or contractors, and from all fines, suits, procedures, claims, and actions of any kind arising out of Landlord s or Landlord s agents failure to provide all information, make all submissions and take all actions required by any division of NJDEP. This paragraph shall survive the expiration or earlier termination of this Lease Landlord represents and warrants to Tenant that (i) neither the Building or the Demised Premises, nor the Land have been used by Landlord to dump, discard, landfill, deposit or dispose of any substance material above, on or below ground which is toxic or hazardous to human health, which would constitute unlawful disposal and/or which would require clean up, removal or special disposal under current federal and/or state environmental laws or regulations; nor to Landlord s knowledge has there been any such occurrence; (ii) to Landlord s knowledge there are no underground tanks or toxic hazardous substances used in or about the Building, Land or Demised Premises including, but not limited to PCB s, asbestos, Urea Formaldehyde 50

194 Foam Insulation or the like; and (iii) to Landlord s knowledge, the Building, Demised Premises and the Land are in full compliance with all Laws, including but not limited to, all applicable rules and regulations related thereto. Landlord shall indemnify and hold Tenant harmless from and against any liabilities, losses and costs, including Tenant s reasonable attorney s fees, which Tenant may incur by reason of Landlord s beach of the foregoing warranties and representations and shall, at Landlord s sole cost and expense, immediately remove any hazardous substance from the Demised Premises which is not attributable to the acts or omissions of Tenant, its agents, contractors, invitees and employees. The foregoing provisions shall survive the expiration or earlier termination of this Lease. ARTICLE 40 HOLDING OVER Tenant will have no right to remain in possession of all or part of the Demised Premises after the expiration of the Term. If Tenant remains in possession of all or any part of the Demised Premises after the expiration of this Lease without the express consent of Landlord: (a) such tenancy will be deemed to be a periodic tenancy from month-to-month only; (b) such tenancy will not constitute a renewal or extension of this Lease for any further Term; and (c) such tenancy may be terminated by Landlord upon the earlier of (i) thirty (30) days prior written notice, or (ii) the earliest date permitted by law. In such event, monthly rent will be increased to an amount equal to one hundred fifty percent (150%) of the monthly rent payable during the last month of the Term, and any other sums due under this Lease will be payable in the amount and at the times specified in this Lease. Such month-to-month tenancy will be subject to every other term, condition, and covenant contained in this Lease. The provisions of this Section shall not be construed to relieve Tenant from liability to Landlord for damages resulting from any such holding over, or preclude Landlord from implementing summary dispossess proceedings Notwithstanding anything to the contrary contained in this Lease, by written notice to Landlord not less than ninety (90) days prior to the scheduled expiration of the Term, Tenant shall have the right to hold over for a period of up to six (6) months following the expiration of the Term, or any extension thereof, without disturbance by Landlord or being subject to any damages, at one hundred twenty-five percent (125%) of the Fixed Rent as in effect during the last month of the previous Term for the first three months of holdover which shall increase to one hundred fifty percent (150%) for the next three months of holdover, plus any increases in Taxes and Operating Expenses due under this Lease. If, however, Landlord has executed a lease with a third party at the time of Tenant s exercise of the right herein accorded, then Tenant s right of holdover for the second three months shall be inapplicable to the space that has been so leased. ARTICLE 41 CERTAIN DEFINITIONS AND CONSTRUCTIONS For the purpose of this Lease and all agreements supplemental to this Lease, unless the context otherwise requires, the definitions set forth in Exhibit F annexed hereto shall be utilized. 51

195 The various terms which are italicized and defined in other Articles of this Lease or are defined in Exhibits annexed hereto, shall have the meanings specified in such other Articles and such Exhibits for all purposes of this Lease and all agreements supplemental thereto, unless the context shall otherwise require The submission of this Lease for examination does not constitute a reservation of, or option for, the Demised Premises, and this Lease becomes effective as a Lease only upon execution and delivery thereof by Landlord and Tenant The Article headings in this Lease and the Index prefixed to this Lease are inserted only as a matter of convenience in reference and are not to be given any effect whatsoever in construing this Lease This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. If any words or phrases in this Lease shall have been stricken out or otherwise eliminated, whether or not any other words or phrases in this Lease shall have been added, this Lease shall be construed as if the words or phrases so stricken out or otherwise eliminated were never included in this Lease and no implication or interference shall be drawn from the fact that said words or phrases were so stricken out or otherwise eliminated. ARTICLE 42 RELOCATION OF TENANT Intentionally Omitted. ARTICLE 43 MORTGAGEE S CONSENT Intentionally Omitted. ARTICLE 44 OPTION TO RENEW Provided that at the time of the exercise of the Option to Renew and as of the expiration of the then current term (i) Tenant is not then in default of the terms, covenants, and provisions of this Lease beyond the expiration of any applicable notice and/or cure period, and (ii) Tenant shall be in occupancy and possession of not less than fifty percent (50%) of the rentable area of the Demised Premises pursuant to this Lease, Landlord hereby grants to Tenant the right to renew the term of this Lease for one (1) additional period of five (5) years (the Renewal Period ) commencing on the day after the initial Expiration Date upon the same terms 52

196 and conditions as set forth in this Lease other than the fixed annual rental which shall be the Fair Market Value (as hereinafter defined) of the Demised Premises at the time of the commencement of the Renewal Period, adjusting as necessary for the lapse of time between the date of Tenant s notification of intent to exercise its option to renew and the date on which the Renewal Period is scheduled to commence. Said fixed annual rental shall be payable in equal monthly installments in advance on the first day of each and every month of the Renewal Period. The base year for calculation of additional rent for increase in taxes and operating expenses for the Renewal Period shall be calendar year Tenant shall exercise the within Option by giving written notice to Landlord not later than twelve (12) months prior to the initial Expiration Date, TIME BEING OF THE ESSENCE. If Tenant fails to give such notice, Tenant will be deemed to have waived such Renewal Option and the provisions of this Section shall be null and void. For a period of thirty (30) days following Landlord s receipt of such notice, Landlord and Tenant shall in good faith attempt to agree upon the Fair Market Value of the Demised Premises. If Landlord and Tenant are unable to agreement upon the Fair Market Value of the Demised Premises within such thirty (30) day period, they shall submit the matter to arbitration pursuant to Article 33 (but not Section 33.06). Promptly after the determination of the Fair Market Value of the Demised Premises, Landlord and Tenant shall enter into an amendment to memorialize the exercise of the Option to Renew and the fixed annual rental Fair Market Value shall mean the rent generally payable in the general area of Garden State Parkway Exit 109 market area (the Market Area ) by tenants accepting their demised premises in their as is condition and taking into consideration the tenant improvement allowance and other concessions for demised premises of approximately the same size, level of tenant improvement and condition as the Demised Premises in a comparable building for an equivalent term, and all other relevant considerations in determining Fair Market Value. ARTICLE 45 RIGHT OF FIRST NEGOTIATION Provided that Tenant is not then in default under the terms, covenants, and provisions of this Lease beyond the expiration of any applicable notice and/or cure period, Landlord hereby grants to Tenant the ongoing right to lease additional space on the second (2 nd ) floor of the Building and that part of the first (1 st ) floor of the Building that is not part of the Demised Premises (hereinafter Expansion Space ). Each and every time that Landlord becomes aware that any Expansion Space is becoming available for occupancy by Tenant (but not earlier than twelve (12) months prior to the date on which such particular Expansion Space will become available for occupancy by Tenant), Landlord shall notify Tenant of the such Expansion Space, which notice shall include a description of such Expansion Space and the date on which Landlord expects the same will become available for occupancy (each, an Availability Notice ). The Right of First Negotiation is further subject to the following terms and conditions: (a) Within twenty one (21) days after Tenant s receipt of an Availability Notice, Tenant shall notify Landlord if Tenant is interested in leasing the Expansion Space. If so, then the Expansion Space shall be leased upon the same terms and conditions as set forth in this Lease other than the fixed annual rental which shall be the Fair Market Rental, as determined pursuant to Article 44 (and, as necessary, Article 33). If Tenant fails to respond to an 53

