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

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

                                    FORM 10-K
 (Mark One)

      [ X ]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended September 30, 1997

      [   ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                  For the transition period from ____________ to _______________

                             Commission File Number
                                     0-16439


                      FAIR, ISAAC AND COMPANY, INCORPORATED
             (Exact name of registrant as specified in its charter)


               DELAWARE                                     94-1499887
    (State or other jurisdiction of                      (I.R.S. Employer
    incorporation or organization)                      Identification No.)

              120 North Redwood Drive, San Rafael, California 94903
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (415) 472-2211

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

           Securities registered pursuant to Section 12(b) of the Act:

 Common Stock, $0.01 par value per share      New York Stock Exchange, Inc.
           (Title of Class)          (Name of each exchange on which registered)

           Securities registered pursuant to Section 12(g) of the Act:
                                      None

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes x    No    .
                                             ---      ---

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     As of December 5, 1997,  the  aggregate  market  value of the  Registrant's
common stock held by nonaffiliates of the Registrant was  $324,231,823.50  based
on the last transaction  price as reported on the New York Stock Exchange.  This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purposes.

     The number of shares of common  stock  outstanding  on December 5, 1997 was
13,507,887 (excluding 12,008 shares held by the Company as treasury stock).

     Items 10, 11, 12 and 13 of Part III  incorporate  information  by reference
from the definitive proxy statement for the Annual Meeting of Stockholders to be
held on February 3, 1998.


