SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q


                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended April 30, 1998


                         Commission file number 0-20008


                                VTEL Corporation

              A Delaware Corporation IRS Employer ID No. 74-2415696



                               108 Wild Basin Road
                               Austin, Texas 78746



                                 (512) 437-2700





The registrant 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
has been subject to such filing requirements for the past 90 days.

At June 1, 1998 the registrant had outstanding  23,167,114  shares of its Common
Stock, $0.01 par value.



PART I - FINANCIAL INFORMATION Item 1. Financial Statements VTEL Corporation CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in thousands, except share and per share amounts) April 30, 1998 July 31, (Unaudited) 1997 --------------- -------------- ASSETS Current assets: Cash and equivalents $ 8,447 $ 4,757 Short-term investments 14,287 20,299 Accounts receivable, net of allowance for doubtful accounts of $10,462 and $10,722 at April 30, 1998 and July 31, 1997 40,624 43,707 Inventories 15,676 22,244 Prepaid expenses and other current assets 2,430 2,891 --------------- -------------- Total current assets 81,464 93,898 Property and equipment, net 25,392 21,660 Intangible assets, net 12,048 12,768 Other assets 3,003 2,809 --------------- -------------- $121,907 $ 131,135 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,158 $ 25,699 Accrued merger and other expenses 3,471 9,704 Accrued compensation and benefits 4,141 4,552 Other accrued liabilities 3,939 3,070 Deferred revenue 12,889 11,345 --------------- -------------- Total current liabilities 42,598 54,370 --------------- -------------- Stockholders'equity: Preferred stock, $.01 par value; 10,000,000 authorized; none issued or outstanding -- -- Common stock, $.0l par value; 40,000,000 authorized; 23,160,000 and 22,873,000 issued and outstanding at April 30, 1998 and July 31, 1997 230 229 Additional paid-in capital 256,044 254,880 Accumulated deficit (176,867) (178,234) Cumulative translation adjustment (32) 5 Unearned compensation (66) (115) --------------- --------------- Total stockholders' equity 79,309 76,765 --------------- --------------- $121,907 $131,135 =============== =============== The accompanying notes are an integral part of these condensed consoloidated financial statements.
2
VTEL Corporation CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Amounts in thousands, except per share amounts) For the For the Nine Months Ended Nine Months Ended April 30, April 30, --------------------------------- ----------------------------------- 1998 1997 1998 1997 -------------- ------------- -------------- --------------- Revenues: Products $ 32,887 $ 35,197 $ 99,290 $ 114,876 Services and other 12,113 8,903 32,691 30,100 -------------- ------------- -------------- --------------- 45,000 44,100 131,981 144,976 -------------- ------------- -------------- --------------- Cost of sales: Products 15,969 19,121 49,176 64,997 Services and other 7,944 6,319 21,316 21,825 23,913 25,440 70,492 86,922 Gross margin 21,087 18,660 61,489 58,154 -------------- ------------- -------------- --------------- Selling, general and 16,525 16,319 46,231 49,913 administrative Research and development 4,786 6,339 14,755 18,515 Amortization of intangible assets 240 240 720 720 -------------- ------------- -------------- --------------- Total operating expenses 21,551 22,898 61,706 69,148 -------------- ------------- -------------- --------------- Loss from operations (464) (4,238) (217) (10,994) -------------- ------------- -------------- --------------- Other income (expense): Interest income 247 561 716 1,762 Interest expense and other 1,217 (163) 906 (1,236) -------------- ------------- -------------- --------------- 1,464 398 1,622 526 -------------- ------------- -------------- --------------- Income (loss) from continuing operations before benefit (provision) for income taxes 1,000 (3,840) 1,405 (10,468) Benefit (provision) for income (20) -- (37) 12 taxes -------------- ------------- -------------- --------------- Income (loss) from continuing 980 (3,840) 1,368 (10,456) operations Loss from discontinued -- -- -- (6,698) operations -------------- ------------- -------------- --------------- Net income (loss) $980 (3,840) 1,368 (17,154) ============== ============= ============== =============== Basic income (loss) per share: Continuing operations $0.04 $(0.18) 0.06 $(0.48) Discontinued operations -- -- -- (0.31) -------------- ------------- -------------- --------------- Net income (loss) per share $0.04 $(0.18) 0.06 $(0.79) ============== ============= ============== =============== Diluted income (loss) per share: Continuing operations $0.04 $(0.18) $0.06 $(0.48) Discontinued operations -- -- -- (0.31) -------------- ------------- -------------- --------------- Net income (loss) per share $0.04 $(0.18) $0.06 $(0.79) ============== ============= ============== =============== Weighted average shares outstanding: Basic 23,130 21,757 23,013 21,856 ============== ============= ============== =============== Diluted 23,400 21,757 23,477 21,856 ============== ============= ============== =============== The accompanying notes are an integral part of these condensed consoloidated financial statements.
3
VTEL CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Nine Months Ended April 30, 1998 1997 --------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 1,368 $ (17,154) Adjustments to reconcile net income (loss) to net cash from operations: Depreciation and amortization 6,601 11,727 Provision for doubtful accounts 44 80 Amortization of unearned compensation 49 111 Foreign currency translation (gain) loss 87 (32) Decrease in accounts receivable 3,039 5,637 Decrease in inventories 6,568 3,367 (Increase) decrease in prepaid expenses and 461 (1,425) other current assets Increase (decrease) in accounts payable (7,539) 287 Decrease in accrued expenses (5,779) (1,313) Increase in deferred revenues 1,544 1,744 Decrease in accrued expenses, discontinued - (657) --------------- -------------- operations Net cash provided by operating 6,443 2,372 --------------- -------------- activities Cash flows from investing activities: Net short-term investment activity 6,012 10,577 Net purchase of property and equipment (9,617) (10,085) Increase in other assets (191) (1,567) --------------- -------------- Net cash used in investing (3,796) (1,075) --------------- -------------- activities Cash flows from financing activities: Repayments under line of credit agreements - (5,145) Net proceeds from issuance of stock 1,165 7,841 Purchase of treasury stock - (3,742) Sale of treasury stock - 1,640 --------------- -------------- Net cash provided by financing activities 1,165 594 --------------- -------------- Effect of translation exchange rates on cash (122) (156) --------------- -------------- Net increase in cash and equivalents 3,690 1,735 Cash and equivalents at beginning of period 4,757 1,973 --------------- -------------- Cash and equivalents at end of period $ 8,447 $ 3,708 =============== ============== The accompanying notes are an integral part of these condensed consoloidated financial statements.
4 VTEL Corporation NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) VTEL Corporation ("VTEL" or the "Company") designs, manufactures, markets and supports multi-media digital visual communication systems. The Company's systems integrate traditional video and audio conferencing with additional functions, including the sharing of PC software applications and the transmission of high-resolution images and facsimiles. Through the use of the Company's multi-media digital visual communication systems, users are able to replicate more closely the impact and effectiveness of face-to-face meetings, education and training classes and certain medical consultations. The Company's systems are built upon a system platform which is based on industry-standard, PC-compatible open hardware and software architecture. By leveraging this open architecture design, the Company is able to integrate into the videoconference PC-compatible hardware and software applications which allow users to customize the systems to meet their unique needs. The PC-architecture also provides a natural pathway to connect the Company's digital visual communication systems onto local area networks (LANs) and wide area networks (WANs) thereby leveraging the rapidly expanding network infrastructures being deployed in organizations throughout the world. Also complementing this open architecture is the Company's compliance with emerging industry standards. The Company's open architecture and compliance with data and telecommunications standards permit the incorporation of new functions through software upgrades, thereby extending the useful life of the user's investment. The Company primarily distributes its systems to a domestic and international marketplace through third party resellers. The Company's headquarters and production facilities are in Austin, Texas. Note 1 - General and Basis of Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and accordingly, do not include all information and footnotes required under generally accepted accounting principles for complete financial statements. In the opinion of management, these interim financial statements contain all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of the financial position of the Company as of April 30, 1998 and the results of the Company's operations and its cash flows for the three month period and nine month period ended April 30, 1998. The results for interim periods are not necessarily indicative of results for a full fiscal year. On May 23, 1997, shareholders of VTEL and Compression Labs, Incorporated, a Delaware corporation ("CLI"), approved the merger (the "Merger") of VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of 5 Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct wholly-owned subsidiary of VTEL. As a result of the Merger, (a) the outstanding shares of CLI's common stock were converted into the right to receive 0.46 shares of common stock of VTEL for each share of CLI common stock converted (or cash in lieu of fractional shares otherwise deliverable in respect thereof), and (b) the outstanding shares of CLI Series C Preferred Stock were converted into the right to receive 3.15 shares of VTEL common stock for each share of CLI preferred stock converted (or cash in lieu of fractional shares otherwise deliverable in respect thereof). The CLI shares were exchanged for a total of 8,424,741 shares of VTEL common stock. The acquisition was accounted for as a pooling of interests and accordingly, the consolidated financial statements have been restated for all periods to include the accounts of CLI. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements (including the notes thereto) contained in the Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 12, 1997. Note 2 - Inventories Inventories consist of the following: April 30, July 31, 1998 1997 (Unaudited) (Dollars in thousands) Raw materials $ 7,551 $ 9,493 Work in process 558 4,143 Finished goods 6,766 7,490 Finished goods held for evaluation - and rental and loan agreements 801_ 1,118 ---------- _ ---------- $ 15,676 $ 22,244 ========== ========== Finished goods held for evaluation consists of completed digital visual communication systems used for demonstration and evaluation purposes, which are generally sold during the next 12 months. Note 3 - Net Income (Loss) Per Share 6 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The new standard, which is effective for financial statements issued for periods ending after December 31, 1997, establishes standards for computing and presenting earnings per share (EPS) and requires restatement of all prior period EPS data presented upon adoption. The Company has implemented this standard in the second quarter of fiscal 1998. The implementation of SFAS No. 128 results in the presentation of a basic EPS presented in the consolidated financial statements as well as a diluted EPS for the periods presented. Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) by the weighted average number of common shares and common share equivalents (if dilutive) outstanding for the period. Stock options and warrants are the only dilutive potential shares that the Company has outstanding for all periods presented. All prior years' EPS data in this report have been recalculated to reflect the provisions of SFAS No. 128. At April 30, 1998, options and warrants to acquire 2.0 million shares of common stock were not included in the computations of diluted earnings per share because the effect of including the options and warrants would have been anti-dilutive. At April 30, 1997, options and warrants to acquire 4.1 million shares of common stock were not included in the computations of diluted earnings per share because the effect of including the options and warrants would have been anti-dilutive. Note 4 - Year 2000 Evaluation The Company has considered the impact of the year 2000 on its business systems and processes and has determined that the year 2000 will not have a material adverse affect on its financial position and results of operations. Note 5 - Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB), issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. As such, the Company will adopt SFAS No. 130 for its fiscal year ended July 31, 1998. 7 In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which the Company adopted in the first quarter of 1998. The statement established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under SFAS No. 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The adoption of this new accounting standard is not expected to have a material impact on the Company's consolidated balance sheet or statement of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations On May 23, 1997, shareholders of VTEL and Compression Labs, Incorporated, a Delaware corporation ("CLI"), approved the merger (the "Merger") of VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct wholly-owned subsidiary of VTEL. As a result of the Merger, (a) the outstanding shares of CLI's common stock were converted into the right to receive 0.46 shares of common stock of VTEL for each share of CLI common stock converted (or cash in lieu of fractional shares otherwise deliverable in respect thereof), and (b) the outstanding shares of CLI Series C Preferred Stock were converted into the right to receive 3.15 shares of VTEL common stock for each share of CLI preferred stock converted (or cash in lieu of fractional shares otherwise deliverable in respect thereof). The CLI shares were exchanged for a total of 8,424,741 shares of VTEL common stock. The acquisition was accounted for as a pooling of interests and accordingly, the consolidated financial statements have been restated for all periods to include the accounts of CLI. The restatement of the consolidated financial information combines the financial information of VTEL and CLI giving retroactive effect to the Merger as if the two companies had operated as a single company for the three and nine months ended April 30, 1998. However, the two companies operated independently prior to the Merger, and the historical changes and trends in the financial condition and results of operations of these two companies resulted from independent activities. Nonetheless, the following management's discussion and analysis of financial condition and results of operations attempts to relate the activities which resulted in the changes in financial condition and results of operations of the combined company, taking into consideration that a trend or change in the historical results of the combined entity was caused by many events related to each individual company operating independently as competitors. The financial information presented on a historical restated basis is not indicative of the financial condition and results of operations that may have been achieved in the past or will be achieved in the future had the companies operated historically as a single entity. 8 The following review of the Company's financial position and results of operations for the three and nine month periods ended April 30, 1998 and 1997 should be read in conjunction with the Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 12, 1997. Results of Operations The following table sets forth for the fiscal periods indicated the percentage of revenues represented by certain items in the Company's Condensed Consolidated Statement of Operations:
For the three For the nine months ended months ended April 30, April 30, 1998 1997 1998 1997 Revenues 100% 100% 100% 100% Gross margin 47 42 47 40 Selling, general and administrative 37 37 35 34 Research and development 11 14 11 13 Total operating expenses 48 52 47 48 Other income, net 3 1 1 - Net income (loss) from continuing operations 2 (9) 1 (7) Loss from discontinued operations - - - (5) Net income (loss) 2% (9)% 1% (12)%
Three and Nine Months Ended April 30, 1998 and 1997 Revenues. Revenues for the quarter ended April 30, 1998 increased to $45.0 million from $44.1 million in the quarter ended April 30, 1997, an increase of $0.9 million or 2%. Revenues for the nine months ended April 30, 1998 decreased to $132.0 million from $145.0 million for the nine months ended April 30, 1997, a decrease of $13.0 million or 9%. The decrease in revenues for the nine month period ended April 30, 1998 is the result of a decrease in the total number of unit sales of the Company's systems primarily led by a decline in the sale of the products of the Company's wholly-owned subsidiary, CLI, in the early part of the nine month period ended April 30, 1998 as a result of the transition by the combined Company to the sale of the Company's Enterprise System Architecture(TM) (ESA)-based products. The increase in revenues during the three months ended April 30, 1998 in comparison with the three months ended April 30, 1997 is the combination of a decline product revenues as described above and an increase in revenues generated from Services and Other. The increase in revenues from Services and Other where driven by an increase in revenues from the Company's Integration Services Group. 9 The following table summarizes the Company's group system unit sales activity:
For nine months For the three months ended ended July 31, October 31, January 31, April 30, April 30, 1997 1997 1998 1998 1998 Large group digital visual communication systems 699 751 583 899 2,233 Small group digital visual communication systems 175 75 140 237 452 Multipoint control units 43 16 42 33 91 ---- ---- ---- ----- ----- Total systems 917 842 765 1,169 2,776 ==== ==== ==== ===== =====
International sales contributed approximately 32% and 24%, respectively, of product revenues for the three and nine months ended April 30, 1998 as compared to 31% and 25% of product revenues for the three and nine months ended April 30, 1997. While the Company strives for consistent revenue growth, there can be no assurance that consistent revenue growth or profitability can be achieved. The Company's business model is characterized by a very high degree of operating leverage. The Company's expense levels are based, in part, on its expectations as to future revenue levels, which are difficult to predict partly due to the Company's strategy of distributing its products through resellers. Because expense levels are based on the Company's expectations of future revenues, the Company's expense base is relatively fixed in the short term. If revenue levels are below expectations, operating results may be materially and adversely affected and net income is likely to be disproportionately adversely affected. In addition, the Company's quarterly and annual results may fluctuate as a result of many factors, including price reductions, delays in the introduction of new products, delays in purchase decisions due to new product announcements by the Company or its competitors, cancellations or delays of orders, interruptions or delays in supplies of key components, changes in reseller base, customer base, business or product mix and seasonal patterns and other shifts of capital spending by customers. There can be no assurance that the Company will be able to increase or even maintain its current level of revenues on a quarterly or annual basis in the future. Due to all of the foregoing factors, it is possible that in one or more future quarters the Company's operating results will be below the expectations of public securities market analysts. In such event, the price of the Company's Common Stock would likely be materially adversely affected. 10 Gross margin. Gross margin as a percentage of total revenues was 47% for the three and nine months ended April 30, 1998, an increase from the gross margin as a percentage for revenues of 42% and 40%, respectively, for the three and nine months ended April 30, 1997. During the three months and nine months ended April 30, 1998, the products that were previously developed by the Company's wholly-owned subsidiary, CLI, represented a smaller proportion of total product revenues due to the transition of the Company's combined product offering to the Company's ESA-based products. The products of the Company's wholly-owned subsidiary, CLI, generally have a lower gross margin than the ESA-based products. During the three and nine months ended April 30, 1997, the Company's restated combined revenues consisted of a higher proportion of revenues from CLI, which resulted in a lower gross margin on a combined basis. The higher proportion of products revenues from the ESA platform products resulted in a higher blended gross margin for the three and nine months ended April 30, 1998. Although the Company expects gross margins to remain consistent during fiscal 1998, it continues to expect gross margin pressures due to price competitiveness in the industry, shifts in the product sales mix and anticipated offerings of new products which may carry a lower gross margin. The Company expects that overall price competitiveness in the industry will continue to become more intense as users of videoconferencing systems attempt to balance performance, functionality and cost. The Company's gross margin is subject to fluctuation based on pricing, production costs and sales mix. Selling, general and administrative. Selling, general and administrative expenses increased by $0.2 million, or 1%, from $16.3 million for the quarter ended April 30, 1997 to $16.5 million for the quarter ended April 30, 1998. Selling, general and administrative expenses decreased by $3.7 million, or 7%, from $49.9 million for the nine months ended April 30, 1997 to $46.2 million for the nine months ended April 30, 1998. Selling, general and administrative expenses as a percentage of revenues were 37% and 37% for the three months ended April 30, 1997 and 1998, respectively, and were 34% and 35% for the nine months ended April 30, 1997 and 1998, respectively. Selling, general and administrative expenses as a percentage of revenues remained consistent between each of the corresponding three and nine month periods ended April 30, 1998 and April 30, 1997 due to the Company investing consistently in selling, general and administrative activities on consistent revenues for each of the quarters ending April 30, 1997 and 1998. However, the composition of the selling, general and administrative expenses changed despite the consistency in amount. During the quarter ended April 30, 1998, the Company reduced selling, general and administrative expenses by creating efficiencies and eliminating duplicate costs by combining the operations of VTEL and its wholly-owned subsidiary, CLI, subsequent to the merger of the two companies. The reduction of selling, general and administrative costs as a result of these actions were then invested in the Company's branding and advertising initiatives which are expected to increase future revenues. As such, the Company has been able to continue to invest in programs designed to increase future revenues without increasing overall selling, general and administrative expenses. Revenues may be affected during the transition period in which the Company is implementing the branding campaign such that the expected increase in revenues from the new marketing strategy may not coincide with potential changes in revenues due to the decline in marketing spending under the Company's former marketing strategy. The result could be a decline in revenues during the transition period. 11 Research and development. Research and development expenses decreased by $1.5 million, or 24%, from $6.3 million for the quarter ended April 30, 1997 to $4.8 million for the quarter ended April 30, 1998. Research and development expenses decreased by $3.7 million, or 20%, from $18.5 million for the nine months ended April 30, 1997 to $14.8 million for the nine months ended April 30, 1998. Research and development expenses as a percentage of revenues were 11% and 14% for the three months ended April 30, 1998 and 1997, respectively, and were 13% and 11%, respectively, for the nine months ended April 30, 1998 and 1997. The decrease in the amount of research and development expenses is due to the combination of VTEL and its wholly-owned subsidiary, CLI, subsequent to the Merger such that the Company is focusing its research and development activities on a single product platform, the ESA platform. The Company was able to reduce total research and development expenses by limiting its development efforts to the development of its family of products on a single product platform while still investing a higher amount in research and development activities related to its ESA platform. The Company has redirected a portion of the research and development expenses related to the products developed by its wholly-owned subsidiary, CLI, to the ESA platform thereby leveraging the development activities of both companies. Although the percentage of revenues invested by the Company in research and development may vary from period to period, the Company is committed to investing in its research and development programs. Future research and development expenses are expected to increase as revenues increase. These expenditures will be largely devoted to improving the Company's system user interface and the development of the next generation product platform. Other income, net. Other income, net increased by $1.1 million, or 275%, from a net income of $0.4 million for the quarter ended April 30, 1997 to income of $1.5 million for the quarter ended April 30, 1998. Other income, net increased by $1.1 million, or 220%, from $0.5 million for the nine months ended April 30, 1997 to $1.6 million for the nine months ended April 30, 1998. The increase in Other income, net during the three and nine months ended April 30, 1998 compared with the three and nine months ended April 30, 1997 is attributable to income generated from a planned non-recurring real estate transaction which eliminated duplicate corporate headquarter facilities. Net income (loss). The Company generated net income of $0.98 million, or $0.04 per share, during the quarter ended April 30, 1998 compared to a net loss of $3.8 million, or $0.18 per share, during the quarter ended April 30, 1997. The Company generated net income of $1.4 million, or $0.06 per share, during the nine months ended April 30, 1998 compared to a net loss of $17.2 million, or $0.79 per share, during the nine months ended April 30, 1997. During the quarter ended April 30, 1997, the Company's wholly-owned subsidiary, CLI, incurred a net loss on a stand-alone basis of $4.2 million, and VTEL generated net income on a stand-alone basis of $0.4 million, which resulted in a restated combined net loss of $3.8 million. During the nine months ended April 30, 1997, the Company's wholly-owned subsidiary, CLI, incurred a net loss on a stand-alone basis of $19.4 million, including a $6.7 million loss from discontinued operations, and VTEL generated net income on a stand-alone basis of $2.2 million, which resulted in a combined net loss of $17.2 million. Subsequent to the Merger, VTEL's management reduced the operating expenses of the combined company by eliminating duplicate operating costs and leveraging the research and development and selling, general and administrative expenses of the two 12 companies such that these expenses were focused on a single company development platform and sales and marketing strategy. The result was a reduction in the combined costs incurred by the two companies, which were investing amounts in implementing two corporate strategies when the companies operated as competitors, and an increase in the amount of funds available to invest in a single company plan. Additionally, the Company has been able to improve gross margins by transitioning the combined Company to the sale of the Company's higher gross margin ESA-based products. Improvement in the Company's financial performance during the remainder of fiscal year 1998 will depend on the Company's ability to increase revenues through growth in the Company's distribution channels, to introduce its new products which should generate revenue growth, and control the growth of operating expenses. There can be no assurances that the Company will be successful in achieving these objectives. Liquidity and Capital Resources At April 30, 1998, the Company had working capital of $38.9 million, including $22.7 million in cash, cash equivalents and short-term investments. Cash provided by operating activities was $6.4 million for the nine months ended April 30, 1998 and primarily results from decreases in inventories and accounts receivable and an increase in deferred revenues, offset by a decrease in accounts payable and accrued liabilities. The reduction in accounts payable and accrued liabilities includes amounts for Merger and other expenses which were accrued at July 31, 1997. Cash provided by operating activities was $2.4 million for the nine months ended April 30, 1997, primarily due to a net loss of $17.2 million coupled with an increase in prepaid expenses and other current assets and a decrease in accrued expenses offset by a decrease in accounts receivable and inventories and an increase in deferred revenues. Net cash used in investing activities during the nine months ended April 30, 1998 was $3.8 million and primarily resulted from in increase in net property and equipment of $9.6 million offset by cash generated from the reduction of short-term investments of $6.0 million. Cash used in investing activities during the nine months ended April 30, 1997 was $1.1 million and primarily resulted from cash generated by a reduction of short-term investments of $10.6 million offset by an increase in net property and equipment of $10.1 million. Cash flows provided by financing activities during the nine months ended April 30, 1998 were $1.2 million and related to sales of stock under the Company's employee stock plans. Cash flows provided by financing activities during the nine months ended April 30, 1997 were $0.6 million and related primarily to the sale of approximately $7.0 million of preferred stock by the Company's wholly-owned subsidiary, CLI, the sale of stock under employee stock purchase plans totaling approximately $0.8 million, the repayment of borrowings made by the Company's wholly-owned subsidiary, CLI, totaling approximately $5.1 million, the purchase of treasury stock totaling $3.7 million, and the sale of treasury stock totaling $1.6 million. At April 30, 1998, the Company had a $25.0 million revolving line of credit with a banking syndicate. The Company has issued a letter of credit totaling $1.2 million under its revolving line of credit as a lease deposit on one of its facilities. No amounts have been drawn under the syndicated line of credit. 13 The Company's principal sources of liquidity at April 30, 1998 consist of $22.7 million of cash, cash equivalents and short-term investments in addition to amounts available under the Company's revolving line of credit. The Company believes that existing cash and cash equivalent balances, short-term investments, cash generated from sales of products and services and its revolving lines of credit will be sufficient to meet the Company's cash and capital requirements for at least the next 12 months. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB), issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. As such, the Company will adopt SFAS No. 130 for its fiscal year ended July 31, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which the Company adopted in the first quarter of 1998. The statement established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under SFAS No. 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The adoption of this new accounting standard is not expected to have a material impact on the Company's consolidated balance sheet or statement of operations. General The markets for the Company's products are characterized by a highly competitive and rapidly changing environment in which operating results are subject to the effects of frequent product introductions, manufacturing technology innovations and rapid fluctuations in product demand. While the Company attempts to identify and respond to these changes as soon as possible, prediction of and reaction to such events will be an ongoing challenge and may result in revenue shortfalls during certain periods of time. 14 The Company's future results of operations and financial condition could be impacted by the following factors, among others: trends in the videoconferencing market, introduction of new products by competitors, increased competition due to the entrance of other companies into the videoconferencing market - especially more established companies with greater resources than those of the Company, delay in the introduction of higher performance products, market acceptance of new products introduced by the Company, price competition, interruption of the supply of low-cost products from third-party manufacturers, changes in general economic conditions in any of the countries in which the Company does business, adverse legal disputes and delays in purchases relating to federal government procurement. Due to the factors noted above and elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company's past earnings and stock price has been, and future earnings and stock price potentially may be, subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors are cautioned in using historical trends to anticipate results or trends in future periods. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant affect on the trading price of the Company's Common Stock in any given period. Also, the Company participates in a highly dynamic industry which often contributes to the volatility of the Company's Common Stock price. Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of the Company. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company's products and services, changes in competition, economic conditions, interest rates fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company's business, and other risks indicated in the Company's filing with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words "believes," "estimates," "plans," "expects," "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. PART II -- OTHER INFORMATION Item 1. Legal Proceedings CLI is currently engaged in several legal proceedings relating to matters arising prior to the Merger. There can be no assurance that CLI's legal proceedings can be resolved favorably to CLI or VTEL. Such legal proceedings, if continued for an extended period of time, could have an adverse effect upon 15 CLI's working capital and management's ability to concentrate on its business. The Company had recorded an estimate of the costs to defend and discharge the claims prior to the quarter ended April 30, 1998 and such contingent liabilities are reflected as accrued expenses at April 30, 1998. In the opinion of management, such reserves should be sufficient to discharge the liabilities, if any. However, an unexpected outcome in any one or several such legal proceedings could have a material adverse effect on CLI and hence, VTEL. In a complaint filed on December 20, 1993 in the United States District Court in Dallas, Texas, Datapoint Corporation ("Datapoint") alleged that CLI had infringed two United States patents owned by Datapoint relating to video conferencing networks. The complaint seeks a judgment of infringement, monetary damages, injunctive relief and attorneys' fees. CLI responded to the complaint by denying the material allegations of the complaint and asserting affirmative defenses. Discovery has commenced in the case. Datapoint filed a similar case against PictureTel Corporation (PictureTel) as well as other companies. The case against PictureTel has been completed whereby a jury ruled against Datapoint. Datapoint is appealing the court decision. The Datapoint suit against CLI will likely be stayed while the appeal relating to the PictureTel suit is pending and the suit against CLI may ultimately be dismissed based upon the outcome of the PictureTel case. In June 1997, Keytech, S.A. ("Keytech") filed suit against CLI in the United States District Court in Tampa, Florida. Keytech was a distributor of satellite encoder and decoder products manufactured by a division of CLI which CLI sold in June 1996. Keytech has asserted that the equipment sold was defective and did not conform to contract specifications and express and implied warranties. Keytech has asserted damages in excess of $20 million based on its allegations of breach of contract, breach of warranties and fraud. CLI has filed an answer denying liability and has asserted cross-claims against Keytech for amounts due and unpaid for equipment sold by CLI to Keytech. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Document description 10.1 Lease Agreement, dated January 30, 1998, between 2800 Industrial, Inc., Lessor and VTEL Corpora- tion, Lessee 10.2 First Amendment, dated March 11, 1998, to Lease Agreement, dated January 30, 1998, between 2800 Industrial, Inc., Lessor and VTEL Corporation, Lessee (b) Reports on Form 8-K: None * * * 16 SIGNATURES Pursuant to the requirements 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. VTEL CORPORATION June 11, 1998 By: /s/Rodney S. Bond ----------------------------------- Rodney S. Bond Vice President-Finance (Chief Financial Officer and Principal Accounting Officer)