197 Availability Notice, it shall be conclusively presumed that Tenant is not interested in leasing the specified Expansion Space, and Landlord shall be free to market the same, free of Tenant s right of first of first refusal; provided, however, that if within six (6) months subsequent to the Availability Notice, Landlord has not leased such Expansion Space to a third party, then Landlord shall again provide an Availability Notice with respect to such Expansion Space prior to leasing the same to a third party. (b) Tenant shall have no rights pursuant to this Article 45 with respect to any particular Expansion Space unless and until such particular Expansion Space has been leased by Landlord to a tenant other than Tenant during the Term and thereafter becomes available. The above right of first negotiation shall be on-going and continue until twelve (12) months preceding the expiration of the original term or Renewal Period, as applicable. Landlord shall not be required to respond to any Tenant Initial Notice if given during the last twelve (12) months of the original term of this Lease unless Tenant exercises (or has exercised) its option to renew as set forth in Article 44 of the Lease, as herein amended. 54

198 IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. WITNESS: LANDLORD: ALFIERI-100 SCHULTZ ASSOCIATES, L.P. a New Jersey Limited Partnership /s/ MICHAEL ALFIERI By: MICHAEL ALFIERI Title: General Partner ATTEST: TENANT: IKANOS COMMUNICATIONS, INC. A Delaware Corporation /s/ Jim Murphy By: Jim Murphy Title: Vice President of Human Resources 55

199 EXHIBIT A DESCRIPTION OF LAND 100 SCHULZ DRIVE ALL that certain tract or parcel of land and premises, situate, lying and being in the Township of Middletown, in the County of Monmouth, State of New Jersey, more particularly described herein. BEING known and designated as Lot 2 in Block 296, on a map entitled Final Map for the SHAV Corporation consisting of Lots 16, 16-D, 17, 18 and 19 in Block 296, Middletown Twp, Monmouth Co. dated June 2, 1980 and filed December 1, 1980 in the Monmouth County Clerk s Office as Case BEING more particularly described in accord with said filed map as follows: BEGINNING at the point of intersection of the northerly line of the Garden State Parkway and the westerly line of Schulz Drive as marked by a monument and running thence: 1. North 52 degrees 20' 10" West for a distance of feet to Garden State Parkway Monument #A-165; thence 2. North 47 degrees 42' 50" West for a distance of to Garden State Parkway Monument #A-167; thence 3. North 34 degrees 29' 19" West for a distance of feet to a monument; thence 4. North 2 degrees 51' 30" West for a distance of feet; thence 5. South 87 degrees 26' 27" East for a distance of feet; thence 6. South 7 degrees 42' 18" West for a distance of feet; thence 7. South 82 degrees 17' 42" East for a distance of feet to the said westerly line of Schulz Drive; thence 8. South 7 degrees 42' 18" West for a distance of feet along the said westerly line of Schulz Drive to the place and point of Beginning. Being Lot 16.06, Block 296, Tax Map of Township of Middletown. Subject to easements, restrictions and covenants of record and such state of facts as an accurate survey may reveal. LAND100S 11/9/90 A-1

200 EXHIBIT B FLOOR PLAN SEE ATTACHED B-1

201

202

203

204

205 EXHIBIT C LANDLORD S WORK This Exhibit C is attached to and made a part of a Lease dated March, 2011 (the Lease ), between ALFIERI 100 SCHULTZ ASSOCIATES, LLP ( Landlord ) and IKANOS COMMUNICATIONS, INC. ( Tenant ). The purpose of this Exhibit C is to set forth the respective rights and obligations of Landlord and Tenant with respect to space planning, engineering, final working drawings, construction and/or installation of Landlord s Work and Tenant s Work (as hereinafter defined) in the premises demised by the Lease (the Demised Premises ) and in 100 Schulz Drive, Red Bank, New Jersey (the Building ). Capitalized terms used herein shall, unless otherwise defined in this Exhibit C, have the same meanings ascribed to them in the Lease. 1. Landlord s Base Building Work. Landlord at its sole cost and expense shall: (a) Construct a cafeteria on the first floor of the Building (the Cafeteria ) that will be open to serve Tenant, other tenants in the Building, and tenants of Tri-Park Corporate Park (200 Schulz Drive and 230 Half Mile Road) no later than January 2, 2012, subject, however to an extension of no more than sixty (60) days in the event there is a delay in the permitting of such improvement (b) Be responsible for the demise of the Demised Premises on the 1 st floor, including, but not limited to construction of the demising walls, ceiling tiles, above ceiling HVAC, life safety systems, and the refinishing of common areas and elevator lobby to building standards no later than March 1, 2012, provided that Tenant surrenders the Give-back Space in accordance with Section 1.07 of the Lease; (c) Renovate the lobby, all common areas and rest rooms of the Building and install a building energy management system no later than January 2, 2012; (d) Install four (4) separate submeters to measure Tenant s consumption of electricity within the Demised Premises no later than March 1, Any more than 4 submeters shall be installed by Landlord at Tenant s sole cost and expense; (e) Construct a fitness center on the 1 st floor of the Building (the Fitness Center ) that shall be open for use by Tenant s employees free of charge no later than January 2, 2012, subject, however to an extension of no more than sixty (60) days in the event there is a delay in the permitting of such improvement, and provided that Tenant surrenders the Give-back Space in accordance with Section 1.07 of the Lease C-1