TABLE OF CONTENTS
Page ---- PART I ITEM 1. Business............................................................................... 3 ITEM 2. Properties............................................................................. 12 ITEM 3. Legal Proceedings...................................................................... 12 ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 12 EXECUTIVE OFFICERS OF THE REGISTRANT........................................................... 13 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 14 ITEM 6. Selected Financial Data........................................................... 15 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 16 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks....................... 22 ITEM 8. Financial Statements and Supplementary Data....................................... 23 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................ 40 PART III ITEM 10. Directors and Executive Officers of the Registrant................................ 41 ITEM 11. Executive Compensation............................................................ 41 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................... 41 ITEM 13. Certain Relationships and Related Transactions ................................... 41 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 42 SIGNATURES .................................................................................. 46 Supplemental Information....................................................................... 47
PART I ITEM 1. BUSINESS Development Of The Business Fair, Isaac and Company (NYSE: FIC) is a leading developer of data management systems and services for the financial services, direct marketing and personal lines insurance industries. The Company employs various tools, such as database enhancement software, predictive modeling, adaptive control and systems automation to help its customers make "better decisions through data." Established in 1956, Fair, Isaac pioneered the credit risk scoring technologies now employed by most major U.S. consumer credit grantors. Its rule-based decision management systems, originally developed to screen consumer credit applicants, are now routinely employed in all phases of the credit account cycle: direct mail solicitation (credit cards, lines of credit, etc.), application processing, card reissuance, on-line credit authorization and collection. Although direct comparisons are difficult, management believes Fair, Isaac ranks first or second in sales of every type of credit management product or service it markets, and that its total sales to the consumer credit market exceed those for similar products by any direct competitor. Approximately 48 percent of fiscal 1997 revenues were derived from usage-priced products and services marketed through alliances with major credit bureaus and third-party credit card processors. Sales of decision management products and services directly to credit industry end-users accounted for approximately 29 percent of revenues. In more recent years Fair, Isaac has branched out, applying its proven risk/reward modeling capabilities to auto and home insurance underwriting, small business and mortgage lending, telecommunications and most recently, healthcare. With the acquisition of DynaMark in December 1992, the Company made its first foray into marketing data processing and database management, an area it considers a prime target for diversification. Its strategy in this area is to develop and market an array of services combining DynaMark's strengths in warehousing and manipulating complex consumer databases with Fair, Isaac's expertise in predictive modeling and decision systems. DynaMark contributed $29.8 million or 15 percent of Fair, Isaac's fiscal 1997 revenues. The Company's Insurance business unit generated revenues in fiscal 1997 of $5.8 million or 3 percent of revenues, and in fiscal l997 the Company recorded its first revenues from its new Healthcare Information business unit. In July 1997 the Company acquired Risk Management Technologies (RMT), a privately held company that is the leading provider of enterprise-wide risk management and performance measurement solutions to major financial institutions around the world. This acquisition enables the Company to extend its franchise in providing data-driven decision support to the financial services industries beyond its current focus on individual customers. With RMT's products and services, the Company has positioned itself to support an institution's entire financial risk management operation, encompassing both the consumer and enterprise levels. RMT's revenues in fiscal l997 were $8.4 million or 4 percent of the Company's revenues. The Company's historical financial statements for prior fiscal year periods have been restated to account for the Company's merger with RMT on a pooling-of-interests basis. Fair, Isaac numbers hundreds of the world's leading credit card and travel card issuers, retail establishments and consumer lenders among its regular customers. It has enjoyed continuous client relationships with some of these companies for more than 27 years. Through alliances with all three major U.S. credit bureaus, the Company also serves a large and growing number of middle-market credit grantors, primarily by providing direct mail solicitation screening, application scoring and account management services on a usage-fee basis. In addition, some of its newer end-user products, such as CreditDesk(R) application processing software and CrediTable(R) pooled-data scoring systems, are designed to meet the needs of relatively small users of scoring systems. Approximately 17 percent of Fair, Isaac's fiscal 1997 revenues came from sales outside the United States. With its long-standing presence in Western Europe and Canada and the more recent establishment of operating bases in Great Britain, France, Germany, Japan, Mexico and South Africa, the Company is well positioned to benefit from the expected growth in global credit card issuance and usage through the balance of the 1990s. In September l997 the Company signed an agreement with Serasa Centralizaco de Servicos dos Banco, Brazil's largest credit reporting agency, which will result in the first bureau-based score delivery service in Brazil. 3 Since 1993, Fair, Isaac's revenues and earnings per share have increased at a compound rate of 31 percent and 41 percent, respectively. The Company attributes this growth to rising market demand for credit scoring and account management services; success in increasing its share of the market; and a gradual shift in marketing and pricing strategy, from primary reliance on direct, end-user sales of customized analytical and software products to ongoing usage revenues from services provided through credit bureaus and bankcard processing agencies. During the period since 1990, while the rate of account growth in the U.S. bankcard industry has been slowing and many of the Company's largest institutional clients have merged and consolidated, the Company has generated above-average growth in revenues--even after adjusting for the effect of acquisitions--from its bankcard-related scoring and account management business by deepening its penetration of large banks and other credit issuers. The Company believes much of its future growth prospects will rest on its ability to: (1) develop new, high-value products, (2) increase its penetration of established or emerging credit markets outside the U.S. and Canada and (3) expand--either directly or through further acquisitions--into relatively undeveloped or underdeveloped markets for its products and services, such as direct marketing, insurance, small business lending and healthcare information management. Products and Services The Company's principal products are statistically derived, rule-based analytic tools designed to help businesses make better decisions on their customers and prospective customers, and software systems and components to implement these analytic tools. In addition to sales of these products directly to end-users, the Company also makes these products available in service mode through arrangements with credit bureaus and third-party credit card processors. The Company's DynaMark subsidiary provides data processing and database management services to businesses engaged in direct marketing. Its RMT subsidiary provides management tools to larger, more sophisticated financial institutions for enterprise-wide, integrated financial risk and profitability management. Products and services sold to the consumer credit industry have traditionally accounted for most of the Company's revenues. However, the Company is actively promoting its products and services to other segments of the credit industry, including mortgage and small business lending; and to non-credit industries, particularly personal lines insurance, direct marketing, telecommunications and healthcare. Consumer credit accounted for over 77 percent of the Company's revenues in each of the three years in the period ended September 30, 1997. Sales to customers in the direct marketing business, including the marketing arms of financial service businesses, accounted for 13 to 15 percent of revenues in each of the three years in the period ended September 30, 1997. Revenues from sales to the insurance industry accounted for 2 to 3 percent of revenues in each of the three years in the period ended September 30, 1997. In fiscal 1997 the Company's recorded the first revenues from its new Healthcare Information business unit. Analytic Products The Company's primary analytic products are scoring algorithms (also called "scorecards") which can be used in screening lists of prospective customers, evaluating applicants for credit or insurance and managing existing credit accounts. Some of the most common types of scoring algorithms developed by the Company are described below. Scoring algorithms are developed by correlating information available at the time a particular decision is made with known performance at a later date. Scoring algorithms can be developed to predict the likelihood of different kinds of performance (e.g. credit delinquency, response to a solicitation, and insurance claims frequency); they can be developed from different data sources (e.g. credit applications and credit bureau files); and they can be developed either for a particular user ("custom" scorecards) or for many users in a particular industry ("pooled data" or "generic" scorecards). Credit Application Scoring Algorithms. First introduced in 1958, Credit Application Scoring Algorithms are tools that permit credit grantors to calculate the risk of lending to individual applicants. They are delivered in the form of a table of numbers, one for each possible answer to each of about ten to twelve selected predictive questions that are found on the form filled in by the applicant or on a credit report purchased by the credit grantor. The user "scores" an applicant by looking in the table for the number associated with the answers provided about the applicant and calculating their sum. The "score" thus obtained is compared to a "cutoff score" previously established by the credit grantor's management to determine whether or not to extend the requested credit. A significant proportion of revenues from Credit Application Scoring Algorithms is derived from sales of new or replacement algorithms to existing users. 4 Behavior Scoring Algorithms. The Company pioneered Behavior Scoring Algorithms with a research program in 1969. The first commercially successful products were introduced in 1978. In contrast to Credit Application Scoring Algorithms which deal with credit applicants, Behavior Scoring Algorithms permit management to define rules for the treatment of existing credit customers on an ongoing basis. Although similar in statistical principle and manner of construction, Behavior Scoring Algorithms differ in several important respects from Credit Application Scoring Algorithms. First, rather than using an applicant's answers on a credit application or a credit report, the data used to determine a behavior score come from the customer's purchase and payment history with that credit grantor. Second, each customer is scored monthly, rather than only at application time, and an action is selected each time in response to the score. Third, the available actions are much more varied than simply granting or denying credit to an applicant. For example, if an account is delinquent, the actions available to a credit manager can include a simple message on a customer's bill calling attention to the delinquency, a dunning letter, a phone call, or a referral to a collection agency, with the action to be taken in any given case to be determined by the customer's behavior score. Scores produced by specially designed Behavior Scoring Algorithms can be used to select actions for mailing promotional materials to customers, for changing the credit limits allowed, for authorizing individual credit card transactions, for taking various actions on delinquent accounts and for reissuing credit cards which are about to expire. Behavior Scoring Algorithms are also components of the Adaptive Control Systems described below. Credit Bureau Scoring Services. The Company also provides scoring algorithms to each of the three major automated credit bureaus in the United States based solely on the information in their files. Customers of the credit bureau can use the scores derived from these algorithms to prescreen solicitation candidates, to evaluate applicants for new credit and to review existing accounts. Credit grantors using these services pay based on usage and the Company and the credit bureau share these usage revenues. The PreScore(R) service offered by the Company combines a license to use such algorithms for prescreening solicitation candidates along with tracking and consulting services provided by the Company and is priced on a time or usage basis. ScoreNetSM Service. The ScoreNet Service, introduced in August 1991, allows credit grantors to obtain Fair, Isaac's credit bureau scores and related data on a regular basis and in a format convenient for use in their account management programs. In most cases the account management program is a Fair, Isaac Adaptive Control System or Adaptive Control service at a credit card processor. The Company obtains the data from the credit bureau(s) selected by each subscriber and delivers it to the subscriber in a format compatible with the subscriber's account management system. Insurance Scoring Algorithms. The Company has also delivered scoring systems for insurance underwriters and marketers. Such systems use the same underlying statistical technology as credit scoring systems, but are designed to predict claim frequency or profitability of applicants for personal insurance such as automobile or homeowners' coverage. During fiscal 1993, the Company introduced a Property Loss Score ("PLS") service in conjunction with Equifax, Inc., a leading provider of data to insurance underwriters. In 1994, the Company introduced a similar service in conjunction with Trans Union called "ASSIST" which is designed to predict automobile insurance risk. In 1995, with Equifax Inc., the Company introduced a risk prediction score for automobile insurance called Casualty Loss Score ("CLS") service. Equifax subsequently spun off its Insurance Unit, which is now Choicepoint. In 1996 with Acxiom, the Company introduced a risk prediction score for homeowners' and automobile insurance called InfoScore. PLS, ASSIST, CLS and InfoScore are similar to the credit bureau scoring services in that a purchaser of data from Choicepoint, Trans Union or Acxiom can use the scores to evaluate the risk posed by applicants for homeowners' or automobile insurance. The Company and Choicepoint, Trans Union or Acxiom, as the case may be, share the usage revenue produced by these services. Aspects of automated application processing systems and Adaptive Control Systems are also applicable to insurance underwriting decisions. The Company is actively marketing its products and services to the insurance industry. Other Scoring Algorithms. The Company has developed scoring algorithms for other users, which include public utilities that require deposits from selected applicants before starting service, tax authorities that select returns to be audited, and mortgage lenders. The Company has also developed scoring algorithms for use in selecting life insurance salesmen, finance company managers, and prisoners suitable for early release, although to date these algorithms have not generated significant revenues. 5 Automated Strategic Application Processing Systems (ASAP) The Company's Automated Strategic Application Processing systems (ASAP) automate the processing of credit applications, including the implementation of the Company's Credit Application Scoring Algorithms. The Company offers Mid-Range ASAPs which are stand-alone assemblies of hardware and software; Mainframe ASAP, SEARCH, StrategyWare,(TM) and ScoreWare consisting of software for IBM and IBM compatible mainframe computers; and CreditDesk which consists of software for personal computers. The Company does not expect significant sales of new Mid-Range ASAP systems but still derives significant maintenance and enhancement revenues from existing systems. The tasks performed by ASAPs include: (i) checking for the completeness of the data initially given and printing an inquiry letter in the case of insufficient information; (ii) checking whether an applicant is a known perpetrator of fraud; (iii) electronically requesting, receiving, and interpreting a credit report when it is economic to do so; (iv) assigning a credit limit to the account, if acceptable, and printing a denial letter if not; and (v) forwarding the data necessary to originate billing records for accepted applicants. Mid-Range ASAP is a minicomputer-based system which carries out the tasks listed above in a manner extensively "tailored" to each user's unique requirements. Mainframe ASAP is a software-only package designed to be executed on IBM or IBM compatible mainframe computers. It is most useful for very large volume credit grantors who elect to enter application information from a number of separate locations. CreditDesk is designed for use on stand-alone or networked personal computers. Although its software functions are not tailored as extensively as the other versions of ASAP, CreditDesk features an easy-to-use graphics interface. The Company also sells software components for IBM or compatible mainframe computers under the tradenames "SEARCH" and "ScoreWare." SEARCH acquires and interprets credit bureau reports as a separate package. ScoreWare provides for easy installation of credit application scorecards and computes scores from such scorecards as part of the application processing sequence. StrategyWare combines the application processing features described above with the "Champion/Challenger" strategy concept described below under Adaptive Control Systems. The Company's Mid-Range and Mainframe ASAP systems are currently being used in the United States, Canada, and Europe by banks, retailers, and other financial institutions. CreditDesk is being used by over 600 credit grantors in more than a dozen countries. To support these installations, the Company provides complete hardware and software maintenance, general software support in the form of consulting, and specific software support by producing enhancements, as well as other modifications at a user's request. Adaptive Control Systems The Company's most advanced product is the Adaptive Control System, now generally marketed under the tradename "TRIAD". An Adaptive Control System is a complex of behavior scoring algorithms, computer software, and account management strategy addressed to one or more aspects of the management of a consumer credit or similar portfolio. For example, the Company has developed an Adaptive Control System for use by an electric utility in the management of its customer accounts. A principal feature of an Adaptive Control System is software for testing and evaluation of alternative management strategies, designated the "Champion and Challenger Strategy Software." The "Champion" strategy applied to any aspect of controlling a portfolio of accounts (such as determining collection messages or setting credit limits) is that set of rules considered by management to be the most effective at the time. A "Challenger" strategy is a different set of rules which is considered a viable candidate to outperform the Champion. The Company's Champion and Challenger Strategy software is tailored to the customer's billing system and is designed to permit the operation of both strategies at the same time and also to permit varying fractions of the accounts to go to each of the competing strategies. For example, if a Challenger is very different from the Champion, management may wish to test it on a very small fraction of the accounts, rather than to risk a large loss. Alternatively, if a Challenger appears to be outperforming a Champion, management can direct more and more of the account flow to it. There need not, in fact, be a limitation on the number of Challengers in place at any one time beyond the limits imposed by the ability of the Company and the user management to study the results. A Champion/Challenger structure is based on one or more of the Company's component products, usually Behavior Scoring Algorithms, as well as Company-developed software that permits convenient allocation of accounts to strategies and convenient modification of the strategies themselves. Adaptive Control Systems can also consider information external to the particular creditor, particularly scores and other information obtained from credit 6 bureaus, in the design of strategies. A specific goal of the Company's Adaptive Control System product is to make the account management functions of the user as independent as possible of the user's overall data processing systems development department. For a Champion/Challenger structure to function effectively, new Challenger strategies must be developed continually as insight is gained, as external conditions change, and as management goals are modified. The Company often participates in the design and development of new Challenger strategies and in the evaluation of the results of Champion/Challenger competitions as they develop. Contracts for Adaptive Control Systems for end-users generally include multi-year software maintenance, strategy design and evaluation, and consulting components. The Company also provides Adaptive Control services through First Data Resources, Inc. and Total System Services, Inc., the two largest third-party credit card processors in the United States. The Adaptive Control service is also available in the United Kingdom through First Data Resources, Ltd. and Bank of Scotland; in Buenos Aires, through Argencard S.A.; and in Frankfurt, through B+S Card Service Gmbh. Credit card issuers subscribing to these services pay monthly fees based on the number of accounts processed. During fiscal 1996, the Company introduced StrategyWare which is an Adaptive Control System designed to apply Champion-Challenger principles to the processing of new credit accounts, rather than the management of existing accounts. The Company also believes that Adaptive Control Systems can operate in areas other than consumer credit; and, as noted above, has provided an Adaptive Control System to an electric utility company. DynaMark DynaMark provides a variety of data processing and database management services to companies and organizations in direct marketing. DynaMark offers several proprietary tools in connection with such services including DynaLink and DynaMatch. DynaLink gives financial institutions and other users remote computer access to their "warehoused" customer account files or marketing databases. It allows them to perform on-line analyses ranging from profiling the history of a single customer purchase or credit usage to calling up print-outs of all files having certain defined characteristics in common. DynaMatch uses a unique scoring system to identify matching or duplicate records that most standard "merge-purge" systems would overlook. Credit managers and direct marketers can use it to identify household relationships (accounts registered in different names, but sharing a common address and surname) and to eliminate costly duplicate mailings. Credit card issuers can use it to spot potentially fraudulent or overlimit credit card charges by individuals using two or more cards issued under slightly different names or addresses. Risk Management Technologies Risk Management Technologies (RMT) provides management tools to larger, more sophisticated financial institutions around the world for enterprise-wide, integrated financial risk and profitability management. Financial institutions must constantly evaluate the effect of interest rate changes and other factors on their entire operation including their loan, credit card and investment portfolios, to determine bottom line exposure and potential revenues. RMT's financial decision support software, the RADAR System, is a comprehensive enterprise management system that performs asset-liability management, transfer pricing, and performance measurement modeling. RMT's Genesis product is a graphical data integration management tool used to integrate data rapidly from multiple legacy systems and other sources into a consolidated, client/server data warehouse. Within this warehouse, data remains readily available for use in multiple decision-support applications. Healthcare The Company is currently providing analytical marketing services to a large pharmaceuticals manufacturer to help improve customer relationship and "compliance" management using a variety of techniques including internet communications. "Compliance" in this instance refers to whether prescriptions are actually filled and taken to completion. The Company has also introduced a receivables management system for hospitals and other healthcare providers which is currently in beta testing. 7 Customer Service and Support The Company provides service and support to its customers in a variety of ways. They include: (i) education of liaison teams appointed by buyers of scoring algorithms and software; ( ii) maintenance of an answering service that responds to inquiries on minor technical questions; (iii) proactive Company-initiated follow-up with purchasers of the Company's products and services; (iv) conducting seminars held several times a year in various parts of the United States and, less often, in other countries; (v) conducting annual conferences for clients in which user experience is exchanged and new products are introduced; (vi) delivery of special studies which are related to the use of the Company's products and services; and (vii) consulting and training services provided by the Company's subsidiary, Credit & Risk Management Associates, Inc. ("CRMA"). Scoring algorithms can diminish in effectiveness over time as the population of applicants or customers changes. Such changes take place for a variety of reasons, many of which are unknown or poorly understood, but some are a result of marketing strategy changes or shifts in the national or the local economy. It is to the user's advantage, therefore, to monitor the performance of its algorithms so that they can be replaced when it is economic to do so. In response to this need as well as the requirement of the Equal Credit Opportunity Act that scoring algorithms be periodically validated, the Company provides tracking services and software products which measure the continuing performance of its scoring algorithms while in use by customers. Technology The Company's personnel have a high degree of expertise in several separate disciplines: operations research, mathematical statistics, computer-based systems design, programming and data processing. The fundamental principle of operations research is to direct attention to a class of management decisions, to make a mathematical model of the situation surrounding that class of decisions and to find rules for making the decisions which maximize achievement of the manager's goal. The Company's analytic products are classic examples of this doctrine reduced to practice. The entire focus is on decision making using the best mathematical and computational techniques available. The fundamental goal of mathematical statistics is to provide the method for deriving the maximum amount of useful information from an undigested body of data. The objective of the design of computer-based systems is to provide a mechanism for efficiently accepting input data from a source, storing that data in a cost-effective medium, operating on the data with reliable algorithms and decision rules and reporting results in readily comprehensible forms. The Company's analytic products have a clear distinguishing characteristic in that they make management by rule possible in situations where the only alternative is reliance on a group of people whose actions can never be entirely consistent. Rules for selecting actions require computation of probabilities of results. But computing the probability of a particular result in the traditional mode, that is, by counting the number of occurrences of each possible result in all possible combinations of circumstances, clearly breaks down when the number of combinations becomes very large. When only a few thousand cases of results are available, more subtle mathematical methods must be used. The Company has been actively developing and using techniques of this kind for 41 years, as indicated by the development and continual enhancement of its proprietary suite of algorithms and computer programs used to develop scoring algorithms. The Company's products must also interface successfully with systems already in place. For example, they must accept data in various forms and in various media such as handwritten applications, video display terminal input, and telecommunications messages from credit bureaus. They must also provide output in diverse forms and media, such as video displays, printed reports, transactions on magnetic tape and printed letters. The Company's response to this interface requirement has been to develop a staff which is expert in both logical design of information systems and the various languages used for coding. 8 Markets and Customers The Company's products for use in the area of consumer credit are marketed to banks, retailers, finance companies, oil companies, credit unions and credit card companies. The Company has over 600 users of products sold directly by the Company to end-users. These include about 75 of the 100 largest banks in the United States; several of the largest banks in Canada; approximately 40 banks in the United Kingdom; more than 70 retailers; 7 oil companies; major travel and entertainment card companies; and more than 40 finance companies. Custom algorithms and systems have generally been sold to larger credit grantors. The scoring, application processing and adaptive control services offered through credit bureaus and third-party processors are intended, in part, to extend usage of the Company's technology to smaller credit issuers and the Company believes that users of its products and services distributed through third-parties number in the thousands. As noted above, the Company also sells its products to utilities, tax authorities, telecommunications and insurance companies. DynaMark markets its services to a wide variety of businesses engaged in direct marketing. These include banks and insurance companies, catalog merchandisers, fund-raisers and others. Most of DynaMark's revenues come from direct sales to the end user of its services, but in some cases DynaMark acts as a subcontractor to advertising agencies or others managing a particular project for the end-user. RMT markets to large financial institutions throughout the world. Its clients are typically large financial institutions with a wide range of products, investments and operational units and a sophisticated balance sheet. No single end-user customer accounted for more than 10% of the Company's revenues in fiscal 1997. Revenues generated through the Company's alliances with the three major credit bureaus in the United States, Equifax, Inc., Experian Information Solutions, Inc. (formerly known as TRW Information Services) and Trans Union Corporation, each accounted for approximately eight to ten percent of the Company's total revenues in fiscal 1997. The percentage of revenues derived from customers outside the United States was approximately 17 percent in fiscal 1997, 17 percent in fiscal 1996, and 14 percent in fiscal 1995. RMT derives more than half of its revenues from clients outside the United States. DynaMark had virtually no non-U.S. revenues prior to fiscal 1997. The United Kingdom, Japan and Canada are the largest international market segments. Mexico, South Africa, a number of countries in South America and almost all of the Western European countries are represented in the user base. The Company has delivered products to users in approximately 50 countries. The information set forth under the caption "Segment Information" in Note 13 to the Consolidated Financial Statements is incorporated herein by reference. The Company's foreign offices are primarily sales and customer service offices acting as agents on behalf of the U.S. production operations. Net identifiable assets, capital expenditures and depreciation associated with foreign offices are not material. The Company has enjoyed good relations with the majority of its customers over extended periods of time, and a substantial portion of its revenue is derived from repeat customers. As noted above, the Company is actively pursuing new users, particularly in the marketing, insurance and healthcare fields as well as those potential users in the consumer credit area not yet using the Company's products. Contracts and Backlog The Company's practice is to enter into contracts with several different kinds of payment terms. Scoring algorithms have historically been sold through one-time, fixed-price contracts. The Company will continue to sell scoring algorithms on this basis but has also entered into longer term contractual arrangements with some of its largest customers for the delivery of multiple algorithms. PC-ASAP ("CreditDesk") customers have the option to enter into contracts that provide for a one-time license fee or volume-sensitive monthly lease payments. The one-time and usage-based contracts contain a provision requiring monthly maintenance payments. Mainframe ASAP contracts include a one-time fee for the basic software license, plus monthly fees for maintenance and enhancement services. The Company also realizes maintenance and enhancement revenues from users of its line of Mid-Range ASAP systems. PreScore contracts call for usage or periodic license fees and there is generally a minimum charge. Contracts for the delivery of complete Adaptive Control Systems typically contain both fixed and variable elements in recognition of the fact that they extend over multiple years and must be negotiated in the face of substantial uncertainties. As noted above, the Company is also providing scoring algorithms and application processing on a service basis through credit bureaus, and credit account management services through third-party bankcard processors. Subscribers pay for these services and for the ScoreNet service based on usage. DynaMark and RMT employ a combination of fixed fee and volume-or usage-based pricing for their services. 9 As of September 30, 1997, the Company's backlog, which includes only firm contracts, was approximately $70,168,000, as compared with approximately $64,650,000 as of September 30, 1996. Most usage-based revenues do not appear as part of the backlog. The Company believes that approximately 30 percent of the September 30, 1997 backlog will be delivered after the end of the current fiscal year ending September 30, 1998. Most DynaMark contracts include unit or usage charges, the total amount of which cannot be determined until the work is completed. DynaMark's and CRMA's backlog are not significant in amount, are not considered a significant indicator of future revenues, and are not included in the foregoing figures. RMT's backlog is included in the foregoing backlog figures. Competition The Company believes that its typical product development cycle, which in the past has extended as long as ten years, has tended to moderate the Company's growth rate. It also believes, however, that this long product development lead time provides a barrier to entry of competitive products. As credit scoring, automated application processing, and behavioral scoring algorithms, all of which were pioneered by the Company, have become standard tools for credit providers, competition has emerged from five sectors: scoring algorithm builders, providers of automated application processing services, data vendors, neural network developers and artificial intelligence system builders. It is likely that a number of new entrants will be attracted to the market, including both large and small companies. Many of the Company's present and potential competitors have substantially greater financial, managerial, marketing, and technological resources than the Company. The Company believes that none of its competitors offer the same mix of products as the Company. However certain competitors may have larger shares of particular geographic or product markets. In-house analytic and systems developers are also a significant source of competition for the Company. The Company believes that the principal factors affecting competition for scoring algorithms are product performance and reliability; expertise and knowledge of the credit industry; ability to deliver algorithms in a timely manner; customer support, training and documentation; ongoing enhancement of products; and comprehensiveness of product applications. It competes with both outside suppliers and in-house groups for this business. The Company's primary competitor among outside suppliers of scoring algorithms is C.C.N. Systems Limited ("CCN") of Nottingham, England, a subsidiary of Great Universal Stores plc, a large British retailer. Scores sold by credit bureaus in conjunction with credit reports, including scores computed by algorithms developed by the Company, provide potential customers with the alternative of purchasing scores on a usage-priced basis. The Company believes that the principal factors affecting competition in the market for automated application processing systems (such as ASAP) are the same as those affecting scoring algorithms, together with experience in developing computer software products. Competitors in this area include outside computer service providers and in-house computer systems departments. The Company believes that its primary competitor in this area is American Management Systems, Incorporated ("AMS"). AMS also offers credit scoring algorithms. The Company competes with data vendors in the market for its credit bureau scoring services including PreScore and ScoreNet. In the past several years, data vendors have expanded their services to include evaluation of the raw data they provide. All of the major credit bureaus offer competing prescreening and credit bureau scoring services developed, in some cases, in conjunction with the Company's primary scoring algorithm competitor, CCN. In November 1996 it was announced that CCN had agreed to acquire Experian Information Solutions, Inc. (formerly known as TRW Information Systems & Services). Both AMS and CCN offer products intended to perform some of the same functions as the Company's Adaptive Control Systems. The Company believes that customers using its Adaptive Control Systems, in both custom end-user form and through third-party processors, significantly outnumber users of the competing AMS and CCN products. Another source of emerging competition comes from companies developing artificial intelligence systems including those known as "expert systems" and "neural networks." An expert system is computer software that replicates the decision-making process of the best available human "experts" in solving a particular class of problem, such as credit approval, charge card authorization, or insurance underwriting. Scoring technology differs from expert systems in that scoring technology is based upon a large data base of results, from which rules and algorithms are developed, as compared to expert systems, which are typically based primarily on the "expert's" judgment and less so upon a significant data base. The Company believes its technology is superior to expert system technology where sufficient performance data is available. Neural networks, on the other hand, are an alternative method of developing scoring algorithms from a data base but using mathematical techniques quite different from those used by the Company. For example, HNC Software, Inc. has developed systems using neural network technology which 10 compete with some of the Company's products and services. The Company believes that analytical skill and knowledge of the business environment in which an algorithm will be used are generally more important than the choice of techniques used to develop the algorithm; and, further, that the Company has an advantage in these areas with respect to its primary markets as compared with neural network developers. There are a large number of companies providing data processing and database management services in competition with DynaMark, some of which are considerably larger than DynaMark. The Company believes the market for such services will continue to expand rapidly for the foreseeable future. Competition in this area is based on price, service, and, in some cases, ability of the processor to perform specialized tasks. DynaMark has concentrated on providing specialized types of data processing and database management services using proprietary tools which, it believes, give it an edge over its competition in these areas. RMT is a leading provider of enterprise-wide risk management and performance-measurement solutions to major financial institutions. There are a number of companies offering enterprise-wide "solutions", or serving sub-segments of this market (such as trading operations of financial institutions), in competition with RMT. The Company believes that no direct competitor currently offers the depth and scope of analytical functionality in products and services for financial risk management that RMT provides, which gives RMT an advantage in this market. Product Protection The Company relies upon the laws protecting trade secrets and upon contractual non-disclosure safeguards, including its employee non-disclosure agreements and restrictions on transferability that are incorporated into its customer agreements, to protect its software and proprietary interests in its product methodology and know-how. The Company currently has one patent application pending but does not otherwise have patent protection for any of its programs or algorithms, nor does it believe that the law of copyrights affords any significant protection for its proprietary software. The Company instead relies principally upon such factors as the knowledge, ability, and experience of its personnel, new products, frequent product enhancements, and name recognition for its success and growth. The Company retains title to and protects the suite of algorithms and software used to develop scoring algorithms as a trade secret and has never distributed its source code. In spite of these precautions, it may be possible for competitors or users to copy or reproduce aspects of the Company's software or to obtain information that the Company regards as trade secrets. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Research and Development Technological innovation and excellence have been goals of the Company since its founding. The Company has devoted, and intends to continue to devote, significant funds to research and development. The Company has ongoing projects for improving its fundamental knowledge in the area of algorithm design, its capabilities to produce algorithms efficiently, and its ability to specify and code algorithm executing software. The information set forth in the line entitled "Research and development" in the Consolidated Statement of Income and the information set forth under the caption "Software costs" in Note 1 to the Consolidated Financial Statements is incorporated herein by reference. Above and beyond the projects formally designated as Research and Development, many of the Company's activities contain a component that produces new knowledge. For example, an Adaptive Control System, by its nature and purpose, must be designed to match its environment and learn as it operates. In the areas in which the Company's products are useful, the "laboratory" is necessarily the site of the user's operations. Hardware Manufacturing Hardware for the Company's Mid-Range ASAP systems consists primarily of a Motorola MC 68030-based central processing unit, one or more video display terminals, a disk storage unit, and various other input-output and peripheral devices. The Company's manufacturing process at its San Rafael, California facility involves assembly, testing, and quality assurance functions. Components and parts used in the Company's Mid-Range ASAP systems are purchased from outside vendors, and the Company generally seeks to use components and parts that are available in quantity from a number of distributors. The Company believes that, should any of these components become unavailable from current sources, alternative sources could be developed. Hardware manufacturing and enhancements account for less than one percent of total revenue. 11 Personnel As of September 30, 1997, the Company employed approximately 1,221 persons. None of its employees is covered by a collective bargaining agreement and no work stoppages have been experienced. ITEM 2. PROPERTIES The Company's principal office is located in San Rafael, California, approximately 15 miles north of San Francisco. The Company leases approximately 270,000 square feet of office space in four buildings at that location under leases expiring in 2001 or later. It also leases approximately 7,822 square feet of warehouse space in San Rafael for its hardware operations and for storage under month-to-month leases. The Company has also exercised an option to purchase land in San Rafael for construction of approximately 406,000 square feet of additional office space with an expected initial occupancy date in the year 2000. DynaMark leases approximately 109,000 square feet of office and data processing space in three buildings in Arden Hills, Minnesota under leases which expire in 2006. DynaMark's Printronic Division leases approximately 25,000 square feet of office and data processing space in New York City under a lease expiring in 2004. RMT leases approximately 9,200 square feet of office space in Berkeley, California. The Company also leases a total of approximately 36,000 square feet of office space for offices in Baltimore, Maryland; New Castle, Delaware; Atlanta, Georgia; Chicago, Illinois; Tampa, Florida; Toronto, Ontario; Birmingham, England; Tokyo, Japan; Paris, France; Mexico City, Mexico; and Wiesbaden, Germany. See Notes 6 and 12 in the Consolidated Financial Statements for information regarding the Company's obligations under leases and Note 15 in the Consolidated Financial Statements for information with respect to the proposed purchase of land in San Rafael. The Company believes that suitable additional space will be available to accommodate future needs. ITEM 3. LEGAL PROCEEDINGS No material legal proceedings are pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 12 EXECUTIVE OFFICERS OF THE REGISTRANT
Name Positions Held Age ---- -------------- --- Larry E. Rosenberger President and Chief Executive Officer 51 since March, 1991, Executive Vice President 1985-1991, Senior Vice President 1983-1985, Vice President 1977-1983. A Director since 1983. Joined the Company in 1974. John D. Woldrich Appointed Chief Operating Officer 54 effective August 1, 1995. Executive Vice President since 1985, Senior Vice President 1983-1985, Vice President 1977-1983. A Director since 1983. Joined the Company in 1972. Barrett B. Roach Executive Vice President since joining 57 the Company in August 1992. Chief Administrative and Financial Officer of Network Equipment Technologies, Inc. from 1986 to July 1990. Owned and operated a vineyard from July 1990 to August 1992. Patrick G. Culhane Executive Vice President since August 43 1995; Senior Vice President 1992- 1995; Vice President 1990-1992; joined the Company in 1985. H. Robert Heller Executive Vice President since September 57 1996 and a Director since February 1994. President of International Payments Institute from December 1994 to September 1996; President and Chief Executive Officer of Visa U.S.A., Inc. 1991-1993, Executive Vice President of Visa International 1989-1991. Jeffrey F. Robinson Senior Vice President since 1986, Vice 48 President 1980-1986. Treasurer 1981- 1983. Joined the Company in 1975. Kenneth M. Rapp Senior Vice President since August 1994, 51 and President and Chief Operating Officer of DynaMark, Inc. since it was founded in 1985. Peter L. McCorkell Senior Vice President since August 1995; 51 Vice President, Secretary and General Counsel since joining the Company in 1987. Patricia Cole Senior Vice President, Chief Financial 48 Officer and Treasurer since November 1996; Controller since joining the Company in September 1995. Vice President and Controller of Quest Communications International Inc. 1993- 1995; Controller of Los Angeles Cellular Telephone Company 1990-1992. David M. LaCross President, Chief Executive Officer of 45 Risk Management Technologies since it was founded in 1989. - ------------ The term of office for all officers is at the pleasure of the Board of Directors.
13 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters As of May 6, 1996, the Company's common stock began trading on the New York Stock Exchange under the symbol: FIC. Prior to that date, it was traded over-the-counter on the NASDAQ Stock Market under the symbol: FICI. At December 5, 1997, Fair, Isaac had 312 holders of record of its common stock. The following table lists the high and low last transaction prices for the periods shown, as reported by the New York Stock Exchange and the NASDAQ Stock Market. Stock Prices High Low - ------------------------------------------------------------ October 1 - December 31, 1995 29 1/4 25 January 1 - March 31, 1996 30 3/8 21 1/2 April 1 - June 30, 1996 50 30 July 1 - September 30, 1996 46 1/4 37 5/8 October 1 - December 31, 1996 39 3/8 33 5/8 January 1 - March 31, 1997 43 1/8 35 April 1 - June 30, 1997 44 7/8 30 1/4 July 1 - September 30, 1997 47 1/2 40 3/4 Dividends On May 24, 1995, Fair, Isaac announced a 100 percent stock dividend (equivalent to a two-for-one stock split) and its intention to pay quarterly dividends of 2 cents per share or 8 cents per year subsequent to issuance of the stock dividend. Quarterly dividends of that amount were paid throughout fiscal 1997. There are no current plans to change the cash dividend or to issue any further stock dividend. Unregistered Equity Sales On July 21, l997, the Company acquired all the outstanding stock of Risk Management Technologies ("RMT"), a privately held California corporation, pursuant to a merger of a wholly owned subsidiary of the Company and RMT in which RMT became a wholly-owned subsidiary of the Company (the "Merger").The Merger was effected pursuant to an Agreement and Plan of Reorganization dated as of June 12, l997 (the "Merger Agreement") among the Company, RMT and the shareholders and option holders of RMT. RMT was founded in 1989 to provide enterprise-wide risk management and performance measurement solutions to major financial institutions. Under the terms of the Merger Agreement, each outstanding share of RMT common stock and options to purchase RMT stock (after adjustment for the exercise price) were exchanged for .3254 shares of Company common stock or option equivalents. The number of shares and option equivalents issued by the Company in connection with the Merger is 1,252,655. The Company accounted for the Merger under the "pooling of interests" method. At the time of the transaction, the shares of the Company common stock and the options to purchase the Company common stock issued to the former RMT security holders in the Merger were not registered under the Securities Act of 1933, as amended (the "1933 Act"), because the transaction involved a non-public offering exempt from registration under Section 4(2) of the 1933 Act and Regulation D promulgated thereunder. 14 ITEM 6. Selected Financial Data
(dollars in thousands, except per share data) Fiscal year ended September 30, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Revenues $199,009 $155,913 $117,089 $92,046 $67,269 Income from operations 37,756 29,518 19,828 16,420 7,599 Income before income taxes 35,546 28,704 21,390 17,178 8,143 Net income 20,686 17,423 12,753 10,559 4,768 Earnings per share $1.46 $1.25 $ .93 $ .79 $ .37 Dividends per share * $ .08 $ .08 $ .055 $ .07 $ .07 At September 30, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Working capital $ 47,727 $ 34,699 $ 23,448 $17,436 $15,126 Total assets 145,228 118,023 91,009 72,056 54,875 Long-term obligations 1,183 1,552 1,930 2,333 2,729 Stockholders' equity 103,189 79,654 56,176 42,929 31,133 * Because the change to quarterly dividends was initiated in September 1995, the rate of dividends paid in fiscal 1995 does not reflect the current annual rate of 8 cents per share.
The financial data for the fiscal years ended September 30, 1993 through 1997 have been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. 15 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fair, Isaac and Company, Incorporated, provides products and services designed to help a variety of businesses use data to make better decisions on their customers, prospective customers and existing portfolios. The Company's products include statistically derived, rule-based analytical tools, software designed to implement those analytical tools and consulting services to help clients use and track the performance of those tools. The Company also provides a range of credit scoring and credit account management services in conjunction with credit bureaus and credit card processing agencies. Its DynaMark subsidiary provides data processing and database management services to businesses engaged in direct marketing activities, many of which are in the credit and insurance industries. On July 21, l997, the Company acquired Risk Management Technologies (RMT), a privately held company, which provides enterprise-wide risk management and performance measurement solutions to major financial institutions. The Company's historical statements for prior periods have been restated to account for the Company's merger with RMT on a pooling-of-interests basis. The Company is organized into business units that correspond to its principal markets: consumer credit, insurance, direct marketing (DynaMark), enterprise-wide financial risk management (RMT) and a new unit, healthcare information. Sales to the consumer credit industry have traditionally accounted for the bulk of the Company's revenues. Products developed specifically for a single user in this market are generally sold on a fixed-price basis. Such products include application and behavior scoring algorithms (also known as "analytic products" or "scorecards"), credit application processing systems (ASAP(TM) and CreditDesk(R)) and custom credit account management systems, including those marketed under the name TRIAD(TM). Software systems usually also have a component of ongoing maintenance revenue, and CreditDesk systems have also been sold under time- or volume-based price arrangements. Credit scoring and credit account management services sold through credit bureaus and third-party credit card processors are generally priced based on usage. Products sold to the insurance industry are generally priced based on the number of policies in force, subject to contract minimums. DynaMark and RMT employ a combination of fixed-fee and usage-based pricing, and the Healthcare Information unit intends to employ a combination of fixed-fee and usage-based pricing for its products. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes. In addition to historical information, this report includes certain forward-looking statements regarding events and trends that may affect the Company's future results. Such statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially. Such factors include, but are not limited to, those described in this discussion and analysis. RESULTS OF OPERATIONS Revenues The following table sets forth for the fiscal periods indicated (a) the percentage of revenues represented by fixed-price and usage-priced revenues from the Credit business unit, and the percentage of revenues contributed by the DynaMark, RMT, Insurance and Healthcare Information business units; and (b) the percentage change in revenues within each category from the prior fiscal year. Credit fixed-price revenues include all revenues from custom scorecard, software and consulting projects. Most credit usage revenues are generated through third-party alliances such as those with credit bureaus and third-party credit card processors. In addition, some credit scorecards and software products are licensed under volume-based fee arrangements and these are included in credit usage-priced revenues. 16
Percentage of Period-to-period revenue percentage changes Years ended 1996 1995 September 30, to to 1997 1996 1995 1997 1996 - ------------------------------------------------------------------------------------------------ Credit: Fixed-price 29 29 29 28 34 Usage-priced 48 50 51 23 31 DynaMark 15 13 15 41 19 RMT 4 5 3 18 123 Insurance 3 3 2 27 63 Healthcare Information 1 -- -- NM* NM* ---- ---- ----- Total Revenues 100 100 100 28 33 ==== ==== ===== * Not meaningful
Revenues from credit application scoring products increased by 36 percent in fiscal 1996 compared with fiscal 1995, and by 22 percent in fiscal 1997 compared with fiscal 1996, due primarily to the Company's sales of new products and increased sales of small business loan scoring products. ASAP revenues increased by 30 percent in fiscal l996 compared with fiscal l995, and by 47 percent in fiscal 1997 compared with fiscal 1996, primarily due to increased sales of PC-based ASAP products (CreditDesk) and sales of StrategyWare(TM), a new decision support software product released in September l996. Revenues from sales of credit account management systems (TRIAD) sold to end-users increased by 38 percent from 1995 to 1996, but decreased by 5 percent from l996 to l997. The major factor in the decline in revenues in fiscal l997 was a delay in the completion of the next major release of the software. That release (TRIAD 5.0) was completed in November l997. The Company's high degree of success in penetrating the U.S. bankcard industry with these products has limited, and may continue to limit, the revenue growth in that market. However, the Company has added functionality for the existing base of TRIAD users and is actively marketing TRIAD for other types of credit products and in overseas markets. Usage revenues are generated primarily by credit scoring services distributed through major credit bureaus and credit account management services distributed through third-party bankcard processors. Revenues from credit bureau-related services increased by 30 percent in fiscal l996 and 22 percent in fiscal l997 and accounted for approximately 37 percent and 35 percent of revenues in fiscal 1996 and 1997, respectively. Revenues from services provided through bankcard processors also increased in each of these years, primarily due to increases in the number of accounts at each of the major processors. The Company provides credit risk management consulting services primarily through CRMA, which was acquired in September 1996. CRMA completed its first year as part of the Credit business unit on September 30, l997. CRMA's revenues were 3 percent of the Company's Credit revenues. Revenues derived from alliances with credit bureaus and credit card processors have accounted for much of the Company's revenue growth and improvement in operating margins over the last three years. While the Company has been very successful in extending or renewing such agreements in the past, and believes it will generally be able to do so in the future, the loss of one or more such alliances or an adverse change in terms could have a significant impact on revenues and operating margin. Revenues generated through the Company's alliances with Equifax, Inc., Experian Information Solutions, Inc., (formerly TRW Information Systems & Services) and Trans Union Corporation each accounted for approximately eight to ten percent of the Company's total revenues in fiscal 1996 and 1997. On November 14, 1996, it was announced that Experian had been acquired by CCN Group Ltd., a subsidiary of Great Universal Stores, PLC. CCN is the Company's largest competitor, worldwide, in the area of credit scoring. TRW/Experian has offered scoring products developed by CCN in competition with those of the Company for several years. The acquisition had no apparent impact on the Company's revenues from Experian in fiscal l997. 17 On September 30, 1997, amendments to the federal Fair Credit Reporting Act became effective. The Company believes these changes to the federal law regulating credit reporting will be favorable to the Company and its clients. Among other things, the new law expressly permits the use of credit bureau data to prescreen consumers for offers of credit and insurance and allows affiliated companies to share consumer information with each other subject to certain conditions. There is also a seven-year moratorium on new state legislation on certain issues. However, the states remain free to regulate the use of credit bureau data in connection with insurance underwriting. The Company believes enacted or proposed state regulation of the insurance industry has had a negative impact on its efforts to sell insurance risk scores through credit reporting agencies. DynaMark`s revenues increased from $17.8 million in fiscal 1995 to $21.2 million in fiscal 1996 and to $29.8 million in fiscal 1997. The increases in DynaMark's revenues (excluding inter-company revenues) were due primarily to increased revenues from customers in the financial services industry. Gross margins for fiscal 1995, 1996 and 1997 were approximately 38, 39 and 42 percent, respectively. Since its acquisition, DynaMark has taken on an increasing share of the mainframe batch processing requirements of the Company's other business units. During fiscal 1997, such inter-company revenue represented approximately 14 percent of DynaMark's total revenues. Accordingly, DynaMark's externally reported revenues tend to understate DynaMark's growth and contribution to the Company as a whole. RMT's revenues for fiscal l996 increased by 123 percent compared with fiscal l995, and in fiscal 1997 increased by 18 percent compared with fiscal 1996. The rapid growth in revenues in fiscal l996 was a result of the acquisition by RMT in June l995 of Software Alliance Corporation, with which RMT had formed an alliance for marketing of all RMT products and sharing of revenues from such product sales. Under the terms of the alliance, RMT received and recorded 25 percent of the revenues from sales made by Software Alliance. After the acquisition, RMT received and recorded 100 percent of the revenues from such sales. Increases in insurance revenues for fiscal l997, compared with fiscal 1996, were due to strong growth in both insurance products sold to end-users and in the insurance scoring services offered through consumer reporting agencies. The Company recorded its first revenues from its Healthcare Information business unit in fiscal 1997. The Company's revenues derived from clients outside the United States increased from $16.4 million in fiscal 1995 to $26.1 million in 1996 and to $33.9 million in fiscal l997. RMT contributed $1.5 million, $4.3 million and $4.6 million to the Company's non-U.S. revenues for fiscal years 1995, l996 and l997, respectively. DynaMark has not had significant non-U.S. revenues. Sales of software products, including TRIAD and CreditDesk, and an increase in the number of accounts using the Company's account management services at credit card processors in Europe and Latin America, accounted for most of the increase in international revenues in fiscal 1996 and 1997. Revenues from software maintenance and consulting services each accounted for less than 10 percent of revenues in each of the three years in the period ended September 30, 1997, and the Company does not expect revenues from either of these sources to exceed 10 percent of revenues in the foreseeable future. During the period since 1990, while the rate of account growth in the U.S. bankcard industry has been slowing and many of the Company's largest institutional clients have merged and consolidated, the Company has generated above-average growth in revenues--even after adjusting for the effect of acquisitions--from its bankcard-related scoring and account management business by deepening its penetration of large banks and other credit issuers. The Company believes much of its future growth prospects will rest on its ability to: (1) develop new, high-value products, (2) increase its penetration of established or emerging credit markets outside the U.S. and Canada and (3) expand--either directly or through further acquisitions--into relatively undeveloped or underdeveloped markets for its products and services, such as direct marketing, insurance, small business lending and healthcare information management. 18 Over the long term, in addition to the factors discussed above, the Company's rate of revenue growth--excluding growth due to acquisitions--is limited by the rate at which it can recruit and absorb additional professional staff. Management believes this constraint will continue to exist indefinitely. On the other hand, despite the high penetration the Company has already achieved in certain markets, the opportunities for application of its core competencies are much greater than it can pursue. Thus, the Company believes it can continue to grow revenues, within the personnel constraint, for the foreseeable future. At times management may forego short-term revenue growth in order to devote limited resources to opportunities that it believes have exceptional long-term potential. This occurred in the period from 1988 through 1990 when the Company devoted significant resources to developing the usage-priced services distributed through credit bureaus and third-party processors. Expenses The following table sets forth for the fiscal periods indicated: (a) the percentage of net revenues represented by certain line items in the Company's Consolidated Statement of Income and (b) the percentage change in the amount of each such line item from the prior fiscal year.
Percentage of Period-to-period revenue percentage changes Years ended 1996 1995 September 30, to to 1997 1996 1995 1997 1996 - --------------------------------------------------------------------------------------------------- Total revenues 100 100 100 28 33 ---- ---- ---- Costs and expenses: Cost of revenues 36 37 37 26 32 Sales and marketing 15 17 20 13 11 Research and development 9 6 4 90 86 General and administrative 20 21 21 23 33 Amortization of intangibles 1 -- 1 74 3 ---- ---- ---- Total costs and expenses 81 81 83 28 30 ---- ---- ---- Income from operations 19 19 17 28 49 Other income (expense) (1) (1) 1 NM* NM* ---- ---- ---- Income before income taxes 18 18 18 24 34 ---- ---- ---- Provision for income taxes 8 7 7 32 31 ---- ---- ---- Net income 10 11 11 19 37 ==== ==== ==== * Not meaningful
Cost of revenues Cost of revenues consists primarily of personnel, travel and related overhead costs; costs of computer service bureaus; and the amounts paid by the Company to credit bureaus for scores and related information in connection with the ScoreNet(R) Service. Cost of revenues, as a percentage of revenues, remained essentially unchanged from fiscal l995 to fiscal 1996, and declined slightly in fiscal l997. The decrease in fiscal l997 was due primarily to the reassignment to research and development activities of certain personnel whose primary assignment had been production and delivery. Sales and marketing Sales and marketing expenses consist principally of personnel, travel, overhead, advertising and other promotional expenses. As a percentage of revenues, sales and marketing expenses decreased in fiscal 1996 compared with fiscal 1995 and further decreased in fiscal l997 due primarily to a reduction in media advertising. 19 Research and development Research and development expenses include the personnel and related overhead costs incurred in product development, researching mathematical and statistical algorithms and developing software tools that are aimed at improving productivity and management control. Research and development increased sharply from fiscal l995 to fiscal 1996 and from fiscal 1996 to fiscal 1997. After several years of concentrating on developing new markets--either geographically or by industry--for its existing technologies, in fiscal 1996 and fiscal l997 the Company renewed its historical emphasis on developing new technologies, especially in the area of software development. General and administrative General and administrative expenses consist mainly of compensation expenses for certain senior management, corporate facilities expenses, the costs of administering certain benefit plans, legal expenses, expenses associated with the exploration of new business opportunities and the costs of operating administrative functions, such as finance and computer information systems. As a percentage of revenues, general and administrative expenses were essentially unchanged for fiscal l995, l996 and l997. Amortization of intangibles The Company is amortizing the intangible assets arising from various acquisitions over periods ranging from 2 to 15 years. The level of amortization expense in future years will depend, in part, on the amount of additional payments to the former shareholders of CRMA, a privately held company acquired at the end of fiscal l996. See below, under "Capital Resources and Liquidity." Other income (expense) The table in Note 14 to the Consolidated Financial Statements presents the detail of other income and expenses. Interest income is derived from the investment of funds surplus to the Company's immediate operating requirements. At September 30, 1997, the Company had approximately $26.1 million invested in U.S. treasury securities and other interest-bearing instruments. Interest income increased in fiscal 1996 due to rising interest rates and the increasing balance in interest-bearing accounts and instruments, and in fiscal 1997 due to higher average cash balances. The Company's share of operating losses in certain early-stage development companies that are accounted for using the equity method is charged to other expense. During the quarter ended September 30, l997, the Company wrote off non-marketable investments with an equity basis of $773,000, principally an Italian start-up venture due to the potential negative impact on the start-up's operations from a new privacy law. In addition, during the quarter ended September 30, 1996, the Company wrote off an investment in a different early-stage development company due to the deteriorating financial condition of that entity. The write-offs and the Company's share of losses in early-stage development companies were primarily responsible for the difference between the increase in operating income in fiscal l996 and 1997 (49 percent and 28 percent, respectively) and the increase in net income (37 percent and 19 percent, respectively). Note 5 to the Consolidated Financial Statements describes the Company's investment in such companies. Provision for income taxes The Company's effective tax rate was 40.4 percent, 39.3 percent and 41.8 percent in fiscal l995, l996 and l997, respectively. The increase to 41.8 percent in fiscal 1997 was due primarily to the nondeductible nature of goodwill, one-time acquisition costs for RMT and an increase in the valuation allowance of deferred tax assets. The Company expects its effective tax rate in fiscal 1998 to be approximately 40 percent, barring any change in the tax laws. 20 CAPITAL RESOURCES AND LIQUIDITY Working capital increased from $23,448,000 at September 30, 1995 to $34,699,000 at September 30, 1996, and to $47,727,000 at September 30, l997. The increase in fiscal 1996 was due primarily to increases in accounts receivable, cash and cash equivalents and prepaid expenses and other assets, which more than offset the increase in accrued compensation and employee benefits and accounts payable and other accrued liabilities. The increase in fiscal 1997 was due primarily to increases in accounts receivable and unbilled work in progress, which more than offset the increase in accrued compensation and employee benefits and the decrease in prepaid expenses and other assets. The Company's exposure to collection risks is comprised of the sum of accounts receivable plus unbilled work in progress, less billings in excess of earned revenues. Changes in contract terms and product mix, along with variations in timing, may cause fluctuations in any or all of these items. During fiscal 1997, the increase in accounts receivable and billings in excess of earned revenues were proportional to the increase in revenues. The greater increase in unbilled work was due primarily to changes in product mix and contract terms. The Company has capitalized as goodwill the amount of $45,000 for amounts due to the former stockholders of CRMA based upon its financial results in fiscal 1997 under the CRMA purchase agreement. Additional payments to the former stockholders of CRMA based upon CRMA's financial results in fiscal 1998 and 1999 may also be required. Those amounts, which will be paid 55 percent in Company stock and 45 percent in cash, will not exceed $1,833,000 per year. In fiscal 1996, cash provided by operations resulted primarily from net income before depreciation and amortization and increases in accrued compensation and employee benefits, partially offset by the increase in accounts receivable. Cash was used in investing activities primarily for additions to property and equipment, purchases of interest-bearing investments, the acquisitions of Printronic and CRMA, and an "earn-out" payment to the former shareholders of DynaMark, partially offset by the maturities of interest-bearing investments. Cash was used in financing activities primarily for the payment of dividends and the reduction of capital lease obligations, partially offset by cash generated by the exercise of stock options. In fiscal 1997, cash provided by operations resulted primarily from net income before depreciation and amortization, decreases in prepaid expenses and other assets and increases in accrued compensation and employee benefits, partially offset by the increase in accounts receivable and unbilled work in progress. Cash was used in investing activities primarily for additions to property and equipment and the purchase of interest-bearing investments, partially offset by the maturities of interest-bearing investments. Cash was used in financing activities for the payment of dividends, reduction of capital lease obligations and repurchase of Company stock, partially offset by cash generated by the exercise of stock options. Future cash flows will continue to be affected by operating results, contractual billing terms and collections, investment decisions and dividend payments, if any. At September 30, 1997, the Company had no significant capital commitments other than those obligations described in Notes 3, 6 and 12 of the Consolidated Financial Statements. On December 1, 1997, the Company exercised an option to purchase undeveloped land in San Rafael, California, with the intention of constructing an office complex to accommodate future growth. The purchase price is $9.35 million plus certain costs incurred by the seller as defined in the agreement. Development is expected to commence in fiscal 1998 and will involve a material capital commitment by the Company. The Company intends to fund the acquisition and development of this land using long-term debt, equity or other financing. Excepting external financing of this capital commitment, the Company believes that the cash and marketable securities on hand, along with cash expected to be generated by operations, will be adequate to meet its capital and liquidity needs for both the current year and the foreseeable future. 21 YEAR 2000 The Company is performing Year 2000 conversion work on its software products marketed to customers. The updated versions of its software products currently being shipped to customers are Year 2000 compliant. The Year 2000 conversion work for earlier versions of the Company's software installed at customer sites will be performed as part of the Company's normal upgrade and maintenance process. Additionally, the Company has completed its Year 2000 audit of internal systems applications and determined that approximately 95 percent of its internally developed systems are Year 2000 compliant. Applications supplied by third parties are either Year 2000 compliant or have patches currently available to bring them into compliance. The Company plans to be fully compliant by the end of fiscal l998. The Company cannot now estimate the costs that will be incurred in performing Year 2000 conversion work. QUARTERLY RESULTS The table in Note 16 to the Consolidated Financial Statements presents unaudited quarterly operating results for the last eight fiscal quarters. Management believes that all the necessary adjustments have been included in the amounts stated to present fairly the selected quarterly information, when read in conjunction with the financial statements included elsewhere in this report. This information includes all normal recurring adjustments that the Company considers necessary for a fair presentation thereof, in accordance with generally accepted accounting principles. Quarterly results may be affected by fluctuations in revenue associated with credit card solicitations, by the timing of orders for and deliveries of certain ASAP and TRIAD systems and by the seasonality of ScoreNet purchases. With the exception of the cost of ScoreNet data purchased by the Company, most of its operating expenses are not affected by short-term fluctuations in revenues; thus short-term fluctuations in revenues may have a significant impact on operating results. However, in recent years these fluctuations were generally offset by the strong growth in revenues from services delivered through credit bureaus and third-party bankcard processors. Management believes that neither the quarterly variations in net revenues and net income nor the results of operations for any particular quarter are necessarily indicative of results of operations for full fiscal years. Accordingly, management believes that the Company's results should be evaluated on an annual basis. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks None. 22 ITEM 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT AUDITORS The Board of Directors Fair, Isaac and Company, Incorporated: We have audited the accompanying consolidated balance sheets of Fair, Isaac and Company, Incorporated, and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fair, Isaac and Company, Incorporated, and subsidiaries as of September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP San Francisco, California October 29, 1997, except as to note 15, which is as of December 1, 1997 23 CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data) Years ended September 30, 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Revenues $199,009 $155,913 $117,089 Costs and expenses: Cost of revenues 72,566 57,732 43,652 Sales and marketing 29,162 25,722 23,236 Research and development 17,572 9,265 4,973 General and administrative 40,679 32,942 24,689 Amortization of intangibles 1,274 734 711 --------- --------- --------- Total costs and expenses 161,253 126,395 97,261 --------- --------- --------- Income from operations 37,756 29,518 19,828 Other income (expense), net (2,210) (814) 1,562 --------- ---------- --------- Income before income taxes 35,546 28,704 21,390 Provision for income taxes 14,860 11,281 8,637 --------- --------- --------- Net income $ 20,686 $ 17,423 $ 12,753 ========= ========= ========= Earnings per share $1.46 $1.25 $.93 ========= ========= ========= Shares used in computing earnings per share 14,202,000 13,922,000 13,693,000 ========== ========== ========== See accompanying notes to the consolidated financial statements.
24 CONSOLIDATED BALANCE SHEETS
(dollars in thousands) September 30, 1997 1996 - ------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 13,209 $ 11,487 Short-term investments 6,108 7,487 Accounts receivable, net of allowance 1997: $758; 1996: $485 36,147 28,206 Unbilled work in progress 18,176 10,565 Prepaid expenses and other current assets 3,673 4,778 Deferred income taxes 4,517 2,904 ------------ ---------- Total current assets 81,830 65,427 Long-term investments 13,261 12,647 Property and equipment, net 34,486 23,652 Intangibles, net 8,361 9,557 Deferred income taxes 3,369 2,304 Other assets 3,921 4,436 ------------ ---------- $ 145,228 $ 118,023 ============ ========== Liabilities and stockholders' equity Current liabilities: Accounts payable and other accrued liabilities $ 8,228 $ 7,899 Accrued compensation and employee benefits 19,160 17,511 Billings in excess of earned revenues 6,346 4,940 Capitalized leases 369 378 ------------ ---------- Total current liabilities 34,103 30,728 Other liabilities 6,753 6,089 Capitalized leases 1,183 1,552 Commitments and contingencies -- -- ------------ ---------- Total liabilities 42,039 38,369 ------------ ---------- Stockholders' equity: Preferred stock -- -- Common stock 135 133 Paid in capital in excess of par value 26,025 21,628 Retained earnings 77,453 58,009 Less treasury stock (1997: 12,114; 1996: 15,938 shares at cost) (433) (68) Cumulative translation adjustments (308) (145) Unrealized gains on investments 317 97 ------------ ---------- Total stockholders' equity 103,189 79,654 ------------ ---------- $ 145,228 $ 118,023 ============ ========== See accompanying notes to the consolidated financial statements.
25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from September 30, 1994, to September 30, 1997 (in thousands) - --------------------------------------------------------------------------------------------------------------------------- Common Stock Paid in Unrealized Total -------------- capital in Pension Cumulative gains on stock- Par excess of Retained Treasury adjust- translation invest- holders' Shares value par value earnings stock ments adjustments ments equity ------ ----- ---------- -------- -------- ------- ----------- --------- -------- Balances at September 30, 1994 12,640 $67 $13,649 $29,554 $(341) $-- $-- $-- $42,929 Issuance of restricted stock 4 -- 4 -- -- -- -- -- 4 Exercise of stock options 217 1 450 -- -- -- -- -- 451 Tax benefit of stock options -- -- 115 -- -- -- -- -- 115 Contribution/sale to ESOP 48 -- 729 -- 113 -- -- -- 842 Net income -- -- -- 12,753 -- -- -- -- 12,753 Dividends declared -- -- -- (668) -- -- -- -- (668) Stock dividend -- 62 -- (62) -- -- -- -- -- Adoption of SFAS No. 115 at October 1, 1995 -- -- -- -- -- -- -- (77) (77) Unrealized gains on investments -- -- -- -- -- -- -- 233 233 Pension adjustment -- -- -- -- -- (406) -- -- (406) -------- ----- ------- ------- ----- --------- ------ --------- --------- Balances at September 30, 1995 12,909 130 14,947 41,577 (228) (406) -- 156 56,176 Issuance of common stock 101 1 3,586 -- -- -- -- -- 3,587 Issuance/vesting of restricted stock 1 -- 115 -- -- -- -- -- 115 Exercise of stock options 221 2 911 -- -- -- -- -- 913 Tax benefit of stock options -- -- 1,124 -- -- -- -- -- 1,124 Contribution/sale to ESOP 38 -- 945 -- 160 -- -- -- 1,105 Net income -- -- -- 17,423 -- -- -- -- 17,423 Dividends declared -- -- -- (991) -- -- -- -- (991) Pension adjustment -- -- -- -- -- 406 -- -- 406 Unrealized losses on investments -- -- -- -- -- -- -- (59) (59) Cumulative translation adjustments -- -- -- -- -- -- (145) -- (145) -------- ----- ------- ------- ----- --------- ------ --------- --------- Balances at September 30, 1996 13,270 133 21,628 58,009 (68) -- (145) 97 79,654 Issuance of common stock 47 -- 1,044 -- -- -- -- -- 1,044 Vesting of restricted stock -- -- 289 -- -- -- -- -- 289 Exercise of stock options 141 2 1,018 -- -- -- -- -- 1,020 Tax benefit of stock options -- -- 1,474 -- -- -- -- -- 1,474 Contribution/sale to ESOP 41 -- 504 -- 105 -- -- -- 609 Deferred compensation -- -- 68 -- -- -- -- -- 68 Purchase of treasury stock (37) -- -- -- (470) -- -- -- (470) Net income -- -- -- 20,686 -- -- -- -- 20,686 Dividends declared -- -- -- (1,028) -- -- -- -- (1,028) Charge to reflect change in RMT's fiscal year -- -- -- (214) -- -- -- -- (214) Unrealized gains on investments -- -- -- -- -- -- -- 220 220 Cumulative translation adjustments -- -- -- -- -- -- (163) -- (163) -------- ----- ------- ------- ----- --------- ------ --------- --------- Balances at September 30, 1997 13,462 $135 $26,025 $77,453 $(433) $ -- $(308) $317 $103,189 ======== ===== ======= ======= ===== ========= ====== ========= ========= See accompanying notes to the consolidated financial statements.
26 CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands) Years ended September 30, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $20,686 $17,423 $12,753 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 11,753 7,928 6,227 Equity loss in investments 2,082 821 97 Investment write-off 773 1,535 -- Deferred income taxes (2,824) 84 (1,714) Charge to reflect change in RMT's fiscal year (214) -- -- Changes in operating assets and liabilities: Increase in accounts receivable (8,104) (7,824) (5,380) Decrease (increase) in unbilled work in progress (7,611) 1,425 (5,149) Decrease (increase) in prepaid expenses and other assets 2,945 (3,180) (1,585) Decrease (increase) in other assets 515 (40) (355) Increase in accounts payable and other accrued liabilities 329 2,894 753 Increase in accrued compensation and employee benefits 3,659 5,105 4,796 Increase (decrease) in billings in excess of earned revenues 1,406 (1,244) 2,679 Increase (decrease) in other liabilities 664 (1,002) (32) -------- -------- -------- Net cash provided by operating activities 26,059 23,925 13,090 -------- -------- -------- Cash flows from investing activities Purchases of property and equipment (21,653) (13,472) (10,912) Proceeds from sale of property and equipment 340 -- -- Purchase of Printronic and CRMA, net of cash acquired (78) (1,682) -- Purchase of DynaMark -- (1,129) (2,150) Purchases of investments (9,658) (10,781) (9,240) Proceeds from maturities of investments 7,568 5,913 7,104 -------- -------- -------- Net cash used in investing activities (23,481) (21,151) (15,198) -------- -------- -------- Cash flows from financing activities Principal payments of capital lease obligations (378) (391) (478) Issuance of stock 1,020 928 494 Dividends paid (1,028) (991) (668) Repurchase of company stock (470) -- -- -------- -------- -------- Net cash used in financing activities (856) (454) (652) -------- -------- -------- Increase (decrease) in cash and cash equivalents 1,722 2,320 (2,760) Cash and cash equivalents, beginning of year 11,487 9,167 11,927 -------- -------- -------- Cash and cash equivalents, end of year $13,209 $11,487 $9,167 ======== ======== ======== See accompanying notes to the consolidated financial statements.
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Summary of Significant Accounting Policies Nature of business Fair, Isaac and Company, Incorporated, (the "Company") is incorporated under the laws of the State of Delaware. The Company offers a variety of technological tools to enable users to make better decisions through data. The Company is a world leader in developing predictive and risk assessment models for the financial services industry, including credit and insurance scoring algorithms. The Company also offers direct marketing and database management services, and enterprise-wide risk management and performance measurement solutions to major financial institutions through its wholly owned subsidiaries, DynaMark, Inc. (DynaMark) and Risk Management Technologies (RMT), respectively. Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated from the consolidated financial statements. Use of estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents consist of cash in banks and investments with an original maturity of 90 days or less at time of purchase. Investments Investments in U.S. government obligations and marketable equity securities are classified as "available-for-sale" and carried at market. Investments in 50% or less owned companies in which the Company has the ability to exercise significant influence are accounted for using the equity method and are classified as non-marketable securities. Other investments are carried at the lower of cost or net realizable method and are classified as non-marketable securities. Investments classified as available-for-sale securities with remaining maturities over one year and non-marketable securities are classified as long-term investments. Credit and market risk The Company invests a portion of its excess cash in U.S. government obligations and has established guidelines relative to diversification and maturities that maintain safety and liquidity. An allowance for doubtful accounts is maintained at a level which management believes is sufficient to cover potential credit losses. Actual losses and allowances have been within management's expectations. Depreciation and amortization Depreciation and amortization on property and equipment including leasehold improvements and capitalized leases are provided using the straight-line method over estimated useful lives ranging from three to ten years or the term of the respective leases. 28 Revenue recognition Revenues from contracts for the development of credit scoring systems and custom software are recognized using the percentage-of-completion method of accounting based upon milestones which are defined using management's estimates of costs incurred at various stages of the project as compared to total estimated project costs. Revenues determined by the percentage-of-completion method in excess of contract billings are recorded as unbilled work in progress. Such amounts are generally billable upon reaching certain performance milestones that are defined by the individual contracts. Deposits billed and received in advance of performance under contracts are recorded as billings in excess of earned revenues. Revenues from usage-priced products and services are recognized on receipt of usage reports from the third-parties through which such products and services are delivered. Amounts due under such arrangements are recorded as unbilled work in progress until collected. Revenues from non-customized software licenses and shrink-wrapped products are recognized upon delivery of product and services, or license renewal. Revenues from products and services sold on time-based pricing, including maintenance of computer and software systems, are recognized ratably over the contract period. Software costs The Company follows one of two paths to develop software. One involves a detailed program design, which is used when introducing new technology; the other involves the creation of a working model for modification to existing technologies that has been supported by adequate testing. All costs incurred prior to the resolution of unproven functionality and features, including new technologies, are expensed as research and development. After the uncertainties have been tested and the development issues have been resolved, technological feasibility is achieved and subsequent costs such as coding, debugging and testing are capitalized. When developing software using existing technology, the costs incurred prior to the completion of a working model are expensed. Once the product design is met, this typically concludes the software development process and is usually the point at which technological feasibility is established. Subsequent expenses, including coding and testing, if any, are capitalized. For the three-year period ending September 30, 1997, technological feasibility coincided with the completion process; thus, all design and development costs were expensed as research and development costs. Purchased software costs are amortized over three years. For the years ended September 30, 1997, 1996 and 1995, amortization of capitalized software was $1,069,000, $248,000 and $573,000, respectively. At September 30, 1997 and 1996, unamortized purchased computer software costs were $3,228,000 and $1,241,000, respectively. Intangibles The intangible assets consisting of goodwill and non-compete agreements arose principally from business acquisitions and are amortized on a straight-line basis over the period of expected benefit which ranges from 2 to 15 years. The Company assesses the recoverability of goodwill by evaluating the undiscounted projected results of operations over the remaining amortization period. Income taxes Income taxes are recognized during the year in which transactions enter into the determination of financial statement income, with deferred taxes being provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Foreign currency The Company has determined that the functional currency of each foreign operation is the local currency. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rate on the balance sheet date, while revenues and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of stockholders' equity. 29 Earnings per share Earnings per share are based on the weighted-average number of common shares outstanding and common stock equivalent shares. Common equivalent shares result from the assumed exercise of outstanding stock options that have a dilutive effect when applying the treasury stock method. Fully diluted earnings per share were approximately equal to primary earnings per share in each of the years in the three-year period ended September 30, 1997. Reclassifications Certain reclassifications were made to the 1995 and 1996 financial statements to conform to the 1997 presentation. Accounting pronouncements In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. SFAS No. 128 simplifies the standards for computing earnings per share previously found in Accounting Principles Board (APB) Opinion No. 15, Earnings per Share, and replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement and requires reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 128 is effective for financial statements issued for both interim and annual periods ending after December 15, 1997; earlier application is not permitted. This statement requires restatement of all prior-period EPS data presented. Management does not believe the impact of the diluted EPS is materially different than the primary EPS amounts currently reported in the accompanying consolidated financial statements; however, basic EPS would be higher than the primary EPS. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," SFAS No. 130 established standards for reporting comprehensive income and its components in financial statements. This statement requires that all items which 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. Comprehensive income is equal to net income plus the change in "other comprehensive income." SFAS No. 130 requires that an entity: (a) classify items of other comprehensive income by their nature in a financial statement, and (b) report the accumulated balance of other comprehensive income separately from common stock and retained earnings in the equity section of the statement of financial position. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. Management intends to conform its consolidated financial statements to this pronouncement. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for publicly held entities to follow in reporting information about operating segments in annual financial statements and requires that those entities report selected information about operating segments in interim financial statements. This statement also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. Management intends to conform its consolidated financial statements to this pronouncement. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position No. 97-2, "Software Revenue Recognition." This statement establishes standards for when to recognize revenue on software transactions and in what amounts for licensing, selling, leasing or otherwise marketing computer software. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. Management intends to conform its consolidated financial statements to this pronouncement. The Company is currently evaluating the impact of the statement in the accompanying consolidated financial statements. Fair value of financial instruments The fair values of cash and cash equivalents, accounts receivable and accounts payable are approximately equal to their carrying amounts because of the short-term maturity of these instruments. The fair values of the Company's investment securities are disclosed in Note 5. 30 2. Dividends On May 23, 1995, the Company's Board of Directors declared a 100% stock dividend equivalent to a two-for-one stock split, payable at the close of business on June 26, 1995. The par value of the additional shares was reclassified from retained earnings to common stock. All per share amounts, options, market prices and number of shares have been restated to retroactively reflect the 100% stock dividend. Concurrent with the 100% stock dividend, the Board of Directors authorized payment of a quarterly dividend of 2 cents or 8 cents per year. Previously, dividends had been paid at a rate of 3.5 cents semi-annually or 7 cents per year. Because the change to quarterly dividends was initiated in September 1995, the rate of dividends paid in fiscal 1995 does not reflect the new annual rate. 3. Mergers and Acquisitions In July 1997, the Company issued 1,252,665 shares of its common stock (including 544,218 shares underlying options assumed by the Company) in connection with the merger with RMT. The acquisition has been accounted for under the pooling-of-interests method. Accordingly, the financial statements have been restated for all prior periods to include RMT. Further, all common share and per share data have been restated for prior periods. For the pre-merger periods indicated, revenues and net income of the Company and RMT are as follows:
Nine-months ended June 30, 1997 Years ended September 30, (dollars in thousands) (Unaudited) 1996 1995 - ------------------------------------------------------------------------------------------------------------ Revenues Fair, Isaac and Company, Incorporated $137,031 $148,749 $113,881 Risk Management Technologies 5,746 7,164 3,208 -------- -------- -------- $142,777 $155,913 $117,089 ======== ======== ======== Net Income Fair, Isaac and Company, Incorporated $13,732 $16,179 $12,695 Risk Management Technologies 630 1,244 58 -------- -------- -------- $14,362 $17,423 $12,753 ======== ======== ========
RMT previously used the fiscal year ended December 31 for its financial reporting. RMT's operating results for the year ended December 31, 1996 are included in the accompanying statement of income in the column headed September 30, 1996. The statement of income's comparative 1997 results reflect the operations of the Company and RMT for the year ended September 30, 1997. Accordingly, the duplication of RMT's net income, for the three months ended December 31, 1996, has been adjusted by a $214,000 charge to retained earnings in fiscal 1997. The balance sheet at September 30, 1996 has been derived from the combination of the audited consolidated financial statements of the Company at that date and the audited financial statements of RMT at December 31, 1996. In July 1996, the Company purchased certain assets and liabilities of Printronic Corporation of America, Inc. (Printronic), a privately held direct mail computer processing company, and effective at the close of September 30, 1996, the Company acquired 100% of the stock of Credit & Risk Management Associates, Inc. (CRMA), a privately held consulting services company. The consideration paid for Printronic and CRMA consisted of 84,735 Company shares valued at $3,572,000 plus $1,697,000 in cash. Both acquisitions have been accounted for as purchases. The results of operations of Printronic have been included in the consolidated financial statements since the acquisition date; no results of operations for CRMA are included in the consolidated financial statements for the year ended September 30, 1996. The purchase price for each acquisition was allocated based on estimated fair values at the dates of acquisition. The excess of the purchase prices over the fair value of net assets or liabilities was $5,547,000 and has been recorded as goodwill, which will be amortized on a straight-line basis over 7 or 15 years. 31 The CRMA purchase agreement provides for additional contingent cash and Company stock payments to the former CRMA shareholders not to exceed $5,499,000 based on specified financial performance of CRMA through September 1999. For the year ended September 30, 1997, an additional $45,000 was capitalized as goodwill relating to the additional contingent cash and Company stock payments. Pro forma unaudited consolidated operating results of the Company, Printronic and CRMA for the years ended September 30, 1996 and 1995, assuming the acquisitions had been made as of October 1, 1995 and 1994, are summarized below. Pro forma summary (unaudited) Years ended September 30, (dollars in thousands except per share data) 1996 1995 - ------------------------------------------------------------------------------- Revenue $162,491 $122,557 Net income $17,495 $12,425 Earnings per share $1.25 $.97 These pro forma results have been prepared for comparative purposes only and include certain adjustments such as additional amortization expense as a result of goodwill and other intangible assets. They do not purport to be indicative of the results of operations that actually would have resulted had the combinations been in effect on October 1, 1995 and 1994, or of future results of operations of the consolidated entities. 4. Cash Flow Statement Supplemental disclosure of cash flow information:
Years ended September 30, (dollars in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Income tax payments $14,278 $13,785 $10,641 Interest paid $ 336 $ 223 $ 243 Non-cash investing and financing activities: Tax benefit of stock options $ 1,474 $ 1,124 $ 115 Issuance of common stock to ESOP $ 969 $ -- $ -- Contributions of treasury stock to ESOP $ 609 $ 1,105 $ 842 Vesting of restricted stock $ 289 $ 115 $ -- Purchase of Printronic and CRMA with common stock $ -- $ 3,572 $ --
5. Investments The following is a summary of available-for-sale securities and other investments at September 30, 1997 and 1996:
1997 1996 ---- ---- Gross Gross Gross Gross Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair (dollars in thousands) cost gains losses value cost gains losses value - --------------------------------------------------------------------------------------------------------------------------- Short-term investments: U.S. government obligations $ 6,069 $ 39 $-- $ 6,108 $ 7,475 $ 14 $ (2) $ 7,487 ======== ======== ===== ======== ======== ======== ======== ======== Long-term investments: U.S. government obligations $ 10,480 $ 93 $-- $ 10,573 $ 10,520 $ 99 $ (23) $ 10,596 Non-marketable securities 306 -- -- 306 1,900 -- -- 1,900 Marketable equity securities 1,987 716 (321) 2,382 79 77 (5) 151 -------- -------- ----- -------- -------- -------- -------- -------- $ 12,773 $ 809 $(321) $ 13,261 $ 12,499 $ 176 $ (28) $ 12,647 ======== ======== ===== ======== ======== ======== ======== ========
The long-term U.S. government obligations mature in one to five years. 32 For the years ended September 30, 1997 and 1996, the Company made purchases of non-marketable equity investments of $2,285,000 and $2,343,000, respectively. For the year ended September 30, 1997, a non-marketable investment with an equity basis of $773,000 in an overseas start-up venture, principally an Italian credit reporting agency, was written off due to the potential negative impact on the agency's operations from a new Italian privacy law. The Company may continue funding future operating losses of this venture, if any. Currently, the Company is in negotiations to liquidate its equity share of this non-marketable security. The Company also recognized its equity share of losses from these non-marketable equity investments, which includes this Italian venture, of $2,082,000, $821,000 and $97,000 for the years ended September 30, 1997, 1996 and 1995, respectively. For the year ended September 30, 1996, an investment of $1,535,000 in the non-marketable preferred stock of an early-stage enterprise was written off due to the deteriorating financial condition of the entity. The Company does not have any further financial commitments with respect to the investment. 6. Property and Equipment Property and equipment at September 30, 1997 and 1996 valued at cost, consist of the following: (dollars in thousands) 1997 1996 - ------------------------------------------------------------------------------ Data processing equipment $34,248 $21,893 Office furniture, vehicles and equipment 14,383 11,424 Leasehold improvements 12,003 8,111 Capitalized leases 2,841 2,969 Less accumulated depreciation and amortization (28,989) (20,745) --------- --------- Net property and equipment $34,486 $23,652 ========= ========= Depreciation and amortization charged to operations were $10,479,000, $7,194,000 and $4,874,000 for the years ended September 30, 1997, 1996 and 1995, respectively. Capitalized leases consist primarily of one lease bearing an interest rate of 7% that matures in the year 2001. The following is a schedule, by years, of future minimum lease payments under capitalized leases, together with the present value of the net minimum lease payments, at September 30, 1997: Years ended September 30, (dollars in thousands) - -------------------------------------------------------------- 1998 $ 466 1999 466 2000 466 2001 375 ------- 1,773 Less: Amount representing interest (221) ------- Present value of net minimum lease payments $1,552 ======= 33 7. Intangibles Intangibles at September 30, 1997 and 1996, consist of the following: (dollars in thousands) 1997 1996 - ---------------------------------------------------------------------- Goodwill $10,138 $10,060 Other 2,270 2,270 Less accumulated amortization (4,047) (2,773) ------- -------- $ 8,361 $ 9,557 ======= ======== Amortization charged to operations was $1,274,000, $734,000 and $711,000 for the years ended September 30, 1997, 1996 and 1995, respectively. 8. Income Taxes The provision for income taxes consists of the following: Years ended September 30, (dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Current: Federal $14,685 $ 9,026 $ 7,992 State 2,863 1,901 2,168 Foreign 136 270 191 ------- ------- ------- 17,684 11,197 10,351 ------- ------- ------- Deferred: Federal (2,400) 183 (1,441) State (424) (99) (273) ------- ------- ------- (2,824) 84 (1,714) ------- ------- ------- $14,860 $11,281 $ 8,637 ======= ======= ======= Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns as filed. The tax effect of significant temporary differences resulting in deferred tax assets at September 30, 1997 and 1996 are, as follows: (dollars in thousands) 1997 1996 - -------------------------------------------------------------------------------- Deferred tax assets: Depreciation and amortization $ 2,637 $ 1,899 Officers' incentives 2,042 1,429 Loss on investments 1,530 919 Compensated absences 1,070 849 State taxes 1,007 581 Bad debt provision 283 170 Employee benefit plans 280 (226) Tax on net unrealized gains on available-for-sale securities (210) (64) Other 330 254 ------- ------- 8,969 5,811 Less valuation allowance (1,083) (603) ------- ------- $ 7,886 $ 5,208 ======= ======= 34 The valuation allowance for deferred tax assets at September 30, 1997 and 1996 was for $1,083,000 and $603,000, respectively. The valuation allowance was needed to reduce the deferred tax assets since the Company does not meet the more-likely-than-not requirement for utilization of the capital loss carryforward. A reconciliation between the federal statutory income tax rate and the Company's effective tax rate is shown below:
Years ended September 30, (dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Income tax provision at federal statutory rates in 1997, 1996 and 1995 $ 12,441 $ 10,031 $ 7,487 State income taxes, net of federal benefit 1,586 1,190 1,229 Increase in valuation allowance 480 603 -- Other 353 (543) (79) -------- -------- ------- $ 14,860 $ 11,281 $ 8,637 ======== ======== =======
9. Employee Benefit Plans Pension plan The Company has a defined benefit pension plan that covers eligible full-time employees. The benefits are based on years of service and the employee's compensation during employment. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table sets forth the plan's funding status at September 30, 1997 and 1996: (dollars in thousands) 1997 1996 - ---------------------------------------------------------------------------- Vested benefit obligation $ 7,578 $ 6,349 Nonvested benefit obligation 479 486 Effect of projected future earnings 3,710 2,778 --------- --------- Projected benefit obligation 11,767 9,613 Fair value of plan assets (10,266) (7,883) --------- --------- Projected benefit obligation in excess of plan assets 1,501 1,730 Unrecognized prior service cost 68 77 Unrecognized net loss (2,692) (3,226) Unrecognized net obligation remaining to be amortized (158) (177) --------- --------- Prepaid pension cost $(1,281) $(1,596) ========= ========= The plan assets consist primarily of marketable equity securities, and also U.S. government securities. The projected benefit obligation includes an accumulated benefit obligation of $8,057,000 and $6,835,000 at September 30, 1997 and 1996, respectively. The obligation exceeded the fair value of the pension plan assets for the years ended September 30, 1997 and 1996. For the year ended September 30, 1996, the Company reduced to zero the additional minimum liability of $517,000 (the intangible asset of $111,000 and pension adjustment of $406,000 in stockholders' equity) that was recorded in the year ended September 30, 1995. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5 and 5.0 percent, respectively, at September 30, 1997, and 8.0 and 5.0 percent, respectively, at September 30, 1996. The expected long-term rate of return on assets was 8.5 percent at September 30, 1997 and 1996. 35 The net pension cost for the fiscal years ended September 30, 1997 and 1996, included the following components: (dollars in thousands) 1997 1996 - --------------------------------------------------------------------------- Service costs $1,011 $ 809 Interest cost on projected benefit obligation 745 609 Actual return on plan assets (2,050) (362) Net amortization and deferral 1,502 66 ------- -------- Net periodic pension plan cost $1,208 $1,122 ======= ======== Employee stock ownership plan The Company has an Employee Stock Ownership Plan (ESOP) that covers eligible full-time employees. Contributions to the ESOP are determined annually by the Company's Board of Directors. In addition, the ESOP may purchase stock from the Company or its stockholders. Provisions for contributions to the ESOP were $1,534,000, $1,445,000 and $1,046,000 for the years ended September 30, 1997, 1996 and 1995, respectively. At September 30, 1997, the ESOP held 970,566 shares of Company stock. The amount of dividends on ESOP shares were $81,000, $94,000 and $64,000 for the years ended September 30, 1997, 1996 and 1995, respectively. Company stock held and paid for by the ESOP is allocated annually to participants based on employee compensation levels. Participants vest in the allocated shares at rates ranging from 0% to 30% after 1 to 7 years of employment until fully vested. Defined contribution plans The Company offers 401(k) plans for eligible employees. Eligible employees may contribute up to 15% of compensation. The Company provides a matching contribution which either vests immediately or over five years. The Company contributions to 401(k) plans were $673,000, $470,000 and $363,000 for years ended September 30, 1997, 1996 and 1995, respectively. During fiscal 1995, the Company established a supplemental retirement and savings plan for certain officers and senior management employees. Company contributions to that plan were $132,000, $104,000 and $91,000 for the years ended September 30, 1997, 1996 and 1995, respectively. Officers' incentive plan The Company has an executive compensation plan for the benefit of officers. Benefits are payable based on the achievement of financial and performance objectives, which are set annually by the Board of Directors, and the market value of the Company's stock. Total expenses under the plan were $3,842,000, $3,560,000 and $4,030,000 for the years ended September 30, 1997, 1996 and 1995, respectively. The incentive earned each year is paid 50% currently, and the balance is payable over a four-year period, subject to certain adjustments, as defined in the plan, based on employment status and the market value of the Company's common stock. At September 30, 1997 and 1996, the long-term officers' incentive plan payable was $3,475,000 and $3,678,000, respectively. Employee incentive plans The Company has incentive plans for eligible employees not covered under the executive compensation plan. Awards under these plans are paid annually and are based on the achievement of certain financial and performance objectives. Total expenses under these plans were $5,211,000, $4,426,000 and $5,401,000 for the years ended September 30, 1997, 1996 and 1995, respectively. 36 10. Stock Common A total of 35,000,000 shares of common stock, $.01 par value, are authorized, of which 13,474,382 shares (including 12,114 shares of treasury stock) were outstanding at September 30, 1997, and 13,286,222 shares (including 15,938 shares of treasury stock) were outstanding at September 30, 1996. Preferred A total of 1,000,000 shares of preferred stock, $.01 par value, are authorized; no preferred stock has been issued. 11. Stock Option Plans The Company has two stock option plans, one of which is for the granting of stock options, stock appreciation rights, restricted stock and common stock that reserves shares of common stock for issuance to officers, key employees and non-employee directors. The Company accounts for the fair value of its stock options under these plans in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected to continue to apply the provisions of APB No. 25, and provide the pro forma disclosures of SFAS No. 123. Granted awards generally have a maximum term of ten years and vest over one to five years. Under this plan approved by the stockholders, the total number of shares that may be granted is 1,400,000. The other plan is limited to the former employees of RMT, who as of the merger date, held unexpired and unexercised stock option grants under the RMT stock option plans. Granted awards have a maximum term of ten years and vest over three years. The total number of issuable options under the plan is 650,800. The fair value of options at the date of grant was estimated using the Black-Scholes model with the following weighted-average assumptions for the years ended September 30: 1997 1996 - ----------------------------------------------------------------------- Expected life (years) 5 5 Interest rate 6.5% 6.2% Volatility 45 % 45 % Dividend yield 0 % 0 % The following information regarding these option plans for the years ended September 30 is as follows:
1997 1996 1995 ---- ---- ---- Weighted-average Weighted-average Weighted-average Options exercise price Options exercise price Options exercise price - ---------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,387,767 $12.21 1,324,407 $ 6.72 1,176,529 $ 4.95 Granted 613,261 $36.82 285,500 $ 32.57 365,378 $11.28 Exercised (141,452) $ 7.19 (222,140) $ 5.62 (217,500) $ 4.83 Forfeited (17,000) $28.96 -- $ -- -- $ -- --------- ---------- ---------- Outstanding at end of year 1,842,576 $20.63 1,387,767 $12.21 1,324,407 $ 6.72 ========= ========= ========= Options exercisable at year end 782,358 $ 5.33 693,902 $ 3.73 759,029 $ 3.61 ========= ========= =========
The weighted-average fair value of options granted for the years ended September 30, 1997 and 1996 was $17.47 and $15.35, respectively. 37 The following table summarizes information about significant fixed-price stock option groups outstanding at September 30, 1997:
Options outstanding Options exercisable -------------------------- ----------------------------- Number Weighted average remaining Weighted average Number Weighted average Range of exercise prices outstanding contractual life exercise price outstanding exercise price - ------------------------------------------------------------------------------------------------------------------------------------ $ .92 to $ 8.50 725,026 3.85 $ 2.87 640,018 $ 2.25 $13.25 to $19.31 230,000 4.63 $ 16.87 104,000 $ 13.90 $20.75 to $33.88 347,550 6.77 $ 30.82 27,340 $ 23.73 $34.00 to $40.00 417,500 8.68 $ 38.02 9,000 $ 40.00 $41.13 to $45.63 122,500 8.50 $ 44.69 2,000 $ 41.88 --------- -------- $ .92 to $45.63 1,842,576 5.90 $ 20.63 782,358 $ 5.33 ========= ========
Stock-based compensation under SFAS No. 123 would have had the following pro forma effects for the years ended September 30: (In thousands, except per share data) 1997 1996 - --------------------------------------------------------------------------- Net income, as reported $20,686 $17,423 ======= ======= Pro forma net income $18,091 $17,002 ======= ======= Earnings per share, as reported $ 1.46 $ 1.25 ======= ======= Pro forma earnings per share $ 1.27 $ 1.22 ======= ======= The pro forma effect on net income for each of the years ended September 30, 1997 and 1996 may not be representative of the effects on reported net income in future years. 12. Commitments and Contingencies The Company conducts certain of its operations in facilities occupied under non-cancelable operating leases with lease terms in excess of one year. The leases provide for annual increases based upon the Consumer Price Index or fixed increments. Minimum future rental commitments under operating leases are as follows: Year ending September 30, (dollars in thousands) - -------------------------------------------------------------- 1998 $ 7,806 1999 8,162 2000 7,174 2001 6,582 2002 4,316 Thereafter 34,016 --------- $68,056 ========= Rent expense under operating leases, including month-to-month leases, was $6,413,000, $4,821,000 and $3,030,000 for the years ended September 30, 1997, 1996 and 1995, respectively. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial condition. 38 13. Segment Information The Company operates principally in the financial services industry. Operations in other industries are less than 10% of consolidated revenues. The Company's international operations consist primarily of sales and service offices. Substantially all foreign sales are exports. The Company's revenues from customers outside the United States were $33,879,000, $26,142,000 and $16,370,000 for the years ended September 30, 1997, 1996 and 1995, respectively. 14. Other Income (Expense) Other income (expense) for the years ended September 30, 1997, 1996 and 1995, consists of the following: (dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------ Interest income $ 2,040 $1,748 $1,574 Equity loss in investments (2,082) (821) (97) Investment write-off (773) (1,535) -- Foreign currency gain (loss) (677) (97) 261 Acquisition expenses (558) -- -- Interest expense (336) (223) (243) Other 176 114 67 -------- ------- ------- $(2,210) $ (814) $1,562 ======== ====== ====== 15. Subsequent Events On November 26, 1997, the Company entered into an option agreement to purchase undeveloped land in San Rafael, California, with the intention of constructing an office complex to accommodate future growth. On December 1, 1997, the Company exercised the option to purchase the land for $9.35 million plus amounts necessary to reimburse certain costs incurred by the seller as defined in the agreement. The consummation of the purchase is subject to a variety of closing conditions, including receipt of required government approvals. On November 26, 1997, the Company also signed a lease agreement and land purchase agreement related to the undeveloped land discussed in the above paragraph. However, these agreements will not be in effect if the purchase of the land described in the above paragraph is consummated. 39 16. Supplementary Financial Data (Unaudited) The following table presents selected unaudited consolidated financial results for each of the eight quarters in the two-year period ended September 30, 1997. In the Company's opinion, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the consolidated financial information for the period presented.
(in thousands except Dec. 31, Mar. 31, June 30, Sept. 30, per share data) 1995 1996 1996 1996 - ------------------------------------------------------------------------------------------------- Revenues $34,218 $36,950 $39,213 $45,532 Cost of revenues 13,531 13,838 14,622 15,741 -------- --------- --------- --------- Gross profit $20,687 $23,112 $24,591 $29,791 ======== ========= ========= ========= Net income $3,785 $4,573 $4,867 $4,198 ======== ========= ========= ========= Earnings per share $.27 $.33 $.35 $.30 ======== ========= ========= ========= Shares used in computing earnings per share 13,791 13,857 13,829 13,891 ======== ========= ========= =========
(in thousands except Dec. 31, Mar. 31, June 30, Sept. 30, per share data) 1996 1997 1997 1997 - ------------------------------------------------------------------------------------------------- Revenues $43,337 $48,366 $51,074 $56,232 Cost of revenues 16,372 17,825 18,715 19,654 -------- --------- --------- --------- Gross profit $26,965 $30,541 $32,359 $36,578 ======== ========= ========= ========= Net income $4,698 $5,370 $4,294 $6,324 ======== ========= ========= ========= Earnings per share $.33 $.38 $.30 $.44 ======== ========= ========= ========= Shares used in computing earnings per share 14,144 14,228 14,325 14,452 ======== ========= ========= =========
The financial data for the above quarterly information has been restated to reflect the merger, effective July 1997, between Fair, Isaac and Company, Incorporated and Risk Management Technologies which has been accounted for under the pooling-of-interests method. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The required information regarding Directors of the registrant is incorporated by reference from the information under the caption "Election of Directors - Nominees" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on February 3, 1998. The required information regarding Executive Officers of the registrant is contained in Part I of this Form 10-K. The required information regarding compliance with Section 16(a) of the Securities Exchange Act is incorporated by reference from the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on February 3, 1998. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the information under the captions "Compensation of Directors and Executive Officers," "Compensation Committee Interlocks and Insider Participation," and "Director Consulting Arrangements" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on February 3, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the information under the caption "Stock Ownership" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on February 3, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the information under the captions "Director Consulting Arrangements" and "Compensation Committee Interlocks and Insider Participation" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on February 3, 1998. 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Reference Page Form 10-K (a) 1. Consolidated financial statements: Report of Independent Auditors............................................... 23 Consolidated statements of income for each of the years in the three-year period ended September 30, 1997....................... 24 Consolidated balance sheets at September 30, 1997 and September 30, 1996...................................................... 25 Consolidated statements of stockholders' equity for each of the years in the three-year period ended September 30, 1997................. 26 Consolidated statements of cash flows for each of the years in the three-year period ended September 30, 1997................. 27 Notes to consolidated financial statements................................... 28 2. Financial statement schedule: II Valuation and qualifying accounts at September 30, 1997 and 1996......... 47
3. Exhibits: 2.1 Asset Purchase Agreement, dated December 31, 1992, by and between the Company and DynaMark, Inc., filed as Exhibit 2.1 to the Company's report on Form 8-K dated December 31, 1992, and incorporated herein by reference. 2.2 Agreement and Plan of Reorganization, dated June 12, l997, among the Company, FIC Acquisition Corporation, Risk Management Technologies ("RMT"), and the shareholders and optionholders of RMT. Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules have been omitted but will be furnished supplementally to the Commission on request. 2.3 Employment Agreement, dated July 21, l997, by and between the Company and David LaCross.* 2.4 Employment and Non-Competition Agreement, dated December 31, 1992, by and between the Company and Kenneth M. Rapp, filed as Exhibit 2.2 to the Company's report on Form 8-K dated December 31, 1992, and incorporated herein by reference.* 3.1 Restated Certificate of Incorporation of the Company. 3.2 Restated By-laws of the Company. 4.1 Registration Rights Agreement, dated June 23, l997, among the Company, David LaCross and Kathleen O. LaCross, Trustees U/D/T dated April 2, 1997, Jefferson Braswell, Software Alliance LLC, Robert Ferguson, James T. Fan and Leland Prussia. 4.2 Registration Rights Agreement, dated September 30, 1996, among the Company, Donald J. Sanders, Paul A. Makowski and Lawrence E. Dukes, filed as Exhibit 4.2 to the Company's report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference. 42 10.1 Company's Stock Option Plan (1984) and form of Stock Option Agreement, filed as Exhibit 10.1 to the Registration Statement and incorporated herein by reference.* 10.2 Company's 1987 Stock Option Plan, filed as Exhibit 10.2 to the Registration Statement and incorporated herein by reference.* 10.3 Lease dated April 28, 1995, between CSM Investors, Inc., and DynaMark, Inc. filed as Exhibit 10.3 to the Company's report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference. 10.4 Fair, Isaac and Company, Inc. Officers' Incentive Plan (effective October 1, 1992), filed as Exhibit 10.4 to the Company's report on Form 10-K for the fiscal year ended September 30, 1994, and incorporated herein by reference.* 10.5 Lease, dated October 30, 1983, between S.R.P. Limited Partnership and the Company, as amended, filed as Exhibit 10.7 to the Registration Statement and incorporated herein by reference. 10.6 Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.8 to the Company's report on Form 10-K for the fiscal year ended September 30, 1988 and incorporated herein by reference.* 10.7 Lease dated July 1, 1993, between The Joseph and Eda Pell Revocable Trust and the Company and the First through Fifth Addenda thereto filed as Exhibit 10.7 to the Company's report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference. 10.8 First Amendment to the Company's 1987 Stock Option Plan, filed as Exhibit 10.11 to the Company's report on Form 10-K for the fiscal year ended September 30, 1989, and incorporated herein by reference.* 10.9 First Amendment to the Company's Stock Option Plan for Non-Employee Directors, filed as Exhibit 10.12 to the Company's report on Form 10-K for the fiscal year ended September 30, 1989, and incorporated herein by reference.* 10.10 Amendment No.1 to the Company's 1992 Long-Term Incentive Plan (as amended and restated effective November 21, 1995).* 10.11 Addendum Number Seven to lease between S.R.P. Limited Partnership and the Company filed as Exhibit 10.15 to the Company's report on Form 10-K for the fiscal year ended September 30, 1990, and incorporated herein by reference. 10.12 Addenda Numbers Eight and Nine to lease between SRP Limited Partnership and the Company filed as Exhibit 10.12 to the Company's report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference. 10.13 Lease, dated September 5, 1991, between 111 Partners, a California general partnership, and the Company filed as Exhibit 10.20 to the Company's report on Form 10-K for the fiscal year ended September 30, 1991, and incorporated herein by reference. 10.14 Construction Loan Agreement, dated September 5, 1991, between 111 Partners and the Company filed as Exhibit 10.21 to the Company's report on Form 10-K for the fiscal year ended September 30, 1991, and incorporated herein by reference. 10.15 Amendment No.2 to the Company's 1992 Long-Term Incentive Plan (as amended and restated effective November 21, 1995).* 10.16 The Company's 1992 Long-Term Incentive Plan as amended and restated effective November 21, 1995, filed as Exhibit 10.16 to the Company's report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference.* 10.17 Amendment No.3 to the Company's Stock Option Plan for Non-Employee Directors.* 43 10.18 Lease dated May 1, 1995, between Control Data Corporation and DynaMark, Inc. filed as Exhibit 10.18 to the Company's report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference. 10.19 Lease dated April 10, 1994, between Leed Properties and DynaMark, Inc., filed as Exhibit 10.19 to the Company's report on Form 10-K for the fiscal year ended September 30, 1994, and incorporated herein by reference. 10.20 Fair, Isaac Supplemental Retirement and Savings Plan and Trust Agreement effective November 1, 1994, filed as Exhibit 10.20 to the Company's report on Form 10-K for the fiscal year ended September 30, 1994, and incorporated herein by reference.* 10.21 Lease dated July 10, 1993, between the Joseph and Eda Pell Revocable Trust and the Company filed as Exhibit 10.21 to the Company's report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference. 10.22 Lease dated October 11, 1993, between the Joseph and Eda Pell Revocable Trust and the Company and the First through Fourth Addenda thereto filed as Exhibit 10.22 to the Company's report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference. 10.23 Fourth Contract Extension, dated April 7, 1995, to the Consulting Contract between the Company and William R. Fair, filed as Exhibit 10.23 to the Company's report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference.* 10.24 Exchange Agreement and Plan of Reorganization, dated July 19, 1996, among DynaMark, Inc., Printronic Corporation of America, Inc., Leo R. Yochim, and Susan Keenan, filed as Exhibit 10.24 to the Company's report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference. 10.25 Agreement and Plan of Merger and Reorganization, dated September 30, 1996, among the Company, FIC Acquisition Corporation, Credit & Risk Management Associates, Inc., Donald J. Sanders, Paul A. Makowski and Lawrence E. Dukes, filed as Exhibit 10.25 to the Company's report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference. 10.26 Contract between the Company and Dr. Robert M. Oliver, dated April 2, 1996, filed as Exhibit 10.26 to the Company's report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference.* 10.27 Letter of Intent dated July 15, 1996, between the Company and Village Properties, and the First Amendment thereto dated July 18, 1996, filed as Exhibit 10.27 to the Company's report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference. 10.28 Office Building Lease, dated November 14, 1996, between the Company and Regency Center, filed as Exhibit 10.28 to the Company's report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference. 10.29 Sixth and Seventh Addenda to the Lease, dated July 1, 1993, between the Company and the Joseph and Eda Pell Revocable Trust, filed as Exhibit 10.29 to the Company's report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference. 10.30 First and Second Addenda to the Lease dated July 10, 1993, between the Company and the Joseph and Eda Pell Revocable Trust, filed as Exhibit 10.30 to the Company's report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference. 10.31 Fifth Addendum to the Lease, dated October 11, 1993, between the Company and the Joseph and Eda Pell Revocable Trust, filed as Exhibit 10.31 to the Company's report on Form 10-K for the fiscal year ended September 30, 1996, and incorporated herein by reference. 44 10.32 First Addendum to Lease, dated August 13, l997, by and between the Company and Regency Center. 10.33 Option Agreement, dated November 26, l997, by and between the Company and Village Builders, L.P. 10.34 Leasehold Improvements Agreement, dated November 26, l997, by and between the Company and Village Builders, L.P. 10.35 Lease, dated March 11, l997, by and between DynaMark, Inc. and CSM. 10.36 First Amendment to Lease, dated September 24, l997, by and between DynaMark, Inc. and CSM. 10.37 Chase Database Agreement, dated October 29, l997, by and among DynaMark, Inc. and Chase Manhattan Bank USA, National Association. Confidential treatment has been requested for certain portions of this document. Such portions have been omitted from the filing and have been filed separately with the Commission. 11.1 Computation of net income per common share. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP (see page 48 of this Form 10-K). 24.1 Power of Attorney (see page 46 of this Form 10-K). 27 Financial Data Schedule. * Management contract or compensatory plan or arrangement. 45 (b) Reports on Form 8-K: No reports on Form 8-K were filed with the Securities and Exchange Commission during the fiscal quarter ended September 30, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FAIR, ISAAC AND COMPANY, INCORPORATED DATE: December 26, 1997 By /s/ PETER L. MCCORKELL ---------------------------------------- Peter L. McCorkell Senior Vice President, Secretary and General Counsel POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints PETER L. McCORKELL his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. LARRY E. ROSENBERGER President, Chief Executive Officer December 26, 1997 - ---------------------------------------- (Principal Executive Officer) and Director Larry E. Rosenberger PATRICIA COLE Senior Vice President, Chief December 26, 1997 - ---------------------------------------- Financial Officer and Controller Patricia Cole A. GEORGE BATTLE Director December 26, 1997 - ---------------------------------------- A. George Battle BRYANT J. BROOKS Director December 26, 1997 - ---------------------------------------- Bryant J. Brooks H. ROBERT HELLER Director December 26, 1997 - ---------------------------------------- H. Robert Heller GUY R. HENSHAW Director December 26, 1997 - ---------------------------------------- Guy R. Henshaw DAVID S. P. HOPKINS Director December26, 1997 - ---------------------------------------- David S. P. Hopkins ROBERT M. OLIVER Director December 26, 1997 - ---------------------------------------- Robert M. Oliver ROBERT D. SANDERSON Director December 26, 1997 - ---------------------------------------- Robert D. Sanderson JOHN D. WOLDRICH Director December 26, 1997 - ---------------------------------------- John D. Woldrich
46 SCHEDULE II FAIR, ISAAC AND COMPANY, INCORPORATED VALUATION AND QUALIFYING ACCOUNTS RULE 12-09 SEPTEMBER 30, 1997 AND 1996
Additions Balance at ----------------------------- Balance at Beginning Charged End of Description of Period to Expense Other (1) Write-offs Period ----------- --------- ---------- --------- ---------- ------ September 30, 1997: Allowance for Doubtful Accounts $485,000 $438,000 $ -- $(165,000) $758,000 September 30, 1996: Allowance for Doubtful Accounts $332,450 $600,000 $11,000 $(458,450) $485,000 September 30, 1995: Allowance for Doubtful Accounts $539,000 $ 16,000 $ -- $(222,550) $332,450 (1) Amount represents the allowance recorded due to the acquisition of Credit & Risk Management Associates, Inc.
47 Consent of Independent Auditors The Board of Directors Fair, Isaac and Company, Incorporated: We consent to incorporation by reference in the registration statement (No. 33-20349) on Form S-8, the registration statement (No. 33-26659) on Form S-8, the registration statement (No. 33-63428) on Form S-8, the registration statement (No. 333-02121) on Form S-8, the registration statement (No. 333-32309) on Form S-8, the registration statement (No. 333-42473) on Form S-3 of Fair, Isaac and Company, Incorporated and subsidiaries of our reports dated October 29, 1997, except as to note 15, which is as of December 1, 1997, relating to the consolidated balance sheets of Fair, Isaac and Company, Incorporated and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows and related financial statement schedule for each of the years in the three-year period ended September 30, 1997, which reports appear in the September 30, 1997 annual report on Form 10-K of Fair, Isaac and Company, Incorporated, and subsidiaries. KPMG PEAT MARWICK LLP San Francisco, California December 26, 1997 48 EXHIBIT INDEX TO FAIR, ISAAC AND COMPANY, INCORPORATED REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 Exhibit No. Exhibit - ----------- ------- 2.2 Agreement and Plan of Reorganization, dated June 12, l997, among the Company, FIC Acquisition Corporation, Risk Management Technologies ("RMT"), and the shareholders and optionholders of RMT. Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules have been omitted but will be furnished supplementally to the Commission on request. 2.3 Employment Agreement, dated July 21, l997, by and between the Company and David LaCross. 3.1 Restated Certificate of Incorporation of the Company. 3.2 Restated By-laws of the Company. 4.1 Registration Rights Agreement dated June 23, l997, among the Company, David LaCross and Kathleen O. LaCross, Trustees U/D/T dated April 2, 1997, Jefferson Braswell, Software Alliance LLC, Robert Ferguson, James T. Fan and Leland Prussia. 10.10 Amendment No.1 to the Company's 1992 Long-Term Incentive Plan (as amended and restated effective November 21, 1995). 10.15 Amendment No.2 to the Company's 1992 Long-Term Incentive Plan (as amended and restated effective November 21, 1995). 10.17 Amendment No.3 to the Company's Stock Option Plan for Non-Employee Directors. 10.32 First Addendum to Lease, dated August 13, l997, by and between the Company and Regency Center. 10.33 Option Agreement, dated November 26, l997, by and between the Company and Village Builders, L.P. 10.34 Leasehold Improvements Agreement, dated November 26, l997, by and between the Company and Village Builders, L.P. 10.35 Lease dated March 11, l997, by and between DynaMark, Inc. and CSM. 10.36 First Amendment to Lease, dated September 24, l997, by and between DynaMark, Inc. and CSM. 10.37 Chase Database Agreement, dated October 29, l997, by and among DynaMark, Inc. and Chase Manhattan Bank USA, National Association. Confidential treatment has been requested for certain portions of this document. Such portions have been omitted from the filing and have been filed separately with the Commission. 11.1 Computation of net income per common share. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP (see page 48 of this Form 10-K). 24.1 Power of Attorney (see page 46 of this Form 10-K). 27 Financial Data Schedule. 49