                                 LEASE AGREEMENT









                                 by and between








                   2800 INDUSTRIAL, INC., a Texas corporation
                                   as Landlord





                                       and





                    VTEL CORPORATION, a Delaware corporation,
                                    as Tenant














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

1.       BASIC LEASE PROVISIONS..............................................  1

2.       CONDITION OF PREMISES; TENANT FINISH ALLOWANCE......................  2

3.       POSSESSION AND SURRENDER OF PREMISES................................  2

4.       TERM................................................................  2

5.       RENT................................................................  4

6.       TAXES...............................................................  4

7.       OPERATING COSTS.....................................................  5

8.       INSURANCE...........................................................  6

9.       BOOKS AND RECORDS; AUDITS...........................................  8

10.      UTILITIES...........................................................  9

11.      USE OF PREMISES.....................................................  9

12.      MAINTENANCE AND REPAIRS............................................. 10

13.      ALTERATIONS......................................................... 11

14.      INDEMNITY; SATISFACTION OF REMEDIES................................. 12

15.      PARKING............................................................. 13

16.      DAMAGE OR DESTRUCTION............................................... 13

17.      CONDEMNATION........................................................ 15

18.      ASSIGNMENT AND SUBLETTING........................................... 16

19.      MORTGAGEE PROTECTION................................................ 19

20.      ESTOPPEL CERTIFICATES; FINANCIAL STATEMENTS......................... 20

21.      DEFAULT............................................................. 20








22.      REMEDIES FOR DEFAULT................................................ 20

23.      BANKRUPTCY OR INSOLVENCY............................................ 23

24.      GENERAL PROVISIONS.................................................. 25

25.      HAZARDOUS SUBSTANCES................................................ 29

26.      CONTINGENCY......................................................... 31


EXHIBITS:

Exhibit A - Floor Plans for Premises
Exhibit B - Legal Description of Land
Exhibit C - Base Rent
Exhibit D - Subordination, Non-Disturbance and Attornment Agreement
Exhibit E - Net Proceeds








                                 LEASE AGREEMENT


         THIS LEASE AGREEMENT (this "Lease"), dated as of January ____, 1998, is
between  2800  INDUSTRIAL,  INC.,  a Texas  corporation  ("Landlord"),  and VTEL
CORPORATION, a Delaware corporation ("Tenant").

         Landlord hereby leases the Premises to Tenant, and Tenant hereby leases
the Premises from Landlord, on the following terms and conditions:

         1.       BASIC LEASE PROVISIONS.

                  (a)  Commencement Date:  The date that  Landlord  acquires fee
simple title in and to the Building and the Land.

                  (b)  Term:   The  term  of  this   Lease  will  begin  on  the
Commencement  Date and will end  fifteen  (15) Lease  Years  thereafter,  unless
extended or  terminated  earlier  pursuant to the terms and  provisions  of this
Lease.

                  (c) Premises:  That portion of the Building occupied by Tenant
as of the  Commencement  Date,  such portion  being  depicted on the floor plans
attached  hereto  as  Exhibit A and made a part  hereof  for all  purposes.  The
parties agree that the Premises currently contain  approximately  132,747 square
feet of rentable area.

                  (d)  Building:  The  two  buildings  containing  approximately
138,715  square  feet of  combined  rentable  area and  associated  improvements
situated on the Land, commonly known as Wild Basin One and Two, 110 and 108 Wild
Basin Road, Austin, Texas.

                  (e)  Land:  The  land on which  the  Building  and  associated
improvements  are  situated,  such land being  more  particularly  described  in
Exhibit B attached hereto and made a part hereof for all purposes.

                  (f) Base Rent:  The  rentals  payable by Tenant to Landlord in
accordance with the terms and provisions of Article 5 hereof.

                  (g)  Tenant's  Percentage:  The  percentage  of  the  Building
occupied  by Tenant from time to time under this Lease,  such  percentage  being
determined by dividing the rentable area of the Premises by the rentable area of
the entire Building. As of the date hereof, Tenant's Percentage equals 95.7%.

                  (h) Use of Premises:  General  office  purposes,  engineering,
research  and   development,   light   manufacturing,   demonstration  of  video
teleconferencing systems, training rooms, customer demonstrations,  repairs, and
uses otherwise incidental thereto as permitted by applicable zoning codes.

                                       1

 
                 (i)      Address for notices to Tenant:

                                    VTEL Corporation
                                    108 Wild Basin Road
                                    Austin, Texas  78746
                                    Attn:  Chief Financial Officer

                  (j)      Address for notices to Landlord:

                                    c/o Hill Partners, Inc.
                                    2800 Industrial Terrace
                                    Austin, Texas  78759
                                    Attn:  Dick Anderson

                  (k)      Certain Other Defined Terms: See Section 24.15 below.

         If there is a conflict  between the summary set forth in this Article 1
and any other terms or provisions set forth in this Lease,  such other terms and
provisions set forth elsewhere in this Lease shall govern and control.

         2. CONDITION OF PREMISES; TENANT FINISH ALLOWANCE.  Landlord and Tenant
agree that, except as expressly  provided  otherwise in this Lease,  Landlord is
leasing the  Premises  to Tenant in its  current "as is," "where is"  condition,
without any obligation to alter, remodel,  improve or repair except as expressly
required by the terms of this Lease.  Landlord  acknowledges  that, prior to the
Commencement Date, Tenant has performed certain  improvements and repairs in, on
or to portions of the  Building  and,  in  reimbursement  thereof and in partial
payment for Tenant's Work (defined below),  Landlord agrees that it shall pay to
Tenant,  on the Commencement  Date, the sum of  $1,400,000.00.  Landlord further
agrees that Tenant shall be permitted to perform "Tenant's Work" as described in
plans and specifications  previously approved by Landlord. Tenant shall complete
Tenant's Work in compliance with all applicable Laws.  Tenant  acknowledges that
Landlord has no responsibility  for any of Tenant's Work or the quality thereof.
Upon completion of Tenant's Work, Tenant shall assign to Landlord all warranties
or  guarantees  received by Tenant with respect to Tenant's  Work, to the extent
such  warranties  or  guarantees  relate to items that  Landlord  is required to
maintain under this Lease.

         3.  POSSESSION AND SURRENDER OF PREMISES.  When this Lease  terminates,
Tenant will remove from the  Premises  all of its  movable  trade  fixtures  and
equipment, inventory and other personal property, whether owned by Tenant or its
Affiliates ("Tenant's  Property").  Tenant's Property remaining more than thirty
(30) days after delivery of written notice from Landlord after such  termination
will be deemed  abandoned  and Landlord may keep,  sell or dispose of it without
any Liabilities to Tenant or its  Affiliates,  provided that Tenant shall remain
liable for any costs  associated  therewith.  Tenant  will repair all damage and
surrender  the  Premises  broom clean and in good order,  condition  and repair,
reasonable  wear and tear,  damage by fire and  casualty  and  taking by eminent
domain excepted.

                                       2


         4.       TERM.

                  4.1 PRIMARY TERM. This Lease is effective as of the date first
set forth above, and the term begins on the Commencement  Date and ends ten (10)
Lease Years after the Commencement  Date, unless terminated  earlier or extended
in  accordance  with this  Lease.  A "Lease  Year" is a period  of  twelve  (12)
consecutive   calendar   months  during  the  Lease  term,   starting  with  the
Commencement  Date;  provided,  however,  that the first Lease Year is the first
twelve  (12) full  calendar  months  plus the  partial  month (if any) after the
Commencement Date if the Commencement Date is not the first day of the month. In
addition to the rent payable for the first Lease Year,  Tenant will pay rent for
the partial calendar month (if any) after the Commencement Date. Within ten (10)
days after the  request of  Landlord or Tenant,  the  parties  shall  execute an
agreement  confirming  the  Commencement  Date of this  Lease,  and any  party's
failure to execute  such an  agreement  will not affect the actual  Commencement
Date.

                  4.2  EXTENSION  OPTIONS.  Landlord  grants to Tenant three (3)
options (the "Extension  Options") to extend the Lease term for additional terms
of five (5) years each on the same terms and  conditions  as this Lease,  except
that  there will be no  further  right to extend and except as set forth  below.
Except as specifically set forth below,  the Extension  Options can be exercised
only by Tenant  delivering  written  notice of exercise to Landlord on or before
one hundred  eighty (180) days prior to the expiration of the then current term.
If for any reason  Landlord  does not actually  receive  Tenant's  unconditional
written  notice of exercise when required,  each such option shall  nevertheless
continue  in full force and effect and shall not lapse until  fifteen  (15) days
after Landlord has notified  Tenant in writing to inquire whether Tenant desires
to exercise  such  option.  The  Extension  Options  are  personal to the Tenant
originally  named in this Lease and may not be  exercised by anyone else (except
for an assignee  pursuant to a valid  assignment of this Lease, and then only if
prior to the date for  exercise  set forth in this  Lease the  assignor  and the
assignee deliver to Landlord a jointly executed notice stating that the specific
Extension   Option  may  be   exercised   by  the   assignee;   provided   that,
notwithstanding anything to the contrary, if there is a valid assignment of this
Lease,  then  thereafter  only the assignee  will have the right to exercise any
Extension  Options and such exercise  shall be subject to the terms above).  The
Extension  Options are granted to and may be exercised on the express  condition
that, at the time of the exercise and at the beginning of each Extension  Option
period,  Tenant is not in default under the terms of this Lease. The annual base
rent for each Lease Year of each Extension Option period will be as set forth in
Exhibit C attached hereto and made a part hereof for all purposes.