206 The above items are referred to as Landlord s Work. Landlord s Work shall be performed in a good and workmanlike manner in accordance with all Laws; in addition, items (a), (b), (c) and (e) of Landlord s Work will be performed with a quality and level of finish comparable to the quality and level of finish in the corresponding portions of the building located at 499 Thornall, Edison, New Jersey. 2. Tenant s Work. Landlord shall improve, renovate and refurbish the Demised Premises for Tenant s continued use and occupancy pursuant to the provisions of this Exhibit C, and the Plans (as defined in 4(b) hereof). All work shown on the Plans shall include, but not be limited to, interior partitions, doors, hardware, wall and floor coverings, lighting, electric power wiring, sprinklers and fire safety equipment, and shall be Tenant s Work and shall be undertaken and paid for as set forth in this Exhibit C; provided, however, that if the base building structure, the base building systems, the common areas and/or the Full-Floor Common Areas do not comply with the Americans with Disabilities Act or any other Law (whether or not the same constitutes an instance of permitted nonconformance) and any changes to the foregoing are required in order to obtain any permit, approval, inspection or other item required for the lawful performance of Tenant s Work and occupancy of the Demised Premises, then such changes shall be performed at Landlord s expense and without deducting the costs thereof from the Workletter Allowance. The cost of the Base Building Work shall not be chargeable against the Workletter Allowance. Landlord at its own cost and expense shall provide space planning services to Tenant to facilitate preparation of the Plans. Landlord shall solicit bids for the trades for Tenant s Work from not less than three (3) qualified contractors per trade. Tenant may select up to three (3) qualified contractors per trade to bid on Tenant s Work, subject to Landlord s reasonable approval of the same. Landlord and Tenant shall jointly, reasonably and expeditiously choose the trade contractors for Tenant s Work based on their reasonable evaluation of the bid price, the contractor s reliability and reputation for quality workmanship, size of jobs performed and timeliness of performance, the contractor s past job performance with them, and the ability of the bidding contractor to satisfy licensing and insurance requirements for the job. The trade contract for Tenant s Work shall be subject to Tenant s reasonable approval and, at Tenant s request, shall be a guaranteed maximum price contract. Landlord or one of Landlord s affiliates shall act as construction manager for the job and shall be entitled to receive a construction management fee comprised of the Overhead and Profit as set forth in the following paragraph Costs (a) Once Plans (as defined in 5(b) below) for Tenant s Work to be performed by Landlord are finalized and approved as provided in 5(b) hereof, Landlord shall furnish to Tenant within five (5) business days a reasonably detailed breakdown of the estimated costs of Tenant s Work based on the approved Plans. The costs shall include all labor and materials and Landlord s architectural and engineering fees plus the following: General conditions, as applicable, to Tenant s Work; The cost estimate for each trade; Overhead at ten percent (10%) for the general conditions and the trade estimates above; Profit at five percent (5%) for all the items listed above.

207 (b) Before Landlord shall become obligated to commence Tenant s Work or any portion thereof, Tenant shall approve in writing the estimated costs thereof as shown on the most recent cost breakdown furnished by Landlord to Tenant. (c) Other than the aforesaid construction management fee, Landlord shall not be entitled to any supervision, administrative, or plan review fee or the like in connection with Tenant s Work. 4. Workletter Allowance (a) Landlord shall provide Tenant with an allowance ( Workletter Allowance ) equal to $18.00 per rentable square foot of Demised Premises which shall be used to pay for the costs of Tenant s Work, including hard and soft costs including but not limited to construction, architectural and consultant fees, furniture, moving costs, voice and cabling expenses and other such items. At Tenant s option, Tenant shall have the right to use the Workletter Allowance during the period commencing on the date on which this Lease is fully executed and expiring concurrently with the initial Term. Any estimated costs, as shown on the latest cost breakdown furnished by Landlord to Tenant, that are anticipated to be incurred by Landlord in connection with the performance of Tenant s Work (other than Tenant s telephone, security and/or computer installations, all of which shall be performed by Tenant) over and above the amount of the Workletter Allowance shall be paid by Tenant to Landlord as additional rent as follows: (i) 50% upon finalization of the Plans and Landlord s and Tenant s approval of the trade contracts; and (ii) 50% upon substantial completion of the work shown on the Plans. Landlord shall not charge Tenant any supervision, administrative or plan review fees for costs related to Tenant s furniture, moving costs, voice and cabling, telephone, security and/or computer installations. (b) The Workletter Allowance (as the same may be supplemented as provided in 4(a) above) shall be used by Landlord for payment of the costs incurred by Landlord in the performance of Tenant s Work. After completion of Tenant s Work by Landlord and Tenant has delivered to Landlord a final list of Punchlist Items (as defined in 9, below), any unused balance of the Workletter Allowance (as the same may have been supplemented as provided in 4(a) above) shall be released or credited by Landlord to Tenant against payment of the fixed rent next becoming due under the Lease. 5. Plan Preparation and Approval (a) Landlord shall cause to be prepared, as part of Tenant s Work, all architectural and engineering drawings, plans and other construction documents ( Construction Drawings and Documents ) for Tenant s Work which, at a minimum, shall include the following: demolition plans, partition plans, ceiling plans, electrical plans, mechanical/hvac plans, plumbing plans, fire protection plans, life safety plans, finishes plans (including a full material board) and any other similar drawings and/or plans that are required for receipt of construction permits. Said Construction Drawings and Documents shall be consistent with the specifications for the Building, all applicable building codes and the architectural and construction practices generally utilized in first class office buildings.