                                                                     EXHIBIT 2.2

                      AGREEMENT AND PLAN OF REORGANIZATION

                                      Among


                     FAIR, ISAAC AND COMPANY, INCORPORATED,

                          FIC ACQUISITION CORPORATION,

                          RISK MANAGEMENT TECHNOLOGIES,

                         AND CERTAIN SECURITYHOLDERS OF
                          RISK MANAGEMENT TECHNOLOGIES





                                  June 12, 1997




                                TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS...................................................................1 1.1 Certain Definitions...........................................................2 1.2 Other Definitions.............................................................5 ARTICLE 2 THE MERGER AND RELATED TRANSACTIONS...........................................5 2.1 Effective Time of the Merger..................................................5 2.2 Effects of the Merger.........................................................5 2.3 Effect of Merger on Capital Stock and Options.................................6 (a) Capital Stock of Acquisition Corporation.............................6 (b) Cancellation of RMT-Owned and FIC-Owned Stock........................6 (c) Conversion of the Stock; Escrow Shares...............................6 (d) Adjustment of Exchange Ratio or Allocation...........................7 (e) Fractional Shares....................................................7 (f) Dissenting Shares; Dissenting Shareholders...........................7 2.4 Issuance and Exchange of Certificates.........................................7 (a) FIC to Make Common Stock Available...................................7 (b) Exchange Procedures..................................................7 (c) Affiliates...........................................................8 2.5 Board of Directors; Officers..................................................8 2.6 No Further Ownership Rights in Stock..........................................8 2.7 Tax Treatment.................................................................8 2.8 Accounting Treatment..........................................................9 2.9 Assumption of Stock Options...................................................9 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF RMT AND THE SIGNING HOLDERS.................9 3.1 Organization..................................................................9 3.2 Capital Structure.............................................................9 3.3 Equity Investments.......................................................... 10 3.4 Authority................................................................... 10 3.5 Financial Statements........................................................ 12 3.6 Business Changes............................................................ 12 3.7 Properties.................................................................. 14 3.8 Accounts Receivable......................................................... 16 3.9 Taxes....................................................................... 16 3.10 Employees................................................................... 16 3.11 Compliance with Law......................................................... 17 3.12 [Reserved].................................................................. 18 3.13 Litigation.................................................................. 18 3.14 Contracts................................................................... 18 3.15 No Default.................................................................. 19 3.16 Customers................................................................... 19 3.17 Proprietary Rights.......................................................... 19 3.18 Insurance................................................................... 22 3.19 Bank Accounts............................................................... 22 3.20 Brokers or Finders.......................................................... 22 3.21 Certain Advances............................................................ 22 -1- 3.22 Related Parties............................................................. 23 3.23 Employee Benefit Plans; ERISA............................................... 23 3.24 Customers and Other Relationships........................................... 24 3.25 Underlying Documents........................................................ 24 3.26 Full Disclosure............................................................. 24 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF FIC....................................... 25 4.1 Organization................................................................ 25 4.2 Acquisition Corporation Capital Structure................................... 25 4.3 Authority................................................................... 25 4.4 Capital Structure........................................................... 26 4.5 SEC Documents............................................................... 27 4.6 Information Supplied........................................................ 27 4.7 No Conflict................................................................. 27 4.8 Shares of Common Stock...................................................... 28 4.9 Brokers or Finders.......................................................... 28 ARTICLE 5 COVENANTS RELATING TO CONDUCT OF BUSINESS................................... 28 5.1 Ordinary Course............................................................. 28 5.2 Dividends; Changes in Stock................................................. 28 5.3 Issuance of Securities...................................................... 28 5.4 Governing Documents......................................................... 28 5.5 No Other Bids or Contacts................................................... 29 5.6 No Acquisitions............................................................. 29 5.7 No Dispositions............................................................. 29 5.8 Indebtedness................................................................ 30 5.9 Benefit Plans, Etc.......................................................... 30 5.10 Business Relations.......................................................... 30 5.11 Other Actions............................................................... 30 5.12 Advice of Changes; Government Filings....................................... 31 5.13 Accounting Methods.......................................................... 31 5.14 Intellectual Property Matters............................................... 31 ARTICLE 6 ADDITIONAL AGREEMENTS....................................................... 32 6.1 Access to Information....................................................... 32 6.2 Legal Conditions to the Merger and Related Transactions..................... 32 6.3 Communications; Confidentiality............................................. 32 6.4 Update to Disclosures....................................................... 33 6.5 Certain Notifications....................................................... 33 6.6 Treatment of Plans, Agreements and Options.................................. 33 6.7 [Reserved].................................................................. 33 6.8 [Reserved].................................................................. 33 6.9 Agreements by Affiliated Stockholders....................................... 33 6.10 Options..................................................................... 34 (a) Assumption......................................................... 34 (b) Qualification as ISOs.............................................. 34 (c) Registration....................................................... 34 (d) Option Documents................................................... 34 6.11 Senior Management Participation............................................. 35 6.12 Employees................................................................... 35 -2- 6.13 Employee Option Grants; Retention Bonuses................................... 35 6.14 Good Faith.................................................................. 36 6.15 Treatment of Merger as Qualifying Reorganization............................ 36 6.16 State Statutes.............................................................. 36 ARTICLE 7 CONDITIONS PRECEDENT........................................................ 36 7.1 Conditions to Obligations of FIC, Acquisition Corporation and RMT........... 36 (a) Government Approvals............................................... 36 (b) Third-Party Approvals.............................................. 36 (c) FTC or Antitrust Division Actions.................................. 36 (d) Legal Action....................................................... 37 (e) Statutes........................................................... 37 (f) RMT Shareholder Approval........................................... 37 (g) Dissenting Shares.................................................. 37 (h) Registration Rights Agreement...................................... 37 (i) Tax-Free Reorganization............................................ 37 (j) Escrow Agreement................................................... 37 7.2 Conditions to Obligations of FIC and Acquisition Corporation................ 37 (a) Representations and Warranties..................................... 37 (b) Performance of Obligations of RMT.................................. 38 (c) Agreements Regarding Equity Securities............................. 38 (d) Opinion of RMT's Counsel........................................... 38 (e) No Material Adverse Change......................................... 38 (f) Change in Laws or Regulations...................................... 38 (g) Employment Agreements.............................................. 38 (h) Non-Compete Agreements............................................. 38 (i) Affiliate Agreements............................................... 38 (j) Resignations....................................................... 38 (k) Satisfactory Completion of Review.................................. 39 (l) Pooling of Interests Accounting Treatment.......................... 39 (m) Good Standing Certificate.......................................... 39 (n) Fairness Opinion................................................... 39 (o) Escrow Agreement................................................... 39 (p) Software Alliance Note and Lien.................................... 39 7.3 Conditions to Obligations of RMT............................................ 39 (a) Representations and Warranties..................................... 39 (b) Performance of Obligations of FIC and Acquisition Corporation...... 39 (c) Opinion of FIC's Counsel........................................... 39 (d) No FIC Charter Amendment or Change in Control...................... 39 (e) Escrow Agreement................................................... 39 ARTICLE 8 CLOSING..................................................................... 40 8.1 Closing Date................................................................ 40 8.2 Filing Date................................................................. 40 8.3 Best Efforts................................................................ 41 ARTICLE 9 INDEMNIFICATION AND ESCROW.................................................. 41 9.1 Survival of Representations and Warranties.................................. 41 -3- 9.2 Indemnification by RMT and the Signing Holders.............................. 41 9.3 Escrow Fund................................................................. 43 9.4 Indemnification Procedure................................................... 43 ARTICLE 10 PAYMENT OF EXPENSES......................................................... 44 ARTICLE 11 TERMINATION, AMENDMENT AND WAIVER........................................... 45 11.1 Termination................................................................. 45 11.2 Effect of Termination....................................................... 45 11.3 Amendment................................................................... 46 11.4 Extension; Waiver........................................................... 46 ARTICLE 12 GENERAL..................................................................... 46 12.1 Notices..................................................................... 46 12.2 Headings.................................................................... 47 12.3 Counterparts................................................................ 47 12.4 Binding Effect; Parties in Interest......................................... 47 12.5 Entire Agreement; Assignment................................................ 47 12.6 Schedules and Exhibits...................................................... 48 12.7 Applicable Law.............................................................. 48 12.8 Severability................................................................ 48 12.9 Remedies Cumulative......................................................... 48 12.10 Specific Performance........................................................ 48 12.11 Best Efforts; Further Assurances............................................ 48
-4- Exhibit A Agreement of Merger Exhibit B Articles of Incorporation Exhibit C Bylaws Exhibit D Form of Affiliate Agreement Exhibit E Employment Agreement - David LaCross Exhibit F Employment Agreement - Jefferson Braswell Exhibit G Employment Agreement - Jeffrey Dandridge Exhibit H Form of Noncompete Agreement Exhibit I Form of Opinion of Whitehead & Porter LLP Exhibit J Form of Opinion of General Counsel of FICO Exhibit K Form of Registration Rights Agreement Exhibit L Escrow Agreement -5- AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement"), made and entered into as of June 12, 1997, by and among FAIR, ISAAC AND COMPANY, INCORPORATED, a Delaware corporation ("FIC"), FIC ACQUISITION CORPORATION, a California corporation and wholly owned subsidiary of FIC ("Acquisition Corporation"), RISK MANAGEMENT TECHNOLOGIES, a California corporation ("RMT"), and the shareholders and optionholders of RMT listed on the signature pages hereto (collectively, the "Signing Holders"), W I T N E S S E T H: WHEREAS, subject to the terms and conditions of this Agreement, on the date provided for in Article 8 hereof (the "Closing Date"), Acquisition Corporation and RMT shall execute three copies of the Agreement of Merger (the "Agreement of Merger") in substantially the form attached hereto as Exhibit A, which provide for the merger (the "Merger") of Acquisition Corporation into RMT at the Effective Time (as defined in Section 2.1 hereof); and WHEREAS, the Merger is intended to qualify as a "reorganization" under the provisions of section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, following the Merger in accordance with the terms of this Agreement, RMT shall be a wholly owned subsidiary of FIC and all shares of Common Stock, no par value per share, of RMT ("RMT Common") issued and outstanding will be converted into shares of Common Stock, $0.01 par value per share, of FIC ("FIC Common") in accordance with this Agreement; and WHEREAS, the parties hereto desire to enter into this Agreement for the purpose of setting forth certain representations, warranties and covenants made by each to the other as an inducement to the execution and delivery of this Agreement and the conditions precedent to the consummation of the Merger and the transactions related thereto: NOW, THEREFORE, in consideration of the premises and of the mutual provisions, agreements and covenants herein contained, FIC, RMT and the Signing Holders agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Definitions. The terms defined in this Section 1.1 shall, for all purposes of this Agreement, have the meanings herein specified: "Acquisition Corporation Common" shall mean the Common Stock, no par value per share, of Acquisition Corporation. "Acquisition Transaction" is defined in Section 5.5. "Affiliate" is defined in Section 6.9. -1- "Antitrust Division" shall mean the Antitrust Division of the Department of Justice. "Agreement of Merger" is defined in the first recital hereof. "Benefit Arrangements" is defined in Section 3.23(d). "Closing" and "Closing Date" are defined in Section 8.1. The "Closing Stock Price" shall mean $39.8375. "Code" is defined in the second recital hereof. "Consents" is defined in Section 3.4. The terms "contract" and "agreement" include every contract, agreement, commitment, understanding and promise, whether written or oral. "Dissenting Share" and "Dissenting Shareholder" are defined in Section 2.3(f). "Effective Time" is defined in Section 2.1. "Employee Plans" is defined in Section 3.23(a). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" is defined in Section 3.23(b). "Escrow Agent" is defined in Section 9.3(a). "Escrow Agreement" and "Escrow Fund" are defined in Section 9.3. "Escrow Shares" is defined in Section 2.3(c). "Exchange Ratio" is defined in Section 2.3(c). "FIC Common" is defined in the third recital hereof. "FIC Indemnitees" is defined in Section 9.2. "FIC Options" is defined in Section 4.4. "FIC Preferred Stock" is defined in Section 4.4. "FIC SEC Documents" is defined in Section 4.5. "Filing Date" is defined in Section 8.2. "Filing Fees" is defined in Article 10. "FTC" shall mean the Federal Trade Commission. -2- "GAAP" shall mean generally accepted accounting principles in the United States. "Governmental Entity" is defined in Section 3.4. "Hazardous Substances" shall mean any pollutant, contaminant, material, substance or waste regulated, restricted or prohibited by any law, regulation or ordinance or designated by any governmental agency to be hazardous, toxic, radioactive, biohazardous or otherwise a danger to health or the environment, including but not limited to "hazardous substances" as defined under the Federal Comprehensive Environmental Responsibility, Cleanup and Liability Act of 1980 or any "hazardous wastes" as defined under the Federal Resource Conservation Recovery Act of 1976. "Holders" is defined in Section 2.3(c). "Holders' Representatives" shall mean David LaCross and Thomas Loo, Esq. or such successor to each of them as may be agreed upon by a majority in interest of the other Holders (as defined in Section 2.3(c) hereof) and identified to FIC by such Holders in writing. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnifiable Damages" is defined in Section 9.2. "Indemnitee" and "Indemnitor" are defined in Section 9.4. "Intellectual Property Disclosure Schedule" shall mean Schedule 3.17 hereto. "ISO" shall mean an "incentive stock option" within the meaning of section 422 of the Code. "Merger" is defined in the first recital hereof. "Merger Shares" is defined in Section 2.3(c). "NYSE" shall mean, in the context of references to stock prices, the New York Stock Exchange Composite Transactions Tape, and in other contexts, the New York Stock Exchange. "Option Plans" is defined in Section 6.10. The term "patent" shall mean any and all patents and patent applications, including any divisions, substitutions, continuations, continuations-in-part, reissues, reexaminations, or extensions thereof, and all corresponding foreign patents and patent applications filed or issued in any country which are based upon or derived from such patents or patent applications. "Permits" is defined in Section 3.11. A "Principal Optionholder" shall mean any holder of Vested Options to purchase more than 50,000 shares of RMT Common immediately prior to the Closing. "Proprietary Rights" is defined in Section 3.17(b). -3- "Purchase Price" shall mean forty-six million dollars ($46,000,000). "RMT Balance Sheet" is defined in Section 3.5. "RMT Common" is defined in the third recital hereof. "RMT Financial Statements" and "RMT Balance Sheet Date" are defined in Section 3.5. "RMT Indemnitors" is defined in Section 9.2. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Stock" is defined in Section 2.3(c). "Subject Optionholders" is defined in Section 6.6. "Subject Options" is defined in Section 6.6. "Subsidiary" of a specified entity means a corporation whose voting securities are owned directly or indirectly by the specified entity in such amounts as are sufficient to elect at least a majority of the Board of Directors. "Surviving Corporation" is defined in Section 2.2. The term "Tax" (including, with correlative meaning, the term "Taxes") includes all federal, state, local and foreign income, profits, franchise, gross receipts, environmental, customs duty, capital stock, severance, stamp, payroll, sales, employment, unemployment, disability, use, property, withholding, excise, production, value added, goods and services, occupancy and other taxes, duties, imposts or assessments or any nature whatsoever, together with all interest, penalties and additions imposed with respect to such amounts and any interest in respect of such penalties and additions. The term "Tax Return" includes all returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns) required to be supplied to a Tax authority relating to Taxes. "Underlying Shares" is defined in Section 2.3(c). "Vested Options" shall mean the options to purchase RMT Common that had fully vested (in accordance with the terms thereof and as disclosed to FIC in Schedule 3.2 hereto) immediately prior to the Effective Time. 1.2 Other Definitions. A representation or warranty made by Software Alliance LLC or Leland Prussia concerning matters "to the knowledge" (or similar phrase) of Software Alliance LLC or Leland Prussia shall be deemed to refer to the actual knowledge of the members and officers of Software Alliance LLC and of Leland Prussia, respectively, without any requirement that such persons conduct an independent investigation into such matter. In addition to the terms defined in Section 1.1, certain other terms are defined elsewhere in this Agreement, and, -4- whenever such terms are used in this Agreement, they shall have their respective defined meanings, unless the context expressly or by necessary implication otherwise requires. ARTICLE 2 THE MERGER AND RELATED TRANSACTIONS 2.1 Effective Time of the Merger. Subject to the provisions of this Agreement, as soon as practicable on or after the Closing Date (as defined in Article 8 of this Agreement), the Agreement of Merger in substantially the form attached hereto as Exhibit A shall be duly prepared, executed and acknowledged by RMT and Acquisition Corporation and thereafter delivered to the Secretary of State of the State of California for filing in accordance with the California General Corporation Law. The Merger shall become effective upon the later to occur of the acceptance of such filing by the Secretary of State of the State of California or such time thereafter as is provided by the Agreement of Merger (the "Effective Time"). 2.2 Effects of the Merger. At the Effective Time, (a) the separate existence of Acquisition Corporation shall cease and Acquisition Corporation shall be merged with and into RMT as the surviving corporation (the "Surviving Corporation"); (b) the Articles of Incorporation of RMT, in the form attached hereto as Exhibit B, shall be the Articles of Incorporation of the Surviving Corporation; (c) the Bylaws of RMT, in the form attached hereto as Exhibit C, shall be the Bylaws of the Surviving Corporation; (d) the directors of the Surviving Corporation shall be as set forth in Section 2.5 herein; (e) the officers of the Surviving Corporation shall be as set forth in Section 2.5 herein; and (f) the Merger shall, from and after the Effective Time, have all the effects provided by applicable law. 2.3 Effect of Merger on Capital Stock and Options. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of the issued and outstanding shares of RMT Common or any options to purchase shares of RMT Common: (a) Capital Stock of Acquisition Corporation. All issued and outstanding shares of capital stock of Acquisition Corporation shall continue to be issued and shall be converted into 1,000 shares of Common Stock of the Surviving Corporation. Each stock certificate of Acquisition Corporation evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. (b) Cancellation of RMT-Owned and FIC-Owned Stock. All shares of RMT Common, if any, that are owned directly or indirectly by RMT, and all shares of RMT Common, if any, that are owned directly or indirectly by FIC or any of its Subsidiaries, shall be canceled, and no stock of FIC or other consideration shall be delivered in exchange therefor. (c) Conversion of the Stock; Escrow Shares. Except for shares to be canceled pursuant to Section 2.3(b) hereof, fractional shares as provided in Section 2.3(e) and Dissenting Shares as provided in Section 2.3(f), and subject to adjustment pursuant to Section 2.3(d), the shares of RMT Common issued and outstanding immediately prior to the Effective Time (all shares not so excepted, the "Stock"), shall cease to be outstanding and shall be converted by virtue of the Merger and without any action on the part of the holders thereof (collectively, the "Holders") into shares of FIC Common (collectively, the "Merger Shares") as provided below. -5- The aggregate number of Merger Shares shall equal the Exchange Ratio multiplied by the number of shares of RMT Common outstanding immediately prior to the Effective Time. The Exchange Ratio shall equal the quotient obtained by dividing (i) the quotient obtained by dividing (a) the sum of the Purchase Price plus the aggregate exercise price of the Vested Options by (b) the Closing Stock Price by (ii) the sum of the number of outstanding RMT Common shares immediately prior to the Effective Time plus the number of shares of RMT Common for which the Vested Options are exercisable immediately prior to the Effective Time, rounded to the nearest one-hundred thousandth (or if there shall not be a nearest one-hundred thousandth, to the next highest one-hundred thousandth). Of the Merger Shares, one hundred fifteen thousand four hundred sixty-nine (115,469) (the "Escrow Shares") shall be issued in accordance with the terms of the Escrow Agreement in the names of the Holders, but shall be delivered at the Effective Time to the Escrow Agent to be held and distributed in accordance with the provisions of Article 9 hereof. Additional shares of FIC Common issued after the Effective Time upon exercise of Subject Options which are deposited into escrow pursuant to the Escrow Agreement shall thereafter constitute a portion of the Escrow Shares. As provided in the Escrow Agreement, Subject Options shall be at risk of forfeiture in the event of the satisfaction of indemnification claims from the escrow. (d) Adjustment of Exchange Ratio or Allocation. If, between the date of this Agreement and the Effective Time, the outstanding shares of FIC Common or RMT Common shall have been changed into a different number of shares or a different class by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, the number of shares of FIC Common to be delivered pursuant to this Agreement shall be correspondingly adjusted. (e) Fractional Shares. No fractional shares of FIC Common shall be issued, but in lieu thereof each Holder who would otherwise be entitled to receive a fraction of a share of FIC Common (after aggregating all fractional shares of FIC Common to be received by such Holder) shall receive from FIC an amount of cash (rounded up to the nearest whole cent) equal to the product of (i) the fraction of a share of FIC Common to which such Holder would otherwise be entitled, times (ii) the Closing Stock Price. (f) Dissenting Shares; Dissenting Shareholders. Notwithstanding anything in this Agreement to the contrary, no share of RMT Common, the holder of which (a "Dissenting Shareholder") has properly exercised and perfected appraisal rights under section 1300 of the California Corporations Code (a "Dissenting Share"), shall be converted into the right to receive any Merger Shares, but such Dissenting Shareholder shall be entitled to receive such consideration as shall be determined pursuant to section 1300 of the California Corporations Code with respect to such Dissenting Share; provided that if any such Dissenting Shareholder shall fail to perfect or shall have effectively withdrawn or otherwise lost his, her or its rights to dissent to the Merger under the California Corporations Code, each of such Dissenting Shareholder's Dissenting Shares shall thereupon be deemed to have been converted into the number of Merger Shares applicable thereto as if such Dissenting Share had not been a Dissenting Share at the Effective Time, without any interest thereon, and such share shall no longer be a Dissenting Share. 2.4 Issuance and Exchange of Certificates. (a) FIC to Make Common Stock Available. Promptly after the Effective Time, FIC shall make available for exchange in accordance with this Agreement, through such reasonable procedures as FIC may adopt, the shares of FIC Common issuable to the Holders pursuant to -6- Section 2.3(c) in exchange for the Stock. In no event shall FIC make any payment in excess of the number of shares of FIC Common specified in Section 2.3. (b) Exchange Procedures. As soon as practicable after the Effective Time, FIC shall mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of RMT Common (collectively, the "Certificates") whose shares are being converted into FIC Common pursuant to Section 2.3, instructions for use in effecting the surrender of the Certificates in exchange for FIC Common. Upon surrender of a Certificate for cancellation to FIC, the holder of such Certificate shall be entitled to receive in exchange therefor the certificates representing the number of shares of FIC Common and payments in lieu of fractional shares to which such Holder is entitled pursuant to Section 2.3 and is represented by the Certificate so surrendered. The Certificates so surrendered shall forthwith be canceled. In the event of a transfer of ownership of RMT Common which is not registered in the transfer records of RMT, the stock certificates representing shares of FIC Common may be delivered to a transferee if the Certificate representing the right to receive such FIC Common is presented to FIC and accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. FIC shall follow the same procedure with respect to lost, stolen or mutilated RMT Certificates as it follows with respect to lost, stolen or mutilated FIC certificates. Unless and until any such Certificate shall be so surrendered, or such procedures respecting lost, stolen or mutilated Certificates are followed, the holders of the Certificate shall not be entitled to receive certificates for the FIC Common or cash for any fractional share of FIC Common and any dividends paid or other distributions made to holders of record of FIC Common after the Effective Time shall be paid to and retained by FIC and paid over to such holder when such Certificate is surrendered or such procedures are implemented in accordance with this Section 2.4(b). (c) Affiliates. Notwithstanding anything herein to the contrary, Certificates formerly representing the Stock surrendered for exchange for FIC Common by any "affiliate" (as determined pursuant to Section 6.9) of RMT shall not be exchanged for certificates representing FIC Common until FIC has received a written Affiliate Agreement from such person as provided in Section 6.9 hereof. 2.5 Board of Directors; Officers. Upon the Effective Time: (a) The directors and officers of the Surviving Corporation shall be as named in the Agreement of Merger and each shall remain a director or officer from the Effective Time until his or her successor shall have been elected or appointed and shall qualify, or as otherwise provided in the Bylaws of the Surviving Corporation. (b) If at the Effective Time a vacancy shall exist in the Board of Directors or in any of the offices of the Surviving Corporation, such vacancy may thereafter be filled in the manner provided in the Bylaws of the Surviving Corporation. 2.6 No Further Ownership Rights in Stock. All FIC Common delivered upon the surrender for exchange of shares of RMT Common in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such shares of stock. There shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of RMT Common which were outstanding immediately prior to the Effective Time. -7- 2.7 Tax Treatment. The parties intend that the transactions contemplated hereby will be a reorganization within the meaning of section 368 of the Code. 2.8 Accounting Treatment. The parties intend that the Merger shall be treated as a pooling of interests for accounting purposes. 2.9 Assumption of Stock Options. At the Effective Time, all options to purchase shares of RMT Common that had not been exercised or expired prior to the Effective Time shall be assumed by FIC and shall thereafter constitute options to purchase shares of FIC Common, in accordance with the provisions of Section 6.10 hereof. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF RMT AND THE SIGNING HOLDERS RMT and each of the Signing Holders represent and warrant to FIC as of the date hereof as follows: 3.1 Organization. RMT is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and is not required to be qualified in any other jurisdiction except where the failure to be so qualified will not have a material adverse effect on RMT. Radar International, Inc. is a corporation duly organized, validly existing and in good standing under the laws of the United States Virgin Islands. Each of RMT and its subsidiary has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. RMT has delivered or made available to FIC true, complete and correct copies of its and its subsidiary's (a) Articles of Incorporation and Bylaws, as amended to the date hereof, (b) minutes of all meetings of directors, shareholders and Board committees and copies of actions by written consent of the foregoing, all of which are complete and accurate as of the date hereof, (c) stock certificate books and all other records that collectively correctly set forth the record ownership of all outstanding shares of its capital stock and all rights to purchase capital stock, and (d) form of stock certificates, option agreements and rights to purchase shares of its capital stock. 3.2 Capital Structure. (a) The authorized capital stock of RMT consists of 10,000,000 shares of RMT Common, of which 2,117,163 are issued and outstanding. The Signing Holders collectively own 2,116,830 of the issued and outstanding shares of RMT Common, and each Signing Holder severally represents and warrants that such holder has good and valid title to his, her or its shares of RMT Common free and clear of all liens, encumbrances, rights of first refusal, restrictions and adverse claims. (b) All of the outstanding shares of RMT Common were issued in compliance with applicable federal and state securities laws. All of the outstanding shares of RMT Common are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, RMT's Articles of Incorporation or Bylaws or any agreement to which RMT is a party or by which it is bound. -8- (c) Except as set forth in Schedule 3.2, there are no equity securities of any class of RMT or its subsidiary, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding, and there are no options, warrants, calls, rights, commitments or agreements of any character to which RMT or its subsidiary is a party or by which it is bound obligating RMT or its subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of RMT or its subsidiary or obligating RMT or its subsidiary to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. (d) Schedule 3.2 contains complete and accurate lists of, and the number of shares owned of record by, the holders of outstanding RMT Common and the number of shares subject to options, and the holders of outstanding options to purchase RMT Common, including in each case the addresses of such holders. Schedule 3.2 is complete and accurate on the date hereof and, if required, an updated Schedule 3.2 to be attached hereto will be complete and accurate as of the Closing Date. Schedule 3.2 identifies the vesting schedule, applicable legends, and repurchase rights or other risks of forfeiture of any outstanding security of RMT. (e) Schedule 3.2 contains a complete and accurate list of each stock option plan, stock appreciation rights or other equity-related stock incentive plan of RMT and its subsidiary. (f) Except for any restrictions imposed by applicable state and federal securities laws, there is no right of first refusal, co-sale right, right of participation, right of first offer, option or other restriction on transfer applicable to any shares of RMT Common or any shares of capital stock of RMT's subsidiary. (g) RMT and each Signing Holder is not a party or subject to any agreement or understanding, and there is no voting trust, proxy, or other agreement or understanding between or among any persons, that affects or relates to the voting or giving of written consent with respect to any outstanding security of RMT, the election of directors, the appointment of officers or other actions of RMT's Board of Directors or the management of RMT. 3.3 Equity Investments. RMT does not own any equity interest, directly or indirectly, in any corporation, partnership, limited liability company, joint venture, firm or other entity, other than Radar International, Inc. RMT owns all of the issued and outstanding capital stock of Radar International, Inc., free and clear of all liens, encumbrances, rights of first refusal, restrictions and adverse claims. 3.4 Authority. RMT has all requisite corporate power and authority to enter into this Agreement and the Agreement of Merger and, subject to satisfaction of the conditions set forth herein, to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Agreement of Merger and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of RMT and the Holders except that this Agreement and the transactions contemplated hereby are subject to approval by the holders of a majority of the voting power of RMT. This Agreement has been duly executed and delivered by RMT and the Signing Holders and the Agreement of Merger will be duly executed and delivered by RMT, and constitutes or in the case of the Agreement of Merger when executed will constitute valid and binding obligations of RMT and the Signing Holders, enforceable in accordance with their terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar federal or state laws affecting the rights of creditors and the effect or availability of rules of law governing specific performance, -9- injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or in equity). Provided the conditions set forth in Article 7 are satisfied, and except as set forth in Schedule 3.4, the execution and delivery of this Agreement and the Agreement of Merger do not or will not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under (a) any provision of the Articles of Incorporation or Bylaws of RMT or (b) any agreement or instrument, permit, franchise, license, judgment or order, applicable to RMT, its subsidiary, the Signing Holders and their respective properties or assets, other than any such conflicts, violations, defaults, terminations, cancellations or accelerations which individually or in the aggregate would not have a material adverse effect on RMT and its subsidiary. Schedule 3.4 sets forth a full and complete list of all necessary consents, waivers and approvals ("Consents") of third parties (other than those described in the following paragraph) applicable to the operations of RMT and its subsidiary and relating to agreements or obligations involving more than $25,000 to be paid by any party thereto within the twelve (12) months following the signing of this Agreement that are required to be obtained by RMT or its subsidiary in connection with the execution and delivery of this Agreement or the Agreement of Merger by RMT and the performance of RMT's obligations hereunder or thereunder. Prior to the Closing Date, RMT will use its best efforts to obtain all such consents. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality (a "Governmental Entity"), is required by or with respect to RMT or its subsidiary in connection with the execution and delivery of this Agreement or the Agreement of Merger by RMT or the consummation by RMT of the transactions contemplated hereby or thereby, except for (a) the filing of the Agreement of Merger and related certificates with the California Secretary of State, and (b) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws in connection with the transactions contemplated hereby. 3.5 Financial Statements. (a) RMT has furnished to FIC its audited consolidated statement of operations, statement of stockholders' equity and statement of cash flows for the two (2) fiscal years ended December 31, 1996 and RMT's unaudited consolidated financial statements and balance sheets at and for the four (4) months ended April 30, 1997. RMT shall furnish monthly unaudited unconsolidated financial statements to FIC for each month after April 30, 1997 until the Closing Date. The consolidated balance sheet at December 31, 1996 is hereinafter referred to as the "RMT Balance Sheet," and all such financial statements are hereinafter referred to collectively as the "RMT Financial Statements." The RMT Financial Statements have been and will be prepared in accordance with GAAP applied on a consistent basis during the periods involved, are and will be in accordance with RMT's books and records, and fairly present or will fairly present the financial position of RMT and the results of its operations as of the date and for the periods indicated thereon, subject in the case of the unaudited portion of the RMT Financial Statements to normal year-end audit adjustments which will not be material individually and in the aggregate. At the date of the RMT Balance Sheet (the "RMT Balance Sheet Date") and as of the Closing Date, RMT and its subsidiaries had and will have no liabilities or obligations, secured or unsecured (whether accrued, absolute, contingent or otherwise and whether or not required to be reflected on the -10- Balance Sheet under GAAP)) not reflected on the RMT Balance Sheet or the accompanying notes thereto or on Schedule 3.5 hereto, except for (i) liabilities incurred in the ordinary course of business since the RMT Balance Sheet Date which are usual and normal in amount and (ii) liabilities incurred in connection with the Merger and the transactions related thereto, and are set forth in Schedule 3.5 hereto. RMT maintains and will continue to maintain a standard system of accounting established and administered in accordance with GAAP. Attached as Schedule 3.5.1 is RMT's budget and business plan for calendar years 1997 and 1998, including RMT's budgeted revenues and expenses on a monthly basis over such period, and RMT's annual budget and business plan for calendar year 1999. 3.6 Business Changes. Since the RMT Balance Sheet Date, except as otherwise contemplated by this Agreement or set forth in Schedule 3.6, RMT and its subsidiary have conducted their businesses only in the ordinary and usual course and, without limiting the generality of the foregoing: (a) There have been no changes in the condition (financial or otherwise), business, net worth, assets, prospects, properties, employees, operations, obligations or liabilities of RMT or its subsidiary which, in the aggregate, have had or may be reasonably expected to have a materially adverse effect on the condition, business, net worth, assets, prospects, properties or operations of RMT and its subsidiary. (b) Neither RMT nor its subsidiary has issued, or authorized for issuance, or entered into any commitment to issue, any equity security, bond, note or other security of RMT or its subsidiary. (c) Neither RMT nor its subsidiary has incurred additional debt for borrowed money, or incurred any obligation or liability except in the ordinary and usual course of business and in any event not in excess of $25,000 for any single occurrence, and except for legal and accounting fees incurred in connection with the transactions contemplated by this Agreement (which shall not exceed $75,000). (d) Neither RMT nor its subsidiary has paid any obligation or liability, or discharged, settled or satisfied any claim, lien or encumbrance, except for current liabilities in the ordinary and usual course of business and in any event not in excess of $10,000 for any single occurrence. (e) Neither RMT nor its subsidiary has declared or made any dividend, payment or other distribution on or with respect to any share of capital stock of RMT or its subsidiary. (f) Neither RMT nor its subsidiary has purchased, redeemed or otherwise acquired or committed itself to acquire, directly or indirectly, any share or shares of capital stock of RMT or its subsidiary. (g) Neither RMT nor its subsidiary has mortgaged, pledged, or otherwise, voluntarily or involuntarily, encumbered any of its assets or properties, except for liens for current taxes which are not yet delinquent and purchase-money liens arising out of the purchase or sale of services or products made in the ordinary and usual course of business and in any event not in excess of $10,000 for any single item or $50,000 in the aggregate. (h) Neither RMT nor its subsidiary has disposed of, or agreed to dispose of, by sale, lease, license or otherwise, any asset or property, tangible or intangible, except in the ordinary and -11- usual course of business, and in each case for a consideration believed to be at least equal to the fair value of such asset or property and in any event not in excess of $10,000 for any single item or $50,000 in the aggregate. (i) Neither RMT nor its subsidiary has purchased or agreed to purchase or otherwise acquire any securities of any corporation, partnership, joint venture, firm or other entity. (j) Neither RMT nor its subsidiary has made any expenditure or commitment for the purchase, acquisition, construction or improvement of a capital asset, except in the ordinary and usual course of business and in any event not in excess of $10,000 for any single item or $50,000 in the aggregate. (k) Neither RMT nor its subsidiary has sold, assigned, transferred or conveyed, or committed itself to sell, assign, transfer or convey, any Proprietary Rights (as defined in Section 3.17). (l) Neither RMT nor its subsidiary has paid or committed itself to pay to or for the benefit of any of its directors, officers, employees or shareholders any compensation of any kind other than wages, salaries and benefits at times and rates in effect on the RMT Balance Sheet Date, adopted or amended any bonus, incentive, profit-sharing, stock option, stock purchase, pension, retirement, deferred-compensation, severance, life insurance, medical or other benefit plan, agreement, trust, fund or arrangement for the benefit of employees of any kind whatsoever, nor entered into or amended any agreement relating to employment, services as an independent contractor or consultant, or severance or termination pay, nor agreed to do any of the foregoing. (m) Neither RMT nor its subsidiary has effected or agreed to effect any change in its directors, officers or key employees. (n) Neither RMT nor its subsidiary has effected or committed itself to effect any amendment or modification in its Articles of Incorporation or Bylaws, except as contemplated in this Agreement or the RMT Agreement of Merger. (o) Neither RMT nor its subsidiary has entered into any transaction or contract, or made any commitment to do the same, except in the ordinary and usual course of business, and except for transactions, contract or commitments involving less than $5,000 for any single item and less than $25,000 in the aggregate. (p) To the best knowledge of RMT and the Signing Holders, no statute has been enacted nor has any rule or regulation been adopted by any state or any federal agency or authority which may have a material adverse effect on the condition (financial or otherwise), business, net worth, assets, prospects, properties, employees, operations, obligations or liabilities of RMT and its subsidiary. 3.7 Properties. (a) Neither RMT nor its subsidiary owns any real property. The RMT Balance Sheet reflects all of the real and personal property used by RMT and its subsidiary in its business or otherwise held by RMT and its subsidiary, except for (i) property acquired or disposed of in the ordinary and usual course of the business of RMT since the date of such balance sheet, and (ii) real and personal property not required under GAAP to be reflected thereon. Except as -12- reflected in the notes to the RMT Balance Sheet and in Schedule 3.7, RMT has good title to all assets and properties listed on the RMT Balance Sheet and thereafter acquired, free and clear of any imperfections of title, lien, claim, encumbrance, restriction, charge or equity of any nature whatsoever, except for the lien of current taxes not yet delinquent. All of the fixed assets and properties reflected on the RMT Balance Sheet or thereafter acquired are in good condition and repair for the requirements of the business as presently conducted by RMT. (b) Schedule 3.7 sets forth a full and complete list of all real property leased by RMT or its subsidiary or under option to lease by RMT or its subsidiary. RMT and its subsidiary have no real property under option to purchase. To the knowledge of the Signing Holders and RMT all such property leased by RMT or its subsidiary is held under valid, subsisting and enforceable leases. Except as disclosed in Exhibit 3.7(b) to Schedule 3.7, either any real property leased by RMT or its subsidiary nor the operations of RMT or its subsidiary thereon violate any applicable material building code, zoning requirement or classification, or pollution control ordinance or statute relating to the property or to such operations, and such non-violation is not dependent, in any instance, on so-called non-conforming use exemptions. (c) There are no Hazardous Substances released or discharged by or resulting from the occupancy or operations of RMT or its subsidiaries that are in, under or about the soil, sediment, surface water or groundwater on, under or around any properties at any time owned, leased or occupied by RMT or its subsidiary in which any part of the premises owned, leased or occupied by RMT were at or below ground level, and to the knowledge of RMT and the Signing Holders there are no Hazardous Substances in, under or about the soil, sediment, surface water or groundwater on, under or around any property at any time owned, leased or occupied by RMT or any of its subsidiaries. Neither RMT nor any of its subsidiaries has disposed of any Hazardous Substances on or about any property at any time owned, leased or occupied by RMT or any of its subsidiaries. RMT has not disposed of any materials at any site being investigated or remediated for contamination or possible contamination of the environment. (d) RMT and its subsidiaries have conducted their business in accordance with all applicable laws, regulations, orders and other requirements of governmental authorities relating to Hazardous Substances and the use, storage, treatment, disposal, transport, generation, release and exposure of others to Hazardous Substances. To the knowledge of RMT and the Signing Holders, there have been no judicial or administrative proceedings or other investigations and there are no judicial or administrative proceedings or other investigations pending or threatened alleging violation by RMT or its subsidiaries of any local, state or federal laws respecting land use, pollution or protection of the environment including, without limitation, laws regulating the use, storage, transportation or disposal of Hazardous Substances. RMT has not received any notice of any investigation, claim or proceeding against RMT or its subsidiaries relating to Hazardous Substances. Neither RMT nor any Signing Holder has any knowledge of any fact or circumstance which could involve RMT or any of its subsidiaries in any environmental litigation, proceeding, investigation or claim or impose any environmental liability upon RMT or any of its subsidiaries. (e) RMT has provided FIC with a complete list of all permits, consents and approvals which RMT or any of its subsidiaries is required to have under local, state or federal laws respecting land use, pollution or protection of the environment for the construction or occupation of its facilities and the operation of its business. RMT and its subsidiaries have obtained all such permits, consents and approvals and are, and at all times have been, in compliance with every material term and condition thereof. All of the listed permits, consents and approvals are in full force and effect, none have been modified, and there is no proceeding pending which may result in -13- the reversal, rescission, termination, modification or suspension of any such permit, consent or approval. (f) RMT and its subsidiaries have kept all records and made all filings required by all applicable local, state and federal laws relating to land use, pollution and protection of the environment with respect to all exposures, emissions, discharges and releases into the environment and the proper use, storage, transportation and disposal of all Hazardous Substances. 3.8 Accounts Receivable. All of the accounts receivable of RMT and its subsidiaries shown on the RMT Balance Sheet or thereafter arose in the ordinary and usual course of its business. The values at which accounts receivable are carried reflect the accounts receivable valuation policy of RMT which is consistent with past practice and in accordance with GAAP applied on a consistent basis. 3.9 Taxes. RMT and each of its subsidiaries has prepared in good faith and duly and timely filed (taking into account any extensions of time within which to file) all Tax Returns required to be filed by it, and all such filed Tax Returns are true, complete and accurate. RMT and each of its subsidiaries has paid all Taxes that are shown as due on such filed Tax Returns, or that it is required to withhold from amounts owing to any employee, creditor or third party. There are not pending nor, to the knowledge of RMT or any Signing Holder, threatened any audits, actions, suits, proceedings, investigations, examinations or other proceedings in respect of Taxes or Tax matters relating to RMT or any of its subsidiaries or their respective assets or business. To the knowledge of RMT, there are no unresolved questions or claims concerning the Tax liability of RMT or any of its subsidiaries. RMT and each of its subsidiaries has no liability with respect to Taxes in excess of the amounts accrued in respect thereof and reflected in the RMT Balance Sheet for all periods up to and including the RMT Balance Sheet Date. All Taxes for which RMT or any of its subsidiaries is or will become liable after the RMT Balance Sheet Date and ending on or prior to the Closing Date (whether or not the period ends for Tax purposes on the Closing Date) have been or will be paid when due or adequately reserved against on the books of RMT on or prior to the Closing Date. RMT has never been a member of a consolidated, combined or unitary group. Except as set forth in Schedule 3.9, neither RMT nor any of its subsidiaries is a party to any tax sharing, tax allocation, tax indemnity or other similar agreement. No extension of the statute of limitations for the assessment of Taxes has been granted by RMT and is currently in effect. Neither RMT nor any of its subsidiaries is required to file a Tax Return in any jurisdiction where it does not currently file a Tax Return. Neither RMT nor any of its subsidiaries nor any of their assets or properties are subject to any liens for Taxes, other than liens for property Taxes not yet delinquent and for which adequate reserves have been established. No payments made or to be made to any officers and employees of RMT as a result of or in connection with the Merger will be subject to the deduction limitations under section 280G of the Code. 3.10 Employees. (a) Schedule 3.10 sets forth a full and complete list of all directors, officers, employees or consultants of RMT and its subsidiary as of the date hereof, specifying their names and job designations, their dates of hire, the total amount paid or payable as wages, salaries or other forms of direct compensation, the basis of such compensation, whether fixed or commission or a combination thereof, together with a description of any written or oral employment contracts, commitments, consulting or termination agreements to which RMT or its subsidiary is a party. -14- (b) Except as set forth in Schedule 3.10, (i) neither RMT nor its subsidiary has any employment contract with any officer or employee or any other consultant or person which is not terminable by it at will without liability, except as the right of RMT or its subsidiary to terminate its employees at will may be limited by applicable federal, state or foreign law, (ii) neither RMT nor its subsidiary has any bonus plan or obligations to pay any bonuses, (iii) there are no amounts (whether currently payable or payable in the future) payable as a result of a change in control of RMT or its subsidiary to which current or former officers, directors or employees of RMT or its subsidiary are entitled or would become entitled after the Merger, and (iv) the consummation of the transactions contemplated by this Agreement will not result in any payment in the nature of severance pay or in any cost or benefit accelerating, becoming due or accruing with respect to any director, officer, employee or consultant of RMT or its subsidiary. (c) The employee relations of RMT are good and there is no pending or threatened labor dispute. None of the employees of RMT or its subsidiary is represented by any union or is a party to any collective bargaining arrangement to which RMT or its subsidiary is a party, and to the best knowledge of RMT and the Signing Holders no attempts are being made to organize or unionize any of the RMT employees. To the best knowledge of RMT and the Signing Holders, RMT and its subsidiary have complied with all applicable foreign, state and federal equal employment opportunity and other laws and regulations related to employment practices, terms and conditions or employment and wages and hours. (d) To the best knowledge of RMT and the Signing Holders, no employee of RMT or its subsidiary has been injured in the workplace or in the course of his or her employment, except for injuries that are covered by insurance or for which a claim has been made under worker's compensation or similar laws. Except as disclosed on Schedule 3.10, no employees of RMT or its subsidiary are absent from active employment on account of illness or injury, other than those employees whose absence has lasted less four weeks as of the date hereof. (e) To the best knowledge of RMT and the Signing Holders, (i) RMT and its subsidiary have complied in all material respects with the verification requirements and the recordkeeping requirements of the Immigration Reform and Control Act of 1986 or its successor ("IRCA"), and (ii) the information and documents upon which RMT and its subsidiary relied to comply with IRCA are true and correct. 3.11 Compliance with Law. Schedule 3.11 sets forth all material licenses, franchises, permits, clearances, consents, certificates and other evidences of authority of RMT which are necessary to the conduct of RMT's business as conducted during the two (2) years prior to the Closing Date ("Permits"). All such Permits are in full force and effect and neither RMT nor its subsidiary is in violation of any Permit except for violations which would not, singly or in the aggregate, have a material adverse effect on the condition (financial or otherwise), business, net worth, assets, prospects, properties or operations of RMT. Except for possible exceptions, the curing or non-curing of which would not have a material adverse effect on the condition (financial or otherwise), business, net worth, assets, prospects, properties or operations of RMT, the business of RMT and its subsidiary has been conducted in accordance with all applicable laws, regulations, orders and other requirements of governmental authorities, employment practices and procedures, the health and safety of employees and export controls. 3.12 [Reserved]. -15- 3.13 Litigation. Schedule 3.13 sets forth each claim, dispute, action, proceeding, notice, order, suit, appeal or investigation, at law or in equity, pending against RMT or its subsidiary, or involving any of their assets or properties, before any court, agency, authority, arbitration panel or other tribunal (other than those, if any, with respect to which service of process or similar notice has not yet been made on RMT or the Signing Holders), and to the knowledge of the Signing Holders and of RMT none have been threatened. The Signing Holders and RMT have no knowledge of facts which, if known to shareholders, customers, governmental authorities or other persons, would result in any such claim, dispute, action, proceeding, suit or appeal or investigation which would have a material adverse effect on the condition (financial or otherwise), business, net worth, assets, prospects, properties or operations of RMT. Neither RMT nor its subsidiary is subject to any order, writ, injunction or decree of any court, agency, authority, arbitration panel or other tribunal, nor is RMT or its subsidiary in default with respect to any notice, order, writ, injunction or decree. 3.14 Contracts. Schedule 3.14 sets forth a complete list of each existing oral or written contract and agreement in the following categories to which RMT or its subsidiary is a party, or by which either of them is bound in any respect: (a) agreements for the purchase, sale, lease or other disposition of equipment, goods, materials, research and development, supplies, studies or capital assets, or for the performance of services, in any case involving more than $10,000; (b) contracts or agreements for the joint performance of work or services, and all other joint venture agreements; (c) management or employment contracts, consulting contracts, collective bargaining contracts, termination and severance agreements; (d) notes, mortgages, deeds of trust, loan agreements, security agreements, guarantees, debentures, indentures, credit agreements and other evidences of indebtedness; (e) contracts or agreements with agents, brokers, consignees, sale representatives or distributors; (f) contracts or agreements with any director, officer, employee, consultant or shareholder; (g) pension, retirement, profit-sharing, deferred compensation, bonus, incentive, life insurance, hospitalization or other employee benefit plans or arrangements (including, without limitation, any contracts or agreements with trustees, insurance companies or others relating to any such employee benefit plan or arrangement); (h) stock option, stock purchase, warrant, repurchase or other contracts or agreements relating to any shares of capital stock of RMT or its subsidiary; (i) powers of attorney or similar authorizations granted by RMT to third parties; (j) licenses, sublicenses, royalty agreements, development agreements and other contracts or agreements to which RMT or its subsidiary is a party, or otherwise subject, relating to technical assistance, software development or Proprietary Rights as defined below (other than standard "shrinkwrap" licenses of generally available, off-the-shelf software from third parties); (k) any agreement pursuant to which RMT or its subsidiary has granted or may grant in the future, to any party, a source code license or option or other right to use or acquire source code; (l) each contract or agreement providing for payments or rights that are triggered upon a change in control of RMT or its subsidiary; and (m) other material contracts. Except as set forth in Schedule 3.14 and except for (i) the binding portions of the letter dated April 21, 1997 between RMT and FIC, as amended, and (ii) this Agreement, neither RMT nor its subsidiary has entered into (A) any contract or agreement containing covenants limiting the right of RMT or its subsidiary to compete in any business or with any person or (B) any contract, agreement or arrangement for sale of a significant portion of its stock or assets or for any merger, consolidation or other combination with a third party. 3.15 No Default. (a) Each of the contracts, agreements or other instruments referred to in Section 3.14 of this Agreement is a legal, binding and enforceable obligation by or against RMT (or its subsidiary, -16- as the case may be), subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar federal or state laws affecting the rights of creditors and the effect or availability of rules of law governing specific performance, injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or in equity). To the knowledge of the Signing Holders and RMT no party with whom RMT or its subsidiary has an agreement or contract is in default thereunder or has breached any terms or provisions thereof. (b) Except as disclosed in Schedule 3.14, each of RMT and its subsidiary in all material respects has performed, or is now performing, the obligations of, and neither RMT nor its subsidiary is in material default (or would by the lapse of time and/or the giving of notice be in material default) in respect of, any contract, agreement or commitment binding upon it, its assets or its properties. Except as disclosed in Schedules 3.6, 3.14 or 3.16, no third party has raised any claim, dispute or controversy with respect to any executory contract of RMT or its subsidiary, nor has RMT or its subsidiary received notice or warning of alleged nonperformance, delay in delivery or other noncompliance by RMT or its subsidiary with respect to its obligations under any contract, nor are there any facts which exist indicating that any contract may be totally or partially terminated or suspended by the other parties thereto. 3.16 Customers. Schedule 3.16 sets forth all customers of RMT from whom more than $50,000 in revenues are expected to be received in the twelve (12) months following the Closing Date indicating revenues for fiscal 1996, first quarter fiscal 1997 and second quarter fiscal 1997 to date, estimated fiscal 1997 revenues and the expiration date of any agreement. Except as disclosed in Schedules 3.6 or 3.16, RMT and the Signing Holders have no knowledge of any circumstances likely to result in termination or failure to renew any customer contract. 3.17 Proprietary Rights. (a) Schedule 3.17 (the "Intellectual Property Disclosure Schedule") sets forth a complete and accurate list of all patents, patent applications, copyrights, trademarks, trade names, service marks or logos owned or used by RMT or its subsidiary or in which they have any rights or licenses, and all applications therefor and registrations and registration applications thereof. Such list specifies, as applicable: (i) the title of the patent, trademark, trade name, service mark, copyright or application therefor or registration thereof; (ii) the jurisdiction by or in which such patent, trademark, trade name, service mark or copyright has been issued or registered or in which an application has been filed, including the registration or application numbers; and (iii) material licenses, sublicenses and similar agreements to which RMT or its subsidiary is a party or pursuant to which any other party is authorized to use, exercise or receive any benefit from any Proprietary Rights (as defined below) of RMT. The Intellectual Property Disclosure Schedule sets forth a complete and accurate description of all agreements of RMT and its subsidiary with each officer, employee or consultant of RMT or its subsidiary providing RMT or its subsidiary with title and ownership to patents, patent applications, trade secrets and inventions developed or used by RMT or its subsidiary in its business, all of which agreements are valid, enforceable and legally binding (subject to the effect or availability of rules of law governing specific performance, injunctive relief or other equitable remedies). (b) Except as disclosed in Schedule 3.7, RMT and its subsidiary own or possess licenses or other rights to use all computer software and hardware, source code, patents, patent applications, trademarks, trademark applications, trade secrets, service marks, trade names, logos, trade dress, copyrights, inventions, business and marketing plans, industrial property rights, copy- -17- rights, trademarks, trade names, logos and service marks (and all goodwill associated therewith, including, without limitation, the right to the names "Risk Management Technologies," "RMT Genesis" and "RADAR") and applications therefor, and all technical information, customer lists, management information systems, drawings, designs, processes and quality control data and all similar materials recording or evidencing proprietary expertise or information, or other rights with respect thereto (collectively referred to as "Proprietary Rights"), used or currently proposed to be used in the business of RMT, and the same are sufficient to conduct RMT's business as it has been and is now being conducted or as it is currently proposed by RMT to be conducted. Except as set forth on the Intellectual Property Disclosure Schedule, RMT is the owner of, or has the right to use, all right, title, and interest in and to each of the Proprietary Rights, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims, and has the right to use, sell, license, sublicense, assign and dispose, in each case without payment to a third party, all of the Proprietary Rights and the products, processes and materials covered thereby. (c) The operations of RMT and its subsidiary as currently and formerly conducted and as planned to be conducted do not conflict with or infringe, and no person or entity has asserted to RMT or its subsidiary that such operations or past operations conflict with or infringe, any Proprietary Rights, owned, possessed or used by any third party. There are no claims, disputes, actions, proceedings, suits or appeals pending against RMT or its subsidiary with respect to any Proprietary Rights, and, to the knowledge of RMT and the Signing Holders, none has been threatened against RMT or its subsidiary. To the knowledge of RMT and the Signing Holders, there are no facts or alleged facts which would reasonably serve as a basis for any claim that RMT or its subsidiary does not have the right to use and to transfer the right to use, free of any rights or claims of others, all Proprietary Rights in the development, manufacture, use, sale or other disposition of any or all products or services presently being used, furnished or sold in the conduct of the business of RMT and its subsidiary as it has been and is now being conducted. The Proprietary Rights referred to in the preceding sentence are free of any unresolved ownership disputes with respect to any third party and there is no unauthorized use, infringement or misappropriation of any of such Proprietary Rights by any third party, including any employee or former employee of RMT and its subsidiary, nor is there any breach of any license, sublicense or other agreement authorizing another party to use such Proprietary Rights. Except as disclosed in part (c) of the Intellectual Property Disclosure Schedule, neither RMT, RMT's subsidiary nor any Signing Holder has entered into any agreement (i) granting any third party the right to bring infringement actions with respect to, or otherwise to enforce rights with respect to, any such Proprietary Right, or (ii) agreeing to indemnify anyone or any entity for or against any interference, infringement, misappropriation or other conflict with respect to any Proprietary Right. (d) The Intellectual Property Disclosure Schedule contains a complete and accurate list of any proceedings before any patent or trademark authority to which RMT or its subsidiary is a party, a description of the subject matter of each proceeding, and the current status of each proceeding, including, without limitation, interferences, priority contests, opposition, and protests. Such list includes any pending applications for reissue or reexamination of a patent. RMT has the exclusive right to file, prosecute and maintain any such applications for patents, copyrights or trademarks and the patents and registrations that issue therefrom. (e) All patents and registered trademarks, service marks, and other company, product or service identifiers and registered copyrights held by RMT and its subsidiary are valid and enforceable, are currently in compliance with formal legal requirements and are not subject to any maintenance or renewal fees or taxes or actions falling due within ninety (90) days after the date of Closing. -18- (f) All fees to maintain RMT's and its subsidiary's rights in the Proprietary Rights, including, without limitation, patent and trademark registration and prosecution fees and all professional fees in connection therewith, which have been presented for payment, have been paid by RMT or will be paid by RMT before the Closing Date. (g) Except as set forth in the Intellectual Property Disclosure Schedule, all disclosures of RMT's and its subsidiary's trade secrets to third parties have been pursuant to non-disclosure agreements pursuant to which the confidentiality and use of such information has been protected. RMT and its subsidiary have taken all other measures it deems reasonable to maintain the confidentiality of the Proprietary Rights used or proposed to be used in the conduct of its business the value of which to RMT is contingent upon maintenance of the confidentiality thereof. (h) RMT and its subsidiary have secured valid written assignments from all consultants, independent contractors and employees who contributed to the creation or development of RMT's Proprietary Rights of all rights to such contributions that RMT does not already own by operation of law. (i) Except as set forth in the Intellectual Property Disclosure Schedule, each current and former employee and officer of and consultant to RMT or its subsidiary has executed a written confidentiality agreement and a written assignment of inventions agreement that assign to RMT all rights to any inventions, improvements, discoveries, or information relating to the business conducted or to be conducted by RMT, and all such agreements are in the forms provided to FIC. To the knowledge of RMT and the Signing Holders, no employee or consultant of RMT or its subsidiary is in violation of any term of any employment contract, proprietary information agreement, inventions agreement, non-competition agreement, consulting agreement, or any other contract or agreement relating to the relationship of any such employee with RMT or its subsidiary or any previous employer. To the knowledge of RMT and the Signing Holders, no employee of RMT or its subsidiary has entered into any contract that restricts or limits in any way the scope or type of work in which the employee may be engaged to anyone other than RMT or its subsidiary or requires the employee to transfer, assign, or disclose information concerning his work to anyone other than RMT or its subsidiary, as the case may be. 3.18 Insurance. Schedule 3.18 sets forth a complete list of all policies of insurance to which RMT or its subsidiary is a party or is a beneficiary or named insured. RMT and its subsidiary have in full force and effect, with all premiums due thereon paid, the policies of insurance set forth therein. Except as disclosed in Schedule 3.18, to the knowledge of RMT and the Signing Holders, there were no claims in excess of $5,000 asserted under any of the insurance policies of RMT or its subsidiary in respect of all motor vehicle, general liability, professional liability, errors and omissions, and worker's compensation, and medical claims for the period from January 1, 1996 to the date of this Agreement. 3.19 Bank Accounts. Schedule 3.19 sets forth a true and correct list of the names and addresses of all banks, other institutions and state governmental departments at which RMT and its subsidiary have accounts, deposits or safety deposit boxes, or special deposits required to be held by such state governmental departments with the nature of such account and the names of all persons authorized to draw on or give instructions with respect to such accounts or deposits, or to have access thereto, and the names and addresses of all persons, if any, holding a power-of-attorney on behalf of RMT or its subsidiary. All cash in such accounts is held in demand deposits and is not subject to any restriction or limitation as to withdrawal. -19- 3.20 Brokers or Finders. Neither RMT nor any of its officers, directors or employees nor any of RMT's Subsidiaries or any of their officers, directors or employees has engaged any broker or finder or incurred, or will incur directly or indirectly, any liability for any brokerage, agent's or finder's fees or commissions in connection with the transactions contemplated by this Agreement. 