                  4.3 RIGHT OF FIRST  REFUSAL.  Tenant  shall have a  continuing
right of first  refusal  to lease  additional  space in the  Building  which may
become  available  from time to time during the term of this Lease,  at the base
rent per square  foot then in effect  under the terms of this Lease and upon all
other terms and conditions hereof; provided, however, that upon Tenant's leasing
of such additional space, Landlord shall provide Tenant an improvement allowance
equal to $5.00 per square foot of rentable area contained within such additional
space;  provided that, if Tenant exercises its right of first refusal under this
Section 4.3 after the fifth (5th) Lease Year,  then such  improvement  allowance
shall be reduced by eight and  thirty-three  one-hundredths  cents ($0.0833) per
square foot of rentable area contained within the applicable  additional  space,

                                       3


multiplied  times the  number of months  after  the fifth  (5th) Lease Year that
Tenant  exercises  its right of first  refusal with respect to such space.  Such
allowance to be paid to Tenant within ten (10) days after  Tenant's  substantial
completion of such work.  At such time as Landlord  receives a third party offer
for lease of such space, Landlord shall give Tenant written notice of such third
party offer and the approximate square footage of rentable area contained in the
space  subject  thereto.  Should Tenant fail to exercise its right to lease such
available  space  within  thirty  (30) days after  receipt of such  notice  from
Landlord,  then  Landlord  shall have the right to lease the space to such third
party,  provided that Tenant shall thereafter have the right of first refusal to
lease such space  pursuant to this Section 4.3 if it is not leased to such third
party or if after such a lease it  becomes  available  again  during the term of
this Lease.

         5. RENT.  Tenant will pay to Landlord the base rent as shown in Exhibit
C in equal monthly  installments in advance  beginning on the Commencement  Date
and thereafter on the first day of each month during the term,  prorated for any
portion of a month. The term "rent" includes base rent,  additional rent and all
other amounts to be paid by Tenant under this Lease, whether or not specifically
described as rent. All rent will be paid without demand, deduction, counterclaim
or  offset  of  any  type  (except  as may be  specifically  provided  otherwise
elsewhere in this Lease) in lawful U.S. legal tender at the address provided for
Landlord in Section  1(j), or to such other person or place as Landlord may from
time to time designate.

         6.       TAXES.

                  6.1  DEFINITION  OF TAXES.  "Taxes" means all ad valorem taxes
and assessments and  governmental  charges imposed against all or any portion of
the Building or the Land.  Notwithstanding any of the foregoing to the contrary,
"Taxes"  shall not include  Landlord's  federal or state net income,  franchise,
excise, inheritance,  gift or estate taxes, or any deed stamps or documentary or
transfer taxes payable upon the Transfer of the Building.

                  6.2 PAYMENT OF TAXES.  Landlord  represents  and warrants that
all Taxes relating to the Building,  except current Taxes not  delinquent,  have
been  paid in full.  Landlord  shall  pay  promptly  when they are due all Taxes
relating to the Building.  Starting as of the  Commencement  Date and continuing
annually  thereafter  during the term,  Tenant will pay Tenant's  Percentage  of
Taxes  directly  to Landlord as  additional  rent within  thirty (30) days after
receipt from Landlord of a copy of the tax bill covering the Building; provided,
however,  that Tenant  shall not be  required  to make such  payment to Landlord
prior to the date that is ten (10) days  before  the date such  Taxes are due to
the applicable taxing authority. Taxes that are assessed during the term of this
Lease and also cover any  periods  prior to or after the term of this Lease will
be  appropriately  prorated.  Landlord shall be responsible  for any interest or
penalties caused by its delay in forwarding any tax bills to Tenant.

                  6.3  TENANT'S  TAXES.  Tenant  will  pay all tax  assessments,
license  fees and  charges  levied,  assessed  or imposed  on  Tenant,  Tenant's
business  operations and Tenant's  Property,  and Tenant will indemnify and hold
Landlord  and  its  Affiliates  harmless  from  any  Liabilities  in  connection
therewith or in connection with any non-payment thereof.

                                       4



                  6.4 CONTEST.  Tenant will have the right to contest the amount
or validity of any Taxes with the appropriate governmental authorities, provided
that (i) Tenant timely pays Tenant's Percentage of Taxes to Landlord when due or
otherwise  provides to  Landlord  reasonable  security  therefor  and  otherwise
complies with all  applicable  rules,  regulations  and other Laws in connection
with such  contest,  and (ii) Tenant pays all costs and  expenses in  connection
with such contest and neither  Landlord nor the  Premises  will,  as a result of
such  contest or any  nonpayment  of Taxes,  become  subject to any cost,  loss,
claim,  liability,  lien or encumbrance  of any type.  Tenant will indemnify and
hold Landlord and its  Affiliates  harmless from any  Liabilities  in connection
with any such contest or any  nonpayment  of Taxes.  Landlord also will have the
right to  contest  Taxes.  A pro rata  share of any  refund  or  rebate of Taxes
obtained, net of all bona fide costs and expenses incurred by either Landlord or
Tenant in connection with the contest resulting in such refund or rebate,  shall
be paid to Tenant,  within ten (10) days after Landlord's  receipt  thereof,  in
proportion  to the amount of the Taxes  paid by Tenant to which  such  refund or
rebate relates.

                  6.5  ASSESSMENTS.  If any  general  or special  assessment  is
assessed  against the Building,  Landlord  shall elect to pay the  assessment in
installments over the longest period of time allowed by applicable law, and only
those  installments (or partial  installments)  attributable to the term of this
Lease  shall be  considered  in  determining  Tenant's  tax  liability  for such
assessment.  Notwithstanding  any  provision  of  this  Lease  to the  contrary,
Landlord (and not Tenant) shall be obligated to pay any  assessment  for special
improvements  heretofore  installed or installed in connection  with the initial
development of the Building.

         7.       OPERATING COSTS.

                  7.1      DEFINITIONS.

                           (a)      "Common Areas" shall consist of all portions
of the Building  which are not occupied by tenants or held for lease to tenants.
The general term "Common  Areas"  includes all parking areas,  landscape  areas,
aisles, driveways, entrances, exits, walkways, corridors, elevators and elevator
shafts,  stairwells,  lobbies and other building areas  available for use by all
tenants of the Building, sidewalks, roadways, loading areas, lighting facilities
(if used to  illuminate  the  Common  Areas),  common  heating  and  ventilation
facilities  and  utility,  mechanical,  telephone  and electric  rooms,  surface
drainage facilities, traffic control signs and fences.

                           (b)      "Operating Costs" are all costs and expenses
reasonably  incurred in connection  with the ownership,  operation,  management,
maintenance,  repair,  restoration  and  replacement  of the Common Areas of the
Building  and  components  thereof,  together  with  a  commercially  reasonable
management  or  administrative  fee (not in any  event,  however,  to exceed the
lesser of (i) three  percent  (3%) of base rent and  other  charges  payable  by
Tenant under this Lease,  or (ii) the actual  management or  administrative  fee
charged to Landlord by the property  manager of the  Building),  provided  that,
after the fifth (5th) Lease Year,  Landlord may increase  the  limitation  under

                                       5


clause  (i) of this  sentence  to the then  prevailing  market  fee,  subject to
Tenant's  reasonable  approval  of  such  increase.  Notwithstanding  any of the
foregoing to the contrary,  "Operating Costs" shall not include expenses due to:
(1)  capital  improvements;  (2)  repairs  and  replacements,  which under sound
accounting   principles   and   practices   should  be   classified  as  capital
expenditures;  (3) painting,  redecorating or other work that Landlord  performs
for any other tenant or prospective tenant of the Building; (4) repairs or other
work (including  rebuilding)  occasioned by fire, windstorm or other casualty or
by  condemnation,  other than  reasonable  deductible  amounts under  applicable
insurance  policies,  if any; (5) any costs that are  separately  charged to and
payable by tenants or for which Landlord is compensated by insurance proceeds or
warranties; (6) leasing commissions and expenses of procuring tenants, including
lease  concessions  and  lease  take-over  obligations;  (7)  depreciation;  (8)
interest  on  and   amortization  of  debt;  (9)  Taxes  (payment  of  which  is
specifically  addressed in Article 6 above) and interest and  penalties for late
payment of Taxes,  except that personal  property  taxes  relating to items used
exclusively  in or for the  Building,  such  as  maintenance  equipment,  may be
included in Operating  Costs;  (10) rent  payable  under any lease to which this
Lease is subject;  (11) off-premises  supervisory personnel or property managers
above the title of building  manager  (subject,  however,  to the  management or
administrative  fee to be included as a part of  Operating  Costs in  accordance
with the first  sentence  of this  subparagraph);  (12)  costs and  expenses  of
enforcing  leases against  tenants,  including legal fees; (13) managing agents'
commissions  (subject,  however,  to the management or administrative  fee to be
included as a part of Operating  Costs in accordance  with the first sentence of
this  subparagraph);  (14) expenses  resulting from any violation by Landlord of
the terms of any lease of space in the  Building or of any ground or  underlying
lease or any  mortgage;  (15)  expenses for vacant or vacated  space,  including
utility,  security  and  renovating  costs  for such  space;  (16) all costs and
expenses associated with Landlord's performance of any environmental remediation
and like required  under the terms and  provisions  of this Lease;  and (17) any
costs and expenses  associated with Landlord's  compliance with Laws pursuant to
Section 11.2 below except as provided therein. In the event the Building is less
than one  hundred  percent  (100%)  occupied,  then those  Operating  Costs that
fluctuate with  occupancy  shall be deemed to equal the amount of such Operating
Costs which would have been  incurred had the Building been fully  occupied,  as
reasonably determined by Landlord and reasonably approved by Tenant.

                  7.2   PAYMENT  OF   OPERATING   COSTS.   Starting  as  of  the
Commencement  Date and continuing  annually  thereafter  during the term, Tenant
will pay Tenant's  Percentage of Operating  Costs to Landlord as additional rent
within thirty (30) days after receipt of Landlord's bill therefor.  Landlord may
make reasonable  estimates of monthly  Operating  Costs,  subject to adjustments
under Section 9.3 below.

         8.       INSURANCE.

                  8.1  TENANT'S INSURANCE.  Tenant will maintain during the term
of this Lease:

                           (a)     Commercial general liability insurance (Broad
Form CGL, or if this insurance is not then commercially  available,  the closest
equivalent), with contractual liability (including indemnities made by Tenant in
this Lease),  cross-liability  endorsements  (or the  equivalent) and fire legal
liability endorsements,  and automobile liability insurance.  The amount of this

                                       6



insurance  will  be at  least  $5,000,000.00  combined  single  limit  for  each
occurrence.  If this policy includes a "general aggregate" limit, the limit will
be at least two (2) times the combined single limit per occurrence.

                           (b)     "All  risk" casualty  insurance (or  if  this
insurance is not then commercially available, the closest equivalent),  covering
all of  Tenant's  Property  and all  Alterations  made by or for the  benefit of
Tenant.  This insurance will be for full  replacement cost (which may be subject
to standard exclusions in such policies).

                           (c)     Employer's  liability  insurance of  not less
than $500,000.00, and worker's compensation insurance in statutory limits.

                  8.2 LANDLORD'S  INSURANCE.  Landlord will maintain  during the
Lease  term  the  following  insurance  policies  (or  if any of  them  are  not
commercially  available,  the closest  equivalents):  (i) an "all risk" casualty
insurance  policy  for the  full  replacement  cost of the  Building,  including
Tenant's Work (which may be subject to standard  exclusions in such policies and
to exclusion for foundations and footings), (ii) rental loss insurance providing
coverage  for twelve (12) months (or the  longest  period not in excess  thereof
that is reasonably  commercially available) of base rent and estimated Taxes and
Operating Costs, (iii) commercial  general liability  insurance (Broad Form CGL)
of at least  $5,000,000.00  combined  single limit for each  occurrence,  with a
deductible not to exceed $10,000.00, and (iv) such other insurance policies with
commercially  reasonable  carriers in such amounts,  with such  deductibles  and
providing  protection  against such perils as may be  customarily  maintained by
prudent owners of property  similar to the Building.  All losses on all policies
maintained by Landlord  pursuant to this Article 8 will be settled in Landlord's
name (or as otherwise designated by Landlord) and proceeds will belong to and be
paid to Landlord,  except and to the extent  specifically  provided otherwise in
Exhibit E attached hereto and made a part hereof for all purposes.

                  8.3 POLICY FORM.  Tenant's commercial general liability policy
must  name  Landlord  and  Landlord's  Mortgagee  as  additional  insureds,  and
Landlord's commercial general liability policy must name Tenant as an additional
insured.  All commercial  general liability  policies  maintained by the parties
pursuant to Article 8 hereof  shall:  (i) be written on an  "occurrence"  basis;
(ii) be from insurers licensed to do business in the State of Texas and who also
maintain a rating of at least A+ by the most current Best's Key Rating Guide (or
its  equivalent,  if such Guide  ceases to be  published);  and (iii) state with
respect to both  liability  and casualty  policies  that the  insurers  will not
cancel or fail to renew the coverage without first giving any additional insured
parties at least thirty (30) days prior written notice.  Landlord and Tenant may
comply with their insurance  obligations hereunder by endorsement to any blanket
policy  of   insurance.   Landlord  and  Tenant  shall  deliver  to  each  other
certificates  issued by the  insurance  carrier or  carriers  for each policy of
insurance  required to  maintain by such party under this Lease  within ten (10)
days after written request therefor, and copies of any renewals of any insurance
policies  required by this Article 8 to be procured by one party for the benefit
of another party shall be provided to such benefitted party not less than thirty
(30) days before the expiration of the applicable coverage.

                                       7
 


                 8.4 WAIVER OF SUBROGATION.  Landlord shall cause each casualty
insurance policy required to be carried under this Lease (or actually carried by
Landlord) to be written in such a manner as to provide  that the insurer  waives
all right of recovery by way of subrogation  against  Tenant in connection  with
any loss or damage covered by that policy,  even if such loss or damage may have
been caused by the act, omission,  negligence or strict liability of Tenant, its
subtenants or assignees or any of their respective officers,  directors, agents,
employees,  contractors,  licensees,  invitees or suppliers.  Tenant shall cause
each casualty insurance policy required to be carried by Tenant under this Lease
(or  actually  carried  by  Tenant) to be written in such a manner as to provide
that the  insurer  waives all right of recovery  by way of  subrogation  against
Landlord and any other additional insureds in connection with any loss or damage
covered by that policy,  even if such loss or damage may have been caused by the
act,  omission,  negligence  or strict  liability of Landlord or the  additional
insureds or their respective general or limited partners,  officers,  directors,
agents, employees,  contractors,  licensees, invitees, suppliers,  successors or
assigns.  Neither  party  shall be liable to the other for any loss or damage to
the property of the other party caused by fire or any of the casualties  covered
by the casualty  insurance  policies  required to be maintained under this Lease
(or  actually  maintained)  by the  other  party  even if such loss or damage is
caused by the party or any of the other persons or entities  described  above in
this  clause and even if the cost of the loss or damage is below the  deductible
amount on the applicable policy or policies maintained.

         9.       BOOKS AND RECORDS; AUDITS.

                  9.1 BOOKS AND RECORD.  Landlord  shall keep good and  accurate
books and records in accordance with generally  accepted  accounting  principles
concerning  the  operation,  maintenance  and repair of the Common Areas and the
payment of Taxes.  All such books and records  shall be maintained in Landlord's
office located in Austin, Texas, and shall be kept for a period of not less than
three (3) years  after the close of the period to which  such books and  records
relate.

                  9.2 TENANT'S  AUDIT OF TAXES AND OPERATING  COSTS.  During the
Lease term (and after the Lease term,  but within one hundred  twenty (120) days
after Landlord's last invoice to Tenant), and upon at least ten (10) days' prior
written notice to Landlord, but not more than once in each calendar year, Tenant
may audit Landlord's records of Taxes and Operating Costs for any prior calendar
year in order to verify the accuracy of the Taxes and Operating Costs charged to
Tenant.  Such audit will be conducted only during  regular  business hours where
Landlord  maintains its records and by a reputable  accounting  firm or auditing
company on a non-contingent fee basis. Tenant will deliver a copy of the results
of the audit to  Landlord  within  fifteen  (15) days after  receipt  thereof by
Tenant. Except as hereinafter provided, all audits will be conducted at Tenant's
cost and expense and no subtenant  will have the right to conduct an audit,  and
no  assignee  will have the right to conduct  an audit for any  period  when the
assignee  was not in  possession  of the  Premises.  If any invoice for Taxes or
Operating  Costs  previously  furnished  Tenant shall  reflect  greater than one
hundred  three  percent  (103%) of the actual Taxes or Operating  Costs shown by
such audit, as the case may be, Landlord shall  immediately pay the cost of such

                                       8



audit for the period audited.  In any event,  Landlord shall promptly pay Tenant
all Taxes and/or Operating Costs shown by such audit to be overpaid by Tenant.

                  9.3   LANDLORD'S   REPORT.   In  addition  to  providing   the
information  described in Exhibit E, Landlord  shall prepare an annual report of
all  financial  matters  relating to this Lease  (including  with respect to Net
Proceeds  under Exhibit E).  Landlord shall deliver a copy of this annual report
to Tenant  within sixty (60) days after the end of each  calendar  year.  If the
results of an annual report made by Landlord show an underpayment or overpayment
with respect to Net Proceeds or rent paid or payable hereunder, the shortfall or
the excess,  as  applicable,  will be paid or refunded  within  thirty (30) days
after such report has been delivered to Tenant.

         10.      UTILITIES.

                  10.1 UTILITY CHARGES.  Beginning as of the Commencement  Date,
Tenant will pay when due to the furnishing  parties all charges for gas,  water,
electricity  and any other utility  services used solely on the Premises  during
the term hereof by Tenant,  based upon Tenant's  Percentage  of the  consumption
charges  covered by the  applicable  utility bill plus, so long as Tenant is not
occupying the entire Building,  actual utility charges for consumption by Tenant
after  normal  business  hours,  as  determined  by the  Building  engineer  and
reasonably approved by Landlord and Tenant.

                  10.2 UTILITY  INTERRUPTION.  Landlord will not be  responsible
for any  Liabilities  incurred by Tenant or Tenant's  Affiliates  nor may Tenant
abate rent,  terminate  this Lease or pursue any other  right or remedy  against
Landlord or Landlord's Affiliates, as a result of any termination or malfunction
of any utilities or systems except as specifically  provided  otherwise  herein,
although  this  will not be  deemed to limit in any way  Landlord's  repair  and
maintenance  obligations  under  Article  12 or its  repair  and/or  restoration
obligations  under  Articles 16 and 17 if and to the extent  applicable.  In the
event of an  interruption  in any utility  service,  Landlord  shall  diligently
pursue the  resumption  of service.  If any such  interruption  is caused by the
negligence  of or breach of this Lease by Landlord  and, as a result,  Tenant is
not able to conduct its normal level of business in the Premises, then base rent
and other charges  hereunder  shall be equitably  adjusted  during the period of
such interruption.

         11.      USE OF PREMISES.

                  11.1  TENANT'S  USE.  Tenant  will  use the  Premises  for the
purposes described in Section 1(h), but for no other purpose. In addition:

                           (a)      Tenant  shall  comply   with  all  Laws  and
insurance  requirements affecting the Premises or any use and occupancy thereof,
including,  without  limitation,  making  required  alterations  to the Premises
required by Tenant's  specific use of the Premises or by any alterations made by
Tenant thereto.  Tenant will, at its expense,  obtain and maintain all licenses,
approvals  and  variances  necessary  to  conduct  its  business  and occupy the
Premises, but none of those licenses, permits or variances will be binding on or
in any way affect or restrict Landlord or the Premises itself.