208 (b) As soon as practicable after execution of the Lease, Landlord shall submit to Tenant, for Tenant s approval (which approval shall not be unreasonably conditioned, delayed or denied), at least two (2) sets of sealed preliminary Construction Drawings and Documents for Tenant s Work described in 2, above, based upon space plans theretofore approved by Landlord and Tenant, the protocol for approval of which shall be the same as for the Construction Drawings and Documents. Tenant shall review and approve or disapprove such Construction Drawings and Documents within ten (10) business days after receipt thereof. If Tenant shall not approve the Construction Drawings and Documents submitted by Landlord, Tenant shall notify Landlord within said ten (10) business days of Tenant s disapproval and shall describe the revisions thereto which are reasonably deemed necessary by Tenant for the purpose of obtaining its approval. Within ten (10) business days after being so informed by Tenant, Landlord shall submit to Tenant for Tenant s approval (which approval shall not be unreasonably conditioned, delayed or denied), revised Construction Drawings and Documents incorporating the revisions and/or modifications requested by Tenant. Tenant shall notify Landlord whether such revised Construction Drawings and Documents are approved within five (5) business days after receipt thereof. The process described in the preceding sentences of this 5(b) shall be repeated until Landlord and Tenant have agreed upon the final form of the Construction Drawings and Documents for Tenant s Work to be performed by Landlord. At least two (2) full sets of Construction Drawings and Documents shall be signed by both Landlord and Tenant, evidencing their respective approvals thereof, whereupon Landlord shall be authorized to proceed with Tenant s Work covered by such Construction Drawings and Documents. (c) Notwithstanding anything to the contrary contained in 5(b) above, Landlord shall have the sole and absolute discretion to approve or disapprove any work that (i) will be visible from the exterior of the Demised Premises, or (ii) will adversely involve or may adversely affect any structural or exterior element of the Building or (iii) will delay completion of the work to be performed by Landlord in the Demised Premises beyond July 31, 2012, or (iv) will increase the costs of insurance or the Taxes on the Building unless in the case of (iv) Tenant first gives assurance reasonably acceptable to Landlord for payment of such increased costs. 6. Modifications to Plans (a) If, after final approval of the Plans for and/or during the performance of Tenant s Work, Tenant desires to amend, change or modify the Plans, Tenant shall submit to Landlord, for its approval (which approval shall not be unreasonably conditioned, delayed or denied), a reasonably detailed description of the proposed amendment, change or modification, together with such drawings and other information as Landlord may reasonably request. The procedure for review and approval of such amendment, change or modification shall be the same as that set forth in 5(b) above. (b) Within three (3) business days after Landlord and Tenant have approved a proposed amendment, change or modification of the Plans, Landlord shall furnish to Tenant an amended statement of the aggregate costs to complete Tenant s Work being performed by Landlord, inclusive of the costs related to the approved amendment, change or modification of the Plans. Landlord shall not be obligated to proceed with any work shown by any such amendment, change or

209 modification of the Plans until Tenant has paid in full to Landlord as additional rent under the Lease the excess of the amended aggregate costs to complete Tenant s Work being performed by Landlord in excess of the unused balance of the Workletter Allowance as of the date of such amended statement of costs to complete Tenant s Work being performed by Landlord. 7. Materials and Workmanship (a) All Landlord s Work and Tenant s Work performed by Landlord in connection with the preparation of the Demised Premises for Tenant s use and occupancy shall be performed in a good and workmanlike manner, in accordance with all applicable laws and regulations, and in substantial conformance with the Plans. Unless specified otherwise, all materials installed in the Demised Premises will be new. (b) All work (such as telephone, security and computer installations) not performed by Landlord in connection with the preparation of the Demised Premises for Tenant s use and occupancy shall likewise be performed in a good and workmanlike manner, in accordance with all applicable laws and regulations, and in substantial conformance with Plans therefor which are first approved by Landlord. With respect to telephone, security and computer installations and any other work not to be performed by Landlord and not required to be removed by Tenant at the expiration or earlier termination of the Lease, all materials installed in the Demised Premises will be new except to the extent otherwise specified in the Plans. 8. Mutual Cooperation Landlord and Tenant agree to mutually cooperate with each other and take all commercially reasonable measures in order to facilitate completion of Landlord s Work and Tenant s Work in an efficient and expeditious manner. Landlord shall use commercially reasonable efforts to minimize any disruption to Tenant s business at the Demised Premises and to complete Tenant s Work as soon as practicable and in any event not later than the milestone schedule attached hereto as Schedule 8, subject to events of Force Majeure. 9. Possession by Tenant The reoccupancy of any part of the Demised Premises by Tenant for its permitted use thereof specified in the Lease following the completion of the portion of Landlord s Work and Tenant s Work to be performed therein shall constitute an acknowledgment by Tenant that the Demised Premises are in good condition and that all work and materials provided by Landlord as part of Landlord s Work or any Tenant s Work performed by Landlord are satisfactory except for any minor defects or incomplete items of Landlord s Work or Tenant s Work ( Punchlist Items ) that are listed in a written notice given by Tenant to Landlord on or before the thirtieth (30th) day after substantial completion of the work and for latent defects.

210 10. Repairs and Corrections (a) Landlord will correct or complete the Punchlist Items which Landlord s architect or engineer verifies (in his or her reasonable professional judgment) are, in fact, defects or incomplete items of Landlord s Work or Tenant s Work within a reasonable time (not to exceed thirty (30) days) thereafter, provided Tenant shall not interfere with Landlord s ability and/or access to the Demised Premises to correct or complete said Punchlist Items. (b) In addition to Punchlist Items, Landlord will repair and correct any Landlord s Work or Tenant s Work installed by Landlord or its contractor in the Demised Premises that is proven to be defective within one (1) year after the substantial completion of Landlord s Work and Tenant s Work to the applicable part of the Demised Premises as a result of faulty materials, equipment or workmanship, provided Tenant shall have given written notice thereof to Landlord within said one (1) year period. Landlord shall complete such repair and correction within a reasonable time (not to exceed thirty (30) days) after Landlord receives Tenant s notice. Notwithstanding the foregoing, Landlord shall not be responsible to repair or correct any Landlord s Work or Tenant s Work installed by Landlord or its contractor in the Demised Premises that proves to be defective as a result of any negligence or willful misconduct of Tenant or any of its agents, contractors, employees, invitees, licensees, subtenants, customers, clients or guests, or any defective Tenant s Work or other materials installed in the Demised Premises by Tenant or any agent or contractor other than Landlord or Landlord s contractor. (c) After Tenant s occupancy of the Demised Premises, Landlord, upon reasonable notice to Tenant, may enter the Demised Premises to correct or complete the Punchlist Items referred to in 9 above or to correct or repair any other Landlord s Work or Tenant s Work installed by Landlord or its contractor in the Demised Premises, and entry by Landlord, its agents, contractors or employees for such purpose shall not constitute an actual or constructive eviction, in whole or in part, of Tenant from the Demised Premises, or entitle Tenant to any abatement of rent, or relieve Tenant from any of its other obligations under the Lease, or impose any liability upon Landlord or its agents, contractors or employees. Landlord shall use commercially reasonable efforts to minimize any disruption to Tenant s business at the Demised Premises in doing so. 11. Elevator Lobby/Common Corridor Restriction. If an elevator lobby or common corridor is included in Tenant s Demised Premises or, if by virtue of the size and configuration of the Demised Premises, other tenants of the Building can see from the Building atrium, lobby or common corridor into the Demised Premises through air space, a transparent door or demising wall, Landlord shall have the sole and final approval as to the colors and design of all paint, wall coverings, art work, lamps and lights, floor coverings and window treatments in the Demised Premises that are so visible. Further, Landlord reserves the right to lower the full height glass wall on the atrium balcony across from the elevators to waste height Restriction. If an elevator lobby or common corridor is included in Tenant s Demised Premises or, if by virtue of the size and configuration of the Demised Premises, other tenants of the Building can see from the lobby or common corridor into the Demised Premises through a transparent door or demising wall, Tenant shall not place any items whatsoever in the area 24 or