3.21 Certain Advances. Other than as disclosed in the RMT Balance Sheet, there are no receivables of RMT or its subsidiary owing from directors, officers, employees, consultants or shareholders of RMT or of RMT's subsidiary, or owing by any affiliate of any director or officer of RMT or its subsidiary, other than advances in the ordinary and usual course of business to officers and employees for reimbursable business expenses which are not in excess of $10,000 for any one individual. 3.22 Related Parties. Except as previously disclosed in writing to FIC or listed on Schedule 3.22, no officer or director of RMT or of RMT's subsidiary, or to the knowledge of RMT and the Signing Holders any affiliate of any such person, has, either directly or indirectly, (a) an interest in any corporation, partnership, firm or other person or entity which furnishes or sells services or products which are similar to those furnished or sold by RMT or its subsidiary or which competes or potentially will compete, directly or indirectly, with RMT or its subsidiary, or (b) a beneficial interest in any contract or agreement to which RMT or its subsidiary is a party or by which RMT or its subsidiary may be bound. For purposes of this Section 3.22, there shall be disregarded any interest which arose solely from the ownership of less than a five percent (5%) equity interest in a corporation whose stock is regularly traded on any national securities exchange or on Nasdaq. 3.23 Employee Benefit Plans; ERISA. (a) Schedule 3.23 sets forth each "employee benefit plan," as defined in section 3(3) of ERISA, and all other plans, agreements, or arrangements involving direct or indirect compensation (excluding workers' compensation, unemployment compensation and similar government-mandated programs) currently or previously maintained, contributed to or entered into by RMT or its subsidiary for the benefit of any employee or former employee of RMT or its subsidiary under which RMT or its subsidiary has any present or future obligation or liability (collectively, the "Employee Plans"). Copies of all Employee Plans (and, if applicable, related trust agreements), and all amendments thereto and material written interpretations thereof have been provided to FIC. RMT and its subsidiary have no Employee Plan which, individually or collectively, constitute(s) (i) an "employee pension benefit plan," as defined in section 3(2) of ERISA, that is subject to Title IV of ERISA, except as disclosed in Schedule 3.23, or (ii) a "multiemployer plan," as defined in section 3(37) of ERISA. (b) No other entity ("ERISA Affiliate") that is a member of a "controlled group of corporations" with or under "common control" with RMT, as defined in section 414(b) or 414(c) of the Code currently or previously maintained, contributed or entered into an employee benefit plan, as defined in section 3(3) of ERISA. (c) Each Employee Plan that is intended to be qualified under section 401(a) of the Code is so qualified and has been so qualified during the period from its adoption to the date of this Agreement. -20- (d) RMT has furnished to FIC copies or descriptions of each severance or other similar contract, arrangement or policy and each plan, agreement, policy or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), vacation benefits, disability benefits, early retirement benefits, death benefits, hospitalization benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock purchase, phantom stock, stock appreciation or other forms of compensation or post-retirement benefits that (i) is not an Employee Plan, (ii) is entered into, maintained or contributed to, as the case may be, by RMT or its subsidiary and (iii) covers any employee or former employee of RMT or its subsidiary or any ERISA Affiliate of RMT or its subsidiary. Such contracts, plans and arrangements as are described in this Section are herein referred to collectively as the "Benefit Arrangements." Each Benefit Arrangement has been maintained in substantial and material compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Benefit Arrangements. (e) Except for continued "COBRA" health coverage required pursuant to Code section 4980B, neither RMT nor its subsidiary is a party to any Employee Plan, Benefit Arrangement or other agreement, contract, arrangement or policy, written or unwritten, that requires RMT or its subsidiary to provide, at any cost to RMT, any health or life insurance coverage to any former employee of RMT or its subsidiary. (f) Except as described in Schedule 3.23, neither RMT nor its subsidiary is a party to any contract, instrument, agreement or arrangement with a "disqualified individual" (as defined in section 280G(c) of the Code) that could result in a disallowance of the deduction for any "excess parachute payment" (as defined in section 280G(b)(i) of the Code) or subject any such disqualified individual to the excise tax imposed under section 4999 of the Code. (g) Each Employee Plan and Benefit Arrangement complies in all material respects with all applicable requirements of (i) the Age Discrimination in Employment Act of 1967, as amended, and the regulations thereunder, (ii) Title VII of the Civil Rights Act of 1964, as amended, and the regulations thereunder, and (iii) any other applicable law. (h) There is no pending or, to the knowledge of RMT and the Signing Holders, threatened litigation relating to any Employee Plan or Benefit Arrangement. All contributions due under each Employee Plan or Benefit Arrangement have been paid or accrued on the books of RMT. 3.24 Customers and Other Relationships. To the knowledge of the Signing Holders and RMT, no client or customer of RMT or its subsidiary intends to cancel or refrain from renewing the services provided by RMT or its subsidiary or any contract or arrangement with RMT or its subsidiary, except as disclosed in Schedule 3.6 or Schedule 3.16. With respect to the agreements with Oracle Corporation, Risk Management GmbH, IBM Corporation, Digital Equipment Corporation and Informix Software, Inc., and their respective subsidiaries, listed in Schedule 3.14, to the knowledge of RMT and the Signing Holders, (i) such agreements are enforceable agreements of the respective parties thereto, (ii) none of such companies or their subsidiaries intends to cancel or refrain from renewing such agreements, (iii) no party to any such agreements has given RMT notice of a breach or default thereunder, and (iv) except as disclosed in Schedule 3.14, neither the execution of this Agreement nor the consummation of the transactions contemplated hereby will constitute a breach of any such agreement or requires the consent of any party to such agreement. -21- 3.25 Underlying Documents. Copies of any underlying documents listed or described as having been disclosed to FIC pursuant to this Agreement, if requested by FIC, have been furnished to FIC. All such documents furnished to FIC are true and correct copies, and there are no amendments or modifications thereto, that have not been disclosed to FIC. The minute books of RMT and its subsidiary contain complete and accurate records of all meetings and other corporate actions taken by the directors and shareholders of RMT and its subsidiary, respectively. 3.26 Full Disclosure. Any information furnished by or on behalf of RMT and the Signing Holders to FIC in writing pursuant to this Agreement as of the date such information is required by this Agreement to be so furnished, and any information contained in the Schedules referred to in this Agreement at any time prior to the Effective Time, does not and will not contain any untrue statement of a material fact and does not and will not omit to state any material fact necessary to make any statement, in light of the circumstances under which such statement is made, not misleading. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF FIC Except as contemplated by this Agreement, FIC represents and warrants to RMT and the Signing Holders as of the date hereof as follows: 4.1 Organization. Each of FIC and Acquisition Corporation is a corporation duly incorporated, validly existing and in good standing under the laws of its state of incorporation. Each of FIC and Acquisition Corporation is duly qualified to do business and is in good standing in its state of incorporation and in each of the other jurisdictions in which it owns or leases property or conducts business, except where the failure to be so qualified would not have a material adverse effect on the business of FIC. Each of FIC and Acquisition Corporation has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and possesses all licenses, franchises, rights and privileges material to the conduct of its respective business. 4.2 Acquisition Corporation Capital Structure. The authorized capital stock of Acquisition Corporation consists of 1,000 shares of Acquisition Corporation Common. On or before the Closing Date, 1,000 shares of Acquisition Corporation Common will be validly issued and outstanding and will be held by FIC of record and beneficially. 4.3 Authority. Each of FIC and Acquisition Corporation has all requisite corporate power and authority to enter into this Agreement, the Agreement of Merger and the related agreements contemplated herein and therein and, subject to satisfaction of the conditions set forth herein, to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and (when executed and delivered) the Agreement of Merger and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of FIC and will be so authorized by Acquisition Corporation. This Agreement has been duly executed and delivered by FIC and the Agreement of Merger will be duly executed and delivered by FIC and Acquisition Corporation, and constitutes (and in the case of the Agreement of Merger when executed as to Acquisition Corporation will constitute) valid and binding obligations of FIC and Acquisition Corporation, enforceable in accordance with their terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, fraudulent -22- conveyance, moratorium or other similar federal or state laws affecting the rights of creditors and the effect or availability of rules of law governing specific performance, injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or in equity). Provided the conditions set forth in Article 7 are satisfied, the execution and delivery of this Agreement and the Agreement of Merger do not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under (a) any provision of the Certificate of Incorporation or Bylaws of FIC, (b) any provision of the Articles of Incorporation or Bylaws of Acquisition Corporation or (c) any agreement or instrument, permit, license, judgment, order, statute, law, ordinance, rule or regulation applicable to FIC or Acquisition Corporation or their respective properties or assets, other than any such conflicts, violations, defaults, terminations, cancellations or accelerations which individually or in the aggregate would not have a material adverse effect on FIC and Acquisition Corporation taken as a whole. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to FIC or Acquisition Corporation in connection with the execution and delivery of this Agreement or the Agreement of Merger by FIC and Acquisition Corporation or the consummation by FIC and Acquisition Corporation of the transactions contemplated hereby or thereby, except for (i) filings to be effected in connection with the organization of Acquisition Corporation, (ii) the filing of the Agreement of Merger and related certificates with the California Secretary of State, and appropriate documents with the relevant Governmental Entities of other states in which Acquisition Corporation is qualified to do business, (iii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws in connection with the transactions set forth herein, (iv) filings required pursuant to the HSR Act and (v) such other consents, authorizations, filings, approvals and registrations which if not obtained or made would not have a material adverse effect on FIC and Acquisition Corporation, taken as a whole. 4.4 Capital Structure. The authorized capital stock of FIC consists of 35,000,000 shares of FIC Common, and 1,000,000 shares of Preferred Stock, $0.01 par value ("FIC Preferred Stock"). At the close of business on June 4, 1997: (i) 12,717,263 shares of FIC Common were issued and outstanding, of which 998,263 were held by FIC's Employee Stock Ownership Plan; (ii) 7,843 shares of FIC Common were held by FIC as treasury stock; and (iii) 1,614,460 shares of FIC Common were reserved for issuance upon exercise of options (the "FIC Options") under FIC's 1992 Long-term Incentive Plan, 1987 Stock Option Plan and Stock Option Plan for Non-employee Directors, of which options to purchase 1,231,910 shares were outstanding. No shares of FIC Preferred Stock are outstanding. Except for the FIC Options and the employee benefit plans set forth above, employment agreements between FIC and certain of its employees, or as otherwise disclosed in Schedule 4.4, there are no options, warrants, calls, rights, commitments or agreements of any character to which FIC is a party or by which it is bound obligating FIC to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of FIC or obligating FIC to grant, extend or enter into any such option, warrant, call, right, commitment or agreement, and there are no voting trusts, proxies or other agreements or understandings with respect to the shares of capital stock of FIC. -23- All of the outstanding shares of FIC Common are, and any shares of FIC Common issuable upon exercise of any FIC Option, when issued pursuant to such exercise, will be duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, FIC's Certificate of Incorporation or Bylaws or any agreement to which FIC is a party or by which it is bound. 4.5 SEC Documents. FIC has made available to the Signing Holders a true and complete copy of FIC's Form 10-K for the year ended September 30, 1996 and Form 10-Q for the three (3) months ended December 31, 1996 and any other statement, report, registration statement or definitive proxy statement filed by FIC with the SEC since January 1, 1997 to the Effective Time (the "FIC SEC Documents"). As of their respective filing dates, FIC has made all necessary SEC filings, the FIC SEC Documents comply or will comply in all material respects with the requirements of the Securities Exchange Act of 1934 or the Securities Act, and none of the FIC SEC Documents contain or will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, except to the extent corrected by a subsequently filed FIC SEC Document. Without limiting the foregoing, each of the consolidated balance sheets included in or incorporated by reference into the FIC SEC Documents fairly presented the consolidated financial position of FIC and its subsidiaries as of its date and each of the consolidated statements of income, stockholders' equity and cash flows included in or incorporated by reference into the FIC SEC Documents fairly presented the results of operations, stockholders' equity and cash flows of FIC and its subsidiaries for the period set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments which would not be material and the absence of certain footnote disclosures), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved. 4.6 Information Supplied. None of the information supplied or to be supplied by FIC at the date such information is supplied, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 4.7 No Conflict. The execution and delivery of this Agreement and the Agreement of Merger by FIC and Acquisition Corporation and the performance of their respective obligations hereunder or thereunder, (a) are not in violation or breach of, and will not conflict with or constitute a default under, any of the terms of the Certificate of Incorporation or Bylaws of FIC, or any contract, agreement or commitment binding upon FIC or any of its assets or properties, other than violations, breaches, conflicts or defaults which individually or in the aggregate would not have a material adverse effect on FIC; (b) will not result in the creation or imposition of any lien, encumbrance, equity or restriction in favor of any third party upon any of the assets or properties of FIC; and (c) will not to the actual knowledge of FIC conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over FIC or any of its assets or properties. 4.8 Shares of Common Stock. The Merger Shares will, when issued and delivered to the Holders in accordance with this Agreement, be duly authorized, validly issued, fully paid and nonassessable. 4.9 Brokers or Finders. FIC has not dealt with any broker or finder in connection with the transactions contemplated by this Agreement in a manner which will cause RMT or any of the -24- Signing Holders to incur, directly or indirectly, any liability to such broker or finder for any brokerage or finders' fees or agents commissions or any similar charges. ARTICLE 5 COVENANTS RELATING TO CONDUCT OF BUSINESS During the period from the date of this Agreement and continuing until the Closing, RMT agrees to act and to cause its subsidiary to act as follows (except as expressly contemplated by this Agreement or to the extent that FIC shall otherwise consent in writing), and each of the Signing Holders shall agree to use its best efforts to cause RMT to act as follows: 5.1 Ordinary Course. Each of RMT and its subsidiary shall carry on its business in the usual, regular and ordinary course, including the payment of all Taxes, in substantially the same manner as heretofore conducted and, to the extent consistent with such businesses, use all commercially reasonable efforts consistent with past practice and policies to preserve intact its present business organizations, use its best efforts to keep available the services of its present officers and key employees and preserve its relationships with present and potential customers, software developers, system integrators, service providers and others having business dealings with them to the end that its goodwill and ongoing business shall be unimpaired at the Effective Time. 5.2 Dividends; Changes in Stock. Neither RMT nor its subsidiary shall, nor shall either of them propose to, directly or indirectly, (a) make, declare or pay any dividends or other distribution on or in respect of any of its capital stock, (b) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of RMT or its subsidiary, or (c) repurchase, redeem or otherwise acquire any shares of its capital stock or rights to acquire any shares of its capital stock. 5.3 Issuance of Securities. Neither RMT nor its subsidiary shall issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock of any class or securities convertible into, or rights, warrants or options to acquire, any such shares or other convertible securities, or enter into any agreement, understanding or arrangement with respect to the sale or voting of its capital stock. 5.4 Governing Documents. RMT shall not amend its Articles of Incorporation or Bylaws. RMT's subsidiary shall not amend its charter documents. 5.5 No Other Bids or Contacts. Neither the Signing Holders nor RMT nor any of any of RMT's directors, officers, employees, affiliates or agents (including investment bankers, attorneys and accountants) will, directly or indirectly, take any of the following actions with any person, entity or group other than FIC and Acquisition Corporation without the prior written consent of FIC: (i) solicit, initiate, facilitate or encourage, or furnish information with respect to RMT or access to RMT's books, records, personnel or properties in connection with, any inquiry, proposal or offer with respect to any merger, consolidation or other business combination involving RMT or any of its subsidiaries, liquidation or dissolution of RMT, sale or other disposition of any securities of RMT or of all or a substantial portion of the assets of RMT (each, an "Acquisition Transaction"); (ii) negotiate, discuss, explore or otherwise communicate or cooperate in any way with any person, entity or group other than FIC and Acquisition Corporation with respect to any Acquisition Transaction; or (iii) enter into any agreement, arrangement or understanding with -25- respect to an Acquisition Transaction or requiring RMT to abandon, terminate or refrain from consummating a transaction with FIC or FIC's affiliates. RMT shall (a) promptly advise FIC orally and in writing of any such offer, inquiries or proposals of or contacts with respect to any possible Acquisition Transaction, and (b) not accept (nor shall RMT's Board of Directors or any committee thereof recommend) any such proposal or offer without giving FIC five days' prior written notice of the intention of RMT (or such Board or committee) to take such action. 5.6 No Acquisitions. Neither RMT nor its subsidiary shall (a) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or (a) otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to RMT except in the ordinary course of business consistent with prior practice. 5.7 No Dispositions. Neither RMT nor its subsidiary shall sell, lease, encumber, pledge or otherwise dispose of any of its assets or properties, except in the ordinary course of business consistent with prior practice and in any event not in excess of $10,000 in the aggregate. 5.8 Indebtedness. Neither RMT nor its subsidiary shall assume or incur any indebtedness or guarantee any indebtedness, enter into, extend or renew any credit agreement, line of credit or similar arrangement, issue or sell any debt securities or warrants or rights to purchase debt securities, or enter into, extend or renew any lease or any agreement to maintain the financial condition of another person or entity, other than operating leases of personal property entered into in the ordinary course of RMT's business consistent with past practice and which provide for annual payments by RMT of less than $5,000 in any one case and less than $25,000 in the aggregate with respect to all such operating leases. 5.9 Benefit Plans, Etc. Neither RMT nor its subsidiary shall adopt or amend in any material respect any Employee Plan, Benefit Arrangement or any other agreement with any employee or employees, shall not hire any employees other than as set forth on Schedule 5.9, shall not increase in any manner the compensation or benefits for its employees, grant any stock option, stock appreciation right or other equity-related compensation right, or pay or accrue any benefit not required by existing policies, plans and agreements that are described on Schedule 5.9. Neither RMT nor its subsidiary shall take any action with respect to (a) the grant of any severance pay, termination pay or any payment or right triggered upon a change in control of RMT or (b) any increase of benefits payable under its severance pay, termination pay or change in control arrangements in effect as of the date hereof. 5.10 Business Relations. Without making any commitment on behalf of or which would be binding upon FIC, each of RMT and its subsidiary will use its best efforts to preserve its business organization, to keep available to FIC the services of present employees, agents and representatives (except those employees terminated for cause or consistent with sound business practices) and to preserve for FIC the goodwill and relationships of software developers, systems integrators, service providers, consultants, suppliers and others with whom business relationships exist. 5.11 Other Actions. Without limiting the generality of the foregoing, except as expressly contemplated by this Agreement, neither RMT nor its subsidiary shall, and the Signing Holders shall use their best efforts to cause RMT and its subsidiary not to: -26- (a) Enter into any material commitment or transaction not in the ordinary course of business consistent with past practice; (b) Transfer to any person or entity any material rights to the Proprietary Rights, other than pursuant to licenses in the ordinary course of business consistent with past practice; (c) Enter into any material agreements (or material amendments thereto) pursuant to which any third party is granted marketing, distribution or similar rights of any type or scope with respect to any products or services of RMT other than in the ordinary course of business consistent with past practice; (d) Amend or otherwise modify, except in the ordinary course of business consistent with past practice, or violate the material terms of, any of the agreements set forth or described in the Schedules to this Agreement; (e) Commence any material litigation; (f) Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable, other than in the ordinary course of business consistent with past practice; (g) Pay, discharge or satisfy, in an amount in excess of $25,000 (in any one case) or $50,000 (in the aggregate), any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in the RMT Financial Statements or that arose in the ordinary course of business subsequent to December 31, 1996 or unless payment of such claim, liability or obligation is due in accordance with its terms or expenses consistent with the provisions of this Agreement incurred in connection with the transactions contemplated hereby not in excess of $50,000; (h) Make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes; or (i) Take, or agree to take, any of the actions described in this Section or any other action that would prevent RMT from performing or cause RMT not to perform its covenants hereunder, or that would or reasonably would be expected to result in any of its, his or her representations and warranties set forth in this Agreement being or becoming untrue in any material respect or in any of the conditions set forth in Article 7 not being satisfied. 5.12 Advice of Changes; Government Filings. RMT shall confer on a regular and frequent basis with FIC, report on operational matters and promptly advise FIC orally and in writing of any change or event having, or, insofar as can reasonably be foreseen, could have, a material adverse effect on RMT or which would cause or constitute a material breach of any of the representations, warranties or covenants of RMT contained herein. RMT shall promptly provide FIC (or its counsel) with copies of any filings made by RMT, RMT's subsidiary or any Signing Holder with any Governmental Entity in connection with this Agreement or the transactions contemplated hereby. -27- 5.13 Accounting Methods. RMT shall not change its methods of accounting in effect at the RMT Balance Sheet Date, except as required by changes in GAAP as concurred in by RMT's independent auditors. RMT shall notify FIC immediately of any such change and shall provide all details thereof. 5.14 Intellectual Property Matters. Without limiting the generality of the foregoing agreements, each of RMT and its subsidiary shall use its best efforts to preserve its Proprietary Rights free and clear of any liens, claims or encumbrances and to assert, contest and prosecute any infringement of any issued patent, trademark, service mark, tradename or copyright that is part of the Proprietary Rights or any misappropriation or disclosure of any trade secret, know-how or confidential information that is part of the Proprietary Rights. ARTICLE 6 ADDITIONAL AGREEMENTS 6.1 Access to Information. RMT shall, and shall cause its subsidiary to, afford to FIC and shall cause its independent accountants to afford to FIC, and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to RMT's and its subsidiary's properties, books, contracts, commitments and records, and to the audit work papers and other records of RMT's accountants. During such period, RMT shall use reasonable efforts to furnish promptly to FIC all other information concerning the business, properties and personnel of RMT and its subsidiary as FIC may reasonably request. 6.2 Legal Conditions to the Merger and Related Transactions. Each party will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on such party with respect to the Merger and will promptly cooperate with and furnish information to the other party in connection with any such requirements imposed upon such other party in connection with the Merger. Each party will take all reasonable actions to obtain (and to cooperate with the other party in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity, or other third party required to be obtained or made by such party (or by the other party) in connection with the Merger or the taking of any action contemplated thereby or by this Agreement. Notwithstanding the generality of the foregoing, (i) FIC shall cause Acquisition Corporation to take all necessary corporate action required by this Agreement, and (ii) RMT shall obtain its shareholders' written consent in favor of this Agreement and the transactions contemplated hereby as soon as practicable, and the Board of Directors of RMT shall recommend approval of this Agreement and the transactions contemplated hereby to the shareholders of RMT. 6.3 Communications; Confidentiality. Each of the parties hereto hereby agrees to and reaffirms the terms and provisions of the Mutual Nondisclosure Agreement between FIC and RMT dated as of April 21, 1997, except to the extent expressly modified hereby. Between the date hereof and the Effective Time, neither RMT, on the one hand, nor FIC, on the other hand, will furnish any communication to its shareholders (other than communications required pursuant to Section 6.2) or to the public generally if the subject matter thereof relates to the other party or to the transactions contemplated by this Agreement without the prior approval of the other party as to the content thereof, which approval shall not be unreasonably withheld, and subject to each party's compliance with applicable law. Notwithstanding the foregoing, FIC may make a public -28- announcement concerning the existence of this Agreement following the execution thereof, which announcement shall be mutually agreed upon in advance by FIC and RMT. 6.4 Update to Disclosures. Without limiting FIC's right to rely on the representations and warranties as of the date of this Agreement, RMT shall provide FIC with updates to the disclosures provided or made available to FIC as to material facts which arise between the date of this Agreement and the Closing Date and which, if they had occurred and been known prior to the date of this Agreement, would have been required to have been disclosed in order to make the representations and warranties contained in Article 3 true and correct as of the date of this Agreement. 6.5 Certain Notifications. At all times from the date hereof and prior to the Effective Time, each party shall promptly notify the other parties in writing of the occurrence of any event known to such party which will or is likely to result in the failure to satisfy any of the conditions specified in Article 7 hereof. 6.6 Treatment of Plans, Agreements and Options. RMT shall obtain prior to the Closing all necessary consents or releases from holders of options to purchase RMT Common and take all such other lawful action as may be necessary to give effect to the transactions contemplated hereby with respect to such options. Without limiting the generality of the foregoing, RMT shall use its best efforts to obtain prior to the Closing a written agreement (in form satisfactory to FIC) from each of the Principal Optionholders to be bound by the Escrow Agreement and of all of the arrangements relating thereto (including without limitation the appointment of the Holders' Representatives to act for and on behalf of such persons with respect to claims by FIC Indemnitees and other matters relating to the Escrow Fund) and consenting to any amendment of such holders' Vested Options which may be necessary to give full effect to the provisions of the Escrow Agreement with respect to such options. The Principal Optionholders delivering the foregoing written agreements and/or consents in form satisfactory to FIC prior to the Closing are referred to as the "Subject Optionholders." The "Subject Options" means, collectively, those options to purchase FIC Common held by the Subject Optionholders which constituted Vested Options immediately prior to the Closing, and which collectively have a Merger Value (as defined below) equal to ten percent (10%) of the Merger Value of all options to purchase FIC Common which constituted Vested Options immediately prior to the Closing (including those held by persons other than the Subject Optionholders) as of the Effective Time. The Subject Options owned by each individual Subject Optionholder shall be determined on a pro rata basis according to the Merger Value of each such holder's Subject Options in comparison to the collective Merger Value of all Subject Options, as provided in the Escrow Agreement. The "Merger Value" of an option to purchase FIC Common refers to the difference between the per-share exercise price of such option and the Closing Stock Price, multiplied by the number of shares of FIC Common issuable upon exercise of such option. 6.7 [Reserved]. 6.8 [Reserved]. 6.9 Agreements by Affiliated Stockholders. At least thirty (30) days prior to the Closing Date, RMT shall deliver to FIC a list of names and addresses of those persons who were, in RMT's reasonable judgment, at the record date for its shareholders' meeting or written consent to approve the Merger, "affiliates" of RMT within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act ("Rule 145") (each such person, an "Affiliate"). -29- RMT shall provide FIC such information and documents as RMT shall reasonably request for purposes of reviewing such list. RMT shall use all reasonable efforts to deliver or cause to be delivered to FIC, prior to the Closing Date, from each of the Affiliates of RMT identified in the foregoing list, a written Affiliate Agreement in the form attached hereto as Exhibit D. FIC shall be entitled to place legends as specified in such Affiliate Agreements on the certificates evidencing any FIC Common to be received by such Affiliates pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for the FIC Common, consistent with the terms of such agreements. 6.10 Options. (a) Assumption. Consistent with the terms of the documents governing each Option, the Merger will not terminate or accelerate any Option or any right of exercise, vesting or repurchase relating thereto with respect to FIC Common acquired upon exercise of such Option assumed by FIC. Holders of Options will not be entitled to acquire shares of the Surviving Corporation after the Merger. Subject to the provisions of this Section, as of the Effective Time, FIC will assume each Option and all obligations of RMT under the RMT option plans relating to Options (the "Option Plans"). Each Option so assumed by FIC under this Agreement will continue to have, and be subject to, substantially the same terms and conditions set forth in the Option Plans and in the other documents governing such Option immediately prior to the Effective Time, except that (i) such Option will be exercisable for that number of whole shares of FIC Common equal to the product of the number of shares of RMT Common that were purchasable under such Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of FIC Common, and (ii) the per share exercise price for the shares of FIC Common issuable upon exercise of such Option will be equal to the quotient determined by dividing the exercise price per share of RMT Common at which such Option was exercisable immediately prior to the Effective Time by the Exchange Ratio, and rounding the resulting exercise price up to the nearest whole cent. In addition, by virtue of the Merger, each Subject Option held by the Subject Optionholders shall be amended to the extent set forth in the Escrow Agreement with respect to the depositing into escrow of Escrow Shares issuable upon the exercise of such option and the forfeiture of all or a portion of such option in accordance with the Escrow Agreement upon satisfaction of indemnification claims under the Escrow Agreement. FIC shall establish a Successor Option Plan for the purpose of the administration of the Options assumed by FIC under this Section. The right to receive an assumed Option may not be assigned or transferred in any manner except as permitted by the Successor Option Plan, by operation of law, by will or by the laws of descent. Any attempted assignment in violation of this Section shall be void. (b) Qualification as ISOs. It is the intention of the parties that each assumed Option qualify as an ISO to the extent that such Option constituted an ISO immediately prior to the Effective Time. No assumed Option will entitle the holder thereof to any additional benefits within the meaning of section 424(a)(2) of the Code that were not available prior to such assumption. (c) Registration. FIC shall file a Registration Statement on Form S-8 as soon as reasonably practicable after the Effective Time, which registration statement shall cover the Successor Option Plan and the shares of FIC Common issuable upon the exercise of the assumed Options that can be registered on a Form S-8, and FIC will use commercially reasonable efforts to cause such FIC shares to be registered under the Securities Act and to maintain such registration in effect until the exercise or termination of all such assumed options. -30- (d) Option Documents. As soon as practicable after the Effective Time, FIC shall issue to each holder of an assumed Option a document evidencing the conversion of such option as provided above and any amendment thereto which is contemplated by this Agreement or the Escrow Agreement. 6.11 Senior Management Participation. It is currently contemplated that the current Chairman and President of RMT will participate in established senior management councils of FIC, such as the Corporate Strategy Council and the Operations Committee, on such terms as may be determined by the FIC Board of Directors or senior management of FIC. 6.12 Employees. Consistent with FIC's employee benefit plans, all RMT employees who become employees of FIC or a subsidiary of FIC as of the Effective Time: (a) shall be entitled to participate in FIC's Employee Stock Ownership Plan (ESOP) and pension plan; (b) shall receive the same or reasonably comparable benefits as such RMT employees currently receive, including participation in RMT's 1997 Incentive Plan through December 31, 1997 and including RMT's current paid time off (PTO) policy and 401(k) plan (in each case, as and to the extent disclosed in writing to FIC prior to the date hereof); and (c) to the extent not prohibited by law, shall receive service credit (other than for benefit accrual under a defined benefit pension plan) that includes their employment by RMT prior to the Effective Time. Any such employment of such former RMT employees shall not affect the "at will" employment status of any such employee or limit any right of FIC or its applicable subsidiary to terminate any employee with or without cause following the Effective Time. 6.13 Employee Option Grants; Retention Bonuses. FIC will, after the Effective Time, (a) grant certain employees of RMT who are employed by FIC or a subsidiary of FIC immediately after the Effective Time, stock options to purchase approximately 100,000 shares of FIC Common, vesting 25% on each anniversary of the grant date; and (b) implement a bonus program for certain such employees, providing for an aggregate of $1.0 million in bonuses vesting approximately twenty-five percent (25%) after twelve (12) months, thirty-five percent (35%) after twenty-four (24) months, and forty percent (40%) after thirty-six (36) months, in each case as previously disclosed in writing to RMT. Such obligations of FIC will be subject to any limitations necessary or advisable in order for the Merger to qualify for pooling-of-interest accounting treatment and as a tax-free reorganization, and to compliance with applicable law. 6.14 Good Faith. Each party shall act in good faith in an attempt to cause to be satisfied all the conditions precedent to its obligations and those of the other parties to this Agreement over which it has control or influence. Each party will act in good faith and take all reasonable action within its capability necessary to render accurate as of the Effective Time its representations and warranties contained in this Agreement. 6.15 Treatment of Merger as Qualifying Reorganization. RMT and FIC shall (a) treat the Merger as a qualified reorganization under section 368 of the Code, (b) report the Merger and all related transactions consistently therewith, (c) take such actions as may be reasonably required to cause the Merger to be treated as a qualifying reorganization, and (d) take no action which could disqualify the Merger from reorganization status under section 368 of the Code. 6.16 State Statutes. If any state takeover law shall become applicable to the transactions contemplated by this Agreement, FIC and its Board of Directors or RMT and its Board of Directors, as the case may be, shall use their reasonable best efforts to obtain such approvals and -31- take such actions as are necessary so that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement. ARTICLE 7 CONDITIONS PRECEDENT 7.1 Conditions to Obligations of FIC, Acquisition Corporation and RMT. The obligations of FIC, Acquisition Corporation and RMT (but no other party to this Agreement) to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of the following conditions unless waived by all of FIC, Acquisition Corporation and RMT: (a) Government Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, any Governmental Entity deemed necessary or appropriate by FIC or RMT for the consummation of the transactions contemplated by this Agreement including, but not limited to, the California Secretary of State and applicable federal or state securities law regulatory bodies, shall have been filed, occurred or been obtained, in each case subject to no term, condition or restriction unacceptable to FIC or RMT. FIC and RMT agree to cooperate with each other to the fullest extent practicable in satisfying all applicable federal and state filing requirements, and in obtaining all applicable federal and state regulatory approvals. (b) Third-Party Approvals. Any and all consents or approvals required from third parties relating to contracts, agreements, licenses, leases and other instruments, material to the respective businesses of FIC (unless waived by RMT) and RMT (unless waived by FIC) shall have been obtained. (c) FTC or Antitrust Division Actions. No action shall have been instituted or authorized to be instituted by the FTC or the Antitrust Division challenging or seeking to enjoin the consummation of the Merger, which action shall not have been withdrawn or terminated. (d) Legal Action. No temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any federal or state court and remain in effect, and no litigation seeking the issuance of such an order or injunction, shall be pending which, in the good faith judgment of RMT or FIC, has a reasonable probability of resulting in such order, injunction or damages. In the event any such order or injunction shall have been issued, each party agrees to use its reasonable efforts to have any such injunction lifted. (e) Statutes. There shall not be in effect any statute, rule or regulation which would (i) make the consummation of the Merger illegal, (ii) prohibit FIC's or Surviving Corporation's ownership or operation of all or a material portion of the business or assets of RMT, or compel FIC or Surviving Corporation to dispose of or hold separate all or a material portion of the business or assets of RMT, as a result of the Merger, or (iii) render FIC, RMT or Acquisition Corporation unable to consummate the Merger, except for any waiting period provisions. (f) RMT Shareholder Approval. The shareholders of RMT shall have duly approved this Agreement, the Agreement of Merger and the transactions contemplated hereby and thereby. (g) Dissenting Shares. No more than five percent (5%) of the shares of RMT Common Stock shall be Dissenting Shares. -32- (h) Registration Rights Agreement. The Registration Rights Agreement in the form attached hereto as Exhibit K shall have been executed and delivered by FIC and the other parties thereto. (i) Tax-Free Reorganization. The Merger shall be a tax-free reorganization within the meaning of section 368(a) of the Code. (j) Escrow Agreement. The Escrow Agent shall have executed and delivered the Escrow Agreement in the form attached hereto as Exhibit L. 7.2 Conditions to Obligations of FIC and Acquisition Corporation. The obligations of FIC and Acquisition Corporation to effect the Merger are subject to the satisfaction on or prior to the Closing Date of the following additional conditions, unless waived by FIC: (a) Representations and Warranties. The representations and warranties of RMT and the Signing Holders set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as if made at and as of the Closing Date, except as otherwise contemplated by this Agreement, and FIC shall have received a certificate or certificates signed by the chief executive officer and chief financial officer of RMT, and by the Signing Holders, respectively, to such effect. (b) Performance of Obligations of RMT. RMT shall have performed in all material respects all obligations required to be performed by it under this Agreement prior to the Closing Date, and FIC shall have received a certificate signed by the chief executive officer and chief financial officer of RMT to such effect. The Signing Holders shall have performed in all material respects all obligations required to be performed by them under this Agreement prior to the Closing Date and shall have delivered certificates to such effect to FIC. (c) Agreements Regarding Equity Securities. Neither RMT nor its subsidiaries shall be bound by any options, warrants, rights or agreements which would entitle any person, other than FIC, to own any capital stock of RMT or any subsidiary of RMT or to receive any payment in respect thereof. (d) Opinion of RMT's Counsel. FIC shall have received an opinion dated the Closing Date of Whitehead & Porter LLP, counsel to RMT, in the form of Exhibit I. (e) No Material Adverse Change. Since the date of this Agreement there shall have been no changes in the condition (financial or otherwise), business, prospects, employees, operations, obligations or liabilities of RMT or its subsidiaries which, in the aggregate, have had or may be reasonably expected to have a materially adverse effect on the financial condition, business or operations of RMT. (f) Change in Laws or Regulations. Since the date of this Agreement, no statute shall have been enacted and no rule or regulation shall have been adopted by the State of California or any federal agency or authority which has had or may reasonably be expected to have a material adverse effect on the condition (financial or otherwise), business, net worth, assets, prospects, properties, employees, operations, obligations or liabilities of RMT or its subsidiaries. -33- (g) Employment Agreements. FIC and David LaCross, Jefferson Braswell and Jeffrey Dandridge shall have entered into employment agreements substantially in the forms attached hereto as Exhibit E, Exhibit F and Exhibit G, respectively. (h) Non-Compete Agreements. David LaCross, Jefferson Braswell and Jeffrey Dandridge shall have entered into non-compete agreements with FIC substantially in the form attached hereto as Exhibit H. (i) Affiliate Agreements. The Affiliate Agreements described herein shall have been executed and delivered to FIC. (j) Resignations. Each individual who serves as a member of the Board of Directors or as an officer of RMT shall have resigned from the Board of Directors or from such office effective on or prior to the Effective Time. (k) Satisfactory Completion of Review. FIC shall have completed its review of the business, books, records, properties and assets of RMT and its subsidiaries and such review shall have been satisfactory to FIC in its sole discretion. (l) Pooling of Interests Accounting Treatment. FIC shall have received the opinion of KPMG Peat Marwick, independent accountants, in form and substance satisfactory to FIC and to the effect that the Merger shall qualify for the pooling-of-interests method of accounting in accordance with GAAP and all applicable rules, regulations and policies of the SEC. In addition, there shall have been no determination by any court, tribunal, regulatory agency or other governmental entity, that the Merger fails or will fail to qualify for pooling-of-interests accounting treatment. (m) Good Standing Certificate. FIC shall have received certificates of good standing in the State of California, dated as of a recent date, with respect to RMT. (n) Fairness Opinion. FIC shall have received from Alliant Partners a written opinion dated not earlier than two (2) days before the Closing Date, stating that the consideration to be paid by FIC in the Merger is fair to FIC from a financial point of view, and such opinion shall not have been withdrawn or modified. (o) Escrow Agreement. RMT and the shareholders and Subject Optionholders of RMT, and the Holders' Representatives, shall have executed and delivered the Escrow Agreement in the form of Exhibit L hereto. (p) Software Alliance Note and Lien. RMT shall have made arrangements satisfactory to FIC to repay, on or prior to the Closing, all of its indebtedness outstanding to Software Alliance LLC and shall have obtained a written agreement of Software Alliance LLC to release any lien, charge, pledge, security interest or encumbrance on any assets of RMT or its subsidiary in favor of Software Alliance LLC upon such repayment, and written evidence of the foregoing, in form and substance satisfactory to FIC, shall have been delivered to FIC. 7.3 Conditions to Obligations of RMT. The obligations of RMT to effect the Merger are subject to the satisfaction on or prior to the Closing Date of the following additional conditions unless waived by RMT: -34- (a) Representations and Warranties. The representations and warranties of FIC and Acquisition Corporation set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as if made at and as of the Closing Date, except as otherwise contemplated by this Agreement, and RMT and the Signing Holders shall have received a certificate or certificates signed by the chief executive officer or an executive vice president and by the chief financial officer of FIC, and by the chief executive officer, president or vice president and by the chief financial officer of Acquisition Corporation to such effect. (b) Performance of Obligations of FIC and Acquisition Corporation. FIC and Acquisition Corporation shall have performed in all material respects all obligations required to be performed by them under this Agreement prior to the Closing Date, and RMT and the Signing Holders shall have received a certificate or certificates signed by the chief executive officer or executive vice president and by the the chief financial officer of FIC, and by the chief executive officer, president or vice president and by the chief financial officer of Acquisition Corporation, to such effect. (c) Opinion of FIC's Counsel. RMT shall have received an opinion dated the Closing Date of Peter L. McCorkell, General Counsel of FIC, in the form of Exhibit J. (d) No FIC Charter Amendment or Change in Control. Since the date of this Agreement, FIC shall not have amended its Certificate of Incorporation, and no change in control of FIC resulting in the changed beneficial ownership of more than fifty percent (50%) of the outstanding FIC Common shall have occurred and become effective. (e) Escrow Agreement. FIC shall have executed and delivered the Escrow Agreement in the form attached hereto as Exhibit L. ARTICLE 8 CLOSING 8.1 Closing Date. The Closing under this Agreement (the "Closing") shall be held not more than two (2) business days following the satisfaction of all conditions precedent to the Merger specified in this Agreement (other than the delivery of the documents and other items required by this Agreement to be delivered at the Closing), unless duly waived by the party entitled to satisfaction thereof; provided, however, that if the Closing would otherwise be held on June 25 through June 30, 1997, inclusive, FIC may in its discretion elect by written notice to the other parties hereto to hold the Closing on July 1, 1997. In any event, if the Closing has not occurred on or before July 31, 1997, this Agreement may be terminated as provided in Section 11.1(c). Such date on which the Closing is to be held is herein referred to as the "Closing Date." The Closing shall be held at the offices of Pillsbury Madison & Sutro LLP, 235 Montgomery Street, San Francisco, California, at 10:00 a.m. on such date, or at such other time and place as FIC, Acquisition Corporation and RMT may agree upon in writing. 8.2 Filing Date. Subject to the provisions of this Agreement, on the Closing Date fully executed and acknowledged copies of the Agreement of Merger, along with required related certificates of RMT and Acquisition Corporation, meeting the requirements of the California General Corporation Law shall be filed with the California Secretary of State, all in accordance with the provisions of this Agreement (the date on which the later of these filings occurs is referred to as the "Filing Date"). -35- 8.3 Best Efforts. All the parties hereto shall use their respective best efforts to cause the Closing Date and Filing Date to be not later than July 31, 1997. ARTICLE 9 INDEMNIFICATION AND ESCROW 9.1 Survival of Representations and Warranties. All of RMT's and the Signing Holders' representations and warranties in this Agreement or in any instrument or document delivered pursuant to this Agreement (a) shall survive the Merger and continue until 5:00 p.m., California time, on the date which is four (4) years after the Closing Date, except the representations and warranties contained in Sections 3.2 (Capital Structure), 3.7 (Properties) and 3.11 (Compliance with Law), which shall survive and continue without limitation, and (b) shall not be affected by any investigation conducted for or on behalf of FIC with respect thereto or any knowledge acquired by FIC or its officers, directors, employees, stockholders or agents as to the accuracy or inaccuracy of any such representation or warranty. The waiver of any condition based on the accuracy of any representation or warranty, or the performance or compliance of any covenant or obligation, will not affect the right to indemnification set forth in this Article 9 or the right to any other remedy. 9.2 Indemnification by RMT and the Signing Holders. (a) RMT and the Signing Holders, in each case subject to the limitations set forth herein, severally (but not including RMT after the Closing), agree to defend and indemnify Acquisition Corporation and FIC (and, after the Closing, RMT), and their respective affiliates, directors, officers and shareholders, and their respective successors and assigns (collectively, "FIC Indemnitees"), against and hold each of them harmless from any and all losses, liabilities, taxes, claims, suits, proceedings, demands, judgments, damages, expenses and costs, including, without limitation, reasonable counsel fees, costs and expenses incurred in the investigation, defense or settlement of any claims covered by this indemnity (net of any insurance recovery) (in this Section 9.2 and in Section 9.3, collectively, the "Indemnifiable Damages") which any such FIC Indemnitee may suffer or incur by reason of (i) the inaccuracy or breach of any of the representations, warranties and covenants of RMT or the Signing Holders contained in this Agreement or any document, certificate or agreement delivered pursuant hereto, and (ii) any claim by any person or entity relating to or arising out of transactions, events, acts or omissions of or by RMT or any subsidiary of RMT prior to the Effective Time that is not adequately accrued or otherwise reflected on the RMT Balance Sheet and the nature and amount of which is not expressly stated in the Schedules delivered by RMT to FIC and Acquisition Corporation on or prior to the date hereof, other than liabilities incurred after the date of the RMT Balance Sheet in the ordinary course of RMT's business and which are usual and normal in amount (including without limitation and without giving effect to the foregoing exception in this clause (ii) any claim relating to Taxes of RMT or any of its subsidiaries for periods prior to the Closing or relating to the matters described in Schedule 3.9). FIC, RMT and the Signing Holders each acknowledge that such Indemnifiable Damages would relate to unresolved contingencies existing at the Effective Time, which if resolved at the Effective Time would have led to a reduction in the aggregate Merger consideration. Notwithstanding the generality of the foregoing, the full amount of the Escrow Fund shall be available as partial security for the satisfaction of all Indemnifiable Damages which any FIC Indemnitee may suffer or incur. RMT or the Signing Holders, as the case may be, are hereinafter -36- referred to as the "RMT Indemnitors." Notwithstanding the foregoing, in no event will the aggregate liability of the RMT Indemnitors under this Section 9.2 (but explicitly excluding liability by reason of the inaccuracy or breach of the representations contained in Section 3.2 (Capital Structure) of this Agreement and liability for breaches of covenants that are willful or inaccuracies that constitute actual fraud, which shall not be subject to limitation) exceed four million six hundred thousand dollars ($4,600,000), and then only for the amount by which Indemnifiable Damages recovered or recoverable hereunder cumulatively exceeds fifty thousand dollars ($50,000); provided, however, that for purposes of determining whether the foregoing $50,000 threshold has been exceeded, any materiality limitations expressly stated in the representations, warranties and covenants of RMT and the Signing Holders herein shall not be taken into account. (b) Without limiting the generality of the foregoing, with respect to the measurement of Indemnifiable Damages, Acquisition Corporation and FIC and, after the Closing Date, Acquisition Corporation, FIC, Surviving Corporation and the affiliates of any of them shall have the right to be put in the same financial position as they would have been in had each of the representations, warranties and covenants of RMT and the Signing Holders been true and accurate or the same said parties had not breached any such covenants or had any of the events, claims or liabilities referred to in clause (a) of this Section 9.2 not occurred or been made or incurred. In determining whether RMT or a Signing Holder has breached a covenant, representation or warranty, the knowledge of FIC or Acquisition Corporation prior to the Closing of any inaccuracy in such representation, covenant or warranty shall not be considered and it shall not be a defense to any claim for indemnification hereunder that any FIC Indemnitee knew or should have known prior to the Closing of the facts giving rise to such claim for indemnification. No FIC Indemnitee shall have any express or implied obligation hereunder to inform RMT as to any inaccuracy in any representation, covenant or warranty of RMT or the Signing Holders, which is discovered by any FIC Indemnitee or any of their officers, directors, employees or agents prior to the Closing. (c) The RMT Indemnitors waive any right to require FIC or any other FIC Indemnitee to (i) proceed against any person or entity including any other Signing Holder, (ii) proceed against or exhaust any collateral or security or any part thereof, or (iii) pursue any other remedy in its power, and waives any defense arising by reason of any inability of any other obligor to pay or any defense based on bankruptcy or insolvency or other similar limitations on creditors' remedies with respect to any other person. Until any claims which have been asserted have been settled and indefeasibly paid in full, each RMT Indemnitor shall have no right of subrogation and each RMT Indemnitor waives any right to enforce any remedy which any FIC Indemnitee now has or may hereafter have against any other person and waives any benefit or any right to participate in any collateral or security whatsoever now hereafter held by the FIC Indemnitees. 9.3 Escrow Fund. (a) As partial security for the indemnity provided for in Section 9.2 of this Agreement, the Escrow Shares (defined in Section 0(c) hereof) shall be registered in the names of the Holders but shall be deposited (together with assignments in blank executed by the Holders) with First Trust of California, N.A. (or other institution selected by FIC with the reasonable consent of the Holders' Representatives) as escrow agent (the "Escrow Agent"), such deposit to constitute an escrow fund (the "Escrow Fund") to be governed by the terms set forth herein and in an Escrow Agreement among FIC, the Escrow Agent and the Holders (the "Escrow Agreement") substantially in the form attached hereto as Exhibit L. Subject to the terms of Section 9.3(b) of this Agreement, upon compliance with the terms hereof and the terms of the Escrow Agreement FIC and the other FIC Indemnitees shall be entitled to obtain indemnification from the Escrow Fund for all Indemnifiable -37- Damages covered by the indemnity provided for in Section 9.2 of this Agreement. From and after the Closing, upon the valid exercise of Subject Options held by the Subject Optionholders as specified in the Escrow Agreement, FIC shall deliver to the Escrow Agent a certificate or certificates issued in the name of such optionholder (or the Escrow Agent under the circumstances specified in the Escrow Agreement) representing additional Escrow Shares, to the extent set forth in the Escrow Agreement. The adoption and approval of this Agreement by RMT's shareholders shall constitute approval of the Escrow Agreement and of all of the arrangements relating thereto, including without limitation the placement of the Escrow Shares in escrow and the appointment of the Holders' Representatives to act for and on behalf of Holders to give and receive notices and communications, to authorize delivery of any shares of FIC Common from the Escrow Fund in satisfaction of claims by FIC Indemnitees, to object to such deliveries, to agree to, negotiate and enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of such representatives for the accomplishment of the foregoing. (b) At any time until the earlier of (i) 11:59 p.m., Pacific time, on the first anniversary of the Closing Date or (ii) the termination of the Escrow Agreement as provided therein, if FIC or any other FIC Indemnitee makes a claim for Indemnifiable Damages and is entitled to indemnification pursuant to Section 9.2 hereof, the Escrow Agent shall, upon compliance with the procedures set forth in the Escrow Agreement, release to FIC or such other FIC Indemnitee, as applicable, such amount from the Escrow Fund which is equal in value to such Indemnifiable Damages. Escrow Shares so released shall be valued as set forth in Section 2(c) of the Escrow Agreement. Some or all of the amount to be so released may, under the circumstances and on the terms and conditions specified in the Escrow Agreement, be satisfied by the forfeiture of Subject Options in lieu of the release of Escrow Shares. Upon a distribution by the Escrow Agent to FIC or any other FIC Indemnitee pursuant to this Section, the Escrow Fund will be correspondingly reduced. 9.4 Indemnification Procedure. A party seeking indemnification (the "Indemnitee") shall use its best efforts to minimize any liabilities, damages, deficiencies, claims, judgments, assessments, costs and expenses in respect of which indemnity may be sought under this Agreement. The Indemnitee shall give prompt written notice to the party from whom indemnification is sought (the "Indemnitor") of the assertion of a claim for indemnification, but in no event longer than (a) thirty (30) days after service of process in the event litigation is commenced against the Indemnitee by a third party, or (b) sixty (60) days after the assertion of such claim. No such notice of assertion of a claim shall satisfy the requirements of this Section 9.4 unless it describes in reasonable detail and in good faith the facts and circumstances upon which the asserted claim for indemnification is based. If any action or proceeding shall be brought in connection with any liability or claim to be indemnified hereunder, the Indemnitee shall provide the Indemnitor twenty (20) calendar days to decide whether to defend such liability or claim. During such period, the Indemnitee shall take all necessary steps to protect the interests of itself and the Indemnitor, including the filing of any necessary responsive pleadings, the seeking of emergency relief or other action necessary to maintain the status quo, subject to reimbursement from the Indemnitor of its expenses in doing so. The Indemnitor shall (with, if necessary, reservation of rights) defend such action or proceeding at its expense, using counsel selected by the insurance company insuring against any such claim and undertaking to defend such claim, or by other counsel selected by it and approved by the Indemnitee, which approval shall not be unreasonably withheld or delayed. The Indemnitor shall keep the Indemnitee fully apprised at all times of the status of the defense and shall consult with the Indemnitee prior to the settlement of any indemnified matter. The Indemnitee agrees to use reasonable efforts to cooperate with the Indemnitor in connection with its defense of indemnifiable claims. In the event the Indemnitee has a claim or claims against any third party -38- growing out of or connected with the indemnified matter, then upon receipt of indemnification, the Indemnitee shall fully assign to the Indemnitor the entire claim or claims to the extent of the indemnification actually paid by the Indemnitor and the Indemnitor shall thereupon be subrogated with respect to such claim or claims of the Indemnitee. ARTICLE 10 PAYMENT OF EXPENSES Except as provided in Section 2.3 or as set forth below, FIC, RMT and the Signing Holders shall each pay its own fees and expenses incurred incident to the preparation and carrying out of the transactions herein contemplated (including legal, accounting and travel). Notwithstanding the foregoing, (i) FIC and RMT shall share equally all government filing fees paid to any state securities commission and the California Secretary of State (collectively, the "Filing Fees"), and each party shall promptly advance on request or reimburse such party's portion of the Filing Fees; and (ii) FIC shall pay the fees imposed by the Escrow Agent pursuant to the Escrow Agreement. ARTICLE 11 TERMINATION, AMENDMENT AND WAIVER 11.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of matters presented in connection with the Merger by the Signing Holders: (a) by mutual written consent of the parties hereto; or (b) by either FIC, on the one hand, or RMT, on the other hand, if there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of any other party set forth in this Agreement and, if such breach is curable, such breach has not been promptly cured after written notice of such breach; or (c) by FIC or RMT if, without fault of the terminating party, the Effective Time shall not have occurred on or before July 31, 1997; or (d) by FIC or RMT if (i) there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Merger or (ii) there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity which would make consummation of the Merger illegal; or (e) by FIC or RMT if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would (i) prohibit FIC's or RMT's ownership or operation of all or a material portion of the business or assets of RMT or FIC, or compel FIC or RMT to dispose of or hold separate all or a material portion of the business or assets of RMT or FIC, as a result of the Merger or (ii) render FIC or RMT unable to consummate the Merger; or -39- (f) By FIC, on or prior to the Closing Date in the event that RMT or any Signing Holder supplements or amends the Schedules to this Agreement pursuant to the terms hereof and such supplements and amendments contain disclosures which collectively would or would reasonably be expected to have a material adverse effect on the condition, business, net worth, assets, prospects, properties or operations of RMT; or (g) by FIC if any condition to FIC's obligation to complete the Merger has not been satisfied or waived by FIC; or (h) by RMT if any condition to RMT's obligations to complete the Merger has not been satisfied or waived by RMT. 11.2 Effect of Termination. In the event of termination of this Agreement by RMT or FIC as provided in Section 11.1, this Agreement and the Agreement of Merger shall forthwith become void and there shall be no liability or obligation on the part of the parties hereto or their respective officers or directors except as set forth in Section 6.3 and Article 10 and except to the extent that such termination results from the (a) willful breach by a party hereto of any of its representations or warranties, or (b) a breach by a party hereto of its covenants or agreements set forth in this Agreement. The obligations of the parties under the Mutual Nondisclosure Agreement shall survive any termination of this Agreement. 11.3 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of all the parties hereto. After approval of this Agreement and the transactions contemplated hereby by the shareholders of RMT, no amendment hereto shall be made which by law requires the further approval of shareholders without obtaining such further approval. 11.4 Extension; Waiver. At any time prior to the Effective Time, FIC or RMT, by such corporate action as shall be appropriate, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to FIC, RMT or the Signing Holders contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit thereof contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE 12 GENERAL 12.1 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and delivered personally or sent by certified mail, postage prepaid by telecopy, or by courier service, as follows: Fair, Isaac and Company, Incorporated 120 North Redwood Drive San Rafael, CA 94903 Attention: Peter L. McCorkell, Esq. Fax: (415) 479-6320 -40- with a copy to: Pillsbury Madison & Sutro LLP 2700 Sand Hill Road Menlo Park, CA 94025 Attention: Jorge Del Calvo, Esq. Fax: (415) 233-4545 and to: Risk Management Technologies 2150 Shattuck Avenue Berkeley, CA 94704 Attention: Mr. David LaCross Fax: (510) 841-3750 with a copy to: Whitehead & Porter LLP 220 Montgomery Street, Suite 1850 San Francisco, CA 94104 Attention: David Whitehead, Esq. Fax: (415) 788-6521 or to such other persons as may be designated in writing by the parties, by a notice given as aforesaid. 12.2 Headings. The descriptive headings of the several sections of this Agreement are inserted for convenience of reference only and are not intended to affect the meaning or interpretation of this Agreement. 12.3 Counterparts. This Agreement may be executed in counterparts, and when so executed each counterpart shall be deemed to be an original, and said counterparts together shall constitute one and the same instrument. 12.4 Binding Effect; Parties in Interest. (a) This Agreement shall be binding upon and inure solely to the benefit of each party hereto and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. (b) This Agreement shall be binding upon the parties hereto only upon execution by each of FIC, Acquisition Corporation, RMT and the Signing Holders; provided, however, that Section 5.5, Section 6.3 and Section 6.14 shall be immediately binding upon each of FIC, Acquisition Corporation and RMT upon the execution of this Agreement by such parties. 12.5 Entire Agreement; Assignment. This Agreement along with each of the exhibits and schedules hereto and the Mutual Nondisclosure Agreement dated April 21, 1997 between RMT and FIC (a) constitute the entire agreement among the parties with respect to the subject matter -41- hereof and supersede all other prior agreements, understandings, representations and warranties, both written and oral, among the parties or any of them with respect to the subject matter hereof and (b) may not be assigned by operation of law or otherwise. 12.6 Schedules and Exhibits. All Exhibits and Schedules attached hereto are by this reference incorporated herein and made a part hereof for all purposes as if fully set forth herein. The disclosures in any Schedule must relate only to the representations and warranties in the Section of this Agreement to which they expressly relate and not to any other representation or warranty in this Agreement. In the event of any inconsistency between the statements in the body of this Agreement and those in the Schedules hereto (other than an exception expressly set forth as such in the Schedules with respect to a specifically identified representation or warranty), the statements in the body of this Agreement will control. 12.7 Applicable Law. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of California as applied to contracts entered into solely between residents of, and to be performed entirely in, such state. 12.8 Severability. If for any reason whatsoever, any one or more of the provisions of this Agreement shall be held or deemed to be inoperative, unenforceable or invalid as applied to any particular case or in all cases, such circumstances shall not have the effect of rendering such provision invalid in any other case or of rendering any of the other provisions of this Agreement inoperative, unenforceable or invalid. 12.9 Remedies Cumulative. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power or privilege under this Agreement or the documents referred to herein will operate as a waiver of such right, power or privilege, and no single or partial exercise of any such right, power or privilege will preclude any other or further exercise of any other right, power or privilege. Without limiting the generality of the foregoing, each party's right of termination under Section 11.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. -42- 12.10 Specific Performance. The parties hereto agree and acknowledge that, in the event of a breach of any provision of this Agreement, the aggrieved party may be without an adequate remedy at law. The parties therefore agree that in the event of a breach of any provision of this Agreement the aggrieved party may elect to institute and prosecute proceedings in any court of competent jurisdiction to obtain specific performance or to enjoin the continuing breach of such provision, as well as to obtain damages for breach of this Agreement and to obtain reasonable attorneys' fees. By seeking or obtaining any such relief, the aggrieved party will not be precluded from seeking or obtaining any other relief to which it may be entitled. 12.11 Best Efforts; Further Assurances. Subject to the terms and conditions of this Agreement, each party shall use its best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable consistent with applicable laws and regulations to consummate the transactions contemplated by this Agreement as promptly as possible. The parties hereto shall do and perform or cause to be done and performed all such further actions and things and shall execute and deliver all such other agreements, certificates, instruments or documents as any other party hereby may reasonably request in order to carry out the intent and purposes of this Agreement and the consummation of the transactions contemplated hereby. IN WITNESS WHEREOF, FIC, Acquisition Corporation and RMT have caused this Agreement to be signed by their respective officers thereunto duly authorized, and the Signing Holders have signed this Agreement, all as of the date first above written. FAIR, ISAAC AND COMPANY, INCORPORATED, a Delaware corporation By ------------------------------------------------- Title ------------------------------------------------- FIC ACQUISITION CORPORATION, a California corporation By ------------------------------------------------- Title ------------------------------------------------- -43- RISK MANAGEMENT TECHNOLOGIES, a California corporation By ------------------------------------------------- Title ------------------------------------------------- SIGNING HOLDERS: ------------------------------------------------- David LaCross and Kathleen O. LaCross, Trustees U/D/T dated 4/2/97 ------------------------------------------------- Jefferson Braswell SOFTWARE ALLIANCE LLC, a California limited liability company By ------------------------------------------------- Print Name: Title: ------------------------------------------------- Robert Ferguson ------------------------------------------------- Leland Prussia ------------------------------------------------- James T. Fan -44- ------------------------------------------------- Jeffrey Dandridge -45-
 