                                       9



                           (b)      Tenant may install  exterior signage  on the
Building,  as well as monument signs,  subject only to Tenant's  compliance with
applicable Laws and restrictive covenants applicable to the Building. Subject to
compliance with applicable  Laws,  Tenant may also install such interior signage
as it may deem  necessary  or  advisable.  Tenant  will be  responsible  for the
maintenance  and repair of its signage,  and on or before the expiration of this
Lease,  it will  remove its  signage  and repair  any damage  arising  from such
removal.

                           (c)      During the Lease term, unless Tenant's right
to possession is  terminated  pursuant to the express  provisions of this Lease,
Tenant and its employees will have access to the Premises twenty-four (24) hours
per day, three hundred  sixty-five  (365) days (or 366 days, as the case may be)
per year,  subject only to  emergencies,  force majeure and  necessary  repairs,
maintenance or  construction.


                  11.2 COMPLIANCE WITH LAWS.  Landlord  shall  comply  with  all
Laws,  including any changes thereto,  relating to the physical condition of and
accessibility  to all  parts of the  Premises  and the  Building,  except to the
extent any such Laws or changes  thereto  apply to Tenant's  specific use of the
Premises and not to real estate  generally or to any  alteration to the Premises
made by Tenant.  The cost of such  compliance  not relating to the  structure or
exterior of the  Building  shall be included in  Operating  Costs.  Tenant shall
comply with all Laws and changes thereto which relate to its specific use of the
Premises or to any alteration to the Premises made by Tenant.

                  11.3  ROOFTOP   COMMUNICATIONS   EQUIPMENT.   Subject  to  the
following  provisions  and to the remaining  provisions of this Article and this
Lease, Tenant may install and maintain satellite dishes and other communications
equipment  and  antennas  of  reasonable  size  on the  roof  of  the  Building.
Notwithstanding  anything to the contrary,  Tenant will be  responsible  for all
Liabilities  in  connection  with  these  satellite   dishes  and  antennas  and
associated Systems and Equipment,  including, without limitation,  installation,
removal, operation, maintenance,  insurance, taxes and other costs and fees, and
any necessary  alterations  or  improvements  to the Building or the rest of the
Premises. Tenant also will be solely responsible for securing all federal, state
and local permits in  connection  with the  installation  and operation of these
satellite  dishes  and  antennas  and for  complying  with all  applicable  Laws
relating thereto.  If any such satellite dishes and antennas are to be placed on
the roof of the Building after the  Commencement  Date,  Tenant will secure from
the  membrane  roofing  manufacturer  certification  that  the  installation  is
compatible with all design requirements and that this installation will not void
the existing roof warranty.  Tenant also will use only a manufacturer-authorized
roofing  contractor for any such installation work that requires the penetration
of the existing  membrane  roofing  system.  Within a reasonable  period of time
after the  expiration  or earlier  termination  of this  Lease,  Tenant,  at its
expense,  will remove  these  satellite  dishes or antennas  and all  associated
Systems  and  Equipment  and  repair  all  damage  arising  from  such  removal.
Notwithstanding  anything to the contrary,  Landlord will have no Liabilities in
connection  with these satellite  dishes or antennas and associated  Systems and
Equipment  (except for Liabilities  arising from the gross negligence or willful
misconduct of Landlord or its  Affiliates),  and Tenant will indemnify  Landlord
for and hold it free and  harmless  from all  Liabilities  arising  out of or in
connection  with these satellite  dishes or antennas and all associated  Systems

                                       10



and Equipment, unless the same arises from or is the result of the negligence or
willful misconduct of Landlord or its Affiliates.

         12.  MAINTENANCE  AND  REPAIRS.  Subject to  Articles 16 and 17 of this
Lease,  Landlord  will  repair  and  maintain  in good order and  condition  all
elements and components  (whether  structural or nonstructural) of the Building,
the Premises, Common Areas and Systems and Equipment, and the costs and expenses
thereof  incurred by Landlord shall  constitute  Operating  Costs (except to the
extent that any such  repairs or  maintenance  are  necessitated  from the gross
negligence or intentional  acts or omissions of Landlord or its Affiliates or as
otherwise  expressly  excluded from Operating Costs under Section 7.1(b) above).
All repairs and maintenance performed by Landlord hereunder will be performed to
Tenant's  reasonable  satisfaction in a first-class manner similar to the repair
and maintenance activities customarily undertaken by prudent owners of "Class A"
suburban office  buildings in the Austin,  Texas  metropolitan  area;  provided,
however, subject to the terms in Section 8.4 of this Lease regarding
casualties and waivers of claims for damage,  Tenant will be responsible for all
repairs  and  maintenance  resulting  from  Tenant's  Alterations  or the  gross
negligence  or  intentional  acts or  omissions  of  Tenant  or its  Affiliates.
Landlord  will  commence such repairs  within ten (10) days  following  Tenant's
notification  that  the  repairs  are  required  and  once  begun  will  proceed
diligently with such repairs.  If requested by Tenant, (i) Landlord will provide
a full-time or part-time building engineer on-site on the Premises acceptable to
Tenant to help supervise and perform Landlord's repair,  maintenance and service
obligations,  and all  costs  for such  personnel  shall be deemed to be part of
Operating Costs,  and (ii) if Tenant is dissatisfied in its reasonable  business
judgment  with the property  manager for the  Building  after prior notice and a
reasonable  opportunity  to cure,  within a reasonable  time after  request from
Tenant,  Landlord will replace such property  manager with a management  company
reasonably acceptable to Tenant.

         13.      ALTERATIONS.

                  13.1   LANDLORD'S   CONSENT.   For  purposes  of  this  Lease,
"Alterations" means Tenant's alterations,  additions, improvements,  remodeling,
repainting,  decorations or other changes (other than those constituting initial
tenant   improvements   made  as  part  of  Tenant's  Work).   Tenant  may  make
nonstructural  Alterations to the Building without Landlord's consent,  provided
that Tenant complies with this Article and the rest of this Lease and,  provided
further,  that the  Alterations  do not (i) affect the  exterior  windows of the
Building,  (ii) increase any mezzanine  areas of the Building,  (iii)  adversely
affect the  strength,  structural  integrity  or  load-bearing  capacity  of any
portion of the Building,  (iv)  materially  and adversely  affect the Systems or
Equipment  or (v)  adversely  affect  any other  tenants  of the  Building.  All
structural  Alterations  shall require  Landlord's prior written consent,  which
consent shall not be unreasonably withheld or delayed. Whether or not Landlord's
consent is  required,  Alterations  shall be subject  to the  remainder  of this
Article 13.

                  13.2 NOTICE. Tenant will notify Landlord at least fifteen (15)
days before beginning any Alterations  requiring Landlord's consent. If Landlord
shall fail to respond  to any  written  request  for  Landlord's  consent to any
Alterations,  Landlord's  consent  shall be deemed to have been given.  Together

                                       11



with  Tenant's  notice (or if notice is not required then prior to beginning the
Alterations),  Tenant  will give  Landlord  copies of any  building  permits and
approvals   obtained  by  Tenant  and  any  plans  and  specifications  for  the
Alterations  prepared  by  Tenant,  if any.  Landlord's  review or  approval  of
Tenant's plans and  specifications is solely for Landlord's benefit and will not
be  considered a  representation  or warranty to Tenant as to safety,  adequacy,
efficiency,  compliance  with  Laws or any other  matter,  or a waiver of any of
Tenant's  obligations  hereunder.  Except for items of  Tenant's  Property,  and
unless  otherwise  specifically  agreed by  Landlord  in writing in  response to
Tenant's  specific  written  request  in  each  instance  with  respect  to each
Alteration,  at the end of this Lease all Alterations  shall be surrendered with
the Premises and will be deemed to be Landlord's  property  (except for moveable
partitions  and any trade  fixtures or  equipment,  which will  remain  Tenant's
Property).

                  13.3  COMPLIANCE  WITH LAWS.  Alterations  performed by Tenant
shall comply in all respects with this Lease and  applicable  Laws and insurance
requirements. Alterations will be done in a good workmanlike manner, using first
quality  materials,  and so as not to  unreasonably  interfere  with Landlord or
other tenants in the Premises, cause labor disputes or impose any Liabilities on
Landlord. Alterations will be performed only by experienced, licensed and bonded
contractors  and  subcontractors,  and  Tenant  will cause its  contractors  and
subcontractors  to carry workmen's  compensation  insurance in statutory limits,
and commercial general liability insurance (Broad Form CGL, or if such insurance
is not then  commercially  available,  the closest  equivalent) in an amount not
less  than  $1,000,000.00  or such  higher  amount  as then  may be  customarily
demanded  by prudent  landlords,  and such  liability  insurance  shall  contain
cross-liability endorsements or the equivalent (if Landlord is to be named as an
additional insured pursuant to the provisions  hereof) and automobile  liability
insurance in the same amount,  and if such work is reasonably  estimated to cost
more than  $100,000.00  in any  instance,  Landlord  and its  general  partners,
Landlord's  Mortgagee  and the  Building  property  manager  shall  be  named as
additional insureds on such policies.

                  13.4  LIENS.  Tenant  will pay when due all  claims for labor,
materials and services claimed to be furnished for Tenant or Tenant's Affiliates
and keep the Building and the Premises free from all liens,  security  interests
and  encumbrances  based on or arising from such claims  ("Liens").  Tenant will
indemnify  Landlord for, and hold Landlord harmless from, all Liens, the removal
of all  Liens  and any  related  actions  or  proceedings,  and all  Liabilities
incurred by  Landlord in  connection  therewith.  NOTICE IS HEREBY  GIVEN TO ALL
PERSONS   FURNISHING   LABOR  OR  MATERIALS   TO  TENANT  THAT  NO   MECHANICS',
MATERIALMEN'S  OR OTHER LIENS SOUGHT ON THE PREMISES  WILL IN ANY MANNER  AFFECT
LANDLORD'S RIGHT, TITLE OR INTEREST THEREIN.

         14.      INDEMNITY; SATISFACTION OF REMEDIES

                  14.1  INDEMNIFICATION.  Notwithstanding  Section  24.11 or any
other provision of this Lease,  Tenant and Landlord (each an "Indemnitor")  will
indemnify the other (each an "Indemnitee") against, and hold Indemnitee harmless
from,  all  claims,  liabilities,  demands  or causes of action,  including  all
reasonable expenses of the Indemnitee incidental thereto, for injury to or death
of any person and, subject to Section 8.4 above,  damage to any property arising

                                       12



within or in the Building,  including the Premises,  and caused by  Indemnitor's
negligent  act or omission or the  negligent  act or omission of any employee or
agent of  Indemnitor.  The liability of  Indemnitor  to indemnify  Indemnitee as
hereinabove  set forth shall not extend to any matter  against which  Indemnitee
shall  be  effectively  protected  by  insurance,  provided  that,  if any  such
liability shall exceed the amount of the effective and collectible  insurance in
question, the liability of Indemnitor shall apply to such excess.

                  14.2  SATISFACTION  OF REMEDIES.  Notwithstanding  anything in
this  Lease or  elsewhere  to the  contrary,  Tenant  agrees  to look  solely to
Landlord's interest in the Building and the Land (including, without limitation,
any and all rents, sales proceeds and other income attributable thereto, as well
as  Landlord's  interest in liability  insurance  proceeds,  casualty  insurance
proceeds and eminent  domain  awards to the extent that such  proceeds or awards
are not paid to or retained by  Landlord's  Mortgagee  or applied in  accordance
with this Lease), to satisfy any claims, rights or remedies of Tenant hereunder,
and Landlord and its partners and their respective Affiliates, at every level of
ownership  and interest,  shall have no personal or individual  liability of any
type,  whether for breach of this Lease or  otherwise,  their assets will not be
subject to lien or levy of any type, nor will they be named  individually in any
suits, actions or proceedings of any type.

         15.  PARKING.  All parking areas on the Premises  shall be available to
Tenant and its  Affiliates  in common  with all other  tenants of the  Building.
Except for Tenant's  Percentage of Taxes and Operating Costs associated with the
parking  areas,  Tenant  will  not be  charged  for  parking.  If  necessary  in
Landlord's  reasonable judgement to protect property,  permit adequate security,
prevent  unauthorized  use or entry,  increase  safety or promote the orderly or
efficient  flow  of  traffic,  Landlord  may (i)  change  signs,  lanes  and the
direction of traffic  within the parking  areas,  (ii) change,  eliminate or add
parking spaces or areas devoted to parking  (provided  that Tenant's  parking is
not reduced),  (iii) allow parking with a  validation,  valet,  sticker or other
system, (iv) promulgate uniform and nondiscriminatory rules and regulations that
do not materially and adversely affect any of Tenant's  parking rights,  and (v)
take any other actions reasonably deemed necessary by Landlord,  as long as such
actions conform with this Lease.

         16.  DAMAGE OR DESTRUCTION.

                  16.1  REPAIRS.  Subject to the  provisions of this Article and
the  provisions  of this Lease,  Landlord will repair damage to the Premises and
the Building (including Tenant's Work) caused by fire or other casualties to the
extent insured  against (or required under the terms of this Lease to be insured
against)  under  standard  "all  risk"  casualty  policies;  provided,  however,
Landlord  shall not be  obligated  to repair  damage for which  Landlord  has no
liability if and to the extent  specifically so provided under other  provisions
of this Section or the rest of this Lease, or to repair or replace any damage to
Tenant's  Property or any Alterations  (except to the extent that damage to such
Alterations is covered by Landlord's  casualty insurance policy).  Except as may
otherwise  be  required  by then  applicable  Laws or as provided in this Lease,
Landlord will restore the damaged  portions to their prior  condition.  Landlord
will proceed  diligently to complete  repairs promptly after receiving notice of
the damage, required approvals,  building permits and licenses and the insurance
proceeds  payable on account of the damage,  all of which  Landlord  will pursue
diligently.
                                       13



                  16.2  ELECTION TO TERMINATE.

                           (a)      Landlord has the option either to (a) repair
the casualty damage in accordance with the terms of this Lease, or (b) terminate
this Lease by delivering  written notice within sixty (60) days after the damage
occurs,  if: (i) the damage  occurs  during the last eighteen (18) months of the
then current term of this Lease and, as determined by an independent third party
estimate, the repairs would take more than one-third (1/3) of the remaining term
to complete (unless Tenant validly exercises a previously  unexercised Extension
Option in  accordance  with this Lease  within 30 days after  receipt of written
notice from Landlord that Landlord intends to terminate this Lease in accordance
with this clause (i) or unless  Tenant,  within such  30-day  period,  agrees in
writing to advance all costs in excess of the insurance  proceeds made available
to Landlord,  or would be made available to Landlord had Landlord  complied with
the  provisions of Section 8.2 above,  in connection  with such casualty  damage
("Landlord's  Insurance  Proceeds") in order to complete such repairs);  or (ii)
the repairs would cost more than one hundred thirty percent (130%) of Landlord's
Insurance Proceeds (unless,  within 30 days after receipt of written notice from
Landlord that it intends to terminate this Lease in accordance  with this clause
(ii),  Tenant  agrees in writing to  advance  all costs in excess of  Landlord's
Insurance  Proceeds  in order to complete  such  repairs);  or (iii)  Tenant has
elected to terminate  this Lease in  accordance  with the  provisions of Section
16.2(b) below.  (b) In the event any casualty damage either denies Tenant access
to the Premises,  or causes more than twenty  percent (20%) of Tenant's  parking
spaces to become  unusable  (and  Landlord  cannot  replace  those  lost  spaces
promptly  and in  reasonable  proximity to the  Premises,  whether by the use of
valet parking,  or otherwise),  or causes at least thirty-five  percent (35%) of
the useable area of the Premises to become entirely  untenantable,  Tenant shall
have  the  right to  terminate  this  Lease  for such  damage  in the  following
circumstances:  (x) if Landlord elects or is required under this Lease to repair
the damage,  Landlord fails to substantially complete the repairs it is required
to make (or restore access or restore or replace parking spaces,  as applicable)
within one  hundred  eighty  (180) days after the damage  occurs (or such longer
period of time as  estimated  by Landlord  under clause (y) below if Tenant does
not  terminate  this Lease under such clause),  and Tenant  delivers its written
termination  notice to  Landlord  within  thirty (30) days after the end of such
180-day (or such  longer)  repair  period and  Landlord  fails to  substantially
complete those repairs (or restore access or restore or replace  parking spaces,
as applicable)  within thirty (30) days after  receiving such notice;  provided,
however,  if  Landlord's  repairs are deemed to be  substantially  completed (or
Landlord  has  restored  access or  restored  or  replaced  parking  spaces,  as
applicable) within such 30-day period,  Tenant's termination notice will be null
and void and this Lease will  continue in  existence;  or (y) Landlord  notifies
Tenant in writing  that the repairs  that  Landlord is required to make has been
estimated by an  independent  third party to take longer than one hundred eighty
(180) days to substantially  complete (or that Landlord cannot restore access or
restore or replace  parking spaces,  as applicable,  within 180 days) and Tenant
delivers to Landlord a written  termination notice within thirty (30) days after
receiving such third party  estimate;  or (z) such damage occurs during the last
eighteen  (18)  months  of the then  current  term of this  Lease  and  Landlord
notifies  Tenant in writing that the repairs  that  Landlord is required to make
has been estimated by an  independent  third party to take longer than one-third
(1/3) of the remaining  period until the  expiration of the current term of this

                                       14




Lease to  substantially  complete (or that  Landlord  cannot  restore  access or
restore or replace  parking  spaces,  as  applicable,  within such period),  and
Tenant delivers to Landlord a written termination notice within thirty (30) days
after receiving such third party estimate.

                  16.3 ABATEMENT OF RENT. If the Building or any portion thereof
is  damaged  by  casualty  so that it is  untenantable  for  more  than  two (2)
consecutive  business days,  base rent,  Taxes and Operating Costs will abate in
proportion to the degree to which  Tenant's use of the Premises is impaired from
the date of the damage until Landlord has substantially completed the repairs it
is  required  to make  and  gives  Tenant  access  to the  Premises,  or  Tenant
reoccupies  or can  reoccupy  the damaged  part of the  Premises,  whichever  is
earlier.  The abatement of base rent,  Taxes and Operating Costs described above
is  Tenant's  sole  remedy  and  compensation  in  connection  with any  damage,
destruction  or repairs,  except for Tenant's right to terminate as permitted in
this Article,  or unless Landlord willfully fails to complete with diligence the
repairs it is required or elects to make.

                  16.4 CONSEQUENCES OF TERMINATION.  If this Lease is terminated
pursuant to this  Article 16 or  pursuant  to Article 17 below but Tenant  holds
over in the  Premises,  then,  notwithstanding  the second to last  sentence  of
Section 24.1,  the most recent  annual base rent will not be increased,  and any
abatement of rent that applied prior to the  termination  will continue to apply
to the same extent and for the same period that it would have
absent the termination;  provided,  however,  the remainder of Section 24.1 will
continue to apply. Notwithstanding anything to the contrary, after a termination
of this Lease  pursuant to this Article 16 or pursuant to Article 17 below,  (i)
Tenant shall remove  Tenant's  Property  from the Premises as soon as reasonably
practicable,  but in any event  within  sixty (60) days after such  termination;
(ii) Tenant shall cooperate with Landlord,  at Tenant's expense, to minimize any
interference  with  Landlord's  activities  on  the  Premises;  and  (iii)  upon
Landlord's  written request,  Tenant shall immediately remove (or relocate to an
unaffected part of the Building,  if any, or the Premises) the items of Tenant's
Property specified by Landlord if, in Landlord's good faith belief, such removal
or  relocation is necessary to avoid the risk of  additional  damage,  injury or
death or to comply  with  applicable  Laws,  and if Tenant does not so remove or
relocate  those items of Tenant's  Property as so required  within  fifteen (15)
days after  Landlord's  written  request  therefor,  those items shall be deemed
abandoned  by Tenant  and  Landlord  shall  have all of the  rights set forth in
Article 3.