211 less from the interior face of the transparent door or wall. In the event Tenant violates said 24 restriction, Tenant shall be liable to pay Landlord upon demand as additional rent the sum of $250 per day for each and every day the violation continues longer than three (3) business days after Landlord s notice that this restriction is being violated. Imposition of the $250 per day additional rent charge shall be Landlord s sole and exclusive remedy for Tenant s violation of the aforesaid 24 restriction, subject, however, to all rights and remedies that Landlord has under this Lease or pursuant to applicable law respecting Tenant s failure to pay the $250 a day imposition as additional rent. 13. Contact Person Tenant shall designate a point of contact person with full authority to act on Tenant s behalf and bind Tenant contractually with respect to the fit-out and preparation of the Demised Premises for Tenant s use and occupancy. 14. Tenant Delays If Landlord shall actually be delayed in meeting any deadline imposed upon it in the completion of Landlord s Work and/or any Tenant s Work to be performed by Landlord as a result of: (1) Tenant s failure to inform Landlord of Tenant s desired contractor for a particular trade within five (5) business days after Landlord provides copies of the bid responses for such trade (which shall be accompanied by Landlord s recommendation as to the most responsive bidder) and notifies Tenant that such selection is required; or (2) Tenant s failure to comply in a timely manner with the provisions of Paragraph 5(b), above; or (3) Tenant s changes in the Plans following Landlord s and Tenant s written approval thereof (notwithstanding Landlord s approval of any such changes); or (4) Tenant s improper failure to pay timely any amounts required to be paid to Landlord pursuant to Paragraph 4(a) and/or any other provision hereof which continues for five (5) business days after written notice to Tenant; or (5) Landlord s inability to obtain materials, finishes or installations requested by Tenant which are not available from ordinary trade sources or which constitute long lead items, provided that Landlord notified Tenant thereof on or before the date on which Landlord submitted to Tenant the proposed Plans that specified the applicable material, finish or installation; or (6) Any other unreasonable act or wrongful omission by Tenant or its agents, contractors, representations and/or employees which continues for five (5) business days after written notice to Tenant (collectively, Tenant Delay );

212 Then, the deadline for completion of Landlord s Work and/or Tenant s Work (as applicable) by Landlord shall be appropriately extended as a result of such delay. At Tenant s request, Landlord shall use commercially reasonable efforts to overcome the effects of any Tenant Delay.

213 Base Building Work shall include the following: EXHIBIT C-l BASE BUILDING WORK 1. HVAC - Perimeter baseboard electric heat for winter operations and a forced air-cooling system for summer operations. Perimeter baseboard electric heat, central high velocity fan system which utilizes a minimum of 10% to a maximum of 100% fresh air to maintain no less than 68 degrees F interior at 0 degrees F exterior, with a 15 mile per hour wind. Air-cooling shall maintain a temperature of no more than 72 degrees F dry bulb with approximately 50% relative humidity, measured five (5 ) feet from the inside of the exterior windows, when the outdoor conditions are 88 degrees F dry bulb and the venetian window blinds closed on the side(s) of the Demised Premises, if any, facing the sun. The above heating and cooling standards are for normal office use only, which shall be deemed to be one (1) person for every two hundred and fifty (250) useable square feet and/or electricity usage of more than five (5) watts per rentable square foot in any given or confined area, and which shall not include areas with special HVAC requirements such as computer rooms, conference rooms, cafeterias or other rooms for high density or excessive heat producing equipment. One (1) 24 x 24 diffuser to supply one (1) CFM per square foot of usable space but not fewer than one (1) such diffuser per [two hundred fifty (250)] square feet of usable interior area of the Demised Premises. 2. WINDOW COVERINGS - one (1) building-standard Venetian blind per exterior window. 3. FINISHED CEILING - using building standard quantities and materials. 4. CORRIDOR - Landlord, at Landlord s sole cost and expense, shall construct a demising corridor using building standard quantities and materials.

214 EXHIBIT D CLEANING AND MAINTENANCE SPECIFICATIONS Landlord will provide building standard cleaning services to the tenant area and the ground floor lobby area in accordance with the following specifications: NIGHTLY 1. GENERAL CLEANING a. Empty all waste and recycling receptacles, removing waste and recycling material to designated central location for disposal. b. Empty and damp wipe clean all ashtrays. Screen and clean all sand urns, wipe exterior of sand urns. c. Wash and disinfect all water coolers and drinking fountains. d. Wipe clean fingermarks, smudges, etc. from all doors, security desks, wall surfaces, furniture system trim, fixtures, cabinets, files, conference tables, chairs, partition glass, flat ledges, heating units, baseboards, blinds and window ledges. e. Replace plastic liners in all waste-disposal cans. f. Hand brush and/or vacuum all upholstered furniture, including furniture system fabric panels. g. Doors: Wash and wipe clean all kick panels, push/pull areas. h. Wash and disinfect all public telephones. i. Wipe down mail chute and mail depository nightly. 2. FLOORS Group A - Ceramic tile, marble, terrazzo. Group B - Linotile, asphalt, koroseal, plastic vinyl, rubber, wood, cork, or other types of floors and base. a. All floors in Group A to be swept and wet-mopped. Move light furniture, planters and equipment other than desks and files. b. All floors in Group B to be dry mopped, using a dustdown preparation, and spots to be removed by wet process. D-1

215 c. Main lobby to be machine buffed nightly. 3. VACUUMING a. Vacuum all rugs and carpeted areas, moving light furniture and office equipment other than desks and file cabinets. Spot clean to remove soluble spots which safely respond to standard spotting procedures without risk of injury to color or fabric. 4. WASHROOMS AND TOILETS a. Sweep, mop, rinse, and dry floors. Polish mirrors, chrome plumbing and bright-work. Clean enameled surfaces. b. Wash and disinfect basins, urinals, and bowls using scouring powder to remove stains, making certain to clean undersides of rims of urinals and bowls. c. Wash and disinfect both sides of all toilet seats. d. Supply and service all toilet tissue, soap, towels, and sanitary napkins. Sanitary napkins will be supplied in coin operated dispensers. e. All wastepaper cans and all receptacles are to be emptied and new plastic liners installed. f. Hand dust and wash clean all partitions, tile walls, dispensers, and receptacles in lavatories and vanity area. g. Empty and clean sanitary disposal receptacles and install new plastic liners. 5. ELEVATORS a. Clean the floor in accordance with specifications outlined above based upon the type of flooring installed. The doors, metal wall surfaces, wood wall surfaces, ceiling and fixtures shall be dusted. 6. GLASS a. Clean both sides of all lobby glass, building entrance doors, upper lobby glass, furniture system partition glass and interior wall glass. 7. STAIRWELLS a. Check all stairwells and landings nightly throughout entire demised area, and keep in clean condition. All stairways and landings will be dry mopped nightly. Railings, ledges, and equipment will be dusted nightly.