                              EMPLOYMENT AGREEMENT


         THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of July
21,  1997 by and  between  FAIR,  ISAAC AND  COMPANY,  INCORPORATED,  a Delaware
corporation ("FICO") located at 120 North Redwood Drive, San Rafael,  California
94903, and David LaCross,  residing at 59 Singingwood Lane,  Orinda,  California
94563 ("Employee").

                              W I T N E S S E T H:

         WHEREAS, Employee is currently employed by Risk Management Technologies
("RMT"), as Chairman of the Board and Chief Executive Officer; and

         WHEREAS,  pursuant to an Agreement and Plan of Reorganization  dated as
of June 10, 1997, among FICO, RMT and others (the "Merger  Agreement"),  FICO is
acquiring all of the outstanding  shares of RMT by way of the merger of RMT with
a wholly owned  subsidiary  of FICO (the  "Merger"),  with RMT as the  surviving
entity (such surviving entity being  hereinafter  referred to as the "Company");
and

         WHEREAS,  FICO  intends to maintain  and  operate  the  business of the
Company after the Merger; and

         WHEREAS,  FICO desires to have the benefits of Employee's knowledge and
experience  as a  full-time  employee  of the  Company  without  distraction  by
employment-related  uncertainties  and considers such employment a vital element
to  protecting  and  enhancing  the  best  interests  of  the  Company  and  its
stockholders,  and Employee  desires to be employed  full-time with the Company;
and

         WHEREAS, FICO and Employee desire to enter into an agreement reflecting
the terms under which Employee will be employed by the Company after the Merger;

         NOW,  THEREFORE,  in consideration of the mutual covenants set forth in
the Merger Agreement and this Agreement, the parties hereto agree as follows:

         1.  Effectiveness.  This  Agreement  shall  become  effective  upon the
Closing of the Merger as defined in the Merger Agreement (the "Closing").

         2. Term. FICO hereby agrees to cause the Company to employ Employee and
Employee  hereby agrees to be employed by the Company on a full-time basis for a
three-year  period commencing on the Closing and ending on the third anniversary
thereof (the "Term"),  unless sooner terminated as provided in Section 8 hereof;
provided,  however,  that Employee's  employment is contingent on his ability to
prove his  identity  and  authorization  to work in the  United  States  for the
Company and his compliance  with the Immigration  and  Naturalization  Service's
employment verification requirements.

         3.  Duties.  Employee  shall  serve as Chief  Executive  Officer of the
Company and hold such positions with any of the Company's future subsidiaries as
Employee and the Company  shall  agree.  Employee  shall report  directly to the
Chairman of the Board of Directors (the  "Chairman")  of the Company,  who shall
initially be the Chief  Executive  Officer of FICO  appointed as Chairman by the
Company's  Board of  Directors  (the  "Board").  Subject  to the  control of the
Chairman or of another  officer  designated  by the  Chairman,  Employee will be
responsible  for cooperating  with the Company and FICO in identifying  areas of
potential synergy between FICO's  businesses and the Company's  business and for
developing  and  implementing  plans and actions to realize the benefits of such
synergies  for  the  Company,   including   cross-selling   opportunities,   the
development of integrated products and services and the consolidation of certain
functional areas. Employee also




agrees to  participate,  on such terms and to such  extent as may be  determined
from time to time by FICO's senior management,  in established senior management
councils of FICO. Employee will also have such other powers and duties as may be
prescribed by the Chairman, the Board, the Company's bylaws, or by an officer of
FICO or its  subsidiaries  designated by the Board or the  Chairman.  Employee's
duties may change from time to time on reasonable notice,  based on the needs of
the Company and his skills, as determined by the Company.

         Employee is required to exercise his specialized expertise, independent
judgment and discretion to provide high-quality services, and to devote his full
business time,  energies,  efforts and abilities  exclusively to his employment,
and shall use his best efforts and abilities to promote the Company's interests.
Employee shall follow office  policies and procedures  adopted from time to time
by the Company,  which the Company may change at any time, and shall follow such
directions as may be given from time to time by his superiors.  During the Term,
Employee may not engage,  directly or indirectly,  in any business activity that
competes  with or is adverse to the  Company's  business,  whether alone or as a
partner, officer,  director,  employee,  consultant or investor in such business
activity.

         4.  Compensation.  FICO shall cause the Company to compensate  Employee
for the services rendered under this Agreement as follows:

         (a) A base salary at the annual rate of $196,310,  less regular payroll
deductions,  which covers all hours worked (the "Base Salary").  The Base Salary
will be payable in accordance with the then-customary  payroll practices of FICO
for the payment of its subsidiaries' officers.

         (b)  Reimbursement  for all reasonable  business  expenses  incurred on
behalf  of the  Company  while  on  business,  upon  submission  of  appropriate
documentation in accordance with the Company's general policies,  as they may be
amended from time to time during the Term.

         (c) A  bonus  upon  each  of the  first  three  anniversaries  of  this
Agreement,  provided in each case that Employee  remains employed by the Company
hereunder at the close of business on such  anniversary  and is not at such time
in  breach  of any  provision  of  this  Agreement  (including  the  Proprietary
Information Agreement incorporated herein) or of his Agreement Not to Compete of
even date herewith:

                  First Anniversary:        $40,000
                  Second Anniversary:       $56,000
                  Third Anniversary:        $64,000

         (d) All  payments  made by the Company  hereunder  to Employee  will be
subject to tax withholding pursuant to applicable laws and regulations.

         5. Employee Benefits.  Employee (a) shall be entitled to participate in
FIC's Employee Stock  Ownership Plan (ESOP) and pension plan in accordance  with
their terms;  (b) shall  continue to  participate  in RMT's 1997  Incentive Plan
through  December  31, 1997 and in RMT's  current paid time off (PTO) policy (in
each case,  as and to the extent  disclosed  in writing to FIC prior to the date
hereof);  (c) to the extent not prohibited by law, shall receive  service credit
(other than for  benefit  accrual  under a defined  benefit  pension  plan) that
includes his  employment  by RMT prior to the Effective  Time;  and (d) shall be
entitled  to  participate,  in  accordance  with  their  terms,  in all plans of
medical,  disability and similar  benefits which generally are made available to
senior  executives  of  subsidiaries  of  FICO.  A list and  description  of the
foregoing benefits has been provided to Employee. These benefits may change from
time to time.

         6. Stock  Options.  Employee  shall be  granted  an option to  purchase
sixteen  thousand  (16,000) shares of FICO common stock as of the Effective Time
of the Merger (as defined in the Merger  Agreement),  at an exercise price equal
to the  closing  sale  price of the  FICO  common  stock

                                      -2-


on the New York Stock Exchange Composite Transactions Tape on the date of grant,
pursuant to the Fair, Isaac and Company,  Incorporated 1992 Long-term  Incentive
Plan and the Stock Option  Agreement to be entered into as of the Effective Time
between FICO and Employee. Such agreement shall provide that 25% of such options
shall be subject to vesting on each of the first four anniversaries of the grant
date, conditioned upon Employee's continued employment by the Company.

         7. Waiver of Certain Rights.  Employee agrees to irrevocably relinquish
and  waive  any  rights  he has  pursuant  to any  employment  or other  service
arrangements  and  agreements  he has with RMT,  and all such  arrangements  and
agreements shall be deemed terminated as of the Closing.

         8. Termination.

         (a) Employee may  terminate  this  Agreement for any reason upon thirty
(30) days' prior written  notice to the Company.  This  Agreement will terminate
automatically  upon the  death of  Employee.  The  Company  may  terminate  this
Agreement,  with or without "Cause" (as defined  below),  upon thirty (30) days'
prior written notice to Employee;  provided,  however,  that,  immediately  upon
receipt of such  notice,  Employee  shall cease to hold himself out to any third
party as an officer of the Company,  shall  refrain from acting as an officer of
the Company  (including but not limited to refraining  from executing  contracts
and  instruments in the name or on behalf of the Company) and shall refrain from
taking  any  action  which  may  lead any  third  party  to  believe  that he is
authorized to act on behalf of the Company.

         (b) In the event  that this  Agreement  is  terminated  by the  Company
without  "Cause"  or by  Employee  for  "Good  Reason,"  then,  if (and only if)
Employee has not breached any term of this  Agreement or of the Agreement Not to
Compete of even date  herewith and  Employee  has executed and  delivered to the
Company a full and  unconditional  release of all past,  present  and  potential
claims and  causes of action  against  the  Company,  FICO and their  respective
officers,  directors,  employees and  affiliates,  in form  satisfactory  to the
Company, Employee shall be entitled to the following payments:

                  (i) the lesser of (x) the  balance of the Base Salary to which
         Employee  is entitled  during the period  from the date of  termination
         through the end of the Term or (y) twelve  (12) months of Base  Salary,
         in each case in  accordance  with the payroll  practices  described  in
         Section 4(a) (the "Base Salary Severance");

                  (ii) a prorated  bonus,  consisting of any bonus  specified in
         Section 4(c) that would have been payable upon the next  anniversary of
         this  Agreement  had Employee  remained  employed on such  anniversary,
         multiplied by a fraction, the numerator of which shall be the number of
         days during the year ending on such  anniversary for which Employee was
         employed  hereunder and the denominator of which shall be 365 (the "Pro
         Rata  Bonus"),  it being  understood  that no bonus with respect to any
         succeeding  anniversary or  anniversaries  would thereafter be payable;
         and

                  (iii) any  accrued  but unused  vacation  through  the date of
         termination.

         (c) In the event of any  termination  of this Agreement by the Employee
except for "Good Reason," any termination  hereof by the Company for "Cause," or
any  termination  hereof  due to the death of  Employee,  Employee  shall not be
entitled to the Base Salary Severance or the Pro Rata Bonus.

         (d) "Good  Reason" for purposes of this  Agreement  shall mean,  unless
otherwise consented to by Employee,  any one or more of (i) a material breach of
this  Agreement by the Company or FICO which is not cured promptly after written
notice, (ii) relocation of Employee

                                      -3-


required  by the  Company,  outside of the San  Francisco  Bay Area,  or (iii) a
significant  and unilateral  reduction by the Company in Employee's  duties with
the Company, as described in Section 3, after the Closing.  "Cause" for purposes
of this  Agreement  shall  mean  any one or more of (i)  Employee's  failure  to
perform his duties and responsibilities  hereunder as contemplated by Section 3,
including without  limitation failure to follow the directions of the Board, the
Chairman or other officer  designated by the Chairman as contemplated by Section
3;  (ii) a breach  by  Employee  of any  other  covenant  or  condition  in this
Agreement (including the Proprietary  Information Agreement  incorporated herein
by  reference)  or of a covenant or condition in the Agreement Not to Compete of
even date herewith;  (iii) without limiting the generality of the foregoing, (1)
fraud, dishonesty, negligence or willful or negligent misconduct, (2) Employee's
conviction  of or plea of  guilty or no  contest  to any  misdemeanor  involving
dishonesty or moral  turpitude or which is punishable  by  imprisonment,  or any
felony,  or (3) any other act or  omission by  Employee  which,  in light of his
position  with the Company,  has or is  reasonably  likely to have the effect of
subjecting  the Company or any of its affiliates to ridicule,  embarrassment  or
other  negative  reaction  among  members  of the  public  or among  current  or
potential customers or business partners.

         (e)  Regardless of the reason for the  termination  of this  Agreement,
Employee shall continue to be subject to and bound by the provisions of Sections
9 through 17, inclusive, after any termination of this Agreement.

         9.  Proprietary  Information.  Employee  is  required  to abide by, and
agrees to sign and abide by, the Customer Information  Confidentiality Agreement
and   Non-Disclosure   Agreement   attached  hereto  as  Exhibit  A,  which  are
incorporated into this Agreement by reference (collectively, such agreements are
referred to as the "Proprietary Information Agreement").

         10. Dispute  Resolution  Procedure.  The parties agree that any dispute
arising  out of or related to this  Agreement  and the  employment  relationship
between them, including the termination of that relationship and any allegations
of unfair or  discriminatory  treatment  arising  under  state or federal law or
otherwise,  shall be resolved by final and binding  arbitration  pursuant to the
following  procedures,  except  where the law  specifically  forbids  the use of
arbitration as a final and binding remedy.

         (a) The party claiming to be aggrieved shall furnish to the other party
a written statement of the grievance identifying any witnesses or documents that
support the grievance and the relief requested or proposed, not less than thirty
(30)  days  after  the  transaction,  occurrence  or event  giving  rise to such
dispute.

         (b) If the other party does not agree to furnish  the relief  requested
or proposed,  or otherwise  does not satisfy the demand of the party claiming to
be  aggrieved,  the parties  shall  submit the dispute to  nonbinding  mediation
before a mediator to be jointly  selected by the  parties.  The Company will pay
the cost of the mediation.

         (c) If the mediation does not produce a resolution of the dispute,  the
parties  agree  that  the  dispute  shall  be  resolved  by  final  and  binding
arbitration.  The  parties  shall  attempt  to  agree  to  the  identity  of  an
arbitrator, and, if they are unable to do so, the Company shall provide Employee
with a list of no fewer  than five (5) names of  arbitrators,  each of whom have
been appointed in at least ten (10) cases,  excluding cases in which the Company
or FICO shall have been involved,  and Employee shall select one arbitrator from
that list.

         The  arbitrator  shall have the  authority  to  determine  whether  the
conduct  complained of in paragraph  (a) of this section  violates the rights of
the  complaining  party  and,  if so, to grant  any  relief  authorized  by law;
provided,  however,  that nothing in this Agreement shall limit the right of the
Company and FICO to seek and obtain  injunctive  or other relief with respect to
any violation or threatened violation of the Proprietary  Information Agreement.
The  arbitrator  shall not have the  

                                      -4-


authority  to modify,  change or refuse to enforce  the terms of any  employment
agreement  between the  parties.  In  addition,  the  arbitrator  shall not have
theauthority  to require  FICO or the  Company  to change  any lawful  policy or
benefit plan.

         The hearing shall be transcribed. The non-prevailing party will pay the
costs of the  arbitration.  Each party shall be  responsible  for paying its own
attorneys' fees.

         (d)  Arbitration  shall be the exclusive,  final remedy for any dispute
between the parties, and the parties agree that no dispute shall be submitted to
arbitration  where the party  claiming to be aggrieved has not complied with the
preliminary steps provided for in paragraphs (a) and (b) above.

         (e)  Nothing  herein  shall  limit  any  remedy   available  under  the
Proprietary  Information  Agreement  with respect to  violations  or  threatened
violations thereof, including the pursuit of injunctive relief in court.

         11.  Representation and Warranty of Employee.  Employee  represents and
warrants to FICO and the Company that the  performance  of his duties  hereunder
will not violate any  agreement  with or any trade secret of any other person or
entity.

         12. Notices.  All notices,  requests,  demands and other  communication
called for or contemplated  hereunder shall be in writing and shall be deemed to
have been duly given when  delivered  personally or when mailed by United States
certified or registered mail, postage prepaid, addressed to the parties or their
successors in interest at the following addresses or such other addresses as the
parties may designate by notice in the manner aforesaid:

         If to the Company or FICO: Risk Management Technologies
                                    2150 Shattuck Avenue
                                    Berkeley, CA 94704
                                    Attn: Chairman of the Board

         With a copy to:            Fair, Isaac and Company, Incorporated
                                    120 North Redwood Drive
                                    San Rafael, CA 94903
                                    Attn: General Counsel

         If to Employee:            59 Singingwood Lane
                                    Orinda, CA 94563

         13.  Governing  Law. This  Agreement and the resolution of any disputes
hereunder  shall be governed by and construed in accordance with the laws of the
State of California.

         14. Entire Agreement. The terms of this Agreement (and of the Agreement
Not to Compete for the purposes expressed herein) are intended by the parties to
be the final  expression of their  agreement  with respect to the subject matter
hereof and may not be contradicted  by evidence of any prior or  contemporaneous
agreements,  representations  or promises of any kind,  whether  written,  oral,
express or implied, between RMT or FICO and Employee with respect to the subject
matters herein,  including any former employment  agreements.  This Agreement is
intended as the  complete  and  exclusive  agreement  between  the parties  with
respect to  Employee's  employment  by the Company,  and no  extrinsic  evidence
whatsoever  may be introduced in any  judicial,  administrative,  or other legal
proceeding involving this Agreement.

         15.  Validity.  If any provision of this Agreement,  or the application
thereof  to any  person,  place or  circumstance,  shall be held to be  invalid,
unenforceable  or void,  the remainder of

                                      -5-


this  Agreement  and such  provision  as  applied to other  persons,  places and
circumstances shall remain in full force and effect.

         16.  Beneficiaries;   Assignment.  The  Company  is  expressly  made  a
beneficiary of the obligations of Employee hereunder. This Agreement is personal
to and may not be assigned by Employee.

         17. Amendment.  This Agreement may not be modified or amended except by
an instrument in writing signed by Employee and an officer of FICO.

         IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.

                                           FAIR, ISAAC AND COMPANY, INCORPORATED


                                           By____________________________

                                           Title: _______________________

                                           EMPLOYEE


                                           ______________________________

                                      -6-


                                    RESTATED
                          CERTIFICATE OF INCORPORATION
                                       OF
                      FAIR, ISAAC AND COMPANY, INCORPORATED

                     (As amended effective February 9, 1996)


         The  undersigned,  WILLIAM  R.  FAIR and  EDWARD  M.  LEWIS,  do hereby
certify:

         First:  They are the duly elected and acting  President and  Secretary,
respectively,  of FAIR, ISAAC AND COMPANY,  INCORPORATED, a Delaware corporation
(the "Corporation").

         Second:  The original  Certificate of  Incorporation of the Corporation
was filed with the Secretary of State on May 15, 1987.

         Third:  The Certificate of  Incorporation of the Corporation is amended
and restated to read in full as follows:

         1.  The  name  of  the   corporation   is  FAIR,   ISAAC  AND  COMPANY,
INCORPORATED.

         2. The  address of its  registered  office in the State of  Delaware is
1209 Orange Street,  in the City of Wilmington,  County of New Castle 19801. The
name of its registered agent at such address is The Corporation Trust Company.

         3. The nature of the  business or purposes to be  conducted or promoted
is to  engage in any  lawful  act or  activity  for  which  corporations  may be
organized under the Delaware General Corporation Law.

         4. (a) The total  number of shares of all  classes  of stock  which the
corporation shall have authority to issue is thirty-six million (36,000,000), of
which one million  (1,000,000)  shares shall be Preferred Stock of the par value
of $.01 per share, and thirty-five  million  (35,000,000) shares shall be Common
Stock of the par value of $.01 per  share.  The number of  authorized  shares of
Common Stock or Preferred Stock may be increased or decreased (but not below the
number of shares  thereof  then  outstanding)  if the  increase  or  decrease is
approved by the holders of a majority of the shares of Common Stock, without the
vote of the  holders of the  shares of  Preferred  Stock or any series  thereof,
unless any such Preferred Stock holders are entitled to vote thereon pursuant to
the  provisions  established  by the Board of  Directors  in the  resolution  or
resolutions providing for the issue of such Preferred Stock, and if such holders
of such  Preferred  Stock are so entitled to vote thereon,  then,  except as may
otherwise  be  set  forth  in  this  Certificate  of  Incorporation,   the  only
stockholder approval required shall be that of a majority of the 





combined voting power of the Common and Preferred Stock so entitled to vote.

         (b) The Board of Directors is expressly  authorized  to provide for the
issue,  in one or more series,  of all or any shares of the Preferred Stock and,
in the resolution or resolutions providing for such issue, to establish for each
such series the number of its shares,  which may thereafter (unless forbidden in
the  resolution  or  resolutions  providing  for such  issue)  be  increased  or
decreased  (but not below the number of shares of the series  then  outstanding)
pursuant  to a  subsequent  resolution  of the Board of  Directors,  the  voting
powers, full or limited, of the shares of such series, or that such shares shall
have  no  voting  powers,  and  the  designations,   preferences  and  relative,
participating,  optional or other  special  rights of the shares of such series,
and the qualifications,  limitations or restrictions  thereof. In furtherance of
the  foregoing  authority and not in limitation of it, the Board of Directors is
expressly  authorized,  in the resolution or resolutions providing for the issue
of a series of Preferred  Stock, to make the shares of such series,  without the
consent of the holders of such  shares,  convertible  into or  exchangeable  for
shares of another  class or classes  of stock of the  corporation  or any series
thereof, or redeemable for cash, property or rights,  including securities,  all
on such  conditions  and on such  terms as may be stated in such  resolution  or
resolutions,  and to make any of the voting powers,  designations,  preferences,
rights and  qualifications,  limitations  or  restrictions  of the shares of the
series   dependent  upon  facts   ascertainable   outside  this  Certificate  of
Incorporation.

         (c) Holders of shares of Common Stock shall be entitled to receive such
dividends or distributions as are lawfully declared on the Common Stock; to have
notice of any authorized meeting of stockholders;  to one vote for each share of
Common  Stock on all  matters  that  are  properly  submitted  to a vote of such
stockholders; and, upon dissolutions of the corporation, to share ratably in the
assets  thereof that may be available for  distribution  after  satisfaction  of
creditors and of the preferences, if any, of any shares of Preferred Stock.

         5. In  furtherance  and not in  limitation  of the powers  conferred by
statutes,  the Board of  Directors  is expressly  authorized  to make,  alter or
repeal the by-laws of the corporation.

         6.  (a) A  director  of the  corporation  shall  not be  liable  to the
corporation  or its  stockholders  for monetary  damages for breach of fiduciary
duty as a director,  except for liability  (i) for any breach of the  director's
duty of  loyalty  to the  corporation  or its  stockholders,  (ii)  for  acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law,  (iii) under Section 174 of the Delaware  General  Corporation
Law, or (iv) for any  transaction  from which the  director  derived an improper
personal benefit.

          (b) Each director or officer of the  corporation  who was or is made a
party or is  threatened  to be made a party to or is in any way  involved in any

                                       2


threatened,  pending or completed  action,  suit or  proceeding,  whether  civil
criminal,  administrative  or investigative  (including  without  limitation any
action,  suit or  proceeding  brought by or in the right of the  corporation  to
procure a judgment in its favor)  (hereinafter  a  "proceeding"),  including any
appeal  therefrom,  by reason of the fact that he or she, or a person of whom he
or she is the legal  representative,  is or was a  director  or  officer  of the
corporation or of a subsidiary of the  corporation,  or is or was serving at the
request  of the  corporation  as a director  or  officer  of  another  entity or
enterprise,  or was a director or officer for a foreign or domestic  corporation
which was a predecessor  corporation of the  corporation or of another entity or
enterprise  at the  request  of such  predecessor  corporation,  or by reason of
anything  done or not  done in such  capacity,  shall  be  indemnified  and held
harmless by the  corporation,  and the  corporation  shall  advance all expenses
incurred by any such person in connection with any such proceeding  prior to its
final  determination,  to the fullest extent  authorized by the Delaware General
Corporation  Law. In any  proceeding  against the  corporation  to enforce these
rights,  such person shall be presumed to be entitled to indemnification and the
corporation  shall have the burden of proof to overcome  that  presumption.  The
rights to indemnification  and advancement of expenses conferred by this Article
shall be  presumed to have been relied  upon by  directors  and  officers of the
corporation  in  serving or  continuing  to serve the  corporation  and shall be
enforceable as contract rights.  Said rights shall not be exclusive of any other
rights to which those seeking  indemnification  may  otherwise be entitled.  The
corporation  may, upon written demand  presented by a director or officer of the
corporation or of a subsidiary of the corporation, or by a person serving at the
request  of the  corporation  as a director  or  officer  of  another  entity or
enterprise, enter into contracts to provide such persons with specific rights to
indemnification,  which  contracts  may  confer  rights and  protections  to the
maximum  extent  permitted  by  the  Delaware   General   Corporation  Law.  The
corporation may create trust funds, grant security interests,  obtain letters of
credit, or use other means to ensure payment of such amounts as may be necessary
to  perform  the  obligations  provided  for in this  Article  6 or in any  such
contract.

         (c) Any repeal or  modification  of the  foregoing  provisions  of this
Article 6, including without  limitation any contractual rights arising under or
authorized by it, by the  stockholders  of the  corporation  shall not adversely
affect  any right or  protection  of a director  or  officer of the  corporation
existing at the time of such repeal or modification.

         (d) In  addition  to any vote of the  holders of any class or series of
the  stock  of  this  corporation  required  by law or by  this  Certificate  of
Incorporation,  the  affirmative  vote of the holders of at least 66-2/3% of the
voting  power  of  all of  the  then-outstanding  shares  of  the  stock  of the
corporation  entitled to vote  generally  in the election of  directors,  voting
together as a single class, shall be required to amend or repeal this Article."

                                       3


         Fourth:  The foregoing  amendment and  restatement  of  Certificate  of
Incorporation has been approved by the Board of Directors of the Corporation.

         Fifth:  The  foregoing  amendment and  restatement  of  Certificate  of
Incorporation  was approved by written  consent of the holder of the outstanding
shares of Common Stock of the Corporation, in accordance with Sections 228, 242,
and 245 of the Delaware General Corporation Law.

         Sixth:  At all  elections  of the  directors of the  corporation,  each
stockholder  shall be entitled to one vote per share entitled to vote multiplied
by the number of directors to be elected,  and the  stockholder  may cast all of
such votes for a single  candidate  or may  distribute  them among the number of
directors to be voted for, or for any two or more of them as the stockholder may
see fit; provided, however, that no stockholder shall be entitled so to cumulate
votes unless such candidate or candidates'  names have been placed in nomination
prior to the voting and the stockholder has given notice at the meeting prior to
the  voting  of the  stockholders  intention  to  cumulate  votes.  If  any  one
stockholder has given such notice, all stockholders may cumulate their votes for
candidates in nomination.

                                       4


                                  B Y - L A W S
                                       OF
                      FAIR, ISAAC AND COMPANY, INCORPORATED

                     (as amended effective August 13, 1996)

                                    ARTICLE I

                                     Offices

         Section 1.1.  Registered  Office. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.

         Section 1.2. Additional Offices.  The Corporation may also have offices
at such other  places both within and without the State of Delaware as the board
of directors may from time to time determine or the business of the  Corporation
may require.

                                   ARTICLE II
                                  Stockholders

         Section 2.1. Annual Meetings.  An annual meeting of stockholders  shall
be held for the  election of  directors  on the last Tuesday of December of each
year, at 10:00 A.M. or, should such day fall upon a legal  holiday,  at the same
time on the next business day thereafter that is not a legal holiday, or at such
other date and time as may be designated by the Board of Directors  from time to
time.  The annual  meeting of  stockholders  shall be held at such place  either
within or without  the State of Delaware  as may be  designated  by the Board of
Directors from time to time; in the absence of any such designation,  the annual
meeting shall be held at the principal executive offices of the Corporation.  At
such meeting,  the  stockholders  shall elect  directors and transact such other
business as may be properly brought before the meeting.

         To be properly  brought  before the annual  meeting,  business  must be
either (a) specified in the notice of meeting (or any supplement  thereto) given
by or at the direction of the Board of Directors, (b) otherwise properly brought
before the  meeting by or at the  direction  of the Board of  Directors,  or (c)
otherwise  properly  brought before the meeting by a stockholder  of record.  In
addition  to any other  applicable  requirements,  for  business  to be properly
brought before the annual meeting by a stockholder,  the  stockholder  must have
given timely notice thereof in writing to the Secretary of 
the  Corporation.  To be timely,  a stockholder's  notice must be delivered by a
nationally  recognized  courier  service or mailed by first class United  States
mail,  postage or  delivery  charges  prepaid,  and  received  at the  principal
executive  offices  of  the  Corporation,  addressed  to  the  attention  of the
Secretary of 

                                     -1-


the  Corporation,  not  less  than 60 days nor  more  than 90 days  prior to the
scheduled  date of the meeting  (regardless of any  postponements,  deferrals or
adjournments of that meeting to a later date);  provided,  however,  that in the
event that less than 70 days' notice or prior public  disclosure  of the date of
the  scheduled  meeting  is  given  or  made  to  stockholders,  notice  by  the
stockholder  to be timely must be so received  not later than the earlier of (a)
the close of business on the 10th day  following the day on which such notice of
the date of the scheduled  annual  meeting was mailed or such public  disclosure
was made,  whichever  first  occurs,  and (b) two days  prior to the date of the
scheduled meeting. A stockholder's notice to the Secretary shall set forth as to
each matter the  stockholder  proposes to bring before the annual  meeting (i) a
brief  description  of the  business  desired  to be  brought  before the annual
meeting,  (ii) the name and record  address of the  stockholder  proposing  such
business,  (iii) the class,  series and number of shares of the Corporation that
are owned beneficially by the stockholder, and (iv) any material interest of the
stockholder in such business.  Notwithstanding  anything in these by-laws to the
contrary,  no  business  shall be  conducted  at the  annual  meeting  except in
accordance with the procedures set forth in this Section 2.1; provided, however,
that nothing in this Section 2.1 shall be deemed to preclude  discussion  by any
stockholder of any business properly brought before the annual meeting.

         The Chairman of the Board of Directors (or such other person  presiding
at the meeting in accordance  with Section 2.6 of these by-laws)  shall,  if the
facts  warrant,  determine  and declare to the  meeting  that  business  was not
properly  brought  before the meeting in accordance  with the provisions of this
Section 2.1, and if he should so  determine,  he shall so declare to the meeting
and any such  business  not  properly  brought  before the meeting  shall not be
transacted.

         Section 2.2. Special Meetings.  Special meetings of stockholders may be
called at any time only by the Chairman of the Board,  if any, the Vice Chairman
of the Board,  if any, the  President or the Board of  Directors,  to be held at
such date,  time and place either within or without the State of Delaware as may
be stated in the  notice of the  meeting.  Business  transacted  at any  special
meeting of stockholders shall be limited to the purposes stated in the notice of
the meeting.

         Section 2.3. Notice of Meetings.  Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting,  and, in the
case of a special  meeting,  the  purpose or  purposes  for which the meeting is
called.  Unless  otherwise  provided by law,  the written  notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting.

         Section  2.4.  Adjournments.  Any  meeting of  stockholders,  annual or
special,  may adjourn  from time to time to  reconvene at the same or some other
place,  and notice need not be given of any such  adjourned  meeting if the time
and place  thereof  are  announced  at the meeting at which the  adjournment  is
taken. At the adjourned  meeting the Corporation may transact any business which
might have been  transacted at the original  meeting.  If the adjournment is for
more than thirty 

                                      -2-


days,  or if after the  adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.

         Section  2.5.  Quorum.  At each meeting of  stockholders,  except where
otherwise  provided by law or the certificate of incorporation or these by-laws,
the  holders  of a  majority  of the  outstanding  shares of each class of stock
entitled  to vote at the  meeting,  present in person or  represented  by proxy,
shall constitute a quorum. For purposes of the foregoing, two or more classes or
series of stock shall be  considered a single  class if the holders  thereof are
entitled to vote together as a single class at the meeting.  In the absence of a
quorum the  stockholders  so present may, by majority vote,  adjourn the meeting
from time to time in the manner provided by Section 2.4 of these by-laws until a
quorum shall  attend.  Shares of its own capital  stock  belonging on the record
date for the meeting to the Corporation or to another corporation, if a majority
of the  shares  entitled  to vote in the  election  of  directors  of such other
corporation is held, directly or indirectly,  by the Corporation,  shall neither
be entitled to vote nor be counted for quorum purposes;  provided, however, that
the  foregoing  shall  not limit the  right of the  Corporation  to vote  stock,
including but not limited to its own stock, held by it in a fiduciary capacity.

         Section 2.6.  Organization.  Meetings of stockholders shall be presided
over by the Chairman of the Board,  if any, or in the absence of the Chairman of
the  Board  by the  President,  or in the  absence  of the  President  by a Vice
President,  or in the absence of the foregoing persons by a chairman  designated
by the Board of Directors,  or in the absence of such  designation by a chairman
chosen at the meeting.  The Secretary shall act as secretary of the meeting,  or
in the absence of the Secretary by an Assistant  Secretary,  or in their absence
the  chairman of the meeting may appoint any person to act as  secretary  of the
meeting.

         Section  2.7.  Voting;   Proxies.  Unless  otherwise  provided  in  the
certificate of incorporation,  each stockholder  entitled to vote at any meeting
of  stockholders  shall be  entitled to one vote for each share of stock held by
such  stockholder  which has  voting  power upon the  matter in  question.  Each
stockholder  entitled to vote at a meeting of stockholders or to express consent
or  dissent  to  corporate  action in writing  without a meeting  may  authorize
another  person or persons  to act for such  stockholder  by proxy,  but no such
proxy shall be voted or acted upon after  three years from its date,  unless the
proxy provides for a longer  period.  A duly executed proxy shall be irrevocable
if it states that it is  irrevocable  and if, and only as long as, it is coupled
with  an  interest  sufficient  in  law  to  support  an  irrevocable  power.  A
stockholder  may revoke any proxy  which is not  irrevocable  by  attending  the
meeting and voting in person or by filing an instrument in writing  revoking the
proxy or another duly executed  proxy bearing a later date with the Secretary of
the  Corporation.  Voting at  meetings  of  stockholders  need not be by written
ballot and need not be conducted by inspectors  unless the holders of a majority
of the  outstanding  shares of all  classes of stock  entitled  to vote  thereon
present  in  person  or by proxy at such  meeting  shall  so  determine.  At all
meetings of stockholders  for the election of directors a plurality of the votes
cast  shall be  sufficient  to elect.  With  respect  to other  matters,  unless
otherwise  provided  by law or by the  certificate  of  

                                      -3-


incorporation  or  these  by-laws,  the  affirmative  vote of the  holders  of a
majority of the shares of all classes of stock present in person or  represented
by proxy at the meeting and entitled to vote on the subject  matter shall be the
act of the stockholders,  provided that (except as otherwise  required by law or
by the certificate of incorporation) the Board of Directors may require a larger
vote upon any such  matter.  Where a  separate  vote by class is  required,  the
affirmative  vote of the  holders  of a  majority  of the  shares of each  class
present in person or  represented  by proxy at the  meeting  shall be the act of
such  class,  except  as  otherwise  provided  by law or by the  certificate  of
incorporation or these by-laws.

         Section 2.8. Fixing Date for  Determination  of Stockholders of Record.
In order that the corporation may determine the stockholders  entitled to notice
of or to vote at any meeting of stockholders or any adjournment  thereof,  or to
express consent to corporate action in writing without a meeting, or entitled to
receive  payment of any  dividend  or other  distribution  or  allotment  of any
rights, or entitled to exercise any rights in respect of any change,  conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
nor less than ten days before the date of such meeting, nor more than sixty days
prior to any other action.  If no record date is fixed:  (1) the record date for
determining  stockholders  entitled  to  notice  of or to vote at a  meeting  of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given,  or, if notice is waived,  at the close of business on
the day next preceding the day on which the meeting is held; (2) the record date
for determining  stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board is necessary, shall
be the day on which the first written  consent is expressed;  and (3) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto. A
determination  of  stockholders  of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board may fix a new record date for the adjourned meeting.

         Section 2.9. List of Stockholders Entitled To Vote. The Secretary shall
prepare and make,  at least ten days before  every  meeting of  stockholders,  a
complete list of the stockholders  entitled to vote at the meeting,  arranged in
alphabetical  order,  and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the  examination  of any  stockholder,  for any purpose  germane to the meeting,
during ordinary  business hours,  for a period of at least ten days prior to the
meeting,  either at a place  within  the city  where the  meeting is to be held,
which  place  shall be  specified  in the notice of the  meeting,  or, if not so
specified,  at the place where the meeting is to be held. The list shall also be
produced  and kept at the time and place of the  meeting  during  the whole time
thereof and may be inspected by any stockholder who is present.

        Section  2.10.  Consent  of  Stockholders  in  Lieu of  meeting.  Unless
otherwise  provided in the certificate of incorporation,  any action required by
law to be  taken  at any  annual  or  special  meeting  of  stockholders  of the
Corporation,  or any action which may be taken at any annual or special  meeting
of such stockholders, may be

                                      -4-


taken  without a meeting,  without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary  to  authorize  or take such  action at a meeting  at which all shares
entitled to vote thereon were present and voted.  Prompt notice of the taking of
the corporate  action without a meeting by less than unanimous  written  consent
shall be given to those stockholders who have not consented in writing.

                                   ARTICLE III

                               Board of Directors

         Section 3.1. Powers; Number;  Qualifications.  The business and affairs
of the  Corporation  shall be managed by or under the  direction of the Board of
Directors,  except as may be otherwise  provided by law or in the certificate of
incorporation.  The number of  directors  which  shall  constitute  the Board of
Directors shall be nine (9). Directors need not be stockholders.

         Section 3.2. Election; Term of Office; Resignation; Removal; Vacancies;
Nominations.  Each  director  shall  hold  office  until the  annual  meeting of
stockholders  next succeeding his or her election and until his or her successor
is elected and qualified or until his or her earlier resignation or removal. Any
director may resign at any time upon written notice to the Board of Directors or
to the President or the Secretary of the  Corporation.  Such  resignation  shall
take  effect at the time  specified  therein,  and  unless  otherwise  specified
therein  no  acceptance  of  such  resignation  shall  be  necessary  to make it
effective. Any director or the entire Board of Directors may be removed, with or
without cause,  by the holders of a majority of the shares then entitled to vote
at an election of directors.  Unless  otherwise  provided in the  certificate of
incorporation  or these  by-laws,  vacancies  and  newly  created  directorships
resulting  from any increase in the  authorized  number of directors or from any
other  cause  may be filled  by a  majority  of the  directors  then in  office,
although less than a quorum, or by the sole remaining director.