                  16.5  RECONSTRUCTION   COSTS.  For  purposes  of  this  Lease,
"Reconstruction  Costs" means the costs  advanced by Tenant,  if any, to perform
Landlord's  repairs  up to  the  same  level  of fit  and  finish  that  existed
immediately  prior to the  casualty  damage  if and to the  extent  that  Tenant
specifically  has been  granted  the right in this  Article 16 to  advance  such
costs.  Reconstruction  Costs  shall not  include any costs to repair or replace
Tenant's  Property or any  Alterations,  nor any advances that are  subsequently
repaid to Tenant (whether by insurance or otherwise).

         17.      CONDEMNATION.

                           (a)      If all or substantially  all of the Premises
is condemned,  taken or  appropriated  by any public or  quasi-public  authority

                                       15



under the power of eminent domain,  police power or otherwise,  or if there is a
conveyance in lieu thereof  ("Condemned" or a  "Condemnation"),  this Lease will
terminate as of the day before the Condemnation.

                           (b)      If more than  twenty-five percent  (25%)  of
the usable area of the  Premises  is  Condemned,  either  Landlord or Tenant may
terminate this Lease as of the day prior thereto by delivering written notice to
the other within fifteen (15) days after the effective date of the Condemnation.
Tenant also will have the right to terminate  this Lease subject to the terms of
and in the manner described in clauses (x), (y) and (z) of Section 16.2(b) above
if the Condemnation  denies Tenant access to the Premises or effectively renders
the Premises  untenantable  in the same  manner,  to the same extent and for the
same  periods as a casualty as described  in those  clauses,  or at least twenty
percent (20%) of Tenant's  parking  spaces are Condemned and are not restored or
replaced by  Landlord  and the ratio of the number of  Tenant's  parking  spaces
Condemned  compared to the rentable  area of the Building  Condemned at the same
time (if any) is  materially  greater than the ratio of Tenant's  total  initial
parking spaces  compared to the initial  rentable area of the Building,  in each
case effective as of the date of Condemnation.

                           (c)      If part of  the  Premises is  Condemned  and
this Lease is not terminated,  Landlord will make the necessary repairs so that,
to the extent reasonably possible,  the remaining part of the Premises will be a
complete architectural unit. Otherwise, Landlord's restoration will be conducted
as described in Section 16.1 above, as applicable, except that Landlord will not
be required to begin repairs until it receives any necessary approvals, building
permits and licenses and substantially all of the proceeds of any awards granted
for the  Condemnation,  and then will proceed  promptly and diligently with such
repairs.  As of the later of the date of Condemnation or the date the condemning
authority requires possession, base rent will abate in proportion to the area of
the Building  Condemned.  Except for Tenant's rights to receive its share of Net
Proceeds  as set forth in  Exhibit E, all  proceeds,  income,  rent,  awards and
interest in connection with any  Condemnation  will belong to Landlord,  whether
awarded as compensation  for the unexpired  portion of this Lease, or otherwise.
Except for  Tenant's  right to receive  Net  Proceeds as set forth in Exhibit E,
Tenant waives all claims  against  Landlord and the  condemning  authority  with
respect  thereto,  and in connection  with a  Condemnation,  but nothing in this
Article  shall  prevent  Tenant  from  bringing a separate  action  against  the
condemning  authority for its leasehold  improvements,  moving costs or for lost
goodwill.

         18.      ASSIGNMENT AND SUBLETTING.

                  18.1 LANDLORD'S CONSENT REQUIRED. Except as otherwise provided
in this  Article 18,  Tenant may not assign this Lease or sublease  greater than
fifty percent  (50%) of the Premises  (collectively,  a "Transfer")  without the
express  written  consent of Landlord  (which consent shall not be  unreasonably
withheld) and otherwise  complying  with this Article,  and any attempt to do so
without  such  consent and  compliance  will be null and void  unless  otherwise
specifically elected by Landlord in writing.

                  18.2 NOTICE.  Tenant will notify  Landlord in writing at least
thirty  (30)  days  before  any  proposed  or  pending  Transfer  (or as soon as
reasonably possible in the case of the Transfer pursuant to Section 18.5(c), but

                                       16



in any  case  before  such  a  Transfer)  and  will  deliver  to  Landlord  such
information as Landlord may reasonably  request in connection  with the proposed
or pending Transfer and the proposed transferee,  including, without limitation,
(i) a copy of the proposed Transfer documents, (ii) current financial statements
of the transferee,  and (iii) other reasonably  available financial  information
about the proposed  transferee and the type of business and business  history of
the proposed transferee. The financial information received by Landlord from the
transferee will be treated as confidential  information,  unless the information
is otherwise  publicly  available or is obtained by Landlord from other sources,
and in any event  Landlord may  disclose it to  Landlord's  lenders,  attorneys,
accountants,  prospective  purchasers and their agents, to be treated by them as
confidential to the same extent as by Landlord.

                  18.3  REASONABLE  CONSENT.   Landlord  will  not  unreasonably
withhold or delay its consent to a Transfer.  Landlord shall consent or withhold
such consent by written  notice to Tenant  within  fifteen (15) days of Tenant's
written request for Landlord's consent. If Landlord fails to respond to Tenant's
request within such 15-day period, Landlord shall be deemed to have consented to
such  Transfer.  Tenant  agrees  that  Landlord's  withholding  of  consent to a
proposed  sublease  or  assignment  will be  deemed  reasonable  if Tenant is in
default under this Lease or any of the other  material  terms and  conditions of
this Article have not been  complied  with, or if (i) the subtenant or assignee,
in Landlord's  reasonable business judgment,  is not reasonably  creditworthy or
does not have the independent financial ability to perform its obligations under
its assignment or sublease (which ability shall be deemed satisfied if the
subtenant  or assignee has a net worth at least equal to Tenant's as of the date
of the intended Transfer), or (ii) such subtenant or assignee is then subject to
any bankruptcy or  reorganization  plan,  proceeding or order,  or a receiver is
managing its affairs or assets.

                  18.4 RELEASE OF TENANT.  Whether or not Landlord consents,  no
Transfer  shall release or alter any of the  assignor's or Tenant's  Liabilities
hereunder,  including,  without limitation, the joint and several obligations of
the  assignor  and  Tenant  to  pay  rent  and  perform  all of  Tenant's  other
obligations  under  this  Lease,  except  that,  provided  that there is then no
default by Tenant under this Lease, but  notwithstanding any other provisions of
this Lease to the contrary,  Tenant or the applicable  assignor will be released
(a "Released Assignor") from further obligations under this Lease as of the date
that the following conditions are satisfied:

                           (a)      There is a valid assignment of this Lease by
the  assignor  in  accordance  with the  terms of this  Article  to an  assignee
(including a Permitted Assignee) who has a net worth and financial capability at
least equal to those possessed by Tenant as of the Commencement Date.

                           (b)      The   assignee   (including    a   Permitted
Assignee)  unconditionally  assumes in writing for Landlord's benefit this Lease
and all of the assignor's and Tenant's  Liabilities  arising after the effective
date of such assignment.

         The  acceptance  of rent by Landlord  from any person other than Tenant
shall not act as a waiver by  Landlord  of any of its rights or  remedies  under
this  Article,  and consent to one Transfer  will not be deemed to be consent to
any subsequent Transfer.  If Tenant or any transferee defaults under this Lease,

                                       17



Landlord may proceed  directly  against the  transferee  and/or  against  Tenant
and/or  against  the  transferor  (providing  the  same  has not  been  released
hereunder)  without  proceeding  or exhausting  its remedies  against the other.
Except to the  extent  expressly  permitted  otherwise  hereunder,  Tenant and a
transferor  will not be relieved of any  Liabilities  under this Lease if and to
the extent that  Landlord  grants or consents to any waivers under this Lease to
or for the benefit of any transferee (but if, prior to a breach by Tenant or any
transferee,  Landlord waives in writing the performance by the transferee of any
obligation that Tenant  otherwise would be required to perform under this Lease,
that waiver  also shall apply with  respect to Tenant,  or such  transferor,  as
applicable). Landlord's waivers with respect to a transferee will not affect the
rights  (if  any) of  Tenant  or the  transferor  (as  applicable)  against  the
transferee  for any breach of this Lease or any  assignment,  sublease  or other
agreement (as  applicable) by the  transferee;  provided,  however,  all of such
rights  against the  transferee  will be subject and  subordinate  to Landlord's
rights under this Lease  against the  transferee in the event of a default under
this Lease.

                  18.5     ADDITIONAL TERMS.

                           (a)      This Article is binding on and will apply to
every transferee, at every level. The surrender of this Lease or its termination
will  not be a  merger,  but  Landlord  will  have the  right  in its  arbitrary
discretion  (subject to any  non-disturbance  and attornment  agreements entered
into by Landlord) to terminate all  subleases  and the  occupancy  rights of all
transferees.

                           (b)      An assignee will  be deemed to  have assumed
all of Tenant's  Liabilities  under this lease and will be deemed to be bound by
this Lease,  and the assignee will indemnify  Landlord and hold it harmless from
all Liabilities in connection with the assignment,  although this indemnity will
not affect any  liability  that  Landlord owes to Tenant or others if and to the
extent  specifically  set  forth  in the  terms  of this  Lease,  and it is also
understood that any assignee's  Liabilities and indemnities  relating to the use
and  occupancy  of the  Premises  will remain as set forth in this Lease and any
amendments  thereto.  To confirm the foregoing,  a prospective  assignee will be
required to execute and  deliver to  Landlord a written  assumption  of Tenant's
Liabilities  under this Lease and the indemnity  described above. Any unreleased
assignor and the assignee will be deemed to be jointly and severally  liable for
all Liabilities of the Tenant under this Lease.

                           (c)      Without  Landlord's   consent,  Tenant   may
sublease up to fifty percent (50%) of the Premises. A sublease will be deemed to
be  subject  and  subordinate  to this  Lease in all  respects;  Tenant  and the
subtenant will indemnify  Landlord and hold it harmless from all  Liabilities in
connection  with the  sublease  (although  this  indemnity  will not  affect any
liability  that  Landlord  owes  to  Tenant  or  others  if and  to  the  extent
specifically  set forth in the terms of this Lease,  and it is  understood  that
Tenant's  Liabilities and  indemnities  relating to the use and occupancy of the
Premises  remain as set forth in this  Lease and any  amendments  thereto);  the
subtenant will acquire no rights or claims against  Landlord or its  Affiliates;
if this Lease is terminated or Landlord  rightfully  reenters or repossesses the
Premises,  Landlord may  terminate the  sublease,  or at its option,  become the
sublessor  under the sublease  and the  subtenant  will attorn to Landlord,  but
Landlord  will not be liable  for  Tenant's  acts or  omissions  or bound by any
amendment  to the  sublease  made  without  Landlord's  prior  written  consent.

                                       18



Sublessees will not have the right or power to make further  Transfers,  and any
attempt to do so will be null and void unless otherwise  specifically elected by
Landlord in writing.

                           (d)      Notwithstanding  anything  to  the  contrary
herein  contained,  an assignment or sublease by Tenant to (i) an entity that is
controlled  by,  controls  or is under  common  control  with Tenant (a "Control
Party"), (ii) an entity resulting from a merger, consolidation or reorganization
with Tenant,  (iii) a purchaser of substantially  all of the assets or shares of
Tenant, or (iv) any partnership  greater than fifty percent (50%) of which shall
be owned by Tenant or a Control Party,  provided Tenant or such Control Party is
a general partner,  will be deemed to be a permitted assignment or sublease,  as
applicable,  that does not require Landlord's or Landlord's Mortgagee's consent,
provided that the rest of this Article is complied with and the  transferee  (if
an assignee)  unconditionally assumes this Lease and all of Tenant's Liabilities
in writing (and such transferee  will be a "Permitted  Assignee" or a "Permitted
Sublessee," as applicable).

                           (e)      An  assignee pursuant to a  valid assignment
and assumption of this Lease in accordance  with the terms of this Article shall
be  regarded  as the  Tenant  under  this  Lease  with  all of  the  rights  and
Liabilities  of the Tenant,  except as otherwise  specifically  provided in this
Lease, but this shall not affect the assignor's  continuing liability under this
Lease as set forth in Section 18.4.

         19.      MORTGAGEE PROTECTION.

                  19.1  SUBORDINATION AND ATTORNMENT.  Prior to the Commencement
Date, Landlord shall obtain from the current holder of any Superior Mortgage (as
defined  in  Section  24.2)  a  subordination,  non-disturbance  and  attornment
agreement  (an  "SNDA")  providing,  among  other  things,  that the holder will
recognize Tenant's lease of the Premises hereunder and will not disturb Tenant's
quiet  possession  of the  Premises  as long as Tenant is not in  default  under
provisions of this Lease. Any SNDA furnished by Landlord or Landlord's mortgagee
under any  Superior  Mortgage  ("Landlord's  Mortgagee")  shall  materially  and
substantively   conform  to  form   attached  as  Exhibit  D  attached   hereto.
Notwithstanding  the foregoing,  Landlord's  Mortgagee may elect that this Lease
will be superior to a Superior  Mortgage,  regardless  of the date of recording,
and Tenant  will  execute an  agreement  confirming  this  election  on request.
Landlord  further  agrees  that,  before it shall have the right to subject  and
subordinate  this Lease to the lien of any mortgages or deeds of trust hereafter
placed upon Landlord's interest in the Building or the Premises,  Landlord shall
have first secured for Tenant's  benefit a written SNDA in the form set forth in
Exhibit D.

                  19.2 MORTGAGEE'S LIABILITY. The obligations and Liabilities of
Landlord,  Landlord's  Mortgagee or their successors under this Lease will exist
only if and for so long as each of these  respective  parties  owns fee title to
the Premises or is the lessee under a ground lease of the Premises.

                  19.3  MORTGAGEE'S  RIGHT TO CURE.  No act or omission (if any)
which otherwise  entitles Tenant under the terms of this Lease or by any Laws to

                                       19



be released from any Lease obligations or to terminate this Lease will result in
such a release or  termination  unless Tenant first gives written  notice of the
act or omission to Landlord and Landlord's Mortgagee and those parties then fail
to correct  or cure the act or  omission  within a  reasonable  time  thereafter
(which will not be less than thirty  (30) days and which,  in any case,  will be
long  enough to allow  Landlord's  Mortgagee  sufficient  time  within  which to
complete such a correction  or cure in a  commercially  reasonable  and diligent
manner).  Nothing  in this  Section  or the rest of this  Lease  shall  obligate
Landlord's Mortgagee to correct or cure any act or omission or is meant to imply
that  Tenant  has the right to  terminate  this  Lease or be  released  from its
obligations  except as may  otherwise be  permitted  in this Lease  (although if
Landlord or Landlord's  Mortgagee fails to cure as set forth above, then nothing
in this  clause  shall  prevent  Tenant  from  exercising  any of its rights and
remedies  as  specifically  set forth in this  Lease).  Landlord  will (and upon
Tenant's written request shall), and/or Landlord's Mortgagee may, give notice to
Tenant in writing of the  identity of any  mortgagee  of the Premises and Tenant
may rely on such notice(s) in complying with this Article.

         20.      ESTOPPEL CERTIFICATES; FINANCIAL STATEMENTS.

                  20.1  ESTOPPEL  CERTIFICATES.  Landlord and Tenant will,  from
time to time,  within twenty (20) days after written request by the other (which
request will be made in accordance with Section  24.16),  execute and deliver an
estoppel certificate in form reasonably  satisfactory to the requesting party or
its designees which will certify (except as may be
truthfully and accurately  noted to the contrary  therein) such information that
is available to such party  concerning  this Lease or concerning the other party
hereto or its Affiliates as the requesting party or its designees may reasonably
request.

                  20.2 FINANCIAL  STATEMENTS.  Within ninety (90) days after the
end of each  fiscal  year of Tenant  that falls  within the term of this  Lease,
Tenant will prepare  and/or  obtain,  at no cost or expense to Landlord,  annual
financial statements for Tenant, including, without limitation, a balance sheet,
income  statement  and  statement  of sources and uses of funds (the  "Financial
Statements"). Within ten (10) days after Landlord's written request from time to
time,  Tenant  shall  deliver  to  Landlord  (and if  requested,  to  Landlord's
Mortgagee) copies of the most recent annual and quarterly Financial  Statements,
whether or not audited (provided, however, that for so long as Tenant and/or the
assignee and/or the sublessee is a public company, such public company shall not
be required  to release  its  Financial  Statements  to  Landlord or  Landlord's
Mortgagee  until it releases them or is permitted to release them to the public,
whichever is earlier).

         21. DEFAULT. The occurrence of one or more of the following events will
be a default by Tenant  under  this  Lease:  (a) the  failure to pay rent or any
other required amount within ten (10) days after written notice that the payment
is due, but even if Tenant has not paid in full within the first 10-day  period,
Tenant  will not be in  default  unless it fails to pay in full  within ten (10)
days after an additional written notice that payment is due (except that no such
additional  notice  will be  required  if Tenant has failed to pay rent when due
more than twice in any twelve (12) month  period);  (b) upon an occurrence of an
event  described  in Article  23; or (c) the  failure to observe or perform  any

                                       20



other  obligation,  term or condition of this Lease which  continues  for thirty
(30)  days  after  Landlord  provides  Tenant  written  notice  of such  failure
(provided  that, if more than thirty (30) days are reasonably  required to cure,
Tenant  will not be in default if Tenant  promptly  begins to cure  within  such
30-day period and then diligently completes the cure as soon as possible).

         22.      REMEDIES FOR DEFAULT.

                  22.1 GENERAL.  If Tenant  defaults under this Lease,  Landlord
may at any time thereafter, with or without any further notice or demand, do any
or all of the following in its  arbitrary  discretion:  (a) give Tenant  written
notice stating that the Lease is  terminated,  effective on the giving of notice
or on a date stated in the notice,  as Landlord  may elect,  in which event this
Lease will terminate without further action;  (b) in any manner permitted by law
or  this  lease,  and  with or  without  further  notice,  and  with or  without
terminating  this Lease,  terminate  Tenant's  right of possession and enter and
repossess the  Premises,  and expel Tenant and Tenant's  Affiliates,  and remove
their property and effects, without being guilty of trespass; and (c) pursue any
other right or remedy now or hereafter available to Landlord under this Lease or
at law or in equity.

                  22.2     TENANT'S OBLIGATIONS.  If Tenant defaults:

                           (a)      All rent due at the time of the default will
be paid  immediately and Tenant also will pay such reasonable  costs as Landlord
may incur for attorneys' fees, inspection fees and brokerage fees (to the extent
allocable  to the current  Lease  term),  and for  putting the  Premises in good
order, condition and repair (fire and casualty excepted, and not including costs
to improve the Premises for a new tenant except to the extent property amortized
over the balance of the term of this Lease).