216 WEEKLY 8. GENERAL CLEANING a. Hand dust all office equipment, furniture, fixtures, including paneling, shelving, window sills and mullions, telephones and all flat surfaces with a treated cloth or yarn duster. 9. FLOORS a. Floors in Group B will be wet mopped weekly. 10. WASHROOMS AND TOILETS a. Wash down walls in washrooms and stalls, from trim to floor. 11. ELEVATORS a. The doors, surfaces and fixtures shall be damp wiped. The floors shall be stripped, waxed and machine buffed weekly. 12. STAIRWAYS a. These areas shall be stripped, waxed and buffed weekly. This will be governed by the amount of wear due to weather and other conditions. 13. MAIN LOBBY a. Clean walls with damp cloth and dust weekly. MONTHLY 14. FLOORS a. Waxing, buffing, stripping or machine scrubbing of the floors in Group A and B. 15. HIGH DUSTING a. Dust all closet shelving and wash all closet floors, when accessible. QUARTERLY 16. GLASS a. Clean inside of windows.

217 17. HIGH DUSTING a. Damp dust all pictures, charts, graphs, light fixtures, etc., not reached in nightly cleaning. b. Dust clean all vertical surfaces such as walls, partitions, doors, door bucks and other surfaces not reached in nightly cleaning. c. Damp dust air conditioning diffusers, wall grills, door louvers, registers and venetian blinds. SEMI ANNUALLY 18. GLASS a. Clean all doors and exterior side of exterior windows. ANNUALLY 19. HIGH DUSTING a. Dust interior and exterior of light fixtures. MISCELLANEOUS a. On completion of work, all slop sinks are to be thoroughly cleaned, and cleaning equipment to be stored neatly in designated locations. b. All cleaning services except those performed by day porters, window cleaners, and matrons are to be performed nightly, five nights per week. No Saturday, Sunday or Building holiday service to be provided. In no event shall performance of any cleaning service interfere with Tenant s normal business operation. c. The Contractor or Landlord is to furnish all necessary approved cleaning materials, implements, and machinery for the satisfactory completion of the work. This includes scaffolding, vacuum machines, scrubbing machines, etc. d. Contractor shall furnish proof of liability and property damage insurance reasonably acceptable to Landlord, and Workman s Compensation Insurance in amounts required under the laws of New Jersey. e. Tenant will be charged for cleaning services in excess of the specifications outlined above. f. Tenant will be charged for the incremental cost to clean any areas of the Demised Premises used for special purposes requiring more difficult cleaning work than office areas including, but not limited to, private toilets and showers, dining areas, cafeteria, kitchen, etc.

218 EXHIBIT E RULES AND REGULATIONS 1. The rights of tenants in the entrances, corridors, elevators, and escalators of the Building are limited to ingress to and egress from the tenants demised premises for the tenants and their employees, licensees, and invitees, and no tenant shall use or permit the use of the entrances, corridors, escalators, or elevators for any other purpose. No tenant shall invite to the tenant s demised premises, or permit the visit of, persons in such numbers or under such conditions as to interfere with the use and enjoyment of any of the plazas, entrances, corridors, escalators, elevators, and other facilities of the Building by other tenants. Fire exits and stairways are for emergency use only, and they shall not be used for any other purpose by the tenants, their employees, licensees, or invitees. No tenant shall encumber or obstruct, or permit the encumbrance or obstruction of any of the sidewalks, plazas, entrances, corridors, escalators, elevators, fire exits, or stairways of the Building. The Landlord reserves the right to control and operate the public portions of the Building and the public facilities, as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally. 2. The Landlord may refuse admission to the Building outside of ordinary business hours to any person not having a pass issued by the Landlord or the tenant whose demised premises are to be entered or not otherwise properly identified, and may require all persons admitted to or leaving the Building outside of ordinary business hours to register. Any person whose presence in the Building at any time shall, in the judgment of the Landlord, be prejudicial to the safety, character, reputation, and interests of the Building or of its tenants may be denied access to the Building or may be ejected therefrom. In case of invasion, riot, public excitement, or other commotion, the Landlord may prevent all access to the Building during the continuance of the same, by closing the doors or otherwise, for the safety of the tenants and protection of property of the Building. The Landlord may require any person leaving the Building with any package or other object to exhibit a pass from the tenant from whose premises the packaging or object is being removed, but the establishment and enforcement of such requirement shall not impose any responsibilities on the Landlord for the protection of any tenant against the removal of property from the premises of the tenant. The Landlord shall in no way be liable to any tenant for damages or loss arising from the admission, exclusion, or ejection of any person to or from the tenant s premises or the Building under the provisions of this rule. Canvassing, soliciting, or peddling in the Building is prohibited, and every tenant shall cooperate to prevent the same. 3. No tenant shall obtain or accept for use in its demised premises ice, food for on premises preparation other than warming, beverage towel, barbering, boot blackening, floor polishing, lighting maintenance, cleaning, or other similar services from any persons not authorized by the Landlord in writing to furnish such services, provided that the charges for such services by persons authorized by the Landlord are not excessive and where appropriate and consonant with the security and proper operation of the Building sufficient persons are so authorized for the same service to provide tenants with a reasonably competitive selection. Such services shall be furnished only at such hours, in such places within the Tenant s Demised Premises and under such reasonable regulations as may be fixed by the Landlord. Tenant may have a coffee service, subject to Landlord s approval, and a kitchen for the use of its employees commensurate with normal office use. E-1