         Only  persons  who are  nominated  in  accordance  with  the  following
procedures  shall be eligible for election as directors.  Nominations of persons
for  election  to the Board of  Directors  at the annual  meeting,  by or at the
direction of the Board of Directors,  may be made by any Nominating Committee or
person appointed by the Board of Directors;  nominations may also be made by any
stockholder  of record of the  Corporation  entitled to vote for the election of
directors at the meeting who complies  with the notice  procedures  set forth in
this Section 3.2. Such nominations, other than those made by or at the direction
of the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation.  To be timely, a stockholder's notice shall be
delivered by a nationally  recognized  courier  service or mailed by first class
United States mail,  postage or delivery  charges  prepaid,  and received at the
principal executive offices of the Corporation addressed to the attention of the
Secretary of the  Corporation  not less than 60 days nor more than 90 days prior
to the scheduled date of the meeting 

                                      -5-


(regardless of any postponements, deferrals or adjournments of that meeting to a
later date);  provided,  however,  that, in the case of an annual meeting and in
the event that less than 70 days' notice or prior public  disclosure of the date
of the  scheduled  meeting  is  given  or made to  stockholders,  notice  by the
stockholder  to be timely must be so received  not later than the earlier of (a)
the close of business on the 10th day  following the day on which such notice of
the date of the scheduled meeting was mailed or such public disclosure was made,
whichever  first  occurs,  or (b) two days  prior  to the date of the  scheduled
meeting.  Such  stockholder's  notice to the Secretary shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or reelection
as a director,  (i) the name, age, business address and residence address of the
person,  (ii) the principal  occupation  or employment of the person,  (iii) the
class,  series and number of shares of capital stock of the Corporation that are
owned  beneficially  by  the  person,  (iv)  a  statement  as  to  the  person's
citizenship,  and (v) any  other  information  relating  to the  person  that is
required to be disclosed in solicitations  for proxies for election of directors
pursuant to Section 14 of the Securities  Exchange Act of 1934, as amended,  and
the rules and regulations promulgated thereunder;  and (b) as to the stockholder
giving the notice,  (i) the name and record address of the  stockholder and (ii)
the class,  series and number of shares of capital stock of the Corporation that
are owned  beneficially  by the  stockholder.  The  Corporation  may require any
proposed nominee to furnish such other information as may reasonably be required
by the  Corporation  to determine the  eligibility  of such proposed  nominee to
serve as director of the  Corporation.  No person shall be eligible for election
as a  director  of the  Corporation  unless  nominated  in  accordance  with the
procedures set forth herein.

         In  connection  with any annual  meeting,  the Chairman of the Board of
Directors  (or such other person  presiding at such meeting in  accordance  with
Section 2.6 of these by-laws) shall, if the facts warrant, determine and declare
to the meeting that a nomination  was not made in accordance  with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.

         Section  3.3.  Regular  meetings.  Regular  meetings  of the  Board  of
Directors may be held at such places within or without the State of Delaware and
at such times as the Board may from time to time determine, and if so determined
notice thereof need not be given.

         Section  3.4.  Special  Meetings.  Special  meetings  of the  Board  of
Directors  may be held at any time or  place  within  or  without  the  State of
Delaware  whenever  called by the  Chairman  of the Board,  if any,  by the Vice
Chairman  of the  Board,  if any,  by the  President  or by any  two  directors.
Reasonable  notice  thereof shall be given by the person or persons  calling the
meeting.

         Section  3.5.   Participation  in  Meetings  by  Conference   Telephone
Permitted.  Unless  otherwise  restricted by the certificate of incorporation or
these by-laws, members of the Board of Directors, or any committee designated by
the Board,  may participate in a meeting of the Board or of such  committee,  as
the case may be, by means of  conference  telephone  or  similar  communications
equipment by means of

                                      -6-


which  all  persons  participating  in the  meeting  can hear  each  other,  and
participation in a meeting pursuant to this by-law shall constitute  presence in
person at such meeting.

         Section 3.6. Quorum;  Vote Required for Action.  At all meetings of the
Board of Directors  one third of the entire  Board,  but not less than two shall
constitute a quorum for the  transaction of business.  The vote of a majority of
the directors present at a meeting at which a quorum is present shall be the act
of the Board unless the  certificate  of  incorporation  or these  by-laws shall
require a vote of a greater number. In case at any meeting of the Board a quorum
shall not be present,  the members of the Board  present may adjourn the meeting
from time to time until a quorum shall attend.

         Section 3.7. Organization.  Meetings of the Board of Directors shall be
presided  over by the  Chairman  of the Board,  if any, or in the absence of the
Chairman  of the Board by the Vice  Chairman  of the  Board,  if any,  or in the
absence of the Vice Chairman of the Board by the President,  or in their absence
by a chairman  chosen at the meeting.  The  Secretary,  or in the absence of the
Secretary an Assistant Secretary,  shall act as secretary of the meeting, but in
the absence of the  Secretary  and any  Assistant  Secretary the chairman of the
meeting may appoint any person to act as secretary of the meeting.

         Section 3.8. Action by Directors  Without a Meeting.  Unless  otherwise
restricted by the  certificate of  incorporation  or these  by-laws,  any action
required or permitted to be taken at any meeting of the Board of  Directors,  or
of any committee  thereof,  may be taken without a meeting if all members of the
Board or of such committee,  as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of  proceedings  of the Board
or committee.

         Section 3.9.  Compensation  of Directors.  The Board of Directors shall
have the authority to fix the compensation of directors.

                                      -7-

                                   ARTICLE IV

                                   Committees

         Section  4.1.  Executive  Committee.  The Board of  Directors  may,  by
resolution  approved  by at  least  a  majority  of  the  authorized  number  of
Directors,  establish  and appoint one or more members of the Board of Directors
to constitute an Executive  Committee  (the  "Executive  Committee"),  with such
powers  as may be  expressly  delegated  to it by  resolution  of the  Board  of
Directors.  The  Executive  Committee  shall act only in the  intervals  between
meetings  of the Board of  Directors  and shall be  subject  at all times to the
control of the Board of Directors.

         Section 4.2. Committees.  In addition to the Executive  Committee,  the
Board of Directors  may, by resolution  passed by a majority of the whole Board,
designate one or more other committees, each committee to consist of one or more
of the  directors  of the  Corporation.  The  Board  may  designate  one or more
directors as alternate  members of any committee,  who may replace any absent or
disqualified  member  at  any  meeting  of the  committee.  In  the  absence  or
disqualification  of a member of a  committee,  the  member or  members  thereof
present at any meeting and not  disqualified  from  voting,  whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board to act at the  meeting  in place of any such  absent  or  disqualified
member.  Any such  committee,  to the extent  provided in the  resolution of the
Board,  shall have and may exercise all the powers and authority of the Board in
the management of the business and affairs of the Corporation, and may authorize
the seal of the  Corporation  to be affixed to all papers  which may require it;
but no such committee shall have power or authority in reference to amending the
certificate  of  incorporation  (except  that a  committee  may,  to the  extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in Section  151(a) of the
General Corporation Law of Delaware fix any of the preferences or rights of such
shares  relating to dividends,  redemption,  dissolution,  any  distribution  of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the  corporation),  adopting an  agreement of
merger or  consolidation,  recommending to the  stockholders  the sale, lease or
exchange of all or substantially all of the  Corporation's  property and assets,
recommending  to  the  stockholders  a  dissolution  of  the  Corporation  or  a
revocation of dissolution,  removing or indemnifying directors or amending these
by-laws;  and,  unless the resolution  expressly so provides,  no such committee
shall have the power or  authority  to declare a dividend  or to  authorize  the
issuance of stock or adopt a certificate of ownership and merger.

                                      -8-


         Section 4.3. Committee Rules.  Unless the Board of Directors  otherwise
provides,  the  committee  designated  by the Board may adopt,  amend and repeal
rules for the conduct of its  business.  In the  absence of a  provision  by the
Board or a provision in the rules of such committee to the contrary,  a majority
of the entire  authorized number of members of such committee shall constitute a
quorum for the  transaction  of business,  the vote of a majority of the members
present at a meeting at the time of such vote if a quorum is then present  shall
be the act of such committee, and in other respects each committee shall conduct
its business in the same manner as the Board  conducts its business  pursuant to
Article III of these by-laws.

                                    ARTICLE V

                                    Officers

         Section  5.1.  Officers;  Election.  As soon as  practicable  after the
annual meeting of  stockholders in each year, the Board of Directors shall elect
a President and a Secretary,  and it may, if it so determines,  elect from among
its members a Chairman  of the Board.  The Board may also elect one or more Vice
Presidents,  one or  more  Assistant  Vice  Presidents,  one or  more  Assistant
Secretaries,  a Treasurer and one or more  Assistant  Treasurers  and such other
officers as the Board may deem desirable or appropriate and may give any of them
such further  designations or alternate  titles as it considers  desirable.  Any
number of offices may be held by the same person;  provided,  however,  that the
offices of President and Secretary shall not be held by the same person.

         Section 5.2. Term of Office; Resignation; Removal; Vacancies. Except as
otherwise  provided in the  resolution  of the Board of  Directors  electing any
officer,  each officer  shall hold office  until the first  meeting of the Board
after the annual meeting of  stockholders  next  succeeding his or her election,
and until his or her  successor  is elected  and  qualified  or until his or her
earlier resignation or removal.  Any officer may resign at any time upon written
notice to the Board or to the  President or the  Secretary  of the  Corporation.
Such  resignation  shall take effect at the time specified  therein,  and unless
otherwise specified therein no acceptance of such resignation shall be necessary
to make it effective.  The Board may remove any officer with or without cause at
any time. Any such removal shall be without prejudice to the contractual  rights
of such officer,  if any, with the  Corporation,  but the election of an officer
shall not of itself  create  contractual  rights.  Any vacancy  occurring in any
office of the  Corporation  by death,  resignation,  removal or otherwise may be
filled  for the  unexpired  portion  of the term by the Board at any  regular or
special meeting.

                                      -9-


         Section 5.3. Powers and Duties.  The officers of the Corporation  shall
have such powers and duties in the  management  of the  Corporation  as shall be
stated in these  by-laws or in a resolution  of the Board of Directors  which is
not  inconsistent  with these  by-laws  and,  to the  extent  not so stated,  as
generally  pertain to their  respective  offices,  subject to the control of the
Board. The Board may require any officer, agent or employee to give security for
the faithful performance of his or her duties.

         Section 5.4. Chairman of the Board. The Chairman of the Board, if there
shall be such an  officer,  shall,  if present,  preside at all  meetings of the
Board of Directors  and exercise and perform such other powers and duties as may
be from time to time  assigned to him by the Board of Directors or prescribed by
the By-laws.

         Section 5.5.  President.  The  President  shall be the chief  executive
officer of the Corporation.  Subject to such supervisory  powers, if any, as may
be given by the Board of  Directors  to the  Chairman of the Board,  if there be
such an  officer,  and  subject to the  provisions  of these  by-laws and to the
direction of the Board of Directors,  the President shall have  supervision over
and may  exercise  general  executive  powers of the business and affairs of the
Corporation  and shall perform all duties and have all powers which are commonly
incident to the office of chief  executive or which are  delegated to him by the
Board  of  Directors.  He shall  have  power  to sign  all  stock  certificates,
contracts and other  instruments  of the  Corporation  which are  authorized and
shall have  general  supervision  and  direction  of all of the other  officers,
employees and agents of the  Corporation.  The President shall be ex officio,  a
member of all the standing committees, including the Executive Committee. In the
absence  of the  Chairman  of the  Board,  the  President  shall  preside at all
meetings of the Board of Directors.

         Section 5.6. Vice President.  In the absence of the President or in his
inability or refusal to act, the Vice  President  (or in the event there be more
than one Vice  President,  the Vice  Presidents  in the order  designated by the
directors,  or in the  absence  of any  designation,  then in the order of their
election) shall perform the duties of the President,  and when so acting,  shall
have  all  the  powers  of and be  subject  to all  the  restrictions  upon  the
President.  The Vice  Presidents  shall  perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.

         Section 5.7. Secretary.  The Secretary shall attend all meetings of the
Board of  Directors  and all  meetings  of the  stockholders  and record all the
proceedings of the meetings of the  corporation and of the Board of Directors in
a book to be kept for  that  purpose  and  shall  perform  like  duties  for the
standing  committees when required.  He shall give, or cause to be given, notice
of all  meetings  of the  stockholders  and  special  meetings  of the  Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or president,  under whose  supervision  he shall be. He shall have
custody  of the  corporate  seal  of the  Corporation  and he,  or an  Assistant
Secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed,  it may be attested by his signature or by the signature of
such Assistant  Secretary.  The Board of Directors 

                                      -10-


may give  general  authority  to any  other  officer  to  affix  the seal of the
Corporation and to attest the affixing by his signature.

         Section 5.8. Assistant Secretary.  The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order determined by the Board
of Directors (or if there be no such  determination,  then in the order of their
election)  shall,  in the  absence  of the  Secretary  or in  the  event  of his
inability  or refusal to act,  perform the duties and exercise the powers of the
Secretary  and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.

         Section 5.9.  Treasurer.  The  Treasurer  shall have the custody of the
corporate  funds and  securities  and shall keep full and  accurate  accounts of
receipts  and  disbursements  in books  belonging to the  Corporation  and shall
deposit all moneys and other  valuable  effects in the name and to the credit of
the  Corporation  in such  depositories  as may be  designated  by the  Board of
Directors.  He shall disburse the funds of the  Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors,  at its regular meetings, or
when the Board of Directors so requires,  an account of all his  transactions as
Treasurer and of the financial condition of the Corporation.

         Section 5.10. Assistant Treasurer. The Assistant Treasurer, or if there
shall be more than one, the Assistant  Treasurers in the order determined by the
Board of Directors (or if there be no such  determination,  then in the order of
their  election)  shall,  in the absence of the Treasurer or in the event of his
inability  or refusal to act,  perform the duties and exercise the powers of the
Treasurer  and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.

                                   ARTICLE VI

                                      Stock

         Section 6.1.  Certificates.  Every  holder of stock in the  Corporation
shall  be  entitled  to  have a  certificate  signed  by or in the  name  of the
Corporation by the Chairman or Vice Chairman of the Board of Directors,  if any,
or the  President  or a Vice  President,  and by the  Treasurer  or an Assistant
Treasurer,  or the  Secretary or an  Assistant  Secretary,  of the  Corporation,
certifying the number of shares owned by such holder in the Corporation. If such
certificate  is manually  signed by one officer or manually  countersigned  by a
transfer agent or by a registrar,  any other signature on the certificate may be
a facsimile. In case any officer,  transfer agent or registrar who has signed or
whose facsimile  signature has been placed upon a certificate  shall have ceased
to be such  officer,  transfer  agent or registrar  before such  certificate  is
issued,  it may be issued  by the  Corporation  with the same  effect as if such
person were such officer, transfer agent or registrar at the date of issue.

                                      -11-


Upon the face or back of each stock  certificate  issued to represent any partly
paid  shares,  or upon the books and records of the  Corporation  in the case of
uncertificated  partly paid  shares,  shall be set forth the total amount of the
consideration  to be paid  therefor and the amount paid thereon shall be stated.
If the Corporation  shall be authorized to issue more than one class of stock or
more than one series of any class,  the powers,  designations,  preferences  and
relative, participating, optional or other special rights of each class of stock
or series thereof and the  qualification,  limitations or  restrictions  of such
preferences  and/or  rights shall be set forth in full or summarized on the face
or back of the certificate  which the Corporation  shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the  General  Corporation  Law of  Delaware,  in  lieu  of the  foregoing
requirements,  there  may be set  forth on the  face or back of the  certificate
which the Corporation  shall issue to represent such class or series of stock, a
statement that the Corporation  will furnish without charge to each  stockholder
who  so  requests   the  powers,   designations,   preferences   and   relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications,  limitations or restrictions of such preferences
and/or rights.

         Section 6.2. Lost, Stolen or Destroyed Stock Certificates;  Issuance of
New  Certificates.  The  Corporation may issue a new certificate of stock in the
place of any  certificate  theretofore  issued by it, alleged to have been lost,
stolen or  destroyed,  and the  Corporation  may  require the owner of the lost,
stolen or destroyed certificate,  or such owner's legal representative,  to give
the  Corporation a bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.

         Section 6.3.  Transfer of Stock.  Upon surrender to the  Corporation or
the transfer agent of the  Corporation of a certificate for shares duly endorsed
or  accompanied by proper  evidence of  succession,  assignation or authority to
transfer,  it shall be the duty of the Corporation to issue a new certificate to
the  person  entitled  thereto,  cancel  the  old  certificate  and  record  the
transaction upon its books.  Upon receipt of proper transfer  instructions  from
the registered  owner of  uncertified  shares such  uncertified  shares shall be
canceled and issuance of new equivalent  uncertificated  shares or  certificated
shares shall be made to the person entitled thereto and the transaction shall be
recorded upon the books of the Corporation.

         Section 6.4.  Fixing  Record Date.  In order that the  Corporation  may
determine  the  stockholders  entitled to notice of or to vote at any meeting of
stockholders  or any  adjournment  thereof,  or to express  consent to corporate
action in  writing  without a meeting,  or  entitled  to receive  payment of any
dividend  or other  distribution  or  allotment  of any  rights,  or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful  action,  the Board of Directors may fix, in
advance,  a record  date,  which  shall not be more than sixty nor less than ten
days  before  the date of such  meeting,  nor more than  sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting  of  stockholders  shall  apply to any  

                                      -12-


adjournment of the meeting;  provided,  however, that the Board of Directors may
fix a new record date for the adjourned meeting.

         Section 6.5. Registered Stockholders. The Corporation shall be entitled
to recognize  the  exclusive  right of a person  registered  on its books as the
owner of shares to receive  dividends,  and to vote as such  owner,  and to hold
liable for calls and  assessments a person  registered on its books as the owner
of shares,  and shall not be bound to recognize  any equitable or other claim to
or interest in such share or shares on the part of any other person,  whether or
not it shall have express or other notice thereof,  except as otherwise provided
by the laws of Delaware.
                                   
                                  ARTICLE VII

                                  Miscellaneous

         Section 7.1. Fiscal Year. The fiscal year of the  Corporation  shall be
determined by the Board of Directors.

         Section 7.2.  Seal.  The  Corporation  may have a corporate  seal which
shall have the name of the  Corporation  inscribed  thereon and shall be in such
form  as may be  approved  from  time to time by the  Board  of  Directors.  The
corporate seal may be used by causing it or a facsimile  thereof to be impressed
or affixed or in any other manner reproduced.

         Section 7.3.  Waiver of Notice of Meetings of  Stockholders,  Directors
and  Committees.  Whenever  notice is  required  to be given by law or under any
provision of the certificate of incorporation or these by-laws, a written waiver
thereof,  signed by the person  entitled to notice,  whether before or after the
time stated  therein,  shall be deemed  equivalent  to notice.  Attendance  of a
person at a meeting shall constitute a waiver of notice of such meeting,  except
when the person attends a meeting for the express  purpose of objecting,  at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully  called or convened.  Neither the business to be transacted  at,
nor the  purpose  of,  any  regular  or  special  meeting  of the  stockholders,
directors,  or members of a committee  of  directors  need be  specified  in any
written waiver of notice unless so required by the certificate of  incorporation
or these by-laws.

         Section 7.4. Interested  Directors;  Quorum. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation  and any other  corporation,  partnership,  association or other
organization  in which one or more of its directors or officers are directors or
officers,  or have a financial  interest,  shall be void or voidable  solely for
this  reason,  or solely  because  the  director  or  officer  is  present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes  the contract or  transaction,  or solely because his or her or their
votes are counted for such purpose,  if: (1) the material facts as to his or her
relationship  or interest and as to the contract or transaction are disclosed or
are known to the Board or the  committee,  and the  Board or  committee  in good
faith  authorizes  the contract or  transaction  by the  affirmative  

                                      -13-


votes  of  a  majority  of  the   disinterested   directors,   even  though  the
disinterested  directors be less than a quorum;  or (2) the material facts as to
his or her  relationship  or interest and as to the contract or transaction  are
disclosed or are known to the  stockholders  entitled to vote  thereon,  and the
contract or  transaction is  specifically  approved in good faith by vote of the
stockholders;  or (3) the contract or transaction is fair as to the  Corporation
as of the time it is authorized, approved or ratified, by the Board, a committee
thereof or the  stockholders.  Common or interested  directors may be counted in
determining the presence of a quorum at a meeting of the Board or of a committee
which authorizes the contract or transaction.

         Section  7.5.  Amendment  of By-Laws.  These  by-laws may be amended or
repealed,  and  new  by-laws  adopted,  by  the  Board  of  Directors,  but  the
stockholders  entitled  to vote may adopt  additional  by-laws  and may amend or
repeal any by-law whether or not adopted by them.

                                      -14-

                          REGISTRATION RIGHTS AGREEMENT


         THIS REGISTRATION RIGHTS AGREEMENT (this  "Agreement"),  made as of the
23rd day of June,  1997 by and among FAIR,  ISAAC AND COMPANY,  INCORPORATED,  a
Delaware  corporation (the  "Company"),  and the persons listed on the signature
pages hereto,

                              W I T N E S S E T H:

         WHEREAS,  the Company,  the Holders (as  hereinafter  defined) and Risk
Management  Technologies,  a California corporation ("RMT"), are parties to that
certain Agreement and Plan of Reorganization, dated the date hereof (the "Merger
Agreement"),  pursuant to which,  among other things,  the Company has agreed to
issue to the shareholders of RMT shares of common stock,  $.01 par value, of the
Company  ("Common  Stock")  pursuant to a merger of a wholly owned subsidiary of
the Company and RMT in which RMT will become a wholly  owned  subsidiary  of the
Company, and

         WHEREAS,  in connection with the  transactions  referred to above,  the
Company  and the Holders  desire to provide  for the rights of the Holders  with
respect  to the  registration  of  shares of the  Company's  Common  Stock  (the
"Shares") constituting forty-five percent 45% of the Merger Shares (as such term
is defined in the Merger Agreement), according to the terms of this Agreement:

                  NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

         1.  Definitions.

         1.1 The term "Commission" means the Securities and Exchange  Commission
or any other federal agency at the time administering the Securities Act.

         1.2 The term "Exchange Act" means the Securities  Exchange Act of 1934,
as  amended,  or any  similar  successor  federal  statute  and  the  rules  and
regulations thereunder, all as the same shall be in effect from time to time.

         1.3 The term "Holder" means each of the persons listed on the signature
pages hereto and any person to whom the  registration  rights  conferred by this
Agreement have been transferred in accordance with Section 9.1 hereof.

         1.4 The terms "register,"  "registered" and  "registration"  refer to a
registration  effected  by  preparing  and filing a  registration  statement  or
similar  document in compliance  with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document.



         1.5 The term "Registrable  Securities"  means (i) the Shares,  and (ii)
any shares of Common  Stock  issued as a  dividend  or other  distribution  with
respect  to, or in exchange  for or in  replacement  of, the  Shares;  provided,
however,  that any shares previously sold to the public pursuant to a registered
public  offering or pursuant to Rule 144 or Rule 145 under the  Securities  Act,
and any shares  otherwise  sold or  transferred  in a  transaction  in which the
transferor's  rights under this  Agreement are not assigned in  accordance  with
this Agreement, shall cease to be Registrable Securities.

         1.6 The term  "Securities  Act" means the  Securities  Act of 1933,  as
amended,  or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.

         2.  Registration.

         2.1 After the  Company has  publicly  released a report  including  the
combined  financial  results of the  Company and RMT for a period of at least 30
days of  combined  operations  of the  Company  and RMT  within  the  meaning of
Accounting  Series Release No. 135, as amended,  of the Commission  (the date of
such release being  referred to as the "Release  Date"),  and upon prior written
notice to the Holders, the Company shall file a registration  statement covering
such of the Holders'  Registrable  Securities  as are the subject of the Notices
defined below, for an offering to be made on a continuous basis pursuant to Rule
415  under  the  Securities  Act;  provided,  that  the  Company  shall  have no
obligation to file or effect any such registration  unless the Holder or Holders
submitting  Notices (as defined  below)  propose to sell less than five thousand
(5,000) Shares pursuant to such registration;  and provided,  further,  that the
Company shall have no obligation  to register any  Registrable  Securities as to
which  it has not  received,  a  reasonable  time  prior  to the  filing  of the
foregoing  registration  statement,  a written notice (each, a "Notice") stating
the name and address of the Holder of such Registrable Securities, the number of
shares of Registrable Securities to be disposed of pursuant to such registration
(in each  case not to  exceed  45% of such  Holder's  Shares)  and the  intended
methods of  distribution.  The  Company's  obligations  under this Section 2 are
subject to the further conditions and limitations set forth below.

         2.2 The  registration  provided  for in  this  Section  2 shall  not be
underwritten.

         2.3 So long as the Company has complied with its obligations hereunder,
any  registration  proceeding  commenced  pursuant  to this  Agreement  which is
subsequently   withdrawn  by  the  Holders   shall  be  counted  as  the  single
registration required of the Company for purposes of Section 2.1 hereof.

                                      -2-


         3.  Obligations of the Company.

         When  obligated  under  Section  2.1 of this  Agreement  to effect  the
registration of any Registrable Securities,  the Company shall, as expeditiously
as reasonably possible:

         3.1 Prepare and file with the Commission a registration  statement with
respect to such Registrable  Securities and use reasonable efforts to cause such
registration  statement to become effective on or before December 1, 1997 and to
keep such registration statement continuously effective under the Securities Act
until  the  earlier  of the  expiration  of sixty  (60)  days  after the date of
declaration of  effectiveness of such  registration  statement by the Commission
(the "Expiration  Date") or the date on which this Agreement has terminated with
respect to all Holders of  Registrable  Securities.  The  Company's  obligations
hereunder to file a registration  statement and to keep a registration statement
continuously  effective  under the  Securities Act shall be suspended if (i) the
fulfillment of such  obligations  would require the Company to make a disclosure
that  would,  in the sole  discretion  and  judgment of the  Company's  Board of
Directors,  be  detrimental  to the Company or  premature,  (ii) the Company has
filed,  or proposes to file within  ninety (90) days after the Release  Date,  a
registration  statement  with respect to any of its securities to be distributed
in an  underwritten  public  offering  and it is advised by its lead or managing
underwriter  that an offering by a Holder or Holders of  Registrable  Securities
would materially adversely affect the distribution of such securities,  or (iii)
the  fulfillment  of such  obligations  would  require  the  Company  to prepare
financial  statements not required to be prepared for the Company to comply with
its obligations under the Exchange Act. Such obligations shall be reinstated (x)
in the case of clause  (i)  above,  upon the  making of such  disclosure  by the
Company  (or,  if  earlier,  when  such  disclosure  would  either  no longer be
necessary for the fulfillment of such obligations or no longer be detrimental or
premature),  (y) in the case of clause (ii) above,  upon the  conclusion  of any
period  during  which  the  Company  would  not,  pursuant  to the  terms of its
underwriting  arrangements,  be permitted to sell Registrable Securities for its
own account and (z) in the case of clause  (iii)  above,  as soon as it would no
longer be  necessary  to prepare such  financial  statements  to comply with the
Securities  Act.  The  Expiration  Date shall be tolled for the  duration of any
suspension  pursuant  to this  Section  3.1 and for the  duration  of any period
described  in  clauses  (i)-(iv)  of Section  4.2  below.  In the event that the
Company's  obligations are suspended as provided above, the Company shall notify
in writing each Holder  participating in such  registration,  which notice shall
state that its obligations hereunder have been suspended in accordance with this
Section 3.1.

                                      -3-


         3.2  Prepare  and  file  with  the  Commission   such   amendments  and
supplements to such registration statement and the prospectus used in connection
with  such  registration  statement  as may be  necessary  to  comply  with  the
provisions  of  the  Securities  Act  with  respect  to the  disposition  of all
securities covered by such registration statement.

         3.3 Furnish to the Holders covered by such registration  statement such
numbers  of copies of a  prospectus,  including  a  preliminary  prospectus,  in
conformity with the requirements of the Securities Act, and such other documents
as they may reasonably  request in order to facilitate  the  disposition of such
Registrable Securities.

         3.4 Use all  reasonable  efforts to register and qualify the securities
covered by such registration  statement under the securities or Blue Sky laws of
such  jurisdictions  as shall be  reasonably  requested by the Holders  thereof,
provided that the Company shall not be required in connection  therewith or as a
condition  thereto  to qualify to do  business  or to file a general  consent to
service of process in any such states or jurisdictions.

         3.5 Use all  reasonable  efforts  to cause the  Registrable  Securities
registered  pursuant  to  such  registration  to  be  listed  on  the  principal
securities exchange on which the Common Stock is then listed.

         4.  Obligations of the Holders.

         4.1 It shall be a condition precedent to the obligations of the Company
to take any  action  pursuant  to this  Agreement  that the  Holders  requesting
inclusion of securities in the Company's registration statement shall furnish to
the Company such information  regarding themselves,  the Registrable  Securities
held  by  them  and to be  disposed  of by  them,  and the  intended  method  of
disposition of such  securities as shall be required to effect the  registration
of the Registrable Securities.

         4.2 Upon the  receipt by a Holder of any notice from the Company of (i)
the existence of any fact or the happening of any event as a result of which the
prospectus included in a registration  statement filed pursuant to Section 2, as
such registration statement is then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary  to make the  statements  therein not  misleading  in the light of the
circumstances then existing, (ii) the existence of any facts or events resulting
in the  suspension of the  Company's  obligations  to file and keep  effective a
registration  statement as provided in Section 3.1 above,  (iii) the issuance by
the  Commission of any stop order or injunction  suspending or enjoining the use
or the  effectiveness  of such  registration  statement or the initiation of any

                                      -4-


proceedings  for that  purpose,  or the  taking  of any  similar  action  by the
securities regulators of any state or other jurisdiction, or (iv) the request by
the Commission or any other federal or state governmental  agency for amendments
or  supplements  to such  registration  statement or related  prospectus  or for
additional   information   related  thereto,   such  Holder  shall   immediately
discontinue  disposition of such Holder's Registrable Securities covered by such
registration  or  prospectus  (other  than  in  transactions   exempt  from  the
registration  requirements under the Securities Act) until such Holder's receipt
of the  supplemented  or amended  prospectus  or until such Holder is advised in
writing by the Company that the use of the applicable  prospectus may be resumed
or, in the case of a notice  pursuant to clause (ii) above,  until the Company's
obligations referred to therein are no longer suspended.

         4.3 Each Holder  shall  notify the  Company in writing  within five (5)
calendar days of the disposition of a Holder's Registrable Securities covered by
a registration statement as provided in Section 3.1 above.

         5.  Expenses.

         The Company shall bear and pay all expenses  incurred by the Company in
connection  with  any  registration,  filing  or  qualification  of  Registrable
Securities  with  respect  to any  registration  pursuant  to  Section 2 hereof,
including (without limitation) all registration,  filing and qualification fees,
printers'  and  accounting  fees  relating or  apportionable  thereto,  fees and
disbursements of counsel for the Company, Blue Sky fees and expenses,  including
fees and disbursements of counsel related to all Blue Sky matters, but excluding
(i) the fees and  disbursements of counsel for the selling  Holders,  (ii) stock
transfer  taxes  that may be  payable  by the  selling  Holders,  and  (iii) all
brokerage or similar  commissions  relating to  Registrable  Securities,  all of
which shall be borne by the Holders whose Registrable  Securities are covered by
such registration statement.

         6.  Indemnification.

         In the event any Registrable  Securities are included in a registration
statement under this Agreement:

         6.1 To the extent permitted by law, the Company will indemnify and hold
harmless each Holder of such Registrable Securities and each person, if any, who
controls  such Holder within the meaning of the  Securities  Act or the Exchange
Act, against any losses,  claims,  damages or liabilities  (joint or several) to
which they may become  subject  under the  Securities  Act,  the Exchange Act or
other  federal  or  state  law,  insofar  as such  losses,  claims,  damages  or
liabilities  (or actions in respect  thereof) arise out of or are based upon any
of  the  following

                                      -5-


statements,  omissions or  violations  (collectively,  a  "Violation"):  (i) any
untrue  statement or alleged  untrue  statement of a material fact  contained in
such  registration  statement,  including  any  preliminary  prospectus or final
prospectus contained therein or any amendments or supplements thereto,  (ii) the
omission or alleged  omission to state  therein a material  fact  required to be
stated therein,  or necessary to make the statements therein not misleading,  or
(iii) any violation or alleged  violation by the Company of the Securities  Act,
the Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state  securities law; and the
Company will reimburse  each such Holder or controlling  person for any legal or
other expenses  reasonably  incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,  however,
that the  indemnity  agreement  contained in this Section 6.1 shall not apply to
amounts paid in settlement of any such loss, claim, damage,  liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such  loss,  claim,  damage,  expense,  liability  or action to the
extent that it arises out of or is based upon a Violation which arises out of or
is based upon information  furnished in writing  expressly for use in connection
with such  registration  by any such  Holder or  controlling  person;  provided,
further, that the Company will not be liable to any Holder or controlling person
with respect to any loss, claim, damage,  expense or liability arising out of or
based upon any untrue  statement  or alleged  untrue  statement  or  omission or
alleged omission to state a material fact in any preliminary prospectus which is
corrected  in an  amended,  supplemented  or final  prospectus  provided to such
Holder if the purchaser asserting such loss, claim, damage, expense or liability
purchased  from such  Holder  and was not sent or given a copy of such  amended,
supplemented  or  final  prospectus  at or  prior  to the  sale  of  Registrable
Securities to such purchaser.

         6.2 To the extent  permitted by law, each selling Holder will indemnify
and hold harmless the Company,  each of its directors,  each of its officers who
have signed the registration  statement,  each person,  if any, who controls the
Company within the meaning of the  Securities  Act, and any other Holder selling
securities in such registration statement or any of its directors or officers or
any person who controls  such  Holder,  against any losses,  claims,  damages or
liabilities  (joint or  several)  to which  the  Company  or any such  director,
officer or  controlling  person,  or other such Holder or  director,  officer or
controlling  person may become  subject,  under the Securities Act, the Exchange
Act or other federal or state law,  insofar as such losses,  claims,  damages or
liabilities  (or actions in respect  thereto) arise out of or are based upon any
Violation,  in each  case to the  extent  (and  only to the  extent)  that  such
Violation  arises out of or is based upon  information  furnished  in writing by
such Holder  expressly for use in connection  with such  registration;  and each

                                      -6-


such Holder will  reimburse any legal or other expenses  reasonably  incurred by
the Company or any such director,  officer,  controlling person,  underwriter or
controlling person, other Holder,  officer,  director,  or controlling person in
connection  with  investigating  or  defending  any such  loss,  claim,  damage,
liability, or action; provided,  however, that the indemnity agreement contained
in this  Section 6.2 shall not apply to amounts paid in  settlement  of any such
loss, claim, damage,  liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably withheld.

         6.3 Promptly after receipt by an indemnified party under this Section 6
of notice of the commencement of any action (including any governmental action),
such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to  participate  in,  and,  to the  extent the  indemnifying  party so
desires,  jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties; provided,
however,  that an  indemnified  party  shall  have the right to  retain  its own
counsel,  with the fees and expenses to be paid by the  indemnifying  party,  if
representation  of  such  indemnified  party  by  the  counsel  retained  by the
indemnifying  party would be inappropriate due to actual or potential  differing
interests between such indemnified party and any other party represented by such
counsel in such  proceeding.  It is understood,  however,  that an  indemnifying
party shall not, in connection  with any proceeding or related  proceedings,  be
liable for the  reasonable  fees and expenses of more than one separate firm for
all  indemnified   parties.  The  failure  to  deliver  written  notice  to  the
indemnifying  party within a  reasonable  time of the  commencement  of any such
action, if prejudicial to its ability to defend such action,  shall relieve such
indemnifying  party of any liability to the indemnified party under this Section
6, but the omission so to deliver written notice to the indemnifying  party will
not  relieve  it of any  liability  that it may  have to any  indemnified  party
otherwise than under this Section 6.

         6.4 The  obligations  of the Company and Holders  under this  Section 6
shall survive the completion of any offering of Registrable  Securities pursuant
to a registration statement under this Agreement, and otherwise.

         7.  Termination of Registration Rights.

         The Company's obligations pursuant to this Agreement shall terminate as
to any Holder of Registrable Securities on the earlier of (i) the date when such
Holder is eligible to sell all of such Holder's Registrable  Securities pursuant
to Rule 144 or

                                      -7-


Rule 145 under the  Securities  Act during  any 90-day  period or (ii) the first
anniversary of the date hereof.

         8.  Representations and Warranties of the Company.

         The Company  hereby  represents  and  warrants to the Holders  that the
Company is current in making all filings  with the  Commission  required by law,
and in the last 12 months, on a timely basis, has made all such filings,  and as
of the date  hereof is  eligible  to  register  the  resale of the Shares by the
Holders on Form S-3 under the Securities Act.

         9.  Miscellaneous.

         9.1  Successors  and Assigns.  This Agreement and all of the provisions
hereof  shall  inure  to the  benefit  of and be  binding  upon  the  respective
successors and assigns of the parties hereto, but neither this Agreement nor any
of the rights,  interests or obligations hereunder may be assigned,  transferred
or  delegated   by  any  Holder  to  any  person   other  than  (i)   executors,
administrators,  legatees  or heirs of such Holder upon the death of such Holder
and  (ii) to a  charitable  remainder  trust  described  in  Section  664 of the
Internal  Revenue Code all of the income  beneficiaries of which are such Holder
or members of such  Holder's  immediate  family or to a trust for the benefit of
one or more members of such Holder's  immediate family;  provided in either such
case  that  the  Company  is given  written  notice  at the time of or  within a
reasonable time after said transfer or assignment,  stating the name and address
of  the  permitted  transferee  or  assignee  and  identifying  the  Registrable
Securities to which such  registration  rights are being transferred or assigned
and, provided further, that the transferee or assignee of such rights assumes in
writing the  obligations  of such Holder  under this  Agreement;  and  provided,
further,  that no rights,  interests or  obligations  hereunder may be assigned,
transferred  or delegated  except to a transferee  or assignee of at least 5,000
shares of  Registrable  Securities  (as  presently  constituted  and  subject to
subsequent  adjustments  for stock  splits,  reverse stock splits and the like).
Nothing in this  Agreement,  express or implied,  is intended to confer upon any
party other than the parties hereto or their respective  successors or permitted
assigns, any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.

         9.2 Legends.

         (a) Each certificate  representing Registrable Securities shall (unless
otherwise permitted by the provisions of this Agreement) be stamped or otherwise
imprinted with a legend  substantially  similar to the following (in addition to
any legend required under applicable state securities laws):

                                      -8-


         "THE  SHARES  REPRESENTED  HEREBY  HAVE NOT BEEN  REGISTERED  UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED,
         ASSIGNED,  PLEDGED OR HYPOTHECATED  UNLESS AND UNTIL  REGISTERED  UNDER
         SUCH ACT OR UNLESS THE  COMPANY  HAS  RECEIVED AN OPINION OF COUNSEL OR
         OTHER EVIDENCE,  SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
         REGISTRATION IS NOT REQUIRED."

         (b) The  Company  shall be  obligated  to reissue  promptly  unlegended
certificates  at the  request  of any holder  thereof  if the holder  shall have
obtained an opinion of counsel at such Holder's  expense  (which  counsel may be
counsel to the Company) reasonably  acceptable to the Company to the effect that
the securities proposed to be disposed of may lawfully be so disposed of without
registration, qualification or legend.

         (c) Any legend endorsed on an instrument  pursuant to applicable  state
securities laws and the related stop-transfer  instructions with respect to such
securities  shall be  removed  upon  receipt  by the  Company of an order of the
appropriate Blue Sky authority authorizing such removal.

         9.3 Notices.  Unless otherwise provided, any notice, request, demand or
other communication required or permitted under this Agreement shall be given in
writing  and shall be deemed  effectively  given upon  personal  delivery to the
party to be notified,  or when sent by telecopier (with receipt  confirmed),  or
overnight  courier service,  or upon deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed as follows (or at
such other address as a party may designate by notice to the other):

         If to the Company:

         Fair, Isaac and Company, Incorporated
         120 North Redwood Drive
         San Rafael, CA 94903
         Telecopier: (415) 479-6320
         Attention:  Peter L. McCorkell

         with a copy to:

         Pillsbury Madison & Sutro LLP
         2700 Sand Hill Road
         Menlo Park, CA  94025
         Telecopier: (415) 233-4545
         Attention:  Jorge A. del Calvo, Esq.

         If to the Holders:

         to their respective addresses shown on the signature pages hereto

                                      -9-


         with a copy to:

         Whitehead & Porter LLP
         220 Montgomery Street, Suite 1850
         San Francisco, CA 94104
         Telecopier:  (415) 788-6521
         Attention:  David Whitehead, Esq.

         9.4 Waivers. The observance of any term of this Agreement may be waived
(either  generally  or in a  particular  instance  and either  retroactively  or
prospectively)  only with the  written  consent of the party  against  whom such
waiver is  sought to be  enforced.  No waiver by any party of any  default  with
respect to any provision,  condition or requirement hereof shall be deemed to be
a continuing  waiver in the future  thereof or a waiver of any other  provision,
condition or requirement hereof; nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.

         9.5 Severability.  If one or more provisions of this Agreement are held
to be unenforceable,  invalid or void by a court of competent jurisdiction, such
provision  shall  be  excluded  from  this  Agreement  and the  balance  of this
Agreement  shall be  interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms.

         9.6 Entire Agreement; Amendments.

         (a) This  Agreement  contains the entire  understanding  of the parties
with respect to the matters  covered herein and supersedes all prior  agreements
and understandings, written or oral, between the parties relating to the subject
matter hereof.

         (b) Any term of this Agreement may be amended and the observance of any
term of this  Agreement  may be  waived  (either  generally  or in a  particular
instance  and either  retroactively  or  prospectively),  only with the  written
consent  of the  Company  and  the  holders  of a  majority  of the  Registrable
Securities then outstanding. Any amendment or waiver effected in accordance with
this paragraph shall be binding upon each holder of any  Registrable  Securities
then outstanding, each future Holder of all such Registrable Securities, and the
Company.

         9.7 Governing  Law. This  Agreement  shall be governed by and construed
under the laws of the State of  California  (irrespective  of its  choice of law
principles).

         9.8  Counterparts.  This  Agreement  may be  executed  in  two or  more
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall constitute one and the same instrument.

                                      -10-


         9.9  Titles  and  Subtitles.  The  titles  and  subtitles  used in this
Agreement  are  used  for  convenience  only  and  are not to be  considered  in
construing or interpreting this Agreement.  Any reference in this Agreement to a
statutory provision or rule or regulation promulgated thereunder shall be deemed
to include any  similar  successor  statutory  provision  or rule or  regulation
promulgated thereunder.

         IN WITNESS WHEREOF,  the parties have executed this Agreement as of the
date first above written.

                                    FAIR, ISAAC AND COMPANY,
                                      INCORPORATED



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

                                    HOLDERS:

                                    David LaCross and Kathleen O. LaCross
                                    Trustees U/D/T dated April 2, 1997
                                    Address: 59 Singingwood Lane
                                    Orinda, CA 94563


                                    --------------------------------------------
                                    By: David LaCross, Co-Trustee


                                    --------------------------------------------
                                    By: Kathleen O. LaCross, Co-Trustee


                                    --------------------------------------------
                                    Name of Holder: Jefferson Braswell
                                    Address: 2800 Regent St.
                                    Berkeley, CA 94705


                                    --------------------------------------------
                                    Name of Holder: Software Alliance LLC
                                    Address: P.O. Box 7370

                                      -11-

                                    Incline Village, NY 89452


                                    --------------------------------------------
                                    Name of Holder: Robert Ferguson
                                    Address: 1040 Greenwich St.
                                    San Francisco, CA 94133


                                    --------------------------------------------
                                    Name of Holder: James T. Fan
                                    Address: 5112 Amberwood Court
                                    Fremont, CA 94555


                                    --------------------------------------------
                                    Name of Holder: Leland Prussia
                                    Address: 16 Redondo Court
                                    Alameda, CA 94501

                                      -12

                                   Amendment 1

                      FAIR, ISAAC AND COMPANY, INCORPORATED
                          1992 LONG-TERM INCENTIVE PLAN
              (As amended and restated effective November 21, 1995)


         Effective  as of  December  23,  1996,  the Fair,  Isaac  and  Company,
Incorporated  1992 Long-Term  Incentive Plan (As amended and restated  effective
November 21, 1995) is hereby amended as follows:

         Section 15 is amended by  designating  the existing two  paragraphs  as
subsection (i) and adding the following new subsection at the end thereof:

         "(ii)  Notwithstanding  paragraph (i) above,  an NSO or portion thereof
         may be  transferred  by the  Optionee  by gift  to (a)  the  Optionee's
         immediate family,  (b) a partnership  consisting solely of the Optionee
         and/or immediate  family, or (c) to a trust established for the benefit
         of the Optionee  and/or one or more members of the immediate  family of
         the  Optionee  (including  a  charitable  remainder  trust whose income
         beneficiaries  consist  solely  of such  persons),  provided  that such
         transfer  will  not be  effective  until  notice  of such  transfer  is
         delivered  to the  Corporation.  For  purposes of this  paragraph  (ii)
         "immediate family" means spouse, children and grandchildren.  An Option
         or  portion  thereof  may also be  transferred  pursuant  to a domestic
         relations order of a court of competent jurisdiction."

         To  record  the  adoption  of this  amendment  to the  Fair,  Isaac and
Company,  Incorporated  Stock  Option  Plan  for  Non-Employee  Directors  by an
Executive  Committee  of the Board on December  23, 1996,  the  Corporation  has
caused its authorized officers to affix the corporate name hereto.


                                    Fair, Isaac and Company, Incorporated




                                    By       /s/ PETER L. MCCORKELL
                                       -----------------------------------------
                                                 Peter L. McCorkell
                                         Senior Vice President & Secretary



                                   Amendment 2

                      FAIR, ISAAC AND COMPANY, INCORPORATED
                          1992 LONG-TERM INCENTIVE PLAN
              (As amended and restated effective November 21, 1995)

         Effective  as of  November  25,  1997,  the Fair,  Isaac  and  Company,
Incorporated  1992 Long-Term  Incentive Plan (As amended and restated  effective
November 21, 1995) is hereby amended as follows:

1.       Section  3.1 of the Plan is amended by  deleting  the last  sentence of
         that section, and adding the following at the end thereof:

              "Effective  October 1, 1997,  and on each October 1 thereafter for
              the remaining  term of the Plan,  the  aggregate  number of Shares
              which  may be  issued  under  the  Plan to  individuals  shall  be
              increased  by a number of Common  Shares equal to 4 percent of the
              total number of Common Shares  outstanding  at the end of the most
              recently  concluded  fiscal year. Any Common Shares that have been
              reserved  but not  issued as  Restricted  Shares,  Stock  Units or
              Options  during any fiscal year shall remain  available  for grant
              during any subsequent fiscal year.  Notwithstanding the foregoing,
              no more than  1,500,000  Common  Shares shall be available for the
              grant of ISOs for the  remaining  term of the Plan.  The aggregate
              number of Common  Shares  which may be issued under the Plan shall
              at all times be subject to adjustment  pursuant to Article 10."

2.       Section 16.1 of the Plan is amended by  substituting  the following for
         the last sentence thereof:

              "The Plan  shall  remain in effect  until it is  terminated  under
              Section 16.2,  except that no ISOs shall be granted after November
              24, 2007."

         To  record  the  adoption  of this  amendment  to the  Fair,  Isaac and
Company,  Incorporated  Stock  Option  Plan  for  Non-Employee  Directors  by an
Executive  Committee  of the Board on November  25, 1997,  the  Corporation  has
caused its authorized officers to affix the corporate name hereto.

                               Fair, Isaac and Company, Incorporated


                               By         /s/ PETER L. McCORKELL
                                  ----------------------------------------------
                                              Peter L. McCorkell
                                      Senior Vice President & Secretary


                                   Amendment 3

                      FAIR, ISAAC AND COMPANY, INCORPORATED
                  STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS


         Effective  as of  December  23,  1996,  the Fair,  Isaac  and  Company,
Incorporated  Stock Option Plan for Non-Employee  Directors is hereby amended as
follows:

         Section 7(e) is amended by  designating  the existing two paragraphs as
subsection (i) and adding the following new subsection at the end thereof:

         "(ii) Notwithstanding paragraph (i) above, an Option or portion thereof
         may be  transferred  by the  Optionee  by gift  to (a)  the  Optionee's
         immediate family,  (b) a partnership  consisting solely of the Optionee
         and/or immediate  family, or (c) to a trust established for the benefit
         of the Optionee  and/or one or more members of the immediate  family of
         the  Optionee  (including  a  charitable  remainder  trust whose income
         beneficiaries  consist  solely  of such  persons),  provided  that such
         transfer  will  not be  effective  until  notice  of such  transfer  is
         delivered  to the  Corporation.  For  purposes of this  paragraph  (ii)
         "immediate family" means spouse, children and grandchildren.  An Option
         or  portion  thereof  may also be  transferred  pursuant  to a domestic
         relations order of a court of competent jurisdiction."

         To  record  the  adoption  of this  amendment  to the  Fair,  Isaac and
Company,  Incorporated  Stock  Option  Plan  for  Non-Employee  Directors  by an
Executive  Committee  of the Board on December  23, 1996,  the  Corporation  has
caused its authorized officers to affix the corporate name hereto.


                                    Fair, Isaac and Company, Incorporated
                         
                         
                         
                         
                                    By       /s/ PETER L. McCORKELL
                                       -----------------------------------------
                                                 Peter L. McCorkell
                                           Senior Vice President & Secretary



                             FIRST ADDENDUM TO LEASE
                                 BY AND BETWEEN
                                 REGENCY CENTER
                                ("THE LANDLORD")
                                       AND
                      FAIR, ISAAC AND COMPANY, INCORPORATED
                                 ("THE TENANT")

This First  Addendum to Lease,  dated  August 13, 1997  ("First  Addendum"),  is
hereby  attached  to and  incorporated  into and made a part of that Lease dated
November 14, 1996, by and between Regency Center  ("Landlord")  and Fair,  Isaac
and Company, Incorporated ("Tenant").

The following Lease provisions are hereby amended as follows:

17.      SERVICES AND UTILITIES

         Paragraph C shall be amended as follows:

         C.       Landlord shall provide Tenant a monthly  allowance of $.11 per
                  usable  square  foot  in the  Premises  (that  is,  $4,191.55;
                  $3,984.31 and $4,107.62 for the first, second and third floors
                  of  the  Building,   respectively)  for  Tenant's   electrical
                  services.  This  allowance  is  included  in the Base  Rent as
                  defined  in  Article  5 of  the  Lease.  Landlord  and  Tenant
                  recognize  that  Tenant's  electrical  service  shall  cost in
                  excess of Eleven Cents ($.11) per square foot per month due to
                  Tenant's heavy electrical and air  conditioning  requirements,
                  and  Tenant  shall pay any such  excess  costs for  electrical
                  service.

                  Tenant  shall be charged for all PG&E  charges to the building
                  over and above the monthly allowance provided above.

                  For the  first  year of  Tenant's  occupancy,  Landlord  shall
                  charge  Tenant $.11 per usable  square foot per month based on
                  the  Third  Floor  usable  square  footage  for  over-standard
                  electrical   usage  as  a  projected   expense.   This  amount
                  ($4,107.62)  shall be paid along with the monthly rent. At the
                  end of the first year of occupancy,  Landlord  shall prepare a
                  PG&E invoice analysis showing the actual cost of over-standard
                  usage by Tenant.  Landlord shall credit Tenant for any amounts
                  paid in excess of the actual




                  cost of over-standard usage. Tenant shall pay landlord for any
                  costs in excess of the total projected sum paid by Tenant over
                  the first year of  occupancy.  The  amount  paid by Tenant for
                  over-standard  electrical  usage for each  subsequent  year of
                  occupancy  shall be based on the previous year's charges and a
                  similar  accounting  between  Landlord  and Tenant  will occur
                  annually.

IN WITNESS WHEREOF, the parties have executed this First Addendum to Lease as of
the date first written above.

                               Regency Center, a California general partnership

                               By:               /s/ Joseph Pell
                                  ----------------------------------------------
                                           Joseph Pell, General Partner

                               Fair, Isaac and Company, Incorporated

                               By:              /s/ Michael C. Gordon
                                  ----------------------------------------------
                               Its:               Vice President




                                OPTION AGREEMENT



                                 by and between



                             Village Builders, L.P.,

                        a California limited partnership


                                  ("Optionor")


                                       and



                         Fair, Isaac and Company, Inc.,
                             a Delaware corporation


                                  ("Optionee")


                          Dated as of November 26, 1997

                                                                  EXHIBIT 10.33




                                OPTION AGREEMENT


         This Option Agreement (this "Option  Agreement") is made as of the 26th
day of  November,  1997,  by and between  Village  Builders,  L.P., a California
limited partnership ("Optionor"),  and Fair, Isaac and Company, Inc., a Delaware
corporation ("Optionee").