                           (b)      Landlord  shall  use  reasonable  efforts to
relet  the  Premises  on  terms  satisfactory  to  Landlord  in  its  reasonable
discretion,  either in its own name or otherwise, for a term or terms which may,
at Landlord's option, be more or less than the balance of the term of this Lease
and  pursuant  to one or  more  leases,  and  Landlord  may  grant  commercially
reasonable concessions, tenant allowances and/or free rent, among other things.

                           (c)      Whether or not the  Premises are  relet, but
subject to the terms of Subsection 22.2(d) below,  Tenant will pay punctually to
Landlord all of the rent and other sums and perform all of Tenant's  obligations
for the  remainder of the then current term of this Lease in the same manner and
at the same times as if this Lease had not been terminated.

                           (d)      If Landlord relets  the  Premises, the  date
that the new tenant  begins to pay base rent to Landlord  will be referred to as
the "New Rent Payment Date." Subject to the rest of this Subsection, Tenant will
be entitled to a credit (the "Credit")  against the amounts owed by Tenant under
this Article in an amount equal to: (a) the total rent stream payable by the new
tenant to Landlord only for the period starting on the New Rent Payment Date and
ending on the expiration  date of the then current term of this Lease;  less (b)
the reasonable costs and expenses  incurred by Landlord to relet the Premises to
such new Tenant  (including,  without  limitation,  marketing fees and brokerage

                                       21



fees to the  extent  allocable  to the then  remaining  term of the  Lease,  and
reasonable  legal fees and costs to repair and improve the Premises for such new
tenant).  The Credit to be  received  by Tenant  will never  exceed the  amounts
actually owed by Tenant to Landlord  under this Article and Landlord will not be
required  to pay any  amounts  to Tenant by reason of the  Credit.  Neither  the
Credit nor any other  credit  will be given to Tenant for any rent  received  or
projected to be received from any reletting for any period after the  expiration
date of the then current term of this Lease.

                           (e)      At  Landlord's  option,   Landlord  may,  by
written notice to Tenant at any time after Tenant's  default,  elect to recover,
and Tenant will  thereupon  pay, as liquidated  damages,  an amount equal to the
total rent stream which would have accrued to Landlord  under this Lease for the
remainder  of the then  current  Lease term,  net of any Credit due Tenant under
Subsection 22.2(d) above (or a deemed Credit for the rental value of any portion
of the Premises not relet at such time),  discounted  to the date of  Landlord's
election at the then prime rate designated in the Wall Street Journal,  plus all
of the unpaid expenses described in Sections 22.2(a) and 22.2(f).

                           (f)      Without   limiting  any   of  the  foregoing
provisions,  and in  addition  to any other  amounts  that  Tenant is  otherwise
obligated to pay,  Tenant agrees that Landlord may recover from Tenant all costs
and  expenses,  including  reasonable  attorneys'  fees and costs,  incurred  by
Landlord in enforcing this Lease from and after Tenant's default.

                  22.3  PERFORMANCE BY LANDLORD.  If Tenant fails to perform any
of its obligations under this Lease beyond any applicable cure period, Landlord,
without waiving or curing the default or failure, may, but will not be obligated
to, perform  Tenant's  obligations for the account and at the expense of Tenant.
Landlord will provide  Tenant with thirty (30) days' prior written notice before
performing Tenant's obligations,  but if Landlord believes that such actions are
necessary due to an emergency or to prevent damage or injury or protect  health,
safety or property,  Landlord  need not give notice before  performing  Tenant's
obligations.  Tenant  will pay on  demand  all  reasonable  costs  and  expenses
incurred by Landlord  in  connection  with  Landlord's  performance  of Tenant's
obligations.

                  22.4  POST-JUDGMENT  INTEREST.  The  amount  of  any  judgment
obtained by Landlord  against Tenant or by Tenant against  Landlord in any legal
proceeding  arising out of a default under this Lease will bear  interest  until
paid at the then applicable prime rate of interest  published in the Wall Street
Journal,  plus  three  percent  (3%),  or the  maximum  rate  permitted  by law,
whichever is less.  Notwithstanding  anything to the  contrary  contained in any
Laws,  with  respect  to any  damages  that  are  certain  or  ascertainable  by
calculation,  interest  will  accrue  from the day that the right to the damages
vests  in  Landlord  or  Tenant,  as the  case  may be,  and in the  case of any
unliquidated claim, interest will accrue from the day the claim arose.

                  22.5  LANDLORD  DEFAULT.  In  addition  to all other  remedies
available to Tenant  under this Lease or at law or in equity,  Tenant shall have
the right,  but not the  obligation,  to perform an obligation  that Landlord is
otherwise  required to perform under this Lease (the "Right of Self Help") under
the circumstances set forth below:

                                       22




                           (a)      If  Landlord   fails  to   commence  or   to
diligently  perform such  obligation as and when required under this Lease,  and
such failure  continues for thirty (30) days after written notice from Tenant to
Landlord  of such  failure  (but if more than  thirty  (30) days are  reasonably
required to cure, Landlord will be deemed to have cured if it promptly begins to
cure within the 30-day period and then diligently  completes the cure as soon as
reasonably  possible),  and Tenant provides an additional notice to Landlord and
Landlord's Mortgagee that it intends to perform such obligation,  and thereafter
Landlord and Landlord  Mortgagee fail to commence such cure within five (5) days
after  receiving  Tenant's  notice of its  intention to so perform or thereafter
fails to diligently pursue such cure to completion.

                           (b)      If  the  failure  to perform such obligation
would  result in an  emergency  condition if not  remedied  promptly  (i.e.,  an
imminent and substantial  risk of significant  additional  property  damage,  or
personal  injury or death)  and  Landlord  fails to  commence  to  perform  such
obligation within twenty-four (24) hours after receiving Tenant's notice of such
emergency  condition  (and in such case Tenant shall  exercise its Right of Self
Help only if and to the extent  reasonably  necessary  to remedy  the  emergency
condition,  and as soon as there no longer  is an  emergency  condition,  Tenant
shall not have the right to continue to exercise the Right of Self Help pursuant
to this Subsection (ii)).

         The  reasonable  cost  incurred  by  Tenant  in  performing  Landlord's
obligations  hereunder  shall be payable from  Landlord to Tenant upon  Tenant's
written demand  therefor.  If Landlord fails to reimburse Tenant within ten (10)
days after  Tenant's  demand for the  reasonable  cost of performing  Landlord's
obligation or if any other monetary  obligation  from Landlord to Tenant remains
unpaid after the date payment of such  obligation is due, then Tenant shall have
the right to deduct any such amounts owing from Landlord,  plus interest thereon
at the rate of interest described in Section 22.4 above, from base rent or other
charges due or to become due Landlord
under this Lease.  If Tenant has not  received  or received  credit for all such
amounts and interest thereon at the expiration of the term of this Lease, Tenant
may,  at its  option,  extend  the  term of this  Lease on the  same  terms  and
conditions then in effect until all such amounts and interest  thereon are fully
paid by  application  of all base rent and other  charges  accruing  during such
extended term.

         23.      BANKRUPTCY OR INSOLVENCY.

                  23.1  TENANT'S  INTEREST NOT  TRANSFERABLE.  Neither  Tenant's
interest in this Lease nor any estate hereby  created in Tenant nor any interest
herein or therein  will pass to any  trustee or  receiver  or  assignee  for the
benefit of creditors or otherwise by operation of law except as may specifically
be provided pursuant to the Bankruptcy Code, 11 U.S.C.  Section 101 et seq. (the
"Bankruptcy Code").

                  23.2  DEFAULT AND TERMINATION. If:

                        (a)      Tenant commences any case,  proceeding or other
action seeking reorganization, arrangement, adjustment, liquidation, dissolution
or  composition  of it or its  debts  under  any  law  relating  to  bankruptcy,

                                       23



insolvency,  reorganization  or relief of debtors,  or seeking  appointment of a
receiver,  trustee, custodian or other similar official for it or for all or any
substantial part of its property; or

                        (b)      Any case,  proceeding or  other action  against
Tenant is commenced  seeking to have an order for relief  entered  against it as
debtor,  or  seeking  reorganization,   arrangement,   adjustment,  liquidation,
dissolution  or  composition  of it or its  debts  under  any  law  relating  to
bankruptcy,  insolvency,   reorganization  or  relief  of  debtors,  or  seeking
appointment of a receiver,  trustee,  custodian or other similar official for it
or for all or any substantial part of its property, and such case, proceeding or
other action  remains  undismissed  or unstayed for a period of sixty (60) days,
then it will be a default  hereunder  and this  Lease  and all  rights of Tenant
hereunder  will  automatically  cease and terminate as if the date of such event
were the  original  expiration  date of this  Lease and Tenant  will  vacate and
surrender the Premises but will remain liable as herein provided.

                  23.3     RIGHTS AND OBLIGATIONS UNDER THE BANKRUPTCY CODE.

                           (a)    Upon the  filing of  a petition  by or against
Tenant under the Bankruptcy Code, Tenant, as debtor and as debtor in possession,
and any  trustee  who may be  appointed  agree as  follows:  (i) to perform  all
obligations  of Tenant  under this  Lease,  including,  but not  limited to, the
covenants  regarding the  operations and uses of the Premises until such time as
this  Lease  is  either  rejected  or  assumed  by order  of the  United  States
Bankruptcy  Court; (ii) to pay monthly in advance on the first day of each month
as reasonable compensation for use and occupancy of the Premises an amount equal
to all base rent and other rent  otherwise due pursuant to this Lease;  (iii) to
reject or assume this Lease  within  sixty (60) days of the filing of a petition
under  any  Chapter  of the  Bankruptcy  Code  or  under  any  Law  relating  to
bankruptcy, insolvency,  reorganization or relief of debtors (any such rejection
being deemed an automatic  termination of this Lease);  (iv) to give Landlord at
least thirty (30) days prior written  notice of any  proceeding  relating to any
assumption  of this Lease;  (v) to give at least thirty (30) days prior  written
notice of any abandonment of the Premises (any such  abandonment  being deemed a
rejection and automatic  termination of this Lease), unless the Bankruptcy Court
has otherwise extended the period for acceptance or rejection; (vi) to all other
things of benefit to Landlord  otherwise  required under the Bankruptcy  Code or
under any Law relating to bankruptcy,  insolvency,  reorganization  or relief of
debtors;  (vii) to be deemed  to have  rejected  this  Lease in the event of the
failure to comply  with any of the above;  and (viii) to have  consented  to the
entry of an order by an appropriate United States Bankruptcy Court providing all
of the above, except that if and to the extent that any of the above provisions,
if enforced,  would violate the  Bankruptcy  Code then in  existence,  then such
provisions shall be conformed to the Bankruptcy Code then in existence.

                           (b)    No default under this Lease by Tenant,  either
prior to or  subsequent to the filing of such  petition,  will be deemed to have
been waived unless expressly done so in writing by Landlord.

                                       24



                           (c)    Included within and  in addition to  any other
conditions or  obligations  imposed upon Tenant or its successor in the event of
assumption  and/or  assignment are the  following:  (i) the cure of any monetary
defaults and the reimbursement of pecuniary loss by the time of the entry of the
order approving such assumption and/or assignment  (pecuniary loss will include,
without  limitation,  any  attorneys'  fees and costs and  expert  witness  fees
incurred by  Landlord  in  protecting  its rights  under this  Lease,  including
representation of Landlord in any proceeding commenced under the Bankruptcy Code
or under any Law relating to bankruptcy, insolvency, reorganization or relief of
debtor);  (ii) the deposit of an additional  sum equal to three (3) months' base
rent;  (iii) the use of the Premises  only as set forth in this Lease;  (iv) the
reorganized  debtor or  assignee  of such  debtor in  possession  or of Tenant's
trustee demonstrates in writing that it has sufficient background including, but
not limited to,  substantial  experience  in operating  businesses in the manner
contemplated in this Lease and meet all other reasonable criteria of Landlord as
did Tenant  upon  execution  of this  Lease;  (v) meet all other  criteria of 11
U.S.C. Section 365(b)(3);  and (v) the prior written consent of any mortgagee to
which this Lease has been assigned as collateral security; and (vi) the Premises
at all times remains a single unit and no Alterations or physical changes of any
kind may be made unless in  compliance  with the  applicable  provisions of this
Lease,  except  that if and to the extent that any of the above  provisions,  if
enforced,  would  violate  the  Bankruptcy  Code  then in  existence,  then such
provisions shall be conformed to the Bankruptcy Code then in existence.

                           (d)    Any person or  entity  to whom  this  Lease is
assigned  pursuant  to the  provisions  of the  Bankruptcy  Code  will be deemed
without further act or deed to have assumed all of the obligations arising under
this Lease on or after the date of such assignment.  Any such assignee will upon
demand execute and deliver to Landlord an instrument confirming such assumption.

                  23.4  CONSTRUCTION.  The  terms  of  this  Article  will be in
addition to, but not exclusive of, any rights or remedies of Landlord in Article
22 and elsewhere in this Lease or otherwise  available at law or in equity,  and
will not be deemed to limit Landlord, except as may be required by law.

         24.      GENERAL PROVISIONS.

                  24.1 HOLDING  OVER.  Tenant will not hold over in the Premises
after the end of the Lease term  without the express  prior  written  consent of
Landlord, which may be withheld arbitrarily; provided, however, if Tenant is not
then in default, Tenant may extend the Lease Term for a period not to exceed six
(6) months on the same terms and  conditions,  provided that Tenant  delivers an
extension  notice to Landlord at least twelve (12) months  before the end of the
then  current  Lease  term and  specifies  in that  notice  the  length  of such
extension  period.  If Tenant validly  exercises this extension  right, the term
will be deemed extended for the period  specified in Tenant's  notice,  and such
extension  will be part of the Lease term and will not be  considered  a holding
over by Tenant,  but there will be no further extension  rights.  This extension
right  is  applicable  only at the end of the  Lease  term,  as the  same may be
extended.  Subject to the  foregoing,  if any  tenancy  is  created by  Tenant's
holding over, the tenancy will be a tenancy at sufferance terminable immediately
at Landlord's sole option on written notice to Tenant,  but otherwise subject to
the terms of this Lease,  except  that the most recent  annual base rent will be

                                       25



increased by  twenty-five  percent  (25%) (except as  specifically  set forth in
Section 16.4). Nothing in this Article or elsewhere in this Lease permits Tenant
to hold over or in any way limits Landlord's other rights and remedies if Tenant
holds over (except as specifically set forth in 16.4).

                  24.2 ENTRY BY LANDLORD.  Upon prior written  notice to Tenant,
Landlord and its designated representatives, during normal business hours, shall
have the right to enter the  Premises,  and Landlord will retain (or be given by
Tenant) keys to unlock all the doors to or within the Building,  excluding doors
to Tenant's vaults and files.  Notwithstanding the foregoing,  Landlord need not
give prior notice and will have the right to use any means reasonably  necessary
to enter the Building if Landlord  reasonably  believes there is an emergency or
that entry is necessary to prevent damage or injury or protect health, safety or
property.  All such entry shall be conducted in a manner as to not  unreasonably
disturb the conduct of Tenant's business.

                  24.3  BROKERS.  Tenant and Landlord  represent  and warrant to
each other that such party has had no dealings with any agent, broker, finder or
other  person  who is or might  be  entitled  to a  commission  or other  fee in
connection with this or any related transaction, other than Hill Partners, Inc.,
and each party  agrees to defend,  indemnify  and hold the other party  harmless
from any cost, expense or liability,  including reasonable  attorney's fees, for
any breach of this  representation.  Landlord shall pay all commissions or other
fees owing to Hill Partners, Inc. in connection with this Lease.

                  24.4 QUIET ENJOYMENT. So long as Tenant pays all rent and pays
and  performs its other  Liabilities  as and when  required,  Tenant may quietly
enjoy the Premises  without  hindrance or  molestation  by Landlord or any other
person,  subject  to the  terms of this  Lease  and the  terms  of any  Superior
Mortgages  and other  agreements  or matters of record or to which this Lease is
subordinate.  As used in this Lease,  the term  "Superior  Mortgages"  means all
present  and future  mortgages,  deeds of trust or other  encumbrances,  and the
documents   and   agreements  in   connection   therewith,   and  all  renewals,
modifications,  consolidations,  replacements or extensions thereof and advances
made thereunder, affecting all or any portion of the Premises.

                  24.5  SECURITY.  Subject to the terms and  conditions  in this
Lease,  Tenant will have the right to install a security system for the Premises
at Tenant's sole cost and expense.  Tenant will keep Landlord fully apprised and
give to Landlord's designated  representatives the means necessary to bypass the
security  system and enter the Premises in the event of an  emergency.  Landlord
shall have no liability or obligations  relating in any way to the installation,
maintenance or operation of such security system.

                  24.6 OBLIGATIONS;  SUCCESSORS; RECORDATION. If Tenant consists
of more than one person or entity,  the  obligations  and  liabilities  of those
persons or entities are joint and several. Time is of the essence of this Lease.
Subject to the restrictions in Article 18 or elsewhere in this Lease, this Lease
inures  to the  benefit  of and binds  Landlord,  Tenant  and  their  respective
successors and assigns and anyone who acquires an interest in this Lease,  or in
the case of Landlord anyone who acquires title to the Premises.  Tenant will not

                                       26



record this Lease, but each party agrees on the written request of the other, to
execute a notice of lease in recordable form.

                  24.7 ACCORD AND SATISFACTION.  Payment by Tenant or acceptance
by  Landlord  of less than the full  amount of rent due is not a waiver  (unless
such acceptance is accompanied by a written waiver signed by Landlord specifying
that such  acceptance is a waiver and specifying  the amount being waived),  but
will be deemed to be on account  of amounts  next due,  and no  endorsements  or
statements on any check or any letter  accompanying any check or payment will be
deemed an accord and  satisfaction  or binding on Landlord.  Landlord may accept
the check or payment without prejudice to any of Landlord's rights and remedies,
including, without limitation, the right to recover the full amount due.

                  24.8 PRIOR AGREEMENTS;  AMENDMENTS;  WAIVER.  This Lease is an
integrated  document  and  contains  all of the  agreements  of the parties with
respect to any matter  covered or mentioned in this Lease,  and  supersedes  all
prior agreements or  understandings.  This Lease may not be amended except by an
agreement  in writing  signed by  Landlord  and Tenant.  All waivers  must be in
writing,  specify the act or omission  waived and be signed by the party charged
with the waiver. No other alleged waivers will be effective,  including, without
limitation,  Landlord's  acceptance  of rent  (except as  specifically  provided
otherwise in Section  24.7),  collection  of a late charge or  application  of a
security  deposit.  Landlord's  waiver of any specific  act,  omission,  term or
condition will not be a waiver of any other or subsequent act, omission, term or
condition.

                  24.9 REPRESENTATIONS;  INABILITY TO PERFORM.  Except as may be
specifically set forth as representations and warranties in this Lease, Landlord
and  its  Affiliates   have  not  made,  and  Tenant  is  not  relying  on,  any
representations or warranties of any kind,  express or implied,  with respect to
the  Premises or this  transaction.  Any party hereto will not be in default nor
incur any  Liabilities  if such party does not  fulfill  any of its  obligations
(other  than  monetary  obligations),  or is  delayed  in doing so,  because  of
accidents,  breakage,  strike,  labor  troubles,  war,  sabotage,   governmental
regulations or controls, inability to obtain materials or services, acts of God,
or  any  other  cause,  whether  similar  or  dissimilar,  beyond  such  party's
reasonable  control,  but such  inability will not be deemed to limit in any way
Landlord's  repair and  maintenance  obligations  under Article 12 or its repair
and/or  restoration  obligations  under Articles 16 and 17, except to the extent
that such repair,  maintenance  or  restoration  activities are affected by such
events or causes.