219 4. The cost of repairing any damage to the public portions of the Building or the public facilities or to any facilities used in common with other tenants, caused by a tenant or the employees, licensees, or invitees of the tenant shall be paid by such tenant. 5. No lettering, sign, advertisement, notice or object shall be displayed in or on the windows or doors, or on the outside of any tenant s demised premises, or at any point inside any tenant s premises where the same might be visible outside of such demised premises, except that the name of the tenant may be displayed on the entrance door of the tenant s demised premises, and in the elevator lobbies of the floors which are occupied entirely by any tenant, subject to the approval of the Landlord as to the size, color, and style of such display. The inscription of the name of the tenant on the door of the tenant s demised premises shall be done by the Landlord at the expense of the tenant. 6. No awnings or other projections over or around the windows shall be installed by any tenant, and only such window blinds as are supplied or permitted by the Landlord shall be used in a tenant s demised premises. Linoleum, tile, or other floor covering shall be laid in a tenant s demised premises only in a manner approved by the Landlord. 7. The Landlord shall have the right to prescribe the weight and position of safes and other objects of excessive weight, and no safe or other object whose weight exceeds the lawful load for the area upon which it would stand shall be brought into or kept upon a tenant s demised premises. If, in the judgment of the Landlord, it is necessary to distribute the concentrated weight of any heavy object, the work involved in such distribution shall be done at the expense of the tenant and in such manner as the Landlord shall determine. The moving of safes and other heavy objects shall take place only outside of ordinary business hours upon previous notice to the Landlord, and the persons employed to move the same in and out of the Building shall be reasonably acceptable to the Landlord and if so required by law, shall hold a Master Rigger s license. Freight, furniture, business equipment, merchandise, and bulky matter of any description shall be delivered to and removed from the demised premises only in the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by the Landlord. Arrangements will be made by the Landlord with any tenant for moving large quantities of furniture and equipment into or out of the Building. 8. In no case shall any machines or mechanical equipment be placed or operated so as to disturb other tenants; but machines and mechanical equipment shall be so equipped, installed and maintained by such tenant as to prevent any disturbing noise, vibration, or electrical or other interference from being transmitted from such premises to any other area of the Building. 9. No noise, including the playing of any musical instruments, radio or television, which, in the judgment of the Landlord might disturb other tenants in the building, shall be made or permitted by any tenant, and no cooking shall be done in the tenant s demised premises, except as expressly approved by the Landlord. Nothing shall be done or permitted in any tenants demised premises, and nothing shall be brought into or kept in any tenants demised premises, which would impair or interfere with any of the Building services or the proper and economic heating, cleaning, or other servicing of the Building or the demised premises, or the

220 use of enjoyment by any other tenant of any other demised premises, nor shall there be installed by any tenant any ventilating, air conditioning, electrical or other equipment of any kind which, in the judgment of the Landlord, might cause any such impairment or interference. No dangerous, inflammable, combustible, or explosive object or material (other than items used in connection with the Permitted Use in accordance with all Laws) shall be brought into the building by any tenant or with the permission of any tenant. Any cuspidors or similar containers or receptacles used in any tenants demised premises shall be cared for and cleaned by and at the expense of the tenant. 10. No acids, vapors, or other materials shall be discharged or permitted to be discharged into the waste lines, vents or flues of the Building which may damage them. The water and wash closets and other plumbing fixtures in or serving any tenant s premises shall not be used for any purpose other than the purposes for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other foreign substances shall be deposited therein. 11. No additional locks or bolts of any kind shall be placed upon any of the doors or windows in any tenants demised premises and no lock on any door therein shall be changed or altered in any respect. Additional keys for a tenant s demised premises and toilet rooms shall be procured only from the Landlord, which may make a reasonable charge therefor. Upon the termination of a tenant s lease, all keys of the tenant s demised premises and toilet rooms shall be delivered to the Landlord. 12. All entrance doors in each tenants demised premises shall be left locked, and all windows shall be left closed by the tenant when the tenant s demised premises are not in use. Entrance doors shall not be left open at any time. 13. Hand trucks not equipped with rubber tires and side guards shall not be used within the Building. 14. All windows in each tenant s demised premises shall be kept closed and all blinds therein above the ground floor shall be lowered when and as reasonably required because of the position of the sun, during the operation of the Building air conditioning system to cool or ventilate the tenant s demised premises. 15. The Landlord reserves the right to rescind, alter, or waive any rule or regulation at any time prescribed for the Building when, in its judgment, it deems it necessary, desirable, or proper for its best interest and for the best interests of the tenants, and no alteration or waiver of any rule or regulation in favor of one tenant shall operate as an alteration or waiver in favor of any other tenant. The Landlord shall not be responsible to any tenant for the non-observance or violation by any other tenant of any of the rules and regulations at any time prescribed by the Building. 16. In case any alterations or installations are made by Tenant or Landlord within the Demised Premises, whether with or without Landlord s approval, or in case anything is placed or allowed by Tenant to be placed near or against any exterior windows of the Demised Premises, which shall be visible from the outside of the Building and which, in the reasonable opinion of Landlord, shall detract from the uniform appearance of the facade of the Building, then Landlord shall be allowed access to the Demised Premises, at reasonable times during Building Hours, to install black Mecho brand shading (or equivalent) on the interior surfaces of the windows of the

221 Demised Premises to mask or shield such alterations, installations or other items from view outside, and to maintain the uniform appearance of the facade, of the Building. Any such Mecho brand shading (or equivalent) shall be installed at Tenant s expense unless Landlord shall have given its approval to such alterations, installations or other items visible from outside the Building without expressly conditioning such approval upon payment for such shading by Tenant.

222 EXHIBIT F DEFINITIONS (a) The term mortgage shall mean an indenture of mortgage, a deed of trust to a trustee to secure a note or an issue of bonds and any other security instrument, and the term mortgagee shall mean such a trustee or holder. (b) The terms include, including, and such as shall each be construed as if followed by the phrase without being limited to. (c) References to Landlord as having no liability to Tenant or being without liability to Tenant, shall mean the Tenant is not entitled to terminate this Lease, or to claim actual or constructive eviction, partial or total, or to receive any abatement or diminution of rent, or to be relieved in any manner of any of its other obligations hereunder, or to be compensated. (d) The term laws and/or requirements of public authorities and words of like import shall mean laws and ordinances of any or all of the Federal, state, city, county, and borough governments and rules, regulations, orders and/or directives of any or all departments, subdivisions, bureaus, agencies, or office thereof, or of any other governmental, public, or quasipublic authorities, having jurisdiction in the premises, and/or the direction of any public officer pursuant to law. (e) The term requirements of insurance bodies and words of like import shall mean rules, regulations, orders, and other requirements of the New Jersey Board of Fire Underwriters and/or similar body performing the same or similar functions and having jurisdiction or cognizance of the Building and/or the Demised Premises. (f) The term repair shall be deemed to include restoration and replacement as may be necessary to achieve and/or maintain good working order and condition. (g) Reference to termination of this Lease includes expiration or earlier termination of the Term of this Lease or cancellation of this Lease pursuant to any of the provisions of this Lease or to law. Upon a termination of this Lease, the Term and estate granted by this Lease shall end at noon of the date of termination as if such date were the date of expiration of the Term of this Lease and neither party shall have any further obligation or liability to the other after such termination (i) except as shall be expressly provided for in this Lease, or (ii) except for such obligation as by its nature or under the circumstances can only be, or by the provisions of this Lease, may be performed after such termination and, in any event, unless expressly otherwise provided in this Lease, any liability for a payment which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this Lease. F-1