                                    RECITALS

         A. Optionor as buyer,  and Pacific Gas & Electric  Company  ("PG&E") as
seller, have entered into an Asset Sale Agreement, dated as of June 25, 1996, as
amended  (collectively,  the "Asset Sale  Agreement")  regarding the purchase of
those  certain  parcels of real property  commonly  known as 750 and 751 Lindaro
Street, San Rafael, California,  more particularly described on Exhibit D hereto
and depicted on the Site Plan (as defined below) (the "PG&E Property").

         B. The City of San Rafael or its Redevelopment Agency (the "Agency") is
the owner of those  certain  parcels  of real  property  described  on Exhibit C
hereto  (the "City  Property").  The Agency has begun the process  necessary  to
dispose of the City Property, and it is Optionor's intention to obtain an option
to purchase the City Property from the Agency, if possible.

         C.  Optionor  and  Optionee  are  entering  into the Lease (as  defined
below),  whereby  Optionor will lease to Optionee,  and Optionee will lease from
Optionor, upon and subject to the terms, covenants, provisions and conditions of
such Lease,  office  buildings to be constructed on the Phase I Land (as defined
below).

         D.   Optionor  and  Optionee  are  also  entering  into  the  Leasehold
Improvements  Agreement (as defined  below),  whereby  Optionor  will  construct
certain Site and Shell Improvements and Tenant  Improvements (as those terms are
defined below) on the PG&E Property for the use of Optionee.

         E. Optionee  desires to obtain from Optionor  certain  options,  one of
which is to purchase  all of the PG&E  Property,  and the others of which are to
purchase  only the Phase I Land (and with respect to each option,  Optionee also
shall  purchase  all  improvements  located on the PG&E  Property or the Phase I
Land,  as  applicable,  as of the date of  Optionee's  purchase),  and  Optionor
desires to grant such options to  Optionee,  all on the terms and subject to the
conditions set forth herein.

         F. In  consideration  whereof,  Optionor and  Optionee  have reached an
understanding  regarding  the  granting  of such  options  and other  rights and
concerning other matters relating thereto.

         Now, therefore,  for good and valuable  consideration,  the receipt and
sufficiency  of which is hereby  acknowledged,  Optionor and  Optionee  mutually
agree as follows:

                                      -2-



         1.       DEFINITIONS.

                  Certain  terms used in this Option  Agreement and the Exhibits
hereto shall have the meaning set forth below for each such term.  Certain other
terms shall have the meaning set forth  elsewhere in this Option  Agreement  and
the Exhibits hereto. Unless otherwise defined in this Option Agreement or in the
Exhibits  hereto,  defined terms shall have the meaning  ascribed to them in the
Lease or the Leasehold Improvements Agreement.

                  1.1.  "Access  Agreement"  shall  mean  an  agreement  between
Optionor and PG&E  permitting  PG&E to have access to the Project in  connection
with the  operation,  maintenance,  repair,  replacement  and  relocation of the
Containment Facilities.

                  1.2.  "Base  Building  Improvements"  shall  have the  meaning
ascribed to that term in the Leasehold Improvements Agreement.

                  1.3.  "Break-Up Fee Maximum Amount" shall mean an amount equal
to the aggregate amount of all application fees,  commitment fees,  appraisal or
property or plan review fees, financing-related legal fees of lender, reasonable
fees and expense  reimbursements  paid to a mortgage broker,  prepayment fees or
penalties,  yield  maintenance  fees,  hedge  fees  and  costs,  break-up  fees,
deposits,  closing  costs and loan fees and other costs and charges which either
(i) were  incurred by Optionor in connection  with the Take-Out  Financing on or
before the Closing Date (whether or not then paid),  but which are ultimately to
be paid by Optionor,  or (ii) in the event that Take-Out  Financing has not been
obtained by Optionor at or before the Closing Date,  the actual  amount  thereof
incurred and  ultimately  paid or to be paid by Optionor in connection  with the
termination  of any agreements for the provision of funds for equity capital and
Take-Out Financing for the Project.  Notwithstanding the foregoing,  in no event
shall Optionee be responsible for any such amount  described in this Section 1.3
which, in the aggregate, exceed Thirty Thousand Dollars ($30,000), and which are
paid or incurred before December 1, 1997.

                  1.4. "Buildings" shall mean the buildings to be constructed by
Optionor on the Phase I Land pursuant to the Leasehold  Improvements  Agreement;
"Building"  shall mean one such  building,  without  inherent  specificity as to
which of them.

                  1.5.  "City"  shall  mean  the City of San  Rafael  or the San
Rafael Redevelopment Agency, without inherent specificity as to which of them.

                  1.6. "Closing Date" shall mean and refer to the date specified
in Section 9.2 below,  unless such date is changed in accordance  with the other
provisions of this Option Agreement.

                  1.7. "Construction  Financing" shall have the meaning ascribed
to that term in the Leasehold Improvements Agreement.

                  1.8.  "Contingent Purchase Price" shall mean the amount of One
Million Dollars ($1,000,000.00).

                  1.9.  "Declaration"  shall have the  meaning  ascribed to that
term in the Lease.

                  1.10.  "Development  Agreement"  shall  mean  and  refer  to a
development  agreement  between  Optionor and the City,  which  provides  vested
rights for the  development of the Project and Phase II with not less than three
hundred fifty thousand  (350,000) square feet of gross 





building area and parking facilities at a rate of not less than three (3) spaces
per one thousand (1,000) square feet of such gross building area.

                  1.11. "Development Management Fee" shall mean and refer to the
development  management  fee which is included  within  Phase I Project  Cost in
accordance with the provisions of the Leasehold Improvements Agreement.

                  1.12.  "Escrow" shall mean and refer to the escrow  depository
and  disbursement  services to be  provided by the Title  Company in closing the
purchase and sale transaction described in this Option Agreement.

                  1.13.  "First  Option"  shall  mean and refer to the option to
purchase the PG&E Option  Property  granted by Optionor to Optionee  pursuant to
Section 0.

                  1.14. "First Option Permitted Exceptions" shall mean and refer
to those liens, encumbrances, defects or other matters pertaining to title which
are referred to in Section 2.10.

                  1.15.  "First Option  Purchase  Price" shall mean the purchase
price for the PG&E Option  Property  if the First  Option is duly  exercised  by
Optionor, as such purchase price is determined in accordance with the provisions
of Section 2.5, but excluding therefrom the Contingent Purchase Price.

                  1.16. "First Option Term Expiration Date" shall mean and refer
to the date so described in Section 2.2 below.

                  1.17.  "Hazardous  Materials"  shall  mean  and  refer  to any
substance or material now or hereafter defined or regulated by any Environmental
Law as "hazardous substance," "hazardous waste," hazardous material," "extremely
hazardous  waste,"  "designated  waste,"  "restricted  hazardous  waste," "toxic
substance," or similar term. As used herein, the term "Hazardous Materials" also
means and includes any substance or material: (1) which is explosive, corrosive,
infectious, radioactive,  carcinogenic, mutagenic, or otherwise hazardous and is
regulated by any appropriate  governmental authority as a hazardous material; or
(2)  which  is or  contains  oil,  gasoline,  diesel  fuel  or  other  petroleum
hydrocarbons;  or (3) which is or contains polychlorinated biphenyls,  asbestos,
urea formaldehyde foam insulation,  radioactive materials; or (4) which is radon
gas.  The  term  "Hazardous  Substances"  may  include  without  limitation  raw
materials, building components, wastes, and the products of any manufacturing or
other activities on the Project.

                  1.18. "Laws" shall mean all present and future Laws, statutes,
ordinances, resolutions, regulations, codes, proclamations, orders or decrees of
any municipal,  county,  state or federal  government or other  governmental  or
regulatory  authority or special district with jurisdiction over the Project, or
any portion  thereof,  whether  currently in effect or adopted in the future and
whether or not in the contemplation of the parties hereto.

                  1.19.  "Lease" shall mean that certain "Lease Agreement (Phase
I)" by and between  Optionor,  as landlord,  Optionee,  as tenant,  of even date
herewith, which lease pertains to the Buildings to be constructed on the Phase I
Land.

                  1.20.  "Leasehold  Improvements  Agreement"  shall  mean  that
certain "Leasehold Improvements Agreement" between Optionor and Optionee of even
date herewith.

                  1.21.  "Option" shall mean and refer to the First Option,  the
Second Option and the Third Option,  without inherent specificity as to which of
them.  "Options"  shall  collectively  mean and refer to the First  Option,  the
Second Option and the Third Option.




                  1.22.  "Optionee"  shall  mean and  refer to Fair,  Isaac  and
Company, Inc., a Delaware corporation, and its successors and assigns.

                  1.23.  "Optionor"  shall mean and refer to  Village  Builders,
L.P., a California limited partnership, and its successors and assigns.

                  1.24.  "Parking  Easement  Agreement"  shall have the  meaning
ascribed to that term in the Leasehold Improvements Agreement.

                  1.25.  "Permitted  Exceptions"  shall mean and  refer:  (i) if
Optionee is  purchasing  the PG&E Property  pursuant to a valid  exercise of the
First  Option,  to the First Option  Permitted  Exceptions;  (ii) if Optionee is
purchasing  the Phase I Land pursuant to a valid  exercise of the Second Option,
to the Second Option Permitted  Exceptions;  or, (iii) if Optionee is purchasing
the Phase I Land pursuant to a valid exercise of the Third Option,  to the Third
Option Permitted Exceptions.

                  1.26.  "PG&E Option  Property"  shall mean and refer to all of
the following:  (i) the PG&E Property;  and (ii) the rights, if any, of Optionor
in all plans,  drawings,  maps,  reports,  studies,  designs,  computer data and
similar  documents  for the  development  of the PG&E  Property.  All  rights of
Optionor in all such  materials  for the  development  of the PG&E  Property are
subject to any rights and  interests  in such  materials  held by the persons or
firms which produced them;  provided,  however,  Optionor shall use commercially
reasonable  efforts to obtain from all such  persons  and firms their  agreement
that the rights of  Optionor;  if any,  may be  assigned  to Optionee as part of
Optionee's purchase of the PG&E Option Property.

                  1.27.  "PG&E  Property"  shall mean that certain real property
owned  by PG&E as of the date of this  Option  Agreement  and more  particularly
described  in  Exhibit  D. The  parties  acknowledge  and  agree  that the legal
description  of the PG&E  Property  attached  hereto as Exhibit D is intended to
describe the real property depicted as the "West Parcel" and "Central Parcel" on
that  certain  Site Plan of the Fair  Isaac  Office  Park,  prepared  by Backen,
Arrigoni & Ross,  Inc., last revised on November 10, 1997 (sheet no. A1.01) (the
"Site  Plan").  The  parties  further  acknowledge  and  agree  that  the  legal
description of the PG&E Property may need to be revised on or before the Closing
Date in order to consummate the transactions  contemplated  herein and cause the
Title Company to insure the same, and neither party shall unreasonably  withhold
or delay its consent  thereto.  Furthermore,  neither party shall  withhold such
consent  if  it  obtains  a  title  policy   endorsement  or  other   reasonably
satisfactory  evidence  that the revised  legal  description  describes the land
which is depicted on the Site Plan described above.

                  1.28.  "Phase I Land"  shall  mean  that  portion  of the PG&E
Property  described  in Exhibit A. The  parties  acknowledge  and agree that the
legal  description of the Phase I Land attached  hereto as Exhibit A is intended
to describe the real  property  depicted as the "Phase I Land" on the Site Plan.
The parties  further  acknowledge  and agree that the legal  description  of the
Phase I Land may need to be revised on or before  the  Closing  Date in order to
consummate the transactions  contemplated  herein and cause the Title Company to
insure the same,  and  neither  party shall  unreasonably  withhold or delay its
consent  thereto.  Furthermore,  neither party shall withhold such consent if it
obtains a title policy  endorsement or other  reasonably  satisfactory  evidence
that the revised legal  description  describes the land which is depicted on the
Site Plan described above.

                  1.29. "Phase I Option Property" shall mean and refer to all of
the following: (i) the Phase I Land; and (ii) the rights, if any, of Optionor in
all plans, drawings, maps, reports,  studies, designs, computer data and similar
documents for the development of the Phase I Land. All rights of Optionor in all
such materials for the development of the Phase I Land are subject to 





any rights and  interests in such  materials  held by the persons or firms which
produced them;  provided,  however,  Optionor shall use commercially  reasonable
efforts to obtain  from all such  persons  and firms  their  agreement  that the
rights of Optionor,  if any,  may be assigned to Optionee as part of  Optionee's
purchase of the Phase I Option Property.

                  1.30.  "Phase I Project Cost" shall have the meaning  ascribed
to that term in the Leasehold Improvements Agreement.

                  1.31.  "Phase  II"  shall  mean  the  Phase  II  Land  and the
improvements which may hereafter be constructed on the Phase II Land.

                  1.32. "Phase II Current Costs" shall have the meaning ascribed
to that term in the Leasehold Improvements Agreement.

                  1.33. "Phase II Land" shall mean those certain parcels of real
property  described  in Exhibit B. The  parties  acknowledge  and agree that the
legal  description of the Phase II Land attached hereto as Exhibit B is intended
to describe the real property  depicted as the "Phase II Land" on the Site Plan.
The parties  further  acknowledge  and agree that the legal  description  of the
Phase II Land may need to be revised on or before the  Closing  Date in order to
consummate the transactions  contemplated  herein and cause the Title Company to
insure the same,  and  neither  party shall  unreasonably  withhold or delay its
consent  thereto.  Furthermore,  neither party shall withhold such consent if it
obtains a title policy  endorsement or other  reasonably  satisfactory  evidence
that the revised legal  description  describes the land which is depicted on the
Site Plan described above.

                  1.34.  "Phase II Purchase  Agreement"  shall mean that certain
"Purchase Agreement" between Village Builders, L.P., and Fair Isaac and Company,
Inc. of even date herewith by which Optionor agrees to sell, and Optionee agrees
to  purchase,  Phase II  (unless  Optionee  acquires  the PG&E  Option  Property
pursuant to the First Option).

                  1.35.  "Project" shall mean the Phase I Land and the Buildings
and all other  improvements to be constructed  thereon pursuant to the Leasehold
Improvements Agreement or which are hereafter constructed thereon by Optionor or
Optionee in  accordance  with the  provisions  of this Option  Agreement  or the
Leasehold Improvements Agreement.

                  1.36.  "Purchase  Price" shall mean and refer: (i) if Optionee
is  purchasing  the PG&E  Property  pursuant  to a valid  exercise  of the First
Option,  the First Option  Purchase  Price;  (ii) if Optionee is purchasing  the
Phase I Land  pursuant  to a valid  exercise  of the Second  Option,  the Second
Option  Purchase  Price;  or, (iii) if Optionee is  purchasing  the Phase I Land
pursuant to a valid  exercise of the Third  Option,  the Third  Option  Purchase
Price.

                  1.37.  "Second  Option"  shall mean and refer to the option to
purchase the Phase I Option Property granted by Optionor to Optionee pursuant to
Section 3.

                  1.38.  "Second  Option  Permitted  Exceptions"  shall mean and
refer to those liens, encumbrances, defects or other matters pertaining to title
which are referred to in Section 3.11.

                  1.39.  "Second Option  Purchase Price" shall mean the purchase
price for the Phase I Option  Property if the Second Option is duly exercised by
Optionor, as such purchase price is determined in accordance with the provisions
of Section 3.5.

                  1.40.  "Second  Option  Term  Expiration  Date" shall mean and
refer to the date so described in Section 3.2 below.





                  1.41.  "Site and Shell  Improvements"  shall have the  meaning
ascribed to that term in the Leasehold Improvements Agreement.

                  1.42. "Substantial Completion", as it pertains to any Building
on  the  Phase  I  Land,  shall  be as  defined  in the  Leasehold  Improvements
Agreement.

                  1.43.  "Synthetic  Lease Lessor" shall mean (i) those entities
identified by Optionee in its October 23, 1997 letter to Optionor,  and (ii) any
other entity to which Optionee  conveys the PG&E Option Property (or any portion
thereof,  with the obligation to lease the PG&E Option Property (or such portion
thereof)  back in a Synthetic  Lease  Transaction,  so long as such other entity
(and any entity which  directly or  indirectly  controls such other entity) does
not conduct as its primary business the acquisition, development or ownership of
real property assets.

                  1.44.  "Synthetic Lease  Transaction" shall mean a transaction
whereby  Optionee  conveys or causes the conveyance of the PG&E Option  Property
(or any portion thereof) to a Synthetic Lease Lessor from which Optionee (or its
affiliate)  leases back the PG&E Option Property (or such portion  thereof) from
such Synthetic Lease Lessor pursuant to a lease which would be categorized under
Generally Accepted Accounting Principles as an operating lease and which has the
following  characteristics:  (i) the initial term of such lease is less than ten
(10) years;  and, (ii) at the  expiration of the term of such lease,  subject to
any rights of the tenant to extend  the term of the lease,  the tenant  would be
required,  at its sole  election  made not more than two (2) years  prior to the
expiration of the term of the lease, either to repurchase the property so leased
and the  improvements  thereon for the Synthetic Lease Lessor's then outstanding
loan balance or,  acting as the  Synthetic  Lease  Lessor's  agent,  to sell the
property  which is the subject of the lease to a third party and to guarantee to
the Synthetic Lease Lessor any deficiency  between the proceeds of such sale and
the Synthetic Lease Lessor's then outstanding  loan balance,  up to a stipulated
amount of deficiency.

                  1.45.  "Take-Out Financing" shall have the meaning ascribed to
that term in the Leasehold Improvements Agreement.


                  1.46.  "Taking"  shall  mean the  exercise  by a  governmental
authority  of the power of eminent  domain or the  conveyance  of the Project or
Phase II or any  portion  thereof  to, or at the  direction  of, a  governmental
authority  which has the power of  eminent  domain and which has  threatened  to
exercise such power if such a conveyance were not made.

                  1.47. "Tenant Improvements" shall have the meaning ascribed to
that term in the Leasehold Improvements Agreement.

                  1.48.  "Third  Option"  shall  mean and refer to the option to
purchase the Phase I Option Property granted by Optionor to Optionee pursuant to
Section 4.

                  1.49. "Third Option Permitted Exceptions" shall mean and refer
to those liens, encumbrances, defects or other matters pertaining to title which
are referred to in Section 4.10.

                  1.50.  "Third Option  Purchase  Price" shall mean the purchase
price for the Phase I Option  Property if the Third Option is duly  exercised by
Optionor, as such purchase price is determined in accordance with the provisions
of Section 4.5.

                  1.51. "Third Option Term Expiration Date" shall mean and refer
to the date so described in Section 4.2 below.



                  1.52.  "Title  Company" shall mean and refer to First American
Title Company of Marin, San Rafael, California.


         2.       FIRST OPTION.

                  2.1. Grant of First Option. Optionor hereby grants to Optionee
an option and right (the "First Option") to purchase the PG&E Option Property at
the price and on both the terms and  conditions  set forth in this Section 2 and
the terms and  conditions  set forth in the  remainder of this Option  Agreement
(other than in Sections 3 and 4, the provisions of which shall not be applicable
to the First Option herein granted).

                  2.2.  Term of First  Option.  The  First  Option  and the term
thereof shall commence on the date hereof,  and shall terminate on the date (the
"First  Option Term  Expiration  Date")  which is the later to occur of: (i) the
fifth (5th) day following both the execution of the Development Agreement by the
City and the approval by the California  Public  Utilities  Commission of PG&E's
Application  to Sell Two  Parcels of Vacant  Land  (Application  No. 97 10 003),
filed on  October  1, 1997 as such  application  may  hereafter  be  amended  or
superseded by PG&E (the "Application"); or, (ii) February 2, 1998. The foregoing
notwithstanding,  in the event that, for any reason, a Development  Agreement is
not  executed  by the City on or before May 1, 1998,  then the First Term Option
Expiration  Date shall be May 15,  1998.  Optionee  also shall have the right to
exercise  the  First  Option in such  other  circumstances  as are  specifically
provided  in this  Option  Agreement,  the  Lease,  the  Leasehold  Improvements
Agreement  or the Phase II  Purchase  Agreement.  Each of  Optionor  or Optionee
agrees that it shall not request any delay in the  execution of the  Development
Agreement or the approval of the Application.

                  2.3. Method of Exercise of First Option.  The First Option may
be  exercised  at any time  between  the date  hereof and 5:00 p.m. on the First
Option Term  Expiration  Date. In order to exercise the First  Option,  Optionee
shall,  before 5:00 p.m. on the First Option Term  Expiration  Date,  deliver to
Optionor an  unconditional  and  irrevocable  written  notice of such  exercise.
Within five (5) days after that  exercise,  Optionor and Optionee  shall execute
standard  form escrow  instructions  which are provided by the Title Company and
which are in all respects consistent with the terms of this Option Agreement, at
which  time  Optionee  shall then  deposit  with  Escrow the sum of One  Million
Dollars   ($1,000,000.00)   in  cash  or  immediately   available   funds  as  a
non-refundable  deposit against the First Option  Purchase Price,  which deposit
shall be  applicable  to the First  Option  Purchase  Price for the PG&E  Option
Property.  The First Option may be exercised,  if at all, by Optionee only as to
the entirety of the PG&E Option  Property.  The First Option shall expire and be
of no force or effect at 5:00 p.m.  on the First  Option Term  Expiration  Date,
unless by that time Optionee has delivered to Optionor the notice referred to in
this Section 2.3.

                  2.4.  Effect  of  Exercise  of First  Option.  Subject  to the
provisions  of Sections 2.9 and 2.13,  upon  exercise of the First  Option:  (i)
Optionor  shall take all steps required under the Asset Sale Agreement to enable
Optionor to perform  its  obligations  to Optionee as and when  required by this
Agreement,  and (ii)  the  parties  shall  be  deemed  to have  entered  into an
agreement  to purchase  and sell the PG&E Option  Property on both the terms and
conditions set forth in this Section 2 and the terms and conditions set forth in
the  remainder  of this  Option  Agreement  (other than in Sections 3 and 4, the
provisions of which shall not be applicable to the First Option herein granted).
In  addition,  upon  exercise  of  the  First  Option,  the  parties  respective
obligations  under the Phase II Purchase  Agreement shall be suspended until the
earlier to occur of: (a) the date on which  Optionee  acquires  the PG&E  Option
Property  pursuant  to the First  Option (in which  event the Phase II  Purchase
Agreement  shall  automatically  terminate on such date and neither  party shall
have any  further  obligations  thereunder);  or (b) the date on which  Optionee
fails, for any reason, to 





acquire the PG&E Option Property pursuant to the First Option.

                  2.5.  Amount  of First  Option  Purchase  Price.  In the event
Optionee  exercises the First Option,  the First Option  Purchase  Price for the
PG&E Option Property shall be the aggregate of: (i) the Net Stipulated  Value of
the PG&E Property (as defined in the Leasehold Improvements Agreement); (ii) all
Aggregate Development Costs (as defined in the Leasehold Improvements Agreement)
(except to the extent that such Aggregate Development Costs have been or will be
paid by Optionee on or before the  Closing  Date) other than the Net  Stipulated
Value of the PG&E Property and other than the Agreed Take-Out  Financing Closing
Costs (as defined in the  Leasehold  Improvements  Agreement)  incurred or to be
incurred on or before the Closing Date (whether or not then paid) and ultimately
paid or to be paid by  Optionor;  (iii) any  amount  by which  the First  Option
Purchase Price is increased in accordance  with the provisions of Section 2.6.B;
(iv) all break-up  fees and other fees,  costs and charges,  of the kinds and to
the extent  described in Section 1.3, which are incurred and ultimately  paid or
to be paid by Optionor in connection with the  arrangements  for and termination
of any  agreements for the provision of funds for equity  capital,  Construction
Financing  and  Take-Out  Financing  for the  Project,  to the extent  that such
agreements are terminated in connection with the exercise of the First Option by
Optionee or in  connection  with the  termination  of the Lease (if the Lease is
terminated in connection with Optionee's  purchase of the PG&E Option Property);
provided,  however,  that the aggregate  amount of such fees,  costs and charges
will not exceed  the  Break-Up  Fee  Maximum  Amount;  and (v) the amount of the
Development  Management  Fee for the  period  commencing  on January 1, 1998 and
ending on the  Closing  Date  (which  Development  Management  Fee for the month
during which the Closing  Date occurs  shall be prorated  based on a thirty (30)
day month) to the extent such  Development  Management Fee is actually  incurred
(whether or not then paid) prior to the Closing Date and which is  ultimately to
be paid by Optionor.  The $30,000 limitation in the last sentence of Section 1.3
is intended to apply only to amounts actually paid or incurred prior to December
1, 1997. In addition,  if the provisions of Section 23 apply, then Optionee also
shall pay to Optionor the Contingent  Purchase Price in accordance  with Section
23.

                  2.6.  Agreement  of the  Parties as to First  Option  Purchase
Price.

                         A.  Commencing on the date that Optionee  exercises the
First  Option,  and  continuing  thereafter  for a period of fifteen  (15) days,
Optionee  and  Optionor  shall meet and confer as soon and as  frequently  as is
reasonably  possible  to  endeavor in good faith to agree upon the amount of the
First Option Purchase Price.  If the parties reach  agreement,  the First Option
Purchase Price shall be the amount to which the parties have agreed.

                         B. If the  parties are not able to so agree,  then,  by
5:00 p.m. on the last day of the fifteen  (15) day period  described  in Section
2.6.A,  each  party  shall  deliver  to the  other  party in  writing  its final
determination of the First Option Purchase Price. If the difference  between the
parties'  determinations  of the First Option Purchase Price exceeds One Hundred
Thousand  Dollars  ($100,000.00),  then the First Option Purchase Price shall be
established through  arbitration  conducted in accordance with the provisions of
Section 6 hereof, and the Closing Date shall be postponed without further act of
the parties  until the fifteenth  (15th) day following the final  issuance of an
award by the arbitrator. In the event that the Closing Date is so postponed, the
First Option  Purchase Price shall be increased by an amount equal to the amount
of  interest  which  would  have  accrued on that  portion  of the First  Option
Purchase Price which (i) is net of any payments  Optionor would have to pay PG&E
upon its purchase of the PG&E Option  Property under the terms of the Asset Sale
Agreement,  and  (ii)  was not the  subject  of  dispute  between  Optionor  and
Optionee, at a rate equal to the "prime," "index" or "reference" rate of Bank of
America NT&SA plus one hundred  (100) basis  points,  during the period from the
date upon which the Closing Date would have  occurred  but for the  postponement
under this  Section  2.6.B.  However,  if the  difference  between the  parties'
determinations  of the  First  Option  Purchase  Price is One  Hundred  Thousand




dollars ($100,000.00) or less, then the Closing Date shall not be postponed, and
on or before the Closing Date,  Optionee  shall deposit in Escrow in immediately
available funds an amount which,  when added to the deposit described in Section
2.3, shall equal the greater of the parties'  determinations of the First Option
Purchase Price. On the Closing Date,  Escrow shall close with an amount equal to
the lesser of the parties'  determinations  of the First Option  Purchase  Price
disbursed in accordance with this Option Agreement.  The difference  between the
parties'  determinations  of the First  Option  Purchase  Price shall be held in
Escrow after the Closing Date in an  interest-bearing  account pursuant to joint
escrow instructions  executed by Optionor,  Optionee and the Title Company on or
before  the  Closing  Date  until the  actual  First  Option  Purchase  Price is
established  through arbitration in accordance with Section 6 hereof. The amount
held in Escrow after the Closing Date and all accrued  interest thereon shall be
disbursed in accordance with the arbitrator's final award (and the parties shall
pay to each other any other amount specified in such final award).

                  2.7.  Payment  of  First  Option  Purchase  Price.  Except  as
otherwise  provided in Section 2.6.B,  the First Option  Purchase Price shall be
paid by  Optionee  to Optionor  in cash or  immediately  available  funds at the
closing of the Escrow.

                  2.8. Closing of the Escrow Following Exercise of First Option.
Following an effective  exercise by Optionee of the First Option, and subject to
the conditions in Section 9.6.A, the closing of the Escrow shall occur on a date
selected by Optionor by ten (10) days prior  written  notice to Optionee,  which
date shall be not less than thirty (30) nor more than fifty (50) days  following
the  receipt  by  Optionor  of the  notice of  exercise  of the First  Option by
Optionee, unless the Closing Date is postponed in accordance with the provisions
of Sections  2.6.B,  2.9 or 19..D.  Notwithstanding  the foregoing,  if Optionee
requests an earlier Closing Date, then Optionor shall promptly make such request
of PG&E under the Asset Sale Agreement,  and the parties shall use  commercially
reasonable  efforts  to close the  Escrow  on the date  requested  by  Optionee.
Optionor shall use commercially  reasonable efforts to cause PG&E to perform its
obligations under the Asset Sale Agreement on or before the Closing Date.

                  2.9.  Delays in  Closing  of the  Escrow.  In the  event  that
Optionor  is  delayed in closing  the  Escrow  for the  acquisition  of the PG&E
Property  from PG&E (or, if Optionor has made the election  described in Section
2.13,  there is a delay in the readiness of PG&E to close the  conveyance of the
PG&E Property to Optionee),  and such delay is caused in whole or in part by any
factor other than a default by Optionor in the  performance  of its  obligations
under the agreements between Optionor and PG&E pertaining to the purchase of the
PG&E  Property by Optionor,  then the Closing  Date shall be  postponed  without
further act of the parties to the date which is five (5) business days following
the closing of escrow for the acquisition of the PG&E Property from PG&E (or, if
applicable,  the readiness of PG&E to close the  conveyance of the PG&E Property
to  Optionee).  If the  Closing  Date has not  occurred  by June 1, 1998 for the
reasons  stated in this Section 2.9, then Optionee  shall have until the earlier
of the  acquisition  of PG&E Property by Optionee or July 1, 1998 to give notice
to Optionor terminating this Option Agreement and the Escrow,  without prejudice
to any rights  Optionee may then have, and without  terminating  the Lease,  the
Leasehold  Improvements  Agreement  or the Phase II Purchase  Agreement.  If the
Closing  Date has not  occurred  by July 1, 1999,  then this  Agreement  and the
Escrow shall  automatically  terminate,  without  prejudice to the rights either
party may then have.

                  2.10. Condition of First Option Title.

                        A. In the event  Optionee  exercises  the First  Option,
Optionor  shall  convey  title to the PG&E  Property  subject only to: (i) those
matters  listed as  exception  nos. 4, 6, 8, 9, 13, 14 and 15 of the  Exceptions
from  Coverage  set forth in  Schedule B - Section 2 of that  certain  pro forma
owner's policy of title  insurance,  prepared by the Title Company,  dated as of
August 8, 





1997 (Commitment No.  8-188141SB  Fourth Amended  Supplemental)  (the "Pro Forma
Policy"), and any matter which is or would be disclosed by an accurate survey of
the PG&E  Property;  (ii) any  matters  arising  from the acts or  omissions  of
Optionee; (iii) any lien, encumbrance or other matter consented to in writing by
Optionee;  (iv) the lien of  current,  non-delinquent  real  property  taxes and
assessments; (v) the Lease; (vi) the Leasehold Improvements Agreement; (vii) the
Development  Agreement;  (viii) the Parking Easement Agreement;  (ix) the Access
Agreement;  (x) the easements reserved in the PG&E Deed (as defined in the Phase
II Purchase  Agreement) to be recorded on or before the Closing  Date;  (xi) the
covenants and restrictions  set forth in the Encroachment  Agreement (as defined
in the Phase II  Purchase  Agreement)  to be  recorded  on or before the Closing
Date; (xii) the terms of the Environmental Agreement (as defined in the Phase II
Purchase  Agreement) to be recorded on or before the Closing Date;  and,  (xiii)
the Declaration.  Such matters are hereinafter  referred to as the "First Option
Permitted Exceptions". In the event that Optionor requests that Optionee consent
to the creation of any lien,  encumbrance,  reservation or dedication  affecting
the  title  to the PG&E  Property,  Optionee  shall  not  unreasonably  delay or
withhold  its  consent,  and  shall  only  withhold  its  consent  if the  lien,
encumbrance,  reservation or dedication: (i) would interfere with the use of the
PG&E Property for the purposes set forth in the Lease; or, (ii) if pertaining to
a lien securing the payment of money,  will not be paid and removed on or before
close of Escrow and such payment would not constitute or have constituted a part
of Aggregate Development Cost.

                        B. In the event that Optionor is unable to deliver title
to the PG&E  Property  to  Optionee  in the  condition  required  by this Option
Agreement,  Optionor  shall so notify  Optionee in writing,  and Optionee  shall
thereafter  notify  Optionor,  within five (5)  business  days of the receipt by
Optionee of such notice from  Optionor,  whether or not Optionee  objects to the
lien,  encumbrance,  defect or other  matter  which is not  consistent  with the
provisions of this Option Agreement regarding the condition of title to the PG&E
Property. If Optionee so objects by written notice to Optionor given within such
period,  then  Optionor  shall have a period of ten (10)  business days from the
receipt by Optionor of such notice of objection from Optionee in which to remove
the lien,  encumbrance,  defect or other matter to which  Optionee has objected.
Optionee  shall not object,  however,  unless the lien,  encumbrance,  defect or
other matter would  interfere with the use of the PG&E Property for the purposes
set forth in the Lease or pertains to a lien securing the payment of money which
will not be paid and removed on or before close of Escrow. If Optionor is unable
to remove such lien,  encumbrance,  defect or other  matter  within such period,
Optionee may (as its sole and exclusive  remedy,  unless the matter  objected to
was caused or created by the bad faith acts or omissions of Optionor)  terminate
this Option Agreement,  the Lease, the Leasehold  Improvements Agreement and the
Phase II Purchase Agreement (but not less than all of them) by written notice to
Optionor  given within ten (10) days of  expiration of the ten (10) business day
period during which Optionor could have caused the lien, encumbrance,  defect or
other matter to be removed from title.  In the event that  Optionee  does not so
terminate this Option Agreement, the Lease, the Leasehold Improvements Agreement
and the Phase II Purchase Agreement,  then Optionee shall conclusively be deemed
to have waived its objection to the lien,  encumbrance,  defect or other matter,
which shall then become a part of the Permitted Exceptions.



                  2.11.  LIQUIDATED  DAMAGES  FOR BREACH BY  OPTIONEE  FOLLOWING
EXERCISE OF FIRST  OPTION.  OPTIONOR AND OPTIONEE  HEREBY AGREE THAT THE DAMAGES
WHICH  WOULD BE  SUFFERED  BY  OPTIONOR  IN THE EVENT OF A DEFAULT  BY  OPTIONEE
HEREUNDER IN PURCHASING THE PG&E PROPERTY  FOLLOWING ANY EXERCISE BY OPTIONEE OF
THE FIRST OPTION  (EXCLUDING ANY ADDITIONAL  COSTS OF FINANCING AND CONSTRUCTION
(THE "ADDITIONAL  COSTS"),  AS REFERRED TO IN SECTION 2.12),  WOULD BE EXTREMELY
DIFFICULT  AND  IMPRACTICABLE  TO  ASCERTAIN,  AND THAT  THE SUM OF ONE  MILLION
DOLLARS  ($1,000,000.00)  (THE "FIRST OPTION LIQUIDATED DAMAGES") REPRESENTS THE
REASONABLE  ESTIMATE BY THE PARTIES OF THE AMOUNT OF THE DAMAGES  (EXCLUDING THE
ADDITIONAL  COSTS) THAT OPTIONOR  WOULD SUFFER BY REASON OF OPTIONEE'S  DEFAULT.
OPTIONEE AND OPTIONOR  UNDERSTAND  AND AGREE THAT OPTIONOR WILL HAVE CHANGED ITS
POSITION IN RELIANCE  UPON THE EXERCISE OF THE FIRST  OPTION BY  OPTIONEE,  THAT
OPTIONOR WILL INCUR SUBSTANTIAL LOSSES AS A RESULT OF SUCH DEFAULT, AND THAT THE
FIRST OPTION LIQUIDATED DAMAGES ARE A REASONABLE  LIQUIDATED DAMAGE AMOUNT UNDER
THE  EXISTING  CIRCUMSTANCES.  ACCORDINGLY,  IN THE EVENT  ESCROW DOES NOT CLOSE
BECAUSE OF A DEFAULT BY OPTIONEE HEREUNDER FOLLOWING THE EXERCISE BY OPTIONEE OF
THE  FIRST  OPTION,  OPTIONOR  SHALL BE  ENTITLED  TO RETAIN  THE  FIRST  OPTION
LIQUIDATED  DAMAGES AS LIQUIDATED  DAMAGES,  AND NOT AS A PENALTY OR FORFEITURE,
AND UPON RECEIPT OF SUCH AMOUNT BY OPTIONOR,  THE SAME SHALL BE OPTIONOR'S  SOLE
AND EXCLUSIVE REMEDY FOR OPTIONEE'S DEFAULT AT LAW OR IN EQUITY AND OPTIONEE AND
OPTIONOR SHALL BE RELIEVED OF ANY FURTHER  OBLIGATIONS  OR LIABILITY  HEREUNDER,
EXCEPT THAT OPTIONEE SHALL REMAIN OBLIGATED TO PAY THE ADDITIONAL COSTS REQUIRED
PURSUANT TO SECTION 2.12, IT BEING AGREED THAT THE  LIQUIDATED  DAMAGES  PAYABLE
PURSUANT TO THIS SECTION 2.11 ARE NOT  APPLICABLE TO SUCH  ADDITIONAL  COSTS AND
THAT THE  COVENANTS  OF  OPTIONEE  PURSUANT  TO SECTION  2.12 SHALL  SURVIVE THE
TERMINATION OF THIS  AGREEMENT.  OPTIONEE AND OPTIONOR INTEND AND AGREE THAT THE
TERMS OF THIS SECTION 2.11 COMPLY WITH THE REQUIREMENTS OF CALIFORNIA CIVIL CODE
SECTIONS 1671 AND 1677. OPTIONEE AND OPTIONOR SHALL SIGN BELOW THIS SECTION 2.11
INDICATING THEIR AGREEMENT TO THE LIQUIDATED DAMAGE CLAUSE HEREIN CONTAINED.

                                    OPTIONOR:

                                    Village Builders, L.P.,
                                    a California limited partnership

                                    By   VPI, Inc., a California corporation, 
                                         its General Partner

                                         By
                                           -------------------------------------
                                              
                                           Its
                                              ----------------------------------

                                    OPTIONEE:

                                    Fair, Isaac and Company, Inc.,
                                    a Delaware corporation





                                         By
                                           -------------------------------------
                                              
                                           Its
                                              ----------------------------------


                  2.12.  Additional Costs. Tenant hereby acknowledges and agrees
that an  exercise  of the  First  Option  and a  subsequent  default  by  Tenant
hereunder  may  result  in a delay in the  construction  of the  Site and  Shell
Improvements.  In the event of a default by Optionee hereunder in purchasing the
PG&E Option  Property  following  any exercise by Optionee of the First  Option,
then: (i) Optionor may elect, by written notice to Optionee,  to redesignate the
Designated  Treasury Date in  accordance  with the  procedures  set forth in the
Leasehold  Improvements  Agreement;  and, (ii) any  increased  costs of whatever
nature  incurred by Optionor in  connection  with such default or in  connection
with any delay in the  construction  of the Site and Shell  Improvements  or the
Tenant  Improvements  occurring  in  connection  with,  or resulting  from,  the
exercise of the First Option or such default (including, without limitation, all
costs actually  incurred by Optionor in connection with providing equity or debt
capital for the Project and the  improvements  to be constructed on the Phase II
Land at the same time as the  construction  of the Project) shall be paid in the
same manner as Phase II Current Costs. In no event shall Optionor have the right
to terminate  the Lease,  the Leasehold  Improvements  Agreement or the Phase II
Purchase  Agreement  following a default by Optionee hereunder in purchasing the
PG&E Option Property following the exercise by Optionee of the First Option. The
rights of Optionor  set forth in this  Section 2.12 are intended by Optionor and
Optionee to supersede any  inconsistent  provisions of the Lease,  the Leasehold
Improvements  Agreement,  the Phase II Purchase Agreement or any other agreement
between Optionor and Optionee.

                  2.13.   Assignment  of  Asset  Sale  Agreement.   If  Optionee
exercises  the First  Option,  and provided  that  Optionor has obtained  PG&E's
written consent,  Optionor may elect, in its sole  discretion,  by delivering to
Optionee  written notice (together with a copy of PG&E's written consent) at any
time before the Closing  Date,  in lieu of the  conveyance  of title to the PG&E
Property to Optionee  at the  closing of the Escrow,  to assign to Optionee  all
right, title and interest which Optionor then has under the existing  agreements
between  Optionor and PG&E for the acquisition of the PG&E Property by Optionor.
If  Optionor  so elects,  Optionor  and  Optionee  shall  execute and deliver an
Assignment  of Asset Sale  Agreement,  in the form attached as Exhibit E, at the
closing of the Escrow and Optionee shall close the acquisition  transaction with
PG&E on the Closing Date.

                  2.14.  Right to Redesignate  Designated  Treasury Rate. In the
event of a default by Optionee  hereunder in purchasing the PG&E Option Property
following  any exercise by Optionee of the First  Option,  Optionor may elect to
redesignate the Designated  Treasury Rate in accordance with Section 19.2.(C) of
the Leasehold Improvements Agreement.


         3.       SECOND OPTION.

                  3.1.  Grant  of  Second  Option.  Optionor  hereby  grants  to
Optionee  an option and right (the  "Second  Option")  to  purchase  the Phase I
Option  Property at the price and on both the terms and  conditions set forth in
this Section 3 and the terms and  conditions  set forth in the remainder of this
Option  Agreement (other than in Sections 2 and 4, the provisions of which shall
not  be  applicable  to  the  Second  Option  herein  granted).  Subject  to the
provisions of Section 21, Optionor shall, however, be obligated to construct the
improvements  required to be constructed  by 





Optionor pursuant to the Leasehold  Improvements  Agreement prior to the closing
of the Escrow,  as more fully  provided in Section  3.8,  and such  improvements
shall be deemed to be a part of the Phase I Option  Property upon the completion
of such construction.

                  3.2.  Term  of Second  Option.  The Second Option and the term
thereof shall commence on the date hereof,  and shall terminate on the date (the
"Second  Option Term  Expiration  Date") which is the later to occur of: (i) the
fifth (5th) day following the execution of the Development Agreement by the City
of San Rafael; or, (ii) February 2, 1998. The foregoing notwithstanding,  in the
event that, for any reason, a Development  Agreement is not executed by the City
of San Rafael on or before May 1, 1998,  then the Second Term Option  Expiration
Date  shall  be May  15,  1998.  Optionee  shall  have  the  right,  but not the
obligation,  to exercise the Second  Option at or before 5:00 p.m. on the Second
Option Term Expiration Date.

                  3.3. Method of Exercise of Second Option. In order to exercise
the Second Option,  Optionee  shall,  before 5:00 p.m. on the Second Option Term
Expiration Date,  deliver to Optionor an unconditional  and irrevocable  written
notice of such exercise. Within five (5) days after that exercise,  Optionor and
Optionee shall execute standard form escrow  instructions  which are provided by
the Title  Company and which are in all  respects  consistent  with the terms of
this Option Agreement,  at which time Optionee shall then deposit the sum of Two
Million Seven Hundred  Thousand Dollars  ($2,700,000.00)  in cash or immediately
available funds as a  non-refundable  deposit against the Second Option Purchase
Price, which deposit shall be applicable to the Second Option Purchase Price for
the Phase I Option  Property.  Such deposit shall be made to the Escrow,  or, if
required by the lender of the  Construction  Financing,  to an  interest-bearing
account with such lender to be held as a non-refundable deposit hereunder, which
may secure,  in whole or in part, the obligations of Optionee under the buy-sell
agreement  referred  to in Section  3.9 as well as the  obligations  of Optionee
pursuant to this Option  Agreement.  The Second Option may be  exercised,  if at
all, by Optionee  only as to the  entirety of the Phase I Option  Property.  The
Second  Option  shall  expire  and be of no force or effect at 5:00 p.m.  on the
Second Option Term Expiration  Date,  unless by that time Optionee has delivered
to Optionor the notice referred to in this Section 3.3.

                  3.4. Effect of Exercise of Second Option. Upon exercise of the
Second Option,  the parties shall be deemed to have entered into an agreement to
purchase and sell the Phase I Option  Property on both the terms and  conditions
set  forth in this  Section  3 and the  terms  and  conditions  set forth in the
remainder  of this  Option  Agreement  (other  than  in  Sections  2 and 4,  the
provisions  of  which  shall  not be  applicable  to the  Second  Option  herein
granted).  The  exercise of the Second  Option  shall not,  however,  affect the
continuance in force of the Lease, the Leasehold  Improvements Agreement and the
Phase II Purchase Agreement.

                  3.5.  Amount  of Second Option  Purchase  Price.  In the event
Optionee  exercises the Second Option,  the Second Option Purchase Price for the
Phase I Option  Property  shall be the aggregate of: (i) one hundred ten percent
(110%) of the difference of (A) the Net  Stipulated  Value of the PG&E Property,
less (B) the portion of such Net  Stipulated  Value of the PG&E Property paid as
part  of the  purchase  price  paid by  Optionee  for the  Phase  II Land  (such
difference  of the amount  described in clause (A) less the amount  described in
clause (B) is  hereinafter  referred  to as the "Phase I Land  Cost");  (ii) one
hundred  ten percent  (110%) of all Phase I Project  Cost other than the Phase I
Land Cost,  incurred or to be incurred on or before the Closing Date (whether or
not then paid) and paid or to be ultimately paid by Optionor;  (iii) ten percent
(10%) of any cost which  would have been a Phase I Project  Cost but was paid by
Optionee; (iv) any amount by which the Second Option Purchase Price is increased
in  accordance  with the  provisions of  Section.3.6;  (v) all break-up fees and
other  fees,  costs and  charges  of all kinds and to the  extent  described  in
Section 1.3, which are incurred and ultimately paid or to be paid by Optionor in
connection with the  arrangements  for and termination of any agreements for the
provision  of funds 





for equity  capital,  Construction  Financing  and  Take-Out  Financing  for the
Project,  to the extent that such  agreements are terminated in connection  with
the  exercise  of the  Second  Option  by  Optionee  or in  connection  with the
termination  of the  Lease  (if the  Lease  is  terminated  in  connection  with
Optionee's purchase of the Phase I Option Property); provided, however, that the
aggregate  amount of such fees,  costs and charges  will not exceed the Break-Up
Fee Maximum Amount;  and (vi) the amount of the  Development  Management Fee for
the period  commencing  on January 1, 1998 and ending on the earlier to occur of
(A) the Substantial Completion of the improvements to be constructed pursuant to
the Leasehold  Improvements Agreement or (B) the Closing Date. In the event that
Optionor  elects to have the  closing of the  Escrow  occur more than sixty (60)
days  following  the Last Rent  Commencement  Date,  then the Agreed  Spread for
Take-Out Financing (as defined in the Leasehold Improvements Agreement) shall be
reduced to four hundred fifty (450) basis  points,  unless there is a default by
Optionee  under this Option  Agreement  or the Lease,  in which event the Agreed
Spread  for  Take-Out  Financing  shall  retroactively  be as  provided  in  the
Leasehold  Improvements  Agreement,  and any resulting arrearage in Monthly Base
Rent shall immediately be paid by Optionee to Optionor.

                  3.6.  Agreement  of the Parties as to Second  Option  Purchase
Price. Following the Last Rent Commencement Date and continuing thereafter for a
period of fifteen (15) days,  Optionee  and Optionor  shall meet and endeavor to
agree upon the Second Option Purchase Price. If the parties reach agreement, the
Second  Option  Purchase  Price  shall be the amount to which the  parties  have
agreed. If the parties are not able to so agree, then the Second Option Purchase
Price shall be established through arbitration  conducted in accordance with the
provisions of Section 6 hereof,  and the Closing Date shall be postponed without
further  act of the  parties  until the tenth  (10th)  day  following  the final
issuance of an award by the  arbitrators.  In the event that the Closing Date is
so postponed,  the Second Option  Purchase Price shall be increased by an amount
equal to the amount of interest  which would have accrued on that portion of the
Second Option Purchase Price which (i) is net of any payment Optionor would have
to pay PG&E upon its purchase of the Phase I Option  Property under the terms of
the Asset Sale  Agreement,  and (ii) was not the subject of a good faith dispute
between  Optionor  and  Optionee,  at a rate  equal to the  "prime",  "index" or
"reference"  rate of Bank of America  NT&SA plus one hundred (100) basis points,
during the period from the date upon which the Closing Date would have  occurred
but for the postponement under this Section 3.6.

                  3.7.  Payment  of Second  Option  Purchase  Price.  The Second
Option  Purchase  Price  shall  be  paid  by  Optionee  to  Optionor  in cash or
immediately available funds at the closing of the Escrow.

                  3.8.  Construction of Improvements. In the event that Optionee
duly  exercises  the Second  Option,  the Lease and the  Leasehold  Improvements
Agreement shall continue in effect until the closing of the Escrow, and Optionor
shall  cause  the  Site  and  Shell  Improvements  and the  Tenant  Improvements
described  in  the  Leasehold   Improvements  Agreement  to  be  constructed  in
accordance with the terms of the Leasehold Improvements Agreement.

                  3.9.  Execution of Buy-Sell  Agreement  Following  Exercise of
Second Option.  Promptly after the receipt by Optionee of a written request from
Optionor, Optionee shall review and negotiate in good faith a buy-sell agreement
with the  lender  of the  Construction  Financing,  whereby  Optionee  agrees to
purchase the loan  representing the Construction  Financing from the lender upon
the  completion  of the  construction  of the  improvements  which  Optionor  is
required to construct  under the  Leasehold  Improvements  Agreement for a price
equal to the aggregate of the outstanding  principal balance and all accrued and
unpaid interest  charges,  fees and penalties due under such loan. Such buy-sell
agreement  shall be in such form as may reasonably be acceptable to Optionee and
such lender of the Construction Financing, provided that such buy-sell agreement
shall not obligate such lender to complete such construction.




                  3.10.  Closing  of the  Escrow  Following  Exercise  of Second
Option.  Following an effective  exercise by Optionee of the Second Option,  the
closing of the Escrow  shall  occur on a date  selected  by  Optionor by written
notice  to  Optionee  given at least  ninety  (90)  days  before  the Last  Rent
Commencement  Date,  which  date shall be not less than sixty (60) days nor more
than eighteen (18) months following the Last Rent Commencement  Date, unless the
Closing Date is postponed in accordance with the provisions of this Section 3.10
or  Sections  3.6 or 19..D.  In the event  that  Optionee  desires  to delay the
Closing Date from the date  specified by Optionor,  Optionee may,  within thirty
(30) days of its receipt of the notice from Optionor,  give to Optionor  written
notice of another date which is not more than sixty (60) days following the date
selected by Optionor,  and the Closing Date shall  thereupon be postponed to the
date specified in the notice from Optionee to Optionor, unless Optionor notifies
Optionee that the term of the  Construction  Financing would expire prior to the
date  selected by  Optionee,  in which event the Closing Date shall be the fifth
(5th) day  preceding  the date upon which the  Construction  Financing  would so
expire.

                 3.11.  Condition of Second Option Title.

                         A. In the event  Optionee  exercises the Second Option,
Optionor  shall  convey  title to the Phase I Land  subject  only to:  (i) those
matters  listed as  exception  nos. 4, 6, 8, 9, 13, 14 and 15 of the  Exceptions
from  Coverage  set forth in Schedule  B--Section 2 of the Pro Forma Policy (but
only to the extent  that the same affect all or any portion of the Phase I Land)
and any matter which is or would be disclosed by an accurate survey of the Phase
I Land; (ii) any matters  arising from the acts or omissions of Optionee;  (iii)
any lien, encumbrance or other matter consented to in writing by Optionee;  (iv)
the lien of current, non-delinquent real property taxes and assessments; (v) the
Lease;  (vi) and the Leasehold  Improvements  Agreement;  (vii) the  Development
Agreement; (viii) the Parking Easement Agreement; (ix) the Access Agreement; (x)
the easements  reserved in the PG&E Deed to be recorded on or before the Closing
Date;  (xi)  the  covenants  and  restrictions  set  forth  in the  Encroachment
Agreement to be recorded on or before the Closing  Date;  (xii) the terms of the
Environmental  Agreement  to be  recorded on or before the  Closing  Date;  and,
(xiii) the Declaration.  Such matters are hereinafter referred to as the "Second
Option Permitted Exceptions".  In the event that Optionor requests that Optionee
consent to the  creation of any lien,  encumbrance,  reservation  or  dedication
affecting the title to the Phase I Land,  Optionee shall not unreasonably  delay
or  withhold  its  consent,  and shall only  withhold  its  consent if the lien,
encumbrance,  reservation or dedication: (i) would interfere with the use of the
Phase I Land for the purposes set forth in the Lease;  or, (ii) if pertaining to
a lien  securing  the payment of money will not be paid and removed on or before
close of Escrow,  and such payment would not  constitute  or have  constituted a
part of Aggregate Development Cost.

                         B. In the event  that  Optionor  is  unable to  deliver
title to the Phase I Land to Optionee in the  condition  required by this Option
Agreement,  Optionor  shall so notify  Optionee  in writing and  Optionee  shall
notify  Optionor,  within five (5)  business  days of the receipt by Optionee of
such  notice  from  Optionor,  whether  or not  Optionee  objects  to the  lien,
encumbrance,  defect or other matter which is not consistent with the provisions
of this Option  Agreement  regarding the condition of title to the Phase I Land.
If Optionee so objects by written  notice to Optionor  given within such period,
then Optionor  shall have a period of ten (10) business days from the receipt by
Optionor of such notice of objection  from Optionee in which to remove the lien,
encumbrance,  defect or other matter to which  Optionee has  objected.  Optionee
shall not object, however, unless the lien, encumbrance,  defect or other matter
would  interfere  with the use of the Phase I Land for the purposes set forth in
the Lease or pertains to a lien  securing the payment of money which will not be
paid and removed on or before  close of Escrow.  If Optionor is unable to remove
such lien, encumbrance,  defect or other matter within such period, Optionee may
(as its sole and exclusive  remedy,  unless the matter objected to was caused by
the bad faith acts or  





omissions of Optionor)  terminate this Option  Agreement (but not the Lease, the
Leasehold  Improvements Agreement or the Phase II Purchase Agreement) by written
notice to  Optionor  given  within ten (10) days of  expiration  of the ten (10)
business  day  period  during  which   Optionor  could  have  caused  the  lien,
encumbrance,  defect or other matter to be removed from title. In the event that
Optionee does not so terminate this Option  Agreement,  the Lease, the Leasehold
Improvements Agreement and the Phase II Purchase Agreement,  then Optionee shall
conclusively  be deemed to have waived its  objection to the lien,  encumbrance,
defect  or  other  matter,  which  shall  then  become  a part of the  Permitted
Exceptions.

                  3.12.  LIQUIDATED  DAMAGES  FOR BREACH BY  OPTIONEE  FOLLOWING
EXERCISE OF SECOND OPTION.  OPTIONOR AND OPTIONEE  HEREBY AGREE THAT THE DAMAGES
WHICH  WOULD BE  SUFFERED  BY  OPTIONOR  IN THE EVENT OF A DEFAULT  BY  OPTIONEE
HEREUNDER IN PURCHASING  THE PHASE I LAND  FOLLOWING ANY EXERCISE BY OPTIONEE OF
THE SECOND OPTION WOULD BE EXTREMELY  DIFFICULT AND  IMPRACTICABLE TO ASCERTAIN,
AND THAT THE SUM OF TWO MILLION SEVEN HUNDRED THOUSAND  DOLLARS  ($2,700,000.00)
REPRESENTS THE  REASONABLE  ESTIMATE BY THE PARTIES OF THE AMOUNT OF THE DAMAGES
THAT  OPTIONOR  WOULD  SUFFER BY  REASON OF  OPTIONEE'S  DEFAULT.  OPTIONEE  AND
OPTIONOR UNDERSTAND AND AGREE THAT THE VALUE OF PROPERTY IS SUBJECT TO CHANGE BY
REASON OF  GENERAL  ECONOMIC  CONDITIONS,  THE LOCAL  REAL  ESTATE  MARKET,  THE
AVAILABILITY  OF MORTGAGE  FINANCING,  AND OTHER  FACTORS  BEYOND THE CONTROL OF
OPTIONOR AND OPTIONEE,  AND THAT THE SUM OF TWO MILLION  SEVEN HUNDRED  THOUSAND
DOLLARS  ($2,700,000.00)  IS A  REASONABLE  LIQUIDATED  DAMAGE  AMOUNT UNDER THE
EXISTING CIRCUMSTANCES.  ACCORDINGLY, IN THE EVENT ESCROW DOES NOT CLOSE BECAUSE
OF A DEFAULT BY OPTIONEE  HEREUNDER  FOLLOWING  THE  EXERCISE BY OPTIONEE OF THE
SECOND OPTION, OPTIONOR SHALL BE ENTITLED TO RETAIN THE SUM OF TWO MILLION SEVEN
HUNDRED THOUSAND DOLLARS  ($2,700,000.00)  AS LIQUIDATED  DAMAGES,  AND NOT AS A
PENALTY OR FORFEITURE,  AS OPTIONOR'S  SOLE AND EXCLUSIVE  REMEDY FOR OPTIONEE'S
DEFAULT  AT LAW OR IN  EQUITY,  AND UPON  RECEIPT  OF SUCH  AMOUNT BY  OPTIONOR,
OPTIONEE AND OPTIONOR SHALL BE RELIEVED OF ANY FURTHER  OBLIGATIONS OR LIABILITY
HEREUNDER. OPTIONEE AND OPTIONOR INTEND AND AGREE THAT THE TERMS OF THIS SECTION
3.12 COMPLY WITH THE  REQUIREMENTS  OF  CALIFORNIA  CIVIL CODE SECTIONS 1671 AND
1677.  OPTIONEE AND OPTIONOR SHALL SIGN BELOW THIS SECTION 3.12 INDICATING THEIR
AGREEMENT TO THE LIQUIDATED DAMAGE CLAUSE HEREIN CONTAINED.

                                    OPTIONOR:

                                    Village Builders, L.P.,
                                    a California limited partnership

                                    By   VPI, Inc., a California corporation, 
                                         its General Partner

                                         By
                                           -------------------------------------
                                              
                                           Its
                                              ----------------------------------



                                    OPTIONEE:




                                    Fair, Isaac and Company, Inc.,
                                    a Delaware corporation


                                    By
                                       -----------------------------------------
                                              
                                           Its
                                              ----------------------------------


                  3.13.  Right to Redesignate  Designated  Treasury Date. In the
event of a  default  by  Optionee  hereunder  in  purchasing  the Phase I Option
Property  following any exercise by Optionee of the Second Option,  Optionor may
elect to  redesignate  the Designated  Treasury Date in accordance  with Section
19.2.(C) of the Leasehold Improvements Agreement.


                  4. THIRD OPTION.

                  4.1. Grant of Third Option. Optionor hereby grants to Optionee
an option and right (the "Third Option") to purchase the Phase I Option Property
at the price and on both the terms and  conditions  set forth in this  Section 4
and the terms and conditions set forth in the remainder of this Option Agreement
(other than in Sections 2 and 3, the provisions of which shall not be applicable
to the Third Option herein  granted).  Subject to the  provisions of Section 21,
Optionor shall,  however, be obligated to construct the improvements required to
be  constructed  by Optionor  pursuant to the Leasehold  Improvements  Agreement
prior to the closing of the Escrow,  as more fully provided in  Section4.8,  and
such  improvements  shall be deemed to be a part of the Phase I Option  Property
upon the completion of such construction.

                  4.2.  Term of Third  Option.  The  Third  Option  and the term
thereof shall commence on the date hereof,  and shall terminate on the date (the
"Third Option Term Expiration  Date") which is the sixtieth (60th) day following
the Last Rent  Commencement  Date. The foregoing  notwithstanding,  in the event
that the term of the  Construction  Financing  would  expire  (or is  reasonably
anticipated to expire) prior to the sixtieth  (60th) day following the Last Rent
Commencement  Date,  then Optionor shall have the right to give a written notice
to  Optionee  stating  such fact and further  stating  that  Optionor  elects to
advance the Third Option Term Expiration Date to a particular date which both is
not less than sixty (60) days  following  the receipt of such notice by Optionee
and is  reasonably  anticipated  by  Optionor  to be not less than ten (10) days
following the Last Rent Commencement  Date, and the Third Option Term Expiration
Date shall thereupon  become the later of: (i) the date specified by Optionor in
such written  notice to Optionee;  or, (ii) the tenth (10th) day  following  the
Last  Rent  Commencement  Date.  Optionee  shall  have  the  right,  but not the
obligation,  to  exercise  the Third  Option at or before 5:00 p.m. on the Third
Option Term Expiration Date.

                  4.3. Method of Exercise of Third Option.  In order to exercise
the Third  Option,  Optionee  shall,  before 5:00 p.m. on the Third  Option Term
Expiration Date,  deliver to Optionor an unconditional  and irrevocable  written
notice of such exercise. Within five (5) days after that exercise,  Optionor and
Optionee shall execute standard form escrow  instructions  which are provided by
the Title Company and which are in all respect consistent with the terms of this
Option Agreement,  at which time Optionee shall then deposit with Escrow the sum
of Three Million  Three  Hundred  Thousand  Dollars  ($3,300,000.00)  in cash or
immediately available funds as a non-refundable deposit against the Third Option
Purchase  Price,  which deposit shall be applicable to the Third Option Purchase
Price for the Phase I Option  Property.  The Third Option shall expire and be of
no force or effect at 5:00 p.m. on the Third Option Term Expiration Date, unless
by that time Optionee has  delivered to Optionor the notice  referred to in this
Section 4.3. 




The  Third  Option  may be  exercised,  if at all,  by  Optionee  only as to the
entirety of the Phase I Option Property.

                  4.4 Effect of Exercise of Third  Option.  Upon exercise of the
Third  Option,  the parties shall be deemed to have entered into an agreement to
purchase and sell the Phase I Option  Property on both the terms and  conditions
set  forth in this  Section  4 and the  terms  and  conditions  set forth in the
remainder  of this  Option  Agreement  (other  than  in  Sections  2 and 3,  the
provisions of which shall not be applicable to the Third Option herein granted).
The exercise of the Third Option shall not,  however,  affect the continuance in
force of the  Lease,  the  Leasehold  Improvements  Agreement  and the  Phase II
Purchase Agreement.

                  4.5.  Amount  of Third  Option  Purchase  Price.  In the event
Optionee exercises the Third Option following the Substantial  Completion of the
Project,  the Third Option  Purchase Price for the Phase I Option Property shall
be the aggregate of: (i) one hundred thirteen percent (113%) of the Phase I Land
Cost; (ii) one hundred thirteen percent (113%) of all Phase I Project Cost other
than the Phase I Land Cost  incurred  or to be incurred on or before the Closing
Date (whether or not then paid) and paid or to be  ultimately  paid by Optionor;
(iii) thirteen percent (13%) of any cost which would have been a Phase I Project
Cost but was paid by  Optionee;  (iv) any  amount  by  which  the  Third  Option
Purchase  Price is increased in accordance  with the  provisions of  Section4.6;
and, (v) all break-up fees and other fees, costs and charges,  all as and to the
extent described in Section1.3,  which are incurred and ultimately paid or to be
paid by Optionor in connection  with the  termination  of any agreements for the
provision  of funds for equity  capital,  Construction  Financing  and  Take-Out
Financing for the Project,  to the extent that such agreements are terminated in
connection  with the exercise of the Third  Option by Optionee or in  connection
with the termination of the Lease (if the Lease is terminated in connection with
Optionee's purchase of the Phase I Option Property); provided, however, that the
aggregate  amount of such fees,  costs and charges  will not exceed the Break-Up
Fee Maximum Amount;  and (vi) the amount of the  Development  Management Fee for
the period  commencing  on January 1, 1998 and ending on the earlier to occur of
(A) the Substantial Completion of the improvements to be constructed pursuant to
the Leasehold Improvements Agreement or (B) the Closing Date.

                  4.6.  Agreement  of the  Parties as to Third  Option  Purchase
Price.  Promptly  following either the exercise by optionee of the Third Option,
and  continuing  thereafter  for a period of  fifteen  (15) days,  Optionee  and
Optionor shall meet and endeavor to agree upon the Third Option  Purchase Price.
If the parties reach  agreement,  the Third Option  Purchase  Price shall be the
amount to which the  parties  have  agreed.  If the  parties  are not able to so
agree,  then the  Third  Option  Purchase  Price  shall be  established  through
arbitration conducted in accordance with the provisions of Section 6 hereof, and
the Closing Date shall be postponed without further act of the parties until the
tenth (10th) day following the final issuance of an award by the arbitrators. In
the event that the Closing Date is so postponed, the Third Option Purchase Price
shall be increased by an amount equal to the amount of interest which would have
accrued on that portion of the Third Option  Purchase  Price which (i) is net of
any  payments  Optionor  would have to pay PG&E upon its purchase of the Phase I
Option  Property under the terms of the Asset Sale  Agreement,  and (ii) was not
the subject of a good faith dispute  between  Optionor and  Optionee,  at a rate
equal to the "prime",  "index" or "reference" rate of Bank of America NT&SA plus
one hundred (100) basis  points,  during the period from the date upon which the
Closing  Date would have  occurred but for the  postponement  under this Section
4.6.

                  4.7.  Payment of Third Option Purchase Price. The Third Option
Purchase  Price shall be paid by  Optionee  to  Optionor in cash or  immediately
available funds at the closing of the Escrow.

                  4.8. Construction of Improvements.  In the event that Optionee
duly  exercises  





the Third  Option,  the Lease and the  Leasehold  Improvements  Agreement  shall
continue in effect until the closing of the Escrow, and Optionor shall cause the
Site  and  Shell  Improvements  and the  Tenant  Improvements  described  in the
Leasehold  Improvements Agreement to be constructed in accordance with the terms
of the Leasehold Improvements Agreement.

                  4.9. Closing of the Escrow Following Exercise of Third Option.
Following an effective  exercise by Optionee of the Third Option, the closing of
the Escrow  shall occur on a date  selected  by  Optionor  by written  notice to
Optionee given not more than thirty (30) days  following  such  exercise,  which
date  shall be not less than  sixty  (60) days nor more  than  twenty-four  (24)
months  following the Last Rent  Commencement  Date,  unless the Closing Date is
postponed in accordance  with the provisions of this Section 4.9 or Sections 4.6
or 19..D. In the event that Optionee  desires to delay the Closing Date from the
date specified by Optionor, Optionee may, within thirty (30) days of its receipt
of the notice from  Optionor,  give to Optionor  written  notice of another date
which is not more than sixty (60) days  following the date selected by Optionor,
and the Closing Date shall  thereupon be postponed to the date  specified in the
notice from Optionee to Optionor,  unless  Optionor  notifies  Optionee that the
term of the  Construction  Financing  would expire prior to the date selected by
Optionee, in which event the Closing Date shall be the fifth (5th) day preceding
the date upon which the Construction Financing would so expire.

                  4.10. Condition of Third Option Title

                         A. In the event  Optionee  exercises  the Third Option,
Optionor  shall  convey  title to the Phase I Land  subject  only to:  (i) those
matters  listed as  exception  nos. 4, 6, 8, 9, 13, 14 and 15 of the  Exceptions
from  Coverage  set forth in Schedule  B--Section 2 of the Pro Forma Policy (but
only to the extent  that the same affect all or any portion of the Phase I Land)
and any matter which is or would be disclosed by an accurate survey of the Phase
I Land; (ii) any matters  arising from the acts or omissions of Optionee;  (iii)
any lien, encumbrance or other matter consented to in writing by Optionee;  (iv)
to the lien of current,  non-delinquent real property taxes and assessments; (v)
the Lease;  (vi) the Leasehold  Improvements  Agreement;  (vii) the  Development
Agreement; (viii) Parking Easement Agreement; (ix) the Access Agreement; (x) the
easements  reserved  in the PG&E Deed to be  recorded  on or before the  Closing
Date;  (xi)  the  covenants  and  restrictions  set  forth  in the  Encroachment
Agreement to be recorded on or before the Closing  Date;  (xii) the terms of the
Environmental  Agreement  to be  recorded on or before the  Closing  Date;  and,
(xiii) the Declaration.  Such matters are hereinafter  referred to as the "Third
Option Permitted Exceptions".  In the event that Optionor requests that Optionee
consent to the  creation of any lien,  encumbrance,  reservation  or  dedication
affecting the title to the Phase I Land,  Optionee shall not unreasonably  delay
or  withhold  its  consent,  and shall only  withhold  its  consent if the lien,
encumbrance,  reservation or dedication: (i) would interfere with the use of the
Phase I Land for the purposes set forth in the Lease;  or, (ii) if pertaining to
a lien securing the payment of money,  will not be paid and removed on or before
close of Escrow and such payment would not constitute or have constituted a part
of Aggregate Development Cost.

                         B. In the event  that  Optionor  is  unable to  deliver
title to the Phase I Land to Optionee in the  condition  required by this Option
Agreement,  Optionor  shall so notify  Optionee  in writing and  Optionee  shall
notify  Optionor,  within five (5)  business  days of the receipt by Optionee of
such  notice  from  Optionor,  whether  or not  Optionee  objects  to the  lien,
encumbrance,  defect or other matter which is not consistent with the provisions
of this Option  Agreement  regarding the condition of title to the Phase I Land.
If Optionee so objects by written  notice to Optionor  given within such period,
then Optionor  shall have a period of ten (10) business days from the receipt by
Optionor of such notice of objection  from Optionee in which to remove the lien,
encumbrance,  defect or other matter to which  Optionee has  objected.  Optionee
shall not object, however, unless the lien, encumbrance,  defect or other matter
would  interfere  with the use of the Phase I Land for the purposes set forth in
the Lease or pertains to a lien  securing the payment 






of money  which will not be paid and  removed on or before  close of Escrow.  If
Optionor  is unable to remove  such lien,  encumbrance,  defect or other  matter
within such period,  Optionee may (as its sole and exclusive remedy,  unless the
matter  objected to was caused or created by the bad faith acts or  omissions of
Optionor)  terminate  this Option  Agreement  (but not the Lease,  the Leasehold
Improvements  Agreement or the Phase II Purchase Agreement) by written notice to
Optionor  given within ten (10) days of  expiration of the ten (10) business day
period during which Optionor could have caused the lien, encumbrance,  defect or
other matter to be removed from title.  In the event that  Optionee  does not so
terminate this Option Agreement, the Lease, the Leasehold Improvements Agreement
and the Phase II Purchase Agreement,  then Optionee shall conclusively be deemed
to have waived its objection to the lien,  encumbrance,  defect or other matter,
which shall then become a part of the Permitted Exceptions.




                  4.11.  LIQUIDATED  DAMAGES  FOR BREACH BY  OPTIONEE  FOLLOWING
EXERCISE OF THIRD  OPTION.  OPTIONOR AND OPTIONEE  HEREBY AGREE THAT THE DAMAGES
WHICH  WOULD BE  SUFFERED  BY  OPTIONOR  IN THE EVENT OF A DEFAULT  BY  OPTIONEE
HEREUNDER IN PURCHASING  THE PHASE I LAND  FOLLOWING ANY EXERCISE BY OPTIONEE OF
THE THIRD OPTION WOULD BE EXTREMELY  DIFFICULT AND  IMPRACTICABLE  TO ASCERTAIN,
AND THAT THE SUM OF THREE MILLION THREE HUNDRED THOUSAND DOLLARS ($3,300,000.00)
REPRESENTS THE  REASONABLE  ESTIMATE BY THE PARTIES OF THE AMOUNT OF THE DAMAGES
THAT  OPTIONOR  WOULD  SUFFER BY  REASON OF  OPTIONEE'S  DEFAULT.  OPTIONEE  AND
OPTIONOR UNDERSTAND AND AGREE THAT THE VALUE OF PROPERTY IS SUBJECT TO CHANGE BY
REASON OF  GENERAL  ECONOMIC  CONDITIONS,  THE LOCAL  REAL  ESTATE  MARKET,  THE
AVAILABILITY  OF MORTGAGE  FINANCING,  AND OTHER  FACTORS  BEYOND THE CONTROL OF
OPTIONOR AND OPTIONEE,  AND THAT THE SUM OF THREE MILLION THREE HUNDRED THOUSAND
DOLLARS  ($3,300,000.00)  IS A  REASONABLE  LIQUIDATED  DAMAGE  AMOUNT UNDER THE
EXISTING CIRCUMSTANCES.  ACCORDINGLY, IN THE EVENT ESCROW DOES NOT CLOSE BECAUSE
OF A DEFAULT BY OPTIONEE  HEREUNDER  FOLLOWING  THE  EXERCISE BY OPTIONEE OF THE
THIRD  OPTION,  OPTIONOR  SHALL BE ENTITLED  TO RETAIN THE SUM OF THREE  MILLION
THREE HUNDRED THOUSAND DOLLARS ($3,300,000.00) AS LIQUIDATED DAMAGES, AND NOT AS
A PENALTY OR FORFEITURE,  AS OPTIONOR'S SOLE AND EXCLUSIVE REMEDY FOR OPTIONEE'S
DEFAULT  AT LAW OR IN  EQUITY,  AND UPON  RECEIPT  OF SUCH  AMOUNT BY  OPTIONOR,
OPTIONEE AND OPTIONOR SHALL BE RELIEVED OF ANY FURTHER  OBLIGATIONS OR LIABILITY
HEREUNDER. OPTIONEE AND OPTIONOR INTEND AND AGREE THAT THE TERMS OF THIS SECTION
4.11 COMPLY WITH THE  REQUIREMENTS  OF  CALIFORNIA  CIVIL CODE SECTIONS 1671 AND
1677.  OPTIONEE AND OPTIONOR SHALL SIGN BELOW THIS SECTION 4.11 INDICATING THEIR
AGREEMENT TO THE LIQUIDATED DAMAGE CLAUSE HEREIN CONTAINED.

                                    OPTIONOR:

                                    Village Builders, L.P.,
                                    a California limited partnership

                                    By   VPI, Inc., a California corporation, 
                                         its General Partner


                                         By
                                            ------------------------------------
                                              
                                           Its
                                              ----------------------------------


                                    OPTIONEE:

                                    Fair, Isaac and Company, Inc.,
                                    a Delaware corporation


                                    By
                                        ----------------------------------------
                                              
                                         Its
                                              ----------------------------------

                                       


                  4.12.  Right to Redesignate  Designated  Treasury Date. In the
event of a  default  by  Optionee  hereunder  in  purchasing  the Phase I Option
Property  following any exercise by Optionee of the Third  Option,  Optionor may
elect to  redesignate  the Designated  Treasury Rate in accordance  with Section
19.2.(C) of the Leasehold Improvements Agreement.

                  4.13. Termination of Third Option.  Optionor may terminate the
Third  Option  and all right of  Optionee  pursuant  to the Third  Option or any
exercise  thereof by giving to Optionee a written notice of such termination and
the  payment  to  Optionee   of  the  sum  of  Two  Hundred   Thousand   Dollars
($200,000.00).


         5. EXPIRATION OF OPTION WITHOUT  EXERCISE.  In the event Optionee fails
to  exercise  any one (1) or more of the  Options in exact  accordance  with its
terms,  then the Options which Optionee did not so exercise shall  automatically
expire and  terminate  without  further  act of the  parties.  In the event that
Optionee  fails to exercise  all of the Options in exact  accordance  with their
respective  terms,  then  all of the  Options  shall  automatically  expire  and
terminate without further act of the parties.


         6.  ARBITRATION  OF  DISPUTES;  DETERMINATION  OF PURCHASE  PRICE.  ANY
CONTROVERSY  OR  CLAIM  ARISING  IN  CONNECTION  WITH THE  DETERMINATION  OF THE
PURCHASE PRICE FOR THE PG&E OPTION PROPERTY OR THE PHASE I OPTION  PROPERTY,  AS
THE CASE MAY BE, SHALL BE SETTLED BY ARBITRATION IN ACCORDANCE WITH THE RULES OF
THE AMERICAN ARBITRATION ASSOCIATION,  AND JUDGMENT ON THE AWARD RENDERED BY THE
ARBITRATOR(S)  MAY BE ENTERED IN ANY COURT HAVING  JURISDICTION.  THE PREVAILING
PARTY IN SUCH ARBITRATION SHALL BE ENTITLED TO ATTORNEYS' FEES AND COSTS.

         NOTICE: BY INITIALLING IN THE SPACE BELOW, YOU ARE AGREEING TO HAVE ANY
         DISPUTE  ARISING OUT OF THE MATTERS  INCLUDED  IN THE  "ARBITRATION  OF
         DISPUTES"  PROVISION  DECIDED BY NEUTRAL  ARBITRATION  AS  PROVIDED  BY
         CALIFORNIA  LAW AND YOU ARE GIVING UP ANY  RIGHTS YOU MIGHT  POSSESS TO
         HAVE THE DISPUTE  LITIGATED IN A COURT OR JURY TRIAL. BY SIGNING IN THE
         SPACE BELOW YOU ARE GIVING UP YOUR  JUDICIAL  RIGHTS TO  DISCOVERY  AND
         APPEAL,   UNLESS  THOSE  RIGHTS  ARE   SPECIFICALLY   INCLUDED  IN  THE
         "ARBITRATION  OF  DISPUTES"  PROVISION.  IF YOU  REFUSE  TO  SUBMIT  TO
         ARBITRATION  AFTER AGREEING TO THIS PROVISION,  YOU MAY BE COMPELLED TO
         ARBITRATE   UNDER  THE  AUTHORITY  OF  THE  CALIFORNIA  CODE  OF  CIVIL
         PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.
///
///
///
///
///
///
///
///
///

                                       


///
///
///
///
///

         WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT  DISPUTES
         ARISING OUT OF THE MATTERS  INCLUDED IN THE  "ARBITRATION  OF DISPUTES"
         PROVISION TO NEUTRAL ARBITRATION.

                                    OPTIONOR:

                                     Village Builders, L.P.,
                                     a California limited partnership

                                     By   VPI, Inc., a California corporation, 
                                          its General Partner


                                          By
                                            ------------------------------------
                                              
                                           Its
                                              ----------------------------------



                                    OPTIONEE:

                                    Fair, Isaac and Company, Inc.,
                                    a Delaware corporation


                                    By
                                        ----------------------------------------
                                              
                                        Its
                                           -------------------------------------
  


         7.       ADJUSTMENT TO REFLECT FINAL PHASE I PROJECT COST

                  7.1.  Determination  of Revised Final Phase I Project Cost. In
the event that  either the closing of Escrow  occurs  pursuant to an exercise of
the First  Option by Optionee  or the closing of the Escrow  occurs in less than
eighteen  (18) months  pursuant  to an  exercise  of the Second  Option or Third
Option by  Optionee,  and in the event that any items of  Aggregate  Development
Cost or Phase I Project  Cost could not have been  reasonably  ascertained  with
precision at least ten (10) days prior to the Closing Date,  Optionor may notify
Optionee in writing of a revised  final  Aggregate  Development  Cost or Phase I
Project Cost within the following  time periods:  (i) if Optionee  exercises the
First Option,  within one hundred twenty (120) days of the Closing Date; or (ii)
if Optionee exercises the Second Option or the Third Option, within one (1) year
of the Closing  Date.  Such written  notice shall be  accompanied  by a detailed
statement of such revised  Aggregate  Development  Cost or final Phase I Project
Cost.

                  7.2.  Possible Review of Revised Final  Aggregate  Development
Cost of Phase I Project Cost by Optionee. Within twenty (20) days of the receipt
by Optionee of the notice from 



                                       


Optionor given in accordance  with Section 7.1 and setting forth a revised final
Aggregate Development Cost or Phase I Project Cost, Optionee may notify Optionor
in writing (a "Difference  Review  Notice") that Optionee  desires to review the
records of Optionor  pertaining  to those items (the  "Difference  Items") which
account for the difference between the revised final Aggregate  Development Cost
or Phase I Project Cost and the  Aggregate  Development  Cost or Phase I Project
Cost upon which the  Purchase  Price was  determined.  If Optionee  gives such a
notice to Optionor within such period,  Optionor shall permit Optionee to review
all of the records of Optionor  relevant to the determination of such Difference
Items.  Such review shall be performed at the offices of Optionor during regular
business  hours,  and  Optionor  shall permit  Optionee to make  copies,  at its
expense, of such portions of such records as Optionee may elect.  Optionee shall
undertake  and  complete  such review  within  sixty (60) days of the receipt by
Optionor of the Difference Review Notice.  In the event that Optionee  concludes
that the  determination  by Optionor of the  Difference  Items is incorrect,  it
shall so notify  Optionor within seventy (70) days of the receipt by Optionor of
the Difference  Review Notice from Optionee,  which notice from Optionee  shall:
(i) state with  particularity the Difference Items as to which Optionee believes
that the  determination of Optionor was incorrect;  and, (ii) state the election
of Optionee  to have the revised  final  Aggregate  Development  Cost or Phase I
Project Cost determined by arbitration in accordance with Section 6.

                  7.3. Payment to Adjust  Aggregate  Development Cost or Phase I
Project Cost. The revised final  Aggregate  Development  Cost or Phase I Project
Cost  stated by  Optionor in its notice to  Optionee  given in  accordance  with
Section  7.2 shall be deemed to have been  accepted  and  approved  by  Optionee
unless:  (i)  Optionor and  Optionee  agree in writing to a different  Aggregate
Development Cost or Phase I Project Cost within seventy (70) days of the receipt
by Optionor of the  Difference  Review Notice from  Optionee;  or, (ii) Optionee
gives to Optionor  within such seventy (70) day period a notice electing to have
the revised final Aggregate  Development Cost or Phase I Project Cost determined
by arbitration in accordance with Section 6. Within thirty (30) days of the date
upon which the revised final Aggregate  Development Cost or Phase I Project Cost
is  established  (whether by  Optionor's  statement of revised  final  Aggregate
Development  Cost or Phase I Project Cost being deemed  accepted and approved by
Optionee in accordance with this Section 7.3 or by a written  agreement  between
Optionor  and  Optionee   establishing  a  different   revised  final  Aggregate
Development Cost or Phase I Project Cost or by an arbitration  resulting from an
election by Optionee made within seventy (70) days of the receipt by Optionor of
the  Difference  Review  Notice  from  Optionee):  _.(i)  if the  revised  final
Aggregate  Development  Cost or Phase I Project Cost is less than the  Aggregate
Development  Cost or Phase I Project  Cost upon  which  the  Purchase  Price was
determined, Optionor shall pay to Optionee a sum equal to the difference between
the Aggregate  Development  Cost or Phase I Project Cost upon which the Purchase
Price was determined and the revised final Aggregate Development Cost or Phase I
Project Cost; or, (ii) if the revised final Aggregate  Development Cost or Phase
I Project Cost is greater than the Aggregate Development Cost or Phase I Project
Cost  upon  which  the  Purchase  Price was  determined,  Optionee  shall pay to
Optionor a sum equal to the  difference  between  the  revised  final  Aggregate
Development  Cost or Phase I Project Cost and the Aggregate  Development Cost or
Phase I Project Cost upon which the Purchase Price was determined.


         8.       TITLE AND DEED.

                  8.1.  Condition  of  Title to  Phase I Land.  Optionee  hereby
accepts the Permitted Exceptions and agrees to accept title to the PG&E Property
or the Phase I Land,  as the case may be,  subject to the  applicable  Permitted
Exceptions. Except as set forth in this Option Agreement, Optionor shall make no
representations or warranties with respect to the condition of title to the PG&E
Property or the Phase I Land,  and  Optionee  agrees that it will rely solely on
its  policy  of title  insurance  issued by the Title  Company  pursuant  to the
provisions of Section 8.3 below.

                                 



                  8.2.  Grant Deed.  Optionor  shall convey the PG&E Property or
the Phase I Land,  as the case may be, to  Optionee on the  standard  form grant
deed  customarily used by the Title Company (the "Grant Deed") as of the closing
of the  Escrow,  but the  warranties  set forth or implied in such deed shall be
expressly  limited by, and shall in the deed be  expressly  made subject to, the
applicable Permitted Exceptions.

                  8.3. Title Insurance.  Optionor shall cause the Title Company,
as of the  closing of the Escrow,  to issue to  Optionee an American  Land Title
Association  Owners  Policy  (10-17-92)  (or such form of policy as is then most
closely equivalent), insuring that fee title to the PG&E Property or the Phase I
Land,  as the case may be,  is  vested in  Optionee,  in an amount  equal to the
applicable Purchase Price, subject only to the applicable Permitted  Exceptions.
Optionee  may  also  obtain  the  following  endorsements:  Subdivision  Map Act
compliance (CLTA form 116.7); survey, with reference to the Site Plan (CLTA form
116.1);  and such other  endorsements  as Optionee may  reasonably  require.  If
requested by Optionee,  Optionor  shall  cooperate  with  Optionee at no cost or
liability to Optionor in obtaining  such  facultative  reinsurance  arrangement,
with  rights  of  direct   access,   as  may  be  reasonably   required  in  the
circumstances,   together  with  the  endorsements  described  above;  provided,
however,  that Optionor  shall not be required to incur any expense or liability
or potential liability in connection with any such cooperation.

                  8.4. Use  Restriction.  The PG&E Property or the Phase I Land,
as the case may be,  shall be used only for office,  research  and  development,
restaurant  and other  commercial  uses and  shall  not be used for  residential
purposes  or for  any  purpose  prohibited  by the  Declaration.  The  foregoing
notwithstanding,  for a period  of ten (10)  years  from the  Closing  Date (the
"Retail  Limitation  Period"),  no portion of the PG&E  Property  or the Phase I
Land,  as the case may be,  shall be used  for a retail  use in  excess  of that
contemplated in the Development  Plan attached (or to have been attached) to the
Declaration  as  Exhibit  H. For the  purposes  of this  Section  8.4,  the term
"retail"   use   shall  be  based   upon  any   definitions,   descriptions   or
characterizations  that may be set forth in the Zoning  Ordinance of the City of
San  Rafael,  except  that a  "retail"  use would in all events  include  retail
banking and like uses.  Upon the  expiration  of the Retail  Limitation  Period,
there shall not be any  prohibition on the use of all or any portion of the PG&E
Property  or the Phase I Land,  as the case may be,  for  retail  purposes.  The
foregoing  notwithstanding,  nothing  in this  Section  8.4  shall be  deemed to
prohibit the direct sale of goods and  services to end users by Fair,  Isaac and
Company,  Inc. or any corporate  successor by merger to Fair, Isaac and Company,
Inc., to the extent that such sales do not involve customer purchases in person,
or be deemed to prohibit the operation of cafeteria or dining facilities for the
use of Optionee's  employees  and business  guests.  Upon the  expiration of the
Retail  Limitation  Period,  Optionor shall execute,  acknowledge and deliver to
Optionee (or to such other person or entity as Optionee may request) a quitclaim
deed  (and/or  such other  documents as may be  reasonably  required)  expressly
terminating  the  use  restrictions  described  in  this  Section  8.4  and  the
memorandum  of  agreement   described  in  Section  23.2   (including,   without
limitation,  Optionor's  right to enforce the use  restrictions  as set forth in
that memorandum of agreement).

        9.       CLOSING OF THE ESCROW.

                  9.1.  Retention  of  Title  Company.  In  the  event  Optionee
exercises one of the Options,  Optionee and Optionor shall each promptly  retain
the Title  Company to perform  escrow  services  at its  offices  located in San
Rafael, California, in connection with the transactions to be completed pursuant
to, and in accordance with the provisions of, this Option Agreement.

                  9.2.  Closing Date. In the event Optionee  exercises the First
Option,  the closing of the Escrow for the sale and  purchase of the PG&E Option
Property shall occur on the date  determined in accordance  with Section 2.8. In
the event Optionee  exercises the Second  Option,  the 



                                       


closing of the Escrow for the sale and  purchase of the Phase I Option  Property
shall occur on the date determined in accordance with Section 3.10. In the event
Optionee  exercises the Third Option, the closing of the Escrow for the sale and
purchase of the Phase I Option  Property  shall occur on the date  determined in
accordance  with  Section  4.9.  The date so  determined  is referred to in this
Option Agreement as the "Closing Date".

                  9.3.  Termination  of the  Lease  and  Leasehold  Improvements
Agreement.  Except  as  otherwise  provided  in  the  Lease  and  the  Leasehold
Improvements  Agreement,  neither of those  documents  shall be terminated at or
prior to the closing of the Escrow, and Optionee shall execute,  and shall cause
any  assignee  or  sublessee  of the  interest  of  Optionee  under the Lease to
execute,  an agreement  releasing  Optionor from all obligations under the Lease
and Leasehold Improvements Agreement as of the closing of the Escrow, except for
obligations  (i) which are to be  performed by Optionor as Landlord on or before
the  Closing  Date,  or (ii) as to which an event of  default by  Optionor  then
exists under either of the Lease or the Leasehold Improvements Agreement.

                  9.4.  Escrow  Instruction.  Prior to the closing of the Escrow
and as  provided in Sections  2.3,  3.3 and 4.3,  Optionee  and  Optionor  shall
execute and deliver to the Title Company joint escrow instructions directing the
Title  Company to close the Escrow in the manner and  subject to the  conditions
provided for herein.

                  9.5.  Conditions  to  Closing  for  Benefit of  Optionor.  The
closing of the Escrow shall be conditioned  for the benefit of Optionor upon the
performance by Optionee (or Optionor's  written waiver of such  performance)  of
the following obligations (or, as to obligations the performance of which is not
to be completed prior to the closing of the Escrow,  upon the  non-occurrence of
any default by Optionee with respect to such obligations), which Optionee hereby
covenants and agrees it shall cause to be performed  within the time limitations
set forth in this Option Agreement:

                         A.  The   performance   by  Optionee  of  each  of  its
obligations under the Lease, the Leasehold Improvements Agreement, and the Phase
II Purchase  Agreement,  all as more fully provided in Section 16 (and except as
otherwise provided in Section2.4);

                         B. The  obligations  of  Optionee  pursuant  to Section
14.2, Section 18 and Section22.4 below;

                         C.  The  deposit  by  Optionee  into the  Escrow  of an
unqualified  assumption of the obligations of Optionor arising after the Closing
Date  under the Lease and the  Leasehold  Improvements  Agreement  and any other
agreements  to  be  assumed  by  Optionee   hereunder,   in  a  form  reasonably
satisfactory to Optionor;

                         D. With respect to only the Second  Option or the Third
Option,  the  purchase of the Phase II Land by Optionee in  accordance  with the
Phase II Purchase Agreement;

                         E. The  execution  and  deposit  by  Optionee  into the
Escrow of the certificate referred to in Section 14.2 below;

                         F. The deposit by  Optionee  into the Escrow of cash or
immediately available funds equal to the Purchase Price, such deposit to be made
by the  transfer  of such  funds by  Optionee,  at or before  5:00  p.m.  on the
business  day  immediately  preceding  the Closing  Date into an account  with a
recognized  banking  institution  at an office  located  in either the County of
Marin or the City and County of San Francisco in the State of  California  under
arrangements  which authorize the disbursement of funds from such account by the
Title  Company  at the  closing  of the  




Escrow in accordance with the escrow  instructions  referred to in Section 9.5.F
above and with the provisions of Section 10 below; and,

                         G. The deposit by  Optionee  into the Escrow of cash or
immediately  available  funds equal to all expenses of  conveyance to be paid by
Optionee  pursuant to Section 11 below, such deposit to be made at the same time
and in the same  manner as the  deposit of the  Purchase  Price  referred  to in
Section 9.5.F above.

                  9.6.  Conditions  to  Closing  for  Benefit of  Optionee.  The
closing of the Escrow shall be conditioned  for the benefit of Optionee upon the
performance by Optionor (or Optionee's  written waiver of such  performance)  of
the following obligations (or, as to obligations the performance of which is not
to be completed prior to the closing of the Escrow,  upon the  non-occurrence of
any default by Optionor with respect to such obligations), which Optionor hereby
covenants and agrees it shall  perform or cause to be performed  within the time
limitations set forth in this Option Agreement:

                         A. Optionor obtaining from all applicable  governmental
agencies  the  Development   Agreement  and  the  entitlements  related  thereto
necessary  for the  construction  and use of the Project as  provided  under the
Leasehold Improvements Agreement and the Lease;

                         B.  The   performance   by  Optionor  of  each  of  its
obligations under the Lease, the Leasehold Improvements Agreement, and the Phase
II Purchase Agreement, except as otherwise provided in Section 2.4;

                         C. The deposit by Optionor  into the Escrow of the duly
executed and acknowledged  Grant Deed conveying the PG&E Property or the Phase I
Land, as the case may be, to Optionee;

                         D.  The  deposit  by  Optionor  into the  Escrow  of an
assignment  to  Optionee  of the  landlord's  interest  under  the Lease and the
Leasehold Improvements  Agreement,  and of all Optionor's rights and interest in
all  documents  described in Section 1.26 or in Section 1.29 as the case may be,
and any other  agreements  to be assumed by  Optionee  hereunder,  all in a form
reasonably satisfactory to Optionee;

                         E. The deposit by Optionor into the Escrow of any funds
necessary  to  obtain  the  release  of  liens  and  encumbrances  which  it  is
responsible  for  removing  prior to the  closing of the Escrow (but only to the
extent that the proceeds from the Purchase Price due to it would be insufficient
for such purpose);

                         F. The Title Company is unconditionally and irrevocably
committed to issue the American  Land Title  Association  Owners Policy of title
insurance referred to in Section 8.3;

                         G. The obligations of Optionor pursuant to Section 22.6
below;

                         H. The  obligations  of Optionor to indemnify  and hold
Optionee harmless set forth in Section 22.3 below; and

                         I. The  representations and warranties made by Optionor
in this Option  Agreement shall be true in all material  respects on the Closing
Date.

                  9.7.  Compliance with  Subdivision Map Act. In addition to the
conditions  set forth in Sections  9.5 and 9.6,  it shall be a condition  to the
Closing for the benefit of both Optionor 



                                       


and  Optionee  that the  conveyance  of the PG&E Option  Property or the Phase I
Option Property, as the case may be, shall comply fully with the requirements of
the California  Subdivision Map Act (California Government Code Section 66410 et
seq.) (the "Map  Act"),  or shall be exempt  therefrom.  Optionor  and  Optionee
hereby agree that they shall  cooperate  reasonably  with one another in causing
the conveyance of the PG&E Option  Property or the Phase I Option  Property,  as
the case may be, to comply with the  requirements of the Map Act or to be exempt
therefrom.  If reasonably  necessary to cause the  conveyance of the PG&E Option
Property  or the Phase I Option  Property,  as the case may be, to comply  fully
with the Map Act or to be exempt  therefrom,  Optionor  shall  use  commercially
reasonable efforts to assign to Buyer all of the right, title and interest which
Optionor then has under the existing  agreements  between  Optionor and PG&E for
the acquisition of the PG&E Option Property or the Phase I Option  Property,  as
the case may be, by Optionor, in a good faith effort to prevent any delay in the
Closing Date.

         10.      CLOSING PROCEDURES.

                  10.1. Order of Performance.  At the closing of the Escrow, the
Title Company shall perform the following obligations in the following order:

                         A. It shall  cause the Grant Deed to be recorded in the
Official Records of Marin County, California.

                         B. It shall pay,  at the time of the  recording  of the
Grant Deed, and charge to the escrow  account of Optionee,  all closing costs to
be paid by Optionee pursuant to the provisions of Section 11 below.

                         C. It shall  charge to the escrow  account of  Optionee
the amount of the  Purchase  Price,  and shall  credit such amount to the escrow
account of Optionor.

                         D. It shall pay and  charge to the  escrow  account  of
Optionor all sums necessary to discharge liens and  encumbrances  which Optionor
is responsible for removing at or prior to the closing of the Escrow.

                         E. It shall pay,  and  charge to the escrow  account of
Optionor,  all closing cost to be paid by Optionor pursuant to the provisions of
Section 11 below.

                         F. It shall pay to Optionor  all sums  remaining in the
escrow account of Optionor after the making of all payments  therefrom and other
charges thereto as set forth in this Section 10.1.

                         G. It shall pay to Optionee  any sums  remaining in the
escrow account of Optionee after the making of all payments  therefrom and other
charges thereto as set forth in this Section 10.1.

                  10.2.   Notice  of  Deficiencies.   The  Title  Company  shall
immediately  notify all parties in writing  should it not receive any  document,
instrument  or funds to be  deposited  into the Escrow by the date and time when
such deposit is to be completed.

///
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         11.      EXPENSES OF CONVEYANCE.

                  The expenses of the Escrow and conveyance shall be paid in the
following manner:

                  11.1. Title Insurance.  The full cost of securing all policies
and endorsements of title insurance, including the policy referred to in Section
8.3 above, shall be paid by Optionee.

                  11.2. Deed Preparation.  The cost of preparing,  executing and
acknowledging the Grant Deed shall be paid by Optionor.

                  11.3.  Prepayment Charges and Costs. All prepayment penalties,
yield maintenance payments,  reconveyance fees and other payments required to be
paid  to  any  holder  of  the  Construction  Financing  or  Take-Out  Financing
encumbering the PG&E Property or the Phase I Land, as the case may be, as of the
Closing Date shall be paid by Optionee.

                  11.4.  Recording  Costs.  The cost of recording the Grant Deed
shall be paid by Optionee.

                  11.5.  Escrow  Fees.  Any  escrow  fees  charged  by the Title
Company  for  escrow  services,  if any,  in excess of the cost of any policy of
title insurance, shall be split equally between the parties.

                  11.6.  Transfer  Taxes.  All  transfer and excise taxes due in
connection with the sale or conveyance of the PG&E Property or the Phase I Land,
as the case may be, shall be paid by Optionor.


         12.      PRORATIONS.  The  following  prorations  shall be made between
Optionor and Optionee on a basis of a thirty (30) day month (except as set forth
below) as of the closing of the Escrow:

                  12.1. Real Estate Taxes and Personal Property Taxes.  Current,
non-delinquent  general or  special  real  property  taxes and  assessments  and
personal  property  taxes (on the basis of the fiscal year for such taxes) shall
be apportioned  through Escrow (on the basis of a 365-day year) as of 12:01 a.m.
on the Closing  Date. In making such  apportionment,  the fact of whether or not
any  reimbursements  for such taxes have been paid prior to the Closing  Date by
Optionee under the Lease shall be taken into account.  If the Closing Date shall
occur before the real  property tax rate is fixed,  the  apportionment  of taxes
shall be made on the basis of the tax rate for the preceding fiscal year applied
to the latest  assessed  valuation.  After the real  property  taxes are finally
fixed,  Optionor and Optionee shall make a recalculation  of such  apportionment
and Optionor or Optionee as the case may be shall make an appropriate payment to
the other based on such recalculation.  Any supplemental assessment imposed with
respect to the PG&E Option Property or the Phase I Option Property,  as the case
may be,  shall be taken into account only with respect to the period as to which
such supplemental assessment is levied.

                  12.2.  Rentals.  All rentals  accruing or paid under the Lease
that relate to the period which  includes the Closing Date shall be  apportioned
through Escrow as of the Closing Date.

                  12.3. Utilities. Charges for utilities shall be apportioned by
Optionee and Optionor  outside of Escrow within four (4) weeks after the Closing
Date.

                                       


                  12.4. Other Management Expenses. Any other amounts that relate
to the  operation,  management,  and leasing of the PG&E Property or the Phase I
Land,  as the case may be, that apply to a period  including  the  Closing  Date
shall be  apportioned  through  Escrow as of the Closing Date, to the extent not
reimbursed by Optionee as a part of "Expenses" pursuant to the Lease.


         13.      POSSESSION.  Optionor shall  surrender and deliver to Optionee
any and all claims of rights to  possession  of the PG&E Option  Property or the
Phase I Option Property, as the case may be, as of the closing of the Escrow.


         14.      CONDITION OF PROPERTY.

                  14.1.   Representations   by  Optionor.   Optionor  shall  use
commercially  reasonable efforts to enforce the  representations  and warranties
made by PG&E in the Asset Sale  Agreement  for the  benefit of  Optionee  to the
extent that  Optionee is not  entitled to enforce the same for its own  account.
Optionor  represents  and  warrants  to  Optionee  that  Optionor  has no actual
knowledge (without any independent investigation), as of the date of this Option
Agreement,  of any  breach  of such  representations  and  warranties  by  PG&E.
Optionor agrees that Optionee would not purchase the PG&E Option Property or the
Phase I Option  Property,  as the case may be,  without such  representation  or
warranty of Optionor or the representations and warranties of Optionor set forth
in other  Sections of this  Agreement,  which are material and on which Optionee
shall rely. Except as set forth in the preceding  sentences of this Section 14.1
and in Section 17, Optionee hereby  represents,  warrants and agrees that it has
not relied and will not rely upon any  representation,  warranty,  agreement  or
understanding,  express or implied,  made or given by Optionor or by its agents,
employees or  representatives  in determining  whether to enter into this Option
Agreement  or to purchase  the PG&E  Property or the Phase I Land or any portion
thereof  and that it has relied and will rely solely upon the results of its own
inquiries and  investigations or on information  received from independent third
parties whom Optionee independently identifies and whom Optionee deems reliable.

                  14.2.  Property Sold "AS IS". Except as otherwise  provided in
Sections 14.1 and 17, and except for Optionor's  covenants and obligations under
this Option  Agreement (and, to the extent required to be performed prior to the
Closing  Date,  the  obligations  of Optionee  under the Lease and the Leasehold
Improvements  Agreement,  excluding any obligation to correct latent defects the
repair  of  which  was  not  commenced   before  the  Closing  Date),   Optionee
acknowledges  and agrees that it is purchasing  the PG&E Property or the Phase I
Land, as the case may be, "AS IS, WITH ALL FAULTS",  that Optionor  shall not be
required to make any repairs or improvements thereon or for the benefit thereof,
and that  Optionor  shall have no  liability  to  Optionee  with  respect to the
condition  of the PG&E  Property or the Phase I Land,  as the case may be, or to
the condition,  design or adequacy of any  improvements  located  thereon or the
condition, design or adequacy of any improvements serving or protecting the PG&E
Property or the Phase I Land, as the case may be, although not located  thereon,
whether such liability arises from the negligence of Optionor or otherwise. Each
of  Optionor  and  Optionee  shall  affirm to the other,  by the  execution  and
delivery  of a  certificate  in the  form  attached  hereto  as  Exhibit  F, its
warranties,  representations,   agreements  and  acknowledgments  set  forth  in
Sections 14.1, 17, 18, 22.3 and 22.4 at and as of the closing of the Escrow. Any
costs to repair latent  defects  incurred after the Closing Date shall be a part
of Phase I Project Cost.


         15.      SPECIFIC  PERFORMANCE.  In the event  that  Optionor  fails to
perform its  obligations  to sell the PG&E  Property or the Phase I Land, as the
case may be, following an effective exercise of one of the Options,  the parties
acknowledge that specific  performance  would 



be an appropriate remedy and that the right to specific performance has not been
waived or otherwise relinquished by Optionee.


         16.      PERFORMANCE  UNDER  OTHER  AGREEMENTS.  The rights of Optionee
under this Option  Agreement are granted in  consideration of the obligations of
Optionee under the Lease, the Leasehold Improvements Agreement, and the Phase II
Purchase Agreement,  and the obligations of Optionor under this Option Agreement
are  expressly  conditioned  upon the  performance  by  Optionee  of each of the
obligations  of Optionee which are to be performed on or before the Closing Date
under the Lease  (save and except for  obligations  which  would  ordinarily  be
regarded  by a landlord  of  similar  premises  as  immaterial),  the  Leasehold
Improvements  Agreement and the Phase II Purchase Agreement (except as otherwise
provided in Section 2.4) within the times for such performance  provided in such
agreements  (including the  applicable  grace period,  if any,  provided in such
agreements  with  respect to any  particular  obligation).  The  performance  by
Optionee upon which the obligations of Optionor under this Option  Agreement are
conditioned include, without limitation, the full performance of the obligations
of Optionee under Section 41  ("Limitation  Upon Further  Negotiations")  of the
Lease,  but only to the extent  that such  obligations  under  Section 41 of the
Lease  were to have  been  performed  prior  to the  exercise  of an  Option  by
Optionee.


         17.      WARRANTIES AND  REPRESENTATIONS  OF OPTIONOR.  Optionor hereby
represents and warrants to Optionee the following matters as of the date hereof,
each of which shall also be true and  complete as of the Closing Date as if made
on the Closing Date; and each of the same shall be deemed independently material
and shall survive the closing of the Escrow:

                  17.1.  Capacity.  Optionor  is,  and as of the  closing of the
Escrow  will be, duly  authorized  and  empowered  to enter into and perform its
obligations  pursuant  to this Option  Agreement  and all other  agreements  and
documents described or contemplated hereby, and the execution and performance of
this Option  Agreement by Optionor does not and will not  constitute a breach of
any  agreement  which is binding upon  Optionor  and which  pertains to the PG&E
Property or the Phase I Land, as the case may be.

                  17.2.  Organization and  Qualification.  Optionor is a limited
partnership  duly  organized  and  existing  under  the  laws  of the  State  of
California.


         18.      WARRANTIES AND  REPRESENTATIONS  OF OPTIONEE.  Optionee hereby
represents and warrants to Optionor the following  matters as of the date hereof
and each of which shall also be true and  complete as of the Closing  Date as if
made on the  Closing  Date;  and each of the same shall be deemed  independently
material and shall survive the closing of the Escrow:

                  18.1.  Capacity.  Optionee  is,  and as of the  closing of the
Escrow  will be, duly  authorized  and  empowered  to enter into and perform its
obligations  pursuant  to this Option  Agreement  and all other  agreements  and
documents described or contemplated hereby, and the execution and performance of
this Option  Agreement by Optionee does not and will not  constitute a breach of
any agreement which is binding upon Optionee.

                  18.2.   Organization   and   Qualification.   Optionee   is  a
corporation duly organized and existing under the laws of the State of Delaware,
and is duly qualified to do business in the State of California.




         19.      DEVELOPMENT AGREEMENT.

                  A.  Optionee  shall use  commercially  reasonable  efforts  to
cooperate with Optionor in obtaining the approval and execution of a Development
Agreement by the City.

                  B. In the event  that  Optionor  is unable  for any  reason to
obtain the approval and execution by the City of the Development Agreement on or
before May 1, 1998 and if Optionor is not then in material  breach of any of its
obligations under this Option Agreement,  the Lease, the Leasehold  Improvements
Agreement,  the Phase II Purchase  Agreement or the Asset Sale  Agreement,  then
Optionor  may  terminate  this  Option  Agreement,   the  Lease,  the  Leasehold
Improvements  Agreement and the Phase II Purchase  