                  24.10 LEGAL PROCEEDINGS. In any action or proceeding involving
or relating in any way to this Lease, the court or other person or entity having
jurisdiction in such action or proceeding will award to the party in whose favor
judgment is entered the actual attorneys' fees and costs incurred.  Landlord and
Tenant submit to and agree not to contest the sole and exclusive jurisdiction of
the state and federal  courts  located in the State of Texas to  adjudicate  all
matters in  connection  with this Lease or involving  Tenant,  Landlord or their
respective  Affiliates in any way, and Landlord and Tenant agree that they shall
bring all suits and actions only in such Texas courts  residing in Travis County
and not to  seek a  change  of  venue.  In any  circumstance  where  a party  is
obligated to indemnify or hold  harmless the other party under this Lease,  that
obligation  also will  include  the  obligation  to protect  the other party and

                                       27



defend it with counsel  acceptable  to the other party or, at the other  party's
election,  the other party may employ its own counsel and the indemnifying party
will pay when due all attorneys' fees and costs. These obligations to indemnify,
hold harmless,  protect and defend will survive the expiration or termination of
this Lease.

                  24.11 OWNERSHIP;  INVALIDITY; REMEDIES; CHOICE OF LAW. As used
in this Lease, the term "Landlord" means only the current owner or owners of the
fee  title  to  the  Premises.   Upon  each  conveyance  (whether  voluntary  or
involuntary)  of  fee  title,  the  conveying  party  will  be  relieved  of all
Liabilities and  obligations  contained in or derived from this Lease or arising
out of any act, occurrence or omission which, in any case, occurs after the date
of such conveyance. Landlord may Transfer all or any portion of its interests in
this Lease or the  Premises  (subject  to  Tenant's  prior  written  approval as
required under Exhibit E attached hereto) without affecting Tenant's obligations
and  Liabilities  under this Lease,  provided  any such  transferee  of Landlord
assumes  in  writing  all of  Landlord's  obligations  under  this  Lease and so
notifies Tenant thereof.  Tenant has no right,  title or interest in the name of
the  Building or of the  Premises,  and may use these names only to identify its
location. Any provision of this Lease which is invalid, void or illegal will not
affect,  impair  or  invalidate  any of  the  other  provisions  and  the  other
provisions will remain in full force and effect.  Landlord's rights and remedies
are  cumulative  and not  exclusive.  This Lease is  governed by the laws of the
State of Texas applicable to transactions to be performed wholly therein.

                  24.12 PRESUMPTIONS;  EXHIBITS;  SUBMISSION. This Lease will be
construed without regard to any presumption or other rule requiring construction
or interpretation for or against the party drafting the document.  The titles to
the  Articles  and  Sections of this Lease are not a part of this Lease and will
have no effect on its construction or  interpretation.  Whenever required by the
context of this Lease, the singular  includes the plural and the plural includes
the singular,  and the  masculine,  feminine and neuter genders each include the
others, and the word "person" includes individuals,  corporations,  partnerships
or other entities.  All exhibits,  addenda and riders attached to this Lease are
incorporated  in this Lease by this  reference.  The submission of this Lease to
Tenant or its broker,  agent or attorney for review or signature is not an offer
to Tenant to lease the  Premises or the grant of an option to lease to Premises.
This Lease will not be binding  unless and until it is executed and delivered by
both Landlord and Tenant.

                  24.13 COOPERATION. If Landlord finds it necessary to enter the
Premises to perform its  obligations  or exercise  its rights  under this Lease,
Tenant will  cooperate  reasonably  with  Landlord,  and this  cooperation  will
include  moving  machinery,  equipment  or  Alterations  within the Premises and
allowing  Landlord  sufficient  space within the Premises to enable  Landlord to
perform any work that  Landlord  has the right or is  required to perform  under
this Lease.

                  24.14 NOTICES.  Unless otherwise  specifically  stated in this
Lease, all notices,  demands or communications  required or permitted under this
Lease (the "Notices") will be in writing and personally  delivered (by messenger
or recognized  national  overnight  carrier),  or sent by certified mail, return
receipt requested, postage prepaid. Notices to Tenant prior will be delivered to

                                       28



the  address  for  Tenant in  Section  1(i) or to such  other  address as may be
specified  by Tenant  to  Landlord  in  writing.  Notices  to  Landlord  will be
delivered to the addresses for Landlord in Section 1(j) or to such other address
as may be specified by Landlord to Tenant in writing.  Notices will be effective
on the earlier of (i)  delivery;  or, (ii) if mailed,  three (3)  business  days
after they are mailed in accordance with this Section.

                  24.15    OTHER DEFINED TERMS.

                           (a)      "Affiliates"  means:   a  party's   internal
partners, and the directors,  officers, agents, employees, parent, subsidiaries,
licensees, concessionaires,  contractors,  subcontractors,  successors, assigns,
subtenants, and representatives of the party or its internal partners.

                           (b)      "Control   Affiliates"   means   a   party's
internal partners, and the directors, officers, employees, parent, subsidiaries,
successors  or assigns of the party or its  internal  partners,  or an entity in
which  any of them  owns at least  20% of the  outstanding  interests  or voting
shares.

                           (c)      "Laws"   means:   laws,   codes,  decisions,
ordinances,  rules,  regulations,  any  CC&R's  or  deed  restrictions  (or  the
equivalent)  to  which  the  Premises  may be  subject,  licenses,  permits  and
directives of governmental and quasi-governmental  officers,  including, without
limitation,  those  relating to building and safety,  fire  prevention,  health,
energy conservation, Hazardous Substances and environmental protection.

                           (d)      "Liabilities" means: all obligations, costs,
damages, claims, injuries, liens, liabilities and judgments,  including, without
limitation,  reasonable  attorneys'  fees  and  costs  (whether  or not  suit is
commenced or judgment entered).

                           (e)      "Related    Entities"   means    a   party's
successors,  assigns,  parent or subsidiaries,  or any person that controls,  is
controlled by or is under common control with that party,  and the successors or
assigns of such person.

                           (f)      "Systems and  Equipment"  means:  all  HVAC,
plumbing, mechanical,  electrical, lighting, water, gas, sewer, safety, sanitary
and any other  utility or service  facilities,  systems and  equipment,  and all
pipes, ducts, poles, stacks,  chases,  conduits and wires.

                  24.16    NO PARTNERSHIP.
Notwithstanding anything to the contrary, neither this Lease nor the performance
of any of the terms and conditions  thereof are intended to create or imply, nor
shall they create or imply, any  partnership,  joint venture,  trust,  fiduciary
relationship or agency relationship between Landlord and Tenant (or any of their
respective Affiliates).

         25.      HAZARDOUS SUBSTANCES.

                  25.1     DEFINITIONS.


                                       29



                           (a)      "Hazardous   Substances"   shall   mean  any
chemical,  substance,  material  or  combination  thereof  which  is or  may  be
hazardous  to  human  health  or  safety  or  to  the  environment  due  to  its
radioactivity,  ignitability,  infectiousness  or other  harmful or  potentially
harmful  properties or effects,  including  petroleum  and  petroleum  products,
asbestos, radon,  polychlorinated biphenyls ("PCBs") and all of those chemicals,
substances,  materials  or  combinations  thereof  that are  listed,  defined or
regulated in any manner by any Environmental Law.

                           (b)      "Environmental Cleanup Work"  shall mean any
cleanup, remediation, removal, construction,  alteration, demolition, renovation
or  installation  that is  required  in  connection  with  Hazardous  Substances
installed,  used, stored, handled or located on the Land or disposed of from the
Land in order to comply with any Environmental Law.

                           (c)      "Environmental Law" shall  mean any federal,
state or local environmental,  health and/or safety-related Law, and any related
decision of the courts,  ordinance,  rule, regulation,  code, order,  directive,
guideline, permit or permit condition.

                  25.2     TENANT'S OBLIGATIONS. Without limiting the generality
of any portion of this Lease, Tenant and its Affiliates will:

                           (a)      Not store, handle,  transport, use, process,
generate, discharge or dispose of any Hazardous Substances from, in or about the
Premises  or the rest of the  Land,  or  create  any  release  of any  Hazardous
Substances,  except for customary and reasonable  amounts of office supplies and
other supplies reasonably used in the conduct of Tenant's permitted research and
development, light manufacturing and warehousing activities which may contain or
consist of reasonable amounts of Hazardous Substances, and then only strictly in
accordance with applicable  Environmental  Laws.  Tenant and its Affiliates will
comply  fully  with  all  Environmental  Laws  and  insurance   requirements  in
connection  with  or  related  to  such  Hazardous  Substances,  whether  now or
hereafter existing,  including,  without limitation,  CERCLA,  SARA, RCRA, TSCA,
CWA, and any other  Environmental Laws promulgated by the EPA, OSHA or the State
of Texas.

                           (b)      Immediately pay, and  indemnify Landlord and
its Affiliates for and hold them harmless from, all Liabilities arising from any
breach  by  Tenant  or its  Affiliates  of their  obligations  in this  Article,
including,   without  limitation,   the  performance  of  and  payment  for  any
Environmental  Cleanup Work and the preparation of any closure or other required
plans.

                           (c)      Immediately  deliver  to Landlord  copies of
any notices,  information,  reports,  and communications of any type received or
given in connection with Hazardous  Substances,  including,  without limitation,
notices  of  violation  and  settlement  actions  from or with  governmental  or
quasi-governmental authorities.

         In the event of any  unintentional  breach of the terms of this Article
25, Tenant shall not be in default of this Lease if Tenant immediately begins to
cure the breach and  diligently  begins and completes all required  remediation,

                                       30



disposal  and  other  responsive  actions  in  accordance  with  the  Lease  and
applicable  Environmental Laws and guidelines and performs all necessary repairs
to the Building or the Premises,  and, upon the completion of which, Tenant will
be deemed to have cured such breach (although Tenant's indemnity obligations and
other  Liabilities  still  will  remain).   All  of  Tenant's   obligations  and
Liabilities   under  this  Article  will  survive  the   expiration  or  earlier
termination of this Lease.

                  25.3 LANDLORD'S  OBLIGATIONS.  Landlord shall comply with, and
shall pay all costs incurred in complying  with, any  Environmental  Law then in
effect with respect to, and the environmental  state,  condition and quality of,
the Land and the  Building,  including  the  performance  of and payment for any
Environmental  Cleanup Work and the preparation of any closure or other required
plans, excluding, however, any costs related to Hazardous Substances on the Land
established to have been caused  directly by Tenant's use of the Premises or the
Building.  Notwithstanding any other provision of this Lease, Landlord shall and
hereby does agree to indemnify, protect, defend and hold harmless Tenant and its
partners, directors, officers, employees,  shareholders, agents, contractors and
each of their  respective  successors  and assigns  from and against any and all
claims, judgments, damages, penalties, fines, taxes, costs, liabilities,  losses
and  expenses  arising  at any time  during or after the term of this Lease as a
result of or in connection with: (i) Landlord's breach of any covenant contained
in this Section 25.3 or (ii) the presence of Hazardous  Substances  on, under or
about the Land which are not the direct  result of Tenant's  activities on or in
the Premises or the Building.  In the event of Landlord's breach of any covenant
contained  in this  Section  25.3,  and  such  breach,  in  Tenant's  reasonable
judgment,  is material or may adversely  affect the health or safety of Tenant's
employees or business invitees,  Tenant shall have the right, in addition to all
other  remedies  provided  herein,  to (i) terminate this Lease upon ninety (90)
days' prior written notice to Landlord  (which notice shall be rendered null and
void if,  within  such  90-day  period,  Landlord  cures such  breach),  or (ii)
immediately  cease operations within the Premises and have the base rent and any
other charges payable by Tenant  hereunder fully abated until Landlord has fully
cured such breach. Landlord's indemnities provided under this Section 25.3 shall
survive the expiration or earlier termination of this Lease.

         26.  CONTINGENCY.  The parties acknowledge and agree that if this Lease
is  executed  by  Landlord  and Tenant  prior to  Landlord  obtaining  fee title
ownership  of the  Land,  the  obligations  of  Landlord  under  this  Lease are
expressly  conditioned  upon Landlord  obtaining fee title ownership of the Land
and the  Building.  In the  event  that  Landlord  has not  obtained  fee  title
ownership  on or before  April 30, 1998 (the  "Acquisition  Date"),  Landlord or
Tenant may, by delivering written notice to the other, at anytime thereafter and
prior to Landlord  obtaining fee title ownership of the Land, elect to terminate
this Lease.  Landlord shall give Tenant written  notice  promptly  following the
satisfaction of the contingency  described  herein.  Upon Tenant's or Landlord's
delivery  to the other of  written  notice of the  termination  of this Lease in
accordance with the terms hereof, this Lease shall thereupon be terminated,  any
amounts  previously  delivered by Tenant to Landlord shall be returned to Tenant
and neither party shall have any further obligation to the other or to any other
person arising out of or in connection with this Lease,  except as may otherwise
be expressly provided in this Lease.

         IN  WITNESS  WHEREOF,  intending  to be legally  bound,  each party has
executed this Lease as of the date first set forth above.

                                       31



                                      LANDLORD:
                                             
                                      2800 INDUSTRIAL, INC., a Texas corporation




                                      By:
                                             -----------------------------------
                                      Name:
                                             -----------------------------------
                                      Title:
                                             -----------------------------------


                                      TENANT:

                                      VTEL CORPORATION, a Delaware corporation


                                      By:
                                             -----------------------------------
                                      Name:
                                             -----------------------------------
                                      Title:
                                             -----------------------------------



                                       32





                                    EXHIBIT A

                            Floor Plans for Premises
                            ------------------------








                     [floor plan of premises to be attached]








                                    EXHIBIT B

                            Legal Description of Land
                            -------------------------


Lots One (1) and Two (2),  WILD BASIN POINT,  a  subdivision  in Travis  County,
Texas,  according  to the map or plat  thereof,  recorded  in Volume  86,  Pages
96B-96C of the Plat Records of Travis County, Texas.









                                    EXHIBIT C

                                    Base Rent
                                    ---------



         Period                                      Annual Base Rent
         ------                                      ----------------

Lease Years 1-10               $14.25 per annum per square foot of rentable area

Lease Years 11-15              $14.75 per annum per square foot of rentable area

First Extension Option         $15.25 per annum per square foot of rentable area

Second Extension Option        $15.75 per annum per square foot of rentable area

Third Extension Option         $16.25 per annum per square foot of rentable area









                                    EXHIBIT D

             Subordination, Non-Disturbance and Attornment Agreement
             -------------------------------------------------------


         THIS AGREEMENT is entered into as of the       day of                 ,
                                                  -----        -----------------
19   , between                                                                 ,
  ---         -----------------------------------------------------------------
a                                                  , with a place of business at
  -------------------------------------------------

- --------------------------------------------------------------------------------
("Mortgagee"), and VTEL Corporation, a Delaware corporation, having an
office at 108 Wild Basin Road, Austin, Texas 78746 ("Tenant").

                                    Recitals

         A.       Mortgagee has made a loan to
                                               ---------------------------------
("Landlord") in the original principal amount of $                          (the
                                                  -------------------------
"Loan").

         B.  Mortgagee is the holder of a mortgage or deed of trust securing the
Loan (the  "Mortgage")  covering that certain parcel of land situated in Austin,
Travis  County,  Texas,  owned by Landlord  and  described on Exhibit A attached
hereto and made a part hereof,  together with the  improvements  erected thereon
(the "Property").

         C. By a certain  Lease  Agreement  entered  into  between  Landlord and
Tenant,  dated  as of  __________________________, 19__ (the  "Lease"), Landlord
leased to Tenant certain premises situated within the Property (the "Premises").

         D. A copy of the Lease has been delivered to Mortgagee,  the receipt of
which is hereby acknowledged.

         E. The parties hereto desire to effect the  subordination  of the Lease
to the Mortgage and to provide for the  non-disturbance  of Tenant by the holder
of the Mortgage or any purchaser under a foreclosure or deed in lieu thereof.

                                    Agreement

         In   consideration  of  the  premises  and  the  mutual  covenants  and
agreements herein contained, the parties hereto agree as follows:

         1. Mortgagee  hereby  consents to and approves the Lease and all of the
terms and conditions thereof.

         2. Tenant  covenants and agrees with Mortgagee that the Lease is hereby
made and shall continue  hereafter to be subject and  subordinate to the lien of
the Mortgage,  and to all  modifications and extensions  thereof,  with the same
force and effect as if the Mortgage had been executed and delivered prior to the

                                      D-1



execution and delivery of the Lease and without  regard to the order of priority
of  recording  the  Mortgage,  subject,  however,  to  the  provisions  of  this
Agreement.

         3.  Tenant  certifies  that the Lease is  presently  in full  force and
effect  and  unmodified  and  Tenant  as of this  date has no  knowledge  of any
default, charge, lien or claim of offset under the Lease.

         4. Mortgagee agrees that, so long as Tenant is not in default under the
Lease:

                  (a)  Tenant  shall  not be  named  or  joined  as a  party  or
otherwise in any suit,  action or proceeding for foreclosure by the Mortgagee or
to enforce any rights under the Mortgage or the Loan.

                  (b) The  possession  by Tenant of the  Premises  and  Tenant's
rights under the Lease shall not be  disturbed,  affected or impaired by (i) any
suit,  action or  proceeding  under the Mortgage or the Loan or for  foreclosure
under the Mortgage, or any other enforcement of any rights under the Mortgage or
any other  documents  pertaining to the Loan,  (ii) any judicial or non-judicial
foreclosure, sale or execution of the Premises or the Property or any deed given
in lieu of foreclosure, or (iii) any default under the Mortgage or the Loan.

                  (c) All  condemnation  awards and  insurance  proceeds paid or
payable  with  respect to the  Premises  or any other part of the  Property  and
received by  Mortgagee  shall be applied and paid in the manner set forth in the
Lease.

                  (d) Neither the  Mortgage  nor any other  security  instrument
executed in  connection  with the Loan shall cover or be construed as subjecting
in any manner to the lien thereof any trade  fixtures,  signs or other  personal
property  at any time  furnished  or  installed  by or for  Tenant  in or on the
Premises.