223 EXHIBIT G SAMPLE FORM OF LETTER OF CREDIT BANK NAME BANK ADDRESS IRREVOCABLE LETTER OF CREDIT REFERENCE NUMBER: TRANSACTION DATE: EXPIRATION DATES: BENEFICIARY: C/O M. ALFIERI CO., INC. 399 THORNALL STREET EDISON, NEW JERSEY DEAR SIRS: WE HEREBY ESTABLISH OUR IRREVOCABLE LETTER OF CREDIT IN THE BENEFICIARY S FAVOR FOR THE ACCOUNT OF ( TENANT ), FOR U.S. DOLLARS $ AVAILABLE BY THE BENEFICIARY S DRAFT(S) DRAWN ON US AT SIGHT. DRAFTS SUBMITTED MUST BE ACCOMPANIED BY THE FOLLOWING: A WRITTEN STATEMENT PURPORTEDLY SIGNED BY A PERSON REPRESENTING HIMSELF OR HERSELF AS AN SIGNATORY OF ( LANDLORD ) CERTIFYING THAT ( TENANT ), HAS FAILED TO COMPLY WITH THE TERMS AND CONDITIONS OF CERTAIN LEASE AGREEMENT BETWEEN, AS LANDLORD AND, AS TENANT. IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT SHALL BE DEEMED AUTOMATICALLY EXTENDED WITHOUT AMENDMENT FOR AN ADDITIONAL TWELVE (12) MONTH PERIOD FROM THE PRESENT OR ANY FUTURE EXPIRATION DATE HEREOF, UNLESS AT LEAST SIXTY (60) DAYS PRIOR TO ANY SUCH DATE WE SHALL NOTIFY YOU BY REGISTERED MAIL THAT WE ELECT NOT TO CONSIDER THIS LETTER OF CREDIT RENEWED FOR ANY SUCH ADDITIONAL PERIOD. IF WE ELECT NOT TO RENEW THIS LETTER OF CREDIT YOU MAY DRAW HEREUNDER BY PRESENTATION OF YOUR SIGHT DRAFT ONLY. ALL DRAFTS MUST BE ACCOMPANIED BY THE ORIGINAL LETTER OF CREDIT INSTRUMENT. WE HEREBY ENGAGE WITH YOU THAT ALL DRAFTS DRAWN AND PRESENTED IN COMPLIANCE WITH THE TERMS OF THIS LETTER OF CREDIT THAT SUCH DRAFT(S) WILL BE DULY HONORED UPON PRESENTATION TO THE DRAWEE. G-1

224 FUNDS DRAWN ON THIS LETTER OF CREDIT SHALL BE PAID IN THE FORM OF A WIRE TRANSFER OR BANK CHECK. ALL CHECKS SHALL BE SENT BY OVERNIGHT DELIVERY OR COURIER SERVICE TO THE ADDRESS ABOVE. THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS, INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION 400. AUTHORIZED SIGNATURE G-2

225 EXHIBIT H SERVICE LEVEL CRITERIA Exhibit A-1 Service Level Agreement: 100 Schulz 1.0 General Building Services General Sweep, wet mop common areas Vacuum (floors/carpet) Spot clean floors, walls, doors, glass Dust/vacuum common areas Clean (common areas, stairwells, light fixtures) Police grounds, building entries, parking structure Parking lot sweeping External window washing Internal window washing Spot and stain common area carpet cleaning Replace common area walk-off mats Common area carpet cleaning Strip and refinish common area floors Replace common area building lamps and common area bulbs cleaning Pest control for building cafe Interior landscaping maintenance Restrooms/ Break rooms Clean & sanitize common area restrooms Stock common area restroom supplies Cafeteria Clean building Kitchen/cafeteria Clean building cafeteria hood Maintenance on building cafe equipment Trash collection /Removal Replace soiled receptacle liners Replace trash containers Collect and remove reveled waste within building General Repairs and Maintenance House HVAC Common Area Plumbing Common Area Electric Locks/Keys/Hardware Other R&M 2.0 Grounds maintenance (Buildings) Grass Cutting and Mowing Maintain Grass Frequency Daily Daily Daily Daily Daily Daily As identified Semi annually Semi annually As identified As identified Quarterly Quarterly Weekly As identified Weekly Twice daily Twice daily Daily Semi annually As identified Daily As identified Daily As scheduled As identified As identified As identified As identified Regional need G-3

226 Rake, sweep, remove clippings from site Per visit Edge lawns and keep free of leaves and debris Per visit Repair and maintain Lawn Sprinklers As scheduled Trees, Shrubs & Beds Trim per frequencies & remove debris from site Spring/Fall Remove/trim trees if/when potential hazard As identified Remove fallen/dead branches Per Visit Weeding Abate from paved areas, beds, and lawns Per Visit Fertilization, lime, herbicide treatment Seasonal Turf disease treatment, aeration As identified Off season clean ups Spring/Fall Bedding/mulch Regional Need Parking Lots Parking lot repair As identified Parking lot striping/sealing As identified 3.0 Snow Services Removal Plowing, stacking, removal Per Event Paths, driveways & sidewalks clear Per Event De-icing material in application & quantities Per Event 4.0 Security Services Main Entrance card Access As scheduled Monitoring base building fire panel and HVAC alarms As scheduled 5.0 Disaster Preparedness Fire Drills Annually Document maintenance safety manuals, evac plans As identified 6.0 Life Safety Fire Extinguishers Inspection As required Fire suppression Inspection As required Fire alarm systems As required 7.0 Tenant Requests within Demised Premises Response Time Emergency (fire, water leak, etc.) Immediate Comfort Call (demised premises temperature) Next available building engineer Cleaning Request (other than mentioned above in section 1.0) Next available maintenance representative Light Bulbs Dependant upon maintenance representative availability Special Service (hang pictures, movie furniture, etc.) Dependant upon maintenance representative availability G-4

227 SCHEDULE 3.02 RESTORATION ITEMS FOR BUILDING EXTERIOR, ROOF AND SITE [SEE ATTACHED]

228 Ground Exterior Schedule 3.02 Restoration Items for Building Exterior, Roof and Site Southwest side of building (7) HVAC Condenser Units (see photo 1) To include removal of units, air handler and all associated wiring. Patch all penetrations to building (ATE lab). Southwest side of building Compressor Unit (see photo 2) Remove unit and all wiring Northwest side of building (2) HVAC condenser units (see photos 3-4) To include removal of units, air handler and all associated wiring Patch all penetrations to building (Café). West side of building Remove concrete from above HVAC units and compressor West side of building Remove fence along building, restore landscaping (see photo 5) Southwest Parking Lot: Remove generator and all related wiring, conduit, transfer switches. Remove concrete and restore with asphalt, remove bollards (see photo 6) Roof East Side of roof (3) HVAC Condenser Units (see photos 7-8) To include removal of units, air handler and all associated wiring. Patch all penetrations to building. East side of roof Compressor Unit (see photo 9) Remove unit and all wiring

229

230

231

232

233

234

235

236

237