         5. If  Mortgagee  or any  future  holder of the  Mortgage  or any other
transferee under the Mortgage shall become the owner of the Property or any part
thereof by reason of foreclosure of the Mortgage, or if the Property or any part
thereof  shall be sold as a result of any action or  proceeding to foreclose the
Mortgage, or by transfer of ownership by deed given in lieu of foreclosure,  the
Lease shall continue in full force and effect,  without  necessity for executing
any new  lease,  as a direct  lease  between  Tenant  and the then  owner of the
Property as "Landlord"  under the Lease,  upon all of the same terms,  covenants
and provisions contained in the Lease, and in such event:

                  (a) Tenant  shall be bound to such new owner  under all of the
terms,  covenants  and  provisions  of the Lease for the  remainder  of the term
thereof (including also any extension  periods,  if Tenant elects or has elected
to exercise its option to extend the term) and Tenant hereby agrees to attorn to
such new owner and to recognize  such new owner as  "Landlord"  under the Lease;
and


                                      D-2



                  (b) Such new owner  shall be bound to Tenant  under and hereby
assumes  all of the  terms,  covenants  and  provisions  of the  Lease  for  the
remainder of the term thereof (including also any extension  periods,  if Tenant
elects or has  elected to  exercise  its option to extend the term),  and Tenant
shall,  from and  after  the date such new owner  succeeds  to the  interest  of
"Landlord"  under the Lease,  have the same remedies  against such new owner for
the breach of any covenant contained in the Lease; provided,  however, that such
new owner  shall not (i) be bound by any rent or  additional  rent which  Tenant
might  have  paid for more  than one  month in  advance  to any  prior  landlord
(including  Landlord) except to the extent,  if any,  expressly  required by the
terms of the Lease, or (ii) be personally  liable for any breach of the Lease by
or other act or omission of any prior landlord (including  Landlord) or (iii) be
bound by any  amendment or  modification  of the Lease made without  Mortgagee's
consent which would reduce fixed annual rent or any other monetary obligation of
Tenant under the Lease.

         6. Any notices or communications given under this Agreement shall be in
writing and shall be deemed given on the earlier of actual  receipt or three (3)
days after deposit in the U.S.  Mail, by  registered or certified  mail,  return
receipt requested, postage prepaid, at the respective addresses set forth above,
or at such  other  address as the party  entitled  to notice  may  designate  by
written notice as provided herein.

         7. This  Agreement  shall  bind and inure to the  benefit  the  parties
hereto and their respective successors and assigns.

         8. This Agreement contains the entire agreement between the parties and
cannot be changed,  modified,  waived or  cancelled  except by an  agreement  in
writing executed by the parties against whom  enforcement of such  modification,
change, waiver or cancellation is sought.

         9. This Agreement and the covenants contained herein shall run with and
shall bind the Property  throughout the entire term (including all renewal terms
that may be exercised by Tenant) of the Lease.

         EXECUTED as of the date first written above.


                                             MORTGAGEE:


                                             -----------------------------------


                                             By:
                                                  ------------------------------
                                             Name:
                                                  ------------------------------
                                             Title:
                                                  ------------------------------


                                      D-3



                                              TENANT:

                                              VTEL CORPORATION


                                             By:
                                                  ------------------------------
                                             Name:
                                                  ------------------------------
                                             Title:
                                                  ------------------------------




STATE OF __________________________ ss.

COUNTY OF _________________________ ss.


         The foregoing instrument was acknowledged before me this _______ day of
______________________, 19___, by __________________________________________, of
___________________________________________, a ________________________________,
on behalf of such _____________________.


                                ------------------------------------------------
                                Notary Public in and for the State of
                                                                      ----------

                                My Commission Expires:
                                                       -------------------------



STATE OF TEXAS _____________________ ss.

COUNTY OF TRAVIS                     ss.


         The foregoing instrument was acknowledged before me this _______ day of
______________________, 19___, by _____________________________________________,
of VTEL Corporation, a Delaware corporation, on behalf of such corporation.



                                ------------------------------------------------
                                Notary Public in and for the State of Texas


                                       D-4




                                    EXHIBIT E

                                  Net Proceeds
                                  ------------

         1. CASH PROCEEDS.  "Cash Proceeds"  means:  all cash proceeds  actually
received by or on behalf of Landlord  that  Landlord is permitted to retain (for
example,  if Landlord must refund an overpayment to Tenant or a third party, the
amount  refunded will not be deemed to be "retained" by Landlord nor shall it be
a part of Cash Proceeds  hereunder) from the sale,  leasing (including base rent
and additional  rents or charges),  assignment,  subleasing,  initial  financing
(including,  without limitation, the initial financing secured by the Building),
refinancing,  encumbrance,  Condemnation  or  other  disposition  of  all or any
portion of the  Building or any  interest  therein,  and any casualty and rental
insurance  proceeds  received  by or on  behalf of  Landlord  that  Landlord  is
permitted to retain in connection  with all or any portion of the Building,  any
loans, advances or capital  contributions made to Landlord,  indemnities paid by
Tenant to Landlord and any interest or investment income received by Landlord on
such cash proceeds.

         2. COSTS.  "Costs" means:  all bona fide costs and expenses of any type
paid by Landlord or its Affiliates,  or reasonably anticipated by Landlord to be
payable by Landlord or its Affiliates, for, as a result of or in connection with
all or any portion of the  Building or any  interest  therein or any  ownership,
operation,   management,   maintenance,   repair,   restoration,    replacement,
improvement,  leasing  (other  than  the  payment  of Net  Proceeds  hereunder),
financing,  refinancing or Transfer by Landlord thereof (whether or not included
as part of Operating  Costs,  but not including any sale or conveyance to any of
Landlord's Control Affiliates),  or any rights or Liabilities in connection with
any of the foregoing, including, without limitation, costs and expenses for: the
acquisition, sale or other disposition of all or any portion of the Building and
any rights appurtenant thereto (including, without limitation, all costs for due
diligence, investigations,  remedial work, closing costs, escrow and title fees,
legal  fees,  professional  fees  and  commissions);  all  labor,  services  and
materials  supplied to or for the benefit of the Building and/or Tenant under or
in connection  with this Lease;  financing,  refinancing  and encumbrance of the
Premises or any interest therein (including,  without limitation, payment of all
principal, interest, reserve deposits, fees, commissions, appraisals, escrow and
title fees, other closing costs,  interest rate hedges,  "caps" or "floors," and
other costs in connection therewith and other amounts owed under any of the loan
documents);  the  repayment  of all bona fide  capital  contributions,  loans or
advances  made by  Landlord  or its  partners  or  their  respective  Affiliates
(including,  without limitation,  the repayment of such amounts and commercially
reasonable  interest on such loans and a commercially  reasonable rate of return
on such  contributions or advances,  and commercially  reasonable closing costs,
commissions  and/or  loan fees or similar  fees in order to obtain  such  loans,
contributions  or advances);  the payment and  performance  of all of Landlord's
Liabilities  and the exercise of Landlord's  rights under or in connection  with
this Lease or the Premises or  agreements in  connection  therewith  (including,
without limitation, costs for Taxes, Operating Costs, amounts in connection with
Hazardous  Substances and  environmental  protection,  compliance will all Laws,
indemnity and defense costs,  and other costs in connection  therewith and other
amounts owed under any of the loan  documents);  reasonable  attorneys' fees and
other costs in  connection  with the defense or  prosection  of any  litigation,

                                      E-1



proceedings,  claims  or  counterclaims  or as  otherwise  deemed  necessary  by
Landlord; judgments, claims, awards or settlements,  whether due to the fault of
Landlord or its  partners or  otherwise;  an amount per  calendar  year equal to
forty  percent  (40%) of an amount  (the "Tax  Payments")  equal to:  Landlord's
taxable  income (if any) in the prior  calendar  year  (other  than the  taxable
income  resulting  solely from the sale or the  conveyance of the Premises) less
the  amounts  paid to Landlord  for that prior  calendar  year  pursuant to this
clause of this  Paragraph  2, and if in any year the Tax  Payments are not fully
paid,  then the unpaid Tax Payments  shall cumulate and be paid as Costs as soon
as there are sufficient  Cash  Proceeds;  the  preparation of Landlord's  annual
financial  statements and any other information to be provided by Landlord under
this Lease  (including  reports of Net Proceeds)  and tax returns;  corporate or
partnership  license fees,  filing fees,  business and franchise taxes and fees,
and similar  charges;  and reserves deemed  reasonably  necessary by Landlord in
connection with any of the foregoing.  Unless otherwise  specifically agreed and
set forth in this Lease (e.g., with respect to the interest rate on loans or the
return on capital,  or with respect to management fees or fees in lieu thereof),
amounts  payable as Costs by  Landlord  to any of its  Affiliates  for  services
rendered  shall not  exceed  the  prevailing  rates  that  would be  payable  to
unaffiliated third parties in an arms-length  transaction.  Costs do not include
any of the above  amounts  which are directly paid by Tenant or which are funded
by  insurance,  and in no  event  shall  Costs  include  any  leasing  or  sales
commissions paid to any Affiliate of Landlord.

         3. PAYMENT OF NET PROCEEDS. "Net Proceeds" means, from time to time, an
amount equal to the positive amount,  if any, obtained by taking an amount equal
to the current  amount of Cash Proceeds and deducting  therefrom an amount equal
to the current amount of Costs. Prior to any distribution of Net Proceeds to any
of Landlord's Control Affiliates, Landlord first will pay to Tenant Net Proceeds
in amount  equal  to:  the  unrepaid  Reconstruction  Costs  (if any)  until the
Reconstruction  Costs have been  repaid in full;  and the  reasonable  costs and
expenses incurred by Tenant in good faith to third parties in validly exercising
its Right of Self Help as set forth in Section 22.5 of the Lease,  but excluding
therefrom  Tenant's  Percentage of any of such costs and expenses that otherwise
would qualify as Operating Costs under Article 7 of the Lease.  Thereafter:  (i)
first, all Net Proceeds available for distribution shall be paid to Tenant until
tenant has  received  under this clause (i)  aggregate  Net  Proceeds  equalling
$2,000,000.00;  and (ii)  thereafter,  Landlord will pay to Tenant fifty percent
(50%) of all Net Proceeds  available for  distribution  at the same times as Net
Proceeds are  distributed  by Landlord to its partners or other owners of equity
interests in Landlord. These payments to Tenant will be deemed to be a reduction
in Tenant's rent already paid from time to time under this Lease  (although they
may not be credited,  offset or deducted against Tenant's current or future rent
payments  owed).  Payments of Net  Proceeds  to Tenant  during any year shall be
subject to an annual  reconciliation  for that year (which shall occur after the
end of that year),  and any amounts overpaid to Tenant or owed by Landlord shall
be adjusted  in cash  between  the  parties  within  thirty (30) days after such
annual  reconciliation  is  delivered.  Upon  Tenant's  written  request in each
instance,  Landlord will furnish to Tenant reasonable backup information for its
annual  reconciliations,  including  copies of Landlord's most recent  financial
statements.  Upon at least ten (10) days' prior written notice to Landlord,  not
more than once in each  calendar  year  Tenant  may audit  Landlord's  books and
records  applicable  to any  prior  period in order to verify  the  accuracy  of
Landlord's calculation of Net Proceeds. Such audit will be conducted only during

                                      E-2



regular business hours where Landlord maintains its books and records and Tenant
will deliver a copy of the audit to Landlord within fifteen (15) days after
receipt by Tenant. All audits will be conducted at Tenant's cost and expense and
shall   be   conducted   only  by   Tenant   or  its   designated   professional
representatives; provided, however, if any such audit shall show that the actual
Net Profits payable to Tenant exceed by one hundred three percent (103%) the Net
Profits payable to Tenant under such annual reconciliation  furnished to Tenant,
Landlord shall immediately pay the cost of such audit for the period audited.

         4. TERMINATION OF RIGHTS.  Notwithstanding anything to the contrary, as
of the  date of the  first  occurrence  of any or all of the  following,  all of
Tenant's  rights and  Landlord's  obligations  under or in connection  with this
Exhibit will terminate and lapse completely,  except that the entity that is the
Landlord  immediately  prior to the  occurrence  of any or all of the  following
shall remain  obligated to pay to Tenant  Tenant's  share of  undistributed  Net
Proceeds (if any) existing as of the date of such occurrence:

                  (a) The  termination  of  this  Lease  or  Tenant's  right  to
possession of the Premises due to a default by Tenant under this Lease, or

                  (b) The  closing  of any bona fide  third  party sale or other
conveyance by Landlord of the Building made in accordance with the terms of this
Exhibit,  but Tenant's  rights and  Landlord's  obligations  with respect to Net
Proceeds shall continue with respect to any Net Proceeds received by Landlord in
connection with such sale or other conveyance.

Notwithstanding  any provision of this Lease to the contrary,  including without
limitation  the  other  provisions  of  this  paragraph  4,  in the  event  of a
termination  or  expiration of this Lease for any reason other than a default by
Tenant under this Lease, Tenant's rights and Landlord's  obligations under or in
connection  with this Exhibit shall  continue in full force and effect and shall
survive such  termination  or expiration  until the  occurrence of the condition
described in subparagraph (b) above of this paragraph 4.

         5.  UNAFFECTED  PARTIES.  Notwithstanding  anything  to  the  contrary,
Tenant's  rights  and  Landlord's  obligations  under this  Exhibit  will not be
binding on and will not affect or otherwise apply in any way to:

                  (a) Any party  that,  in a bona fide third  party  transaction
made in  accordance  with the  terms of this  Exhibit,  purchases  or  otherwise
acquires  all or any portion of the  Building or any  interest  therein,  or its
successors, assigns and purchasers, or their respective Affiliates; or

                  (b) Landlord's Mortgagee, whether or not they take title to or
acquire all or any portion of the  Premises or any interest  therein,  and their
successors, assigns and purchasers, or their respective Affiliates.

         6.  PERSONAL  RIGHTS.  Notwithstanding  anything to the  contrary,  the
rights granted to Tenant under or in connection with this Exhibit are granted to
and may be exercised only by the Tenant originally named in this Lease, and they

                                      E-3



may not be  exercised  by anyone  else  (other  than by an assignee to whom such
rights have been entirely assigned pursuant to a valid assignment of this Lease,
if at the time of such assignment the assignor and the assignee deliver
to Landlord a jointly executed written notice stating  unconditionally  that the
assignee has the right to exercise such rights), and Tenant shall not, and shall
not have the  right or power  to,  otherwise  assign  or  Transfer  any of these
rights.  If at the time of a valid  assignment  the  assignor  and the  assignee
deliver to Landlord a jointly executed written notice directing  Landlord to pay
a portion of the Net Proceeds  otherwise  payable to the assignee instead to the
assignor, then Landlord will continue to pay that portion of the Net Proceeds to
the  assignor  until and unless  Landlord  receives  from the  assignor  and the
assignee a jointly  executed  written notice changing such direction to Landlord
and then Landlord shall pay in accordance with the new direction.

         7. LIMITATIONS ON SALES AND FINANCING.  Notwithstanding anything to the
contrary in this Exhibit or elsewhere in the Lease, the sale or financing of the
Building shall be subject to the following:

                  (a) Until and unless Tenant  otherwise  agrees in writing,  or
upon the  termination of Tenant's  rights under this Exhibit,  Landlord will not
sell or convey the Building,  nor will Landlord permit any sale or conveyance of
any interest in Landlord.

                  (b) So long as Tenant is  entitled  to  continue  to receive a
share of Net Proceeds in accordance  with this Exhibit,  Landlord  agrees not to
use the Building or any portion thereof to secure any  indebtedness  other than:
(i) the  initial  acquisition  of the  Building  and any  extensions,  renewals,
consolidations,  replacements or modifications  thereof, so long as the proceeds
thereof are used for the  purposes set forth in clause (ii)  following;  or (ii)
financing,  the proceeds of which are:  used only to repay all of the  financing
described  in  Subsection  (i)  above on or about the date of  maturity  of such
financing  (provided  that  such  proceeds  may  also be used to pay  reasonable
closing costs  associated with such new financing);  or used only to benefit the
Building or pay any  Liabilities  in connection  therewith or as required  under
this Lease.  In any case,  any such  permitted  financing  that is placed on the
Building shall be subject to the  reasonable  approval of Tenant if the terms of
such financing do not conform to the following parameters:


                           (1) The principal  balance of any such loan shall not
                  exceed  the  amounts  required  to be  applied as set forth in
                  clause (ii) above.

                           (2) The term of any such  loan shall be  no less than
                  10 years.

                           (3) The  repayment of any such loan shall be based on
                  an amortization of the original  principal amount of such loan
                  over a period of not less than 20 years and not  exceeding  25
                  years.

                           (4)  Any  such  loan   shall  bear   interest   at  a
                  competitively bid market rate.

                           (5) No  participation  or net profits interest in the
                  Building shall be provided to the lender.



                                       E-4


                       FIRST AMENDMENT TO LEASE AGREEMENT


         THIS FIRST  AMENDMENT TO LEASE  AGREEMENT is entered into as of the day
of  March,  1998,  by and  between  VTEL  Corporation,  a  Delaware  corporation
("Tenant"), and WB One and Two, Ltd., a Texas limited partnership ("Landlord").

                                    Recitals

         A. Tenant and 2800 Industrial,  Inc. ("2800") entered into that certain
Lease Agreement dated January 30, 1998 (the "Lease"), relating to Tenant's lease
of  approximately  132,747 square feet of rentable area in the office  buildings
known as Wild Basin One and Two,  Austin,  Texas, as more fully described in the
Lease.

         B. 2800 has assigned to Landlord  all of the right,  title and interest
of 2800 in and to the Lease,  and Landlord has assumed all of the obligations of
2800 under the Lease.

         C.  Landlord  and  Tenant  desire  to amend  the  Lease as  hereinafter
provided.

                                    Amendment

         In   consideration   of  the  premises  and  other  good  and  valuable
consideration,  the receipt and  sufficiency  of which are hereby  acknowledged,
Landlord and Tenant hereby amend the Lease as follows:

         1. The following  sentence is hereby added to Section 6.2 of the Lease,
immediately following the third grammatical sentence of Section 6.2:

         "Notwithstanding  the immediately  preceding sentence or the provisions
         of clause (9) of Section 7.1(b) below,  Landlord may include in monthly
         Operating Costs one-twelfth (1/12) of Landlord's reasonable estimate of
         Taxes for the  calendar  year to which  such  monthly  Operating  Costs
         applies,  subject to adjustments  under Section 9.3 below, and Tenant's
         payment of such monthly estimate,  as adjusted,  shall satisfy Tenant's
         obligation  for the payment of Taxes under this Section 6.2;  provided,
         however,  Landlord  shall  have the right to  include  Taxes in monthly
         Operating  Costs  under this  sentence  only to the extent  Landlord is
         required to escrow Taxes under any loan secured by a first lien deed of
         trust encumbering the Building and the Land."

         2. Unless defined  differently  herein or the context clearly  requires
otherwise, all initially capitalized terms used in this Amendment shall have the
meanings  ascribed to them under the Lease.  Except as expressly amended hereby,
the Lease shall remain unchanged and in full force and effect.







         EXECUTED as of the date first written above.

                                        TENANT:

                                        VTEL CORPORATION, a Delaware corporation


                                        By:
                                              ----------------------------------
                                        Name:
                                              ----------------------------------
                                        Title:
                                              ----------------------------------

                                        LANDLORD:

                                        WB ONE AND TWO, LTD., a Texas limited
                                        partnership

                                        By:      WB One and Two, Inc., a Texas
                                                 corporation, General Partner


                                                  By:
                                                        ------------------------
                                                  Name:
                                                        ------------------------
                                                  Title:
                                                        ------------------------

                                                              





 


5 This Schedule contains Summary Financial Information extracted from VTEL Corporation's Balance Sheet & Income Statement for the Nine Months ended April 30, 1998, and is qualified in its entirety by reference to such Quarterly Report on Form 10-Q Filing 0000884144 VTEL Corporation 1,000 U.S. Dollars 9-MOS JUL-31-1998 FEB-01-1998 APR-30-1998 1 8,447 14,287 51,086 (10,462) 15,676 81,464 61,620 (36,228) 121,907 42,598 0 0 0 256,274 (176,965) 121,907 45,000 45,000 (23,913) (21,551) 1,464 0 0 1,000 (20) 980 0 0 0 980 .04 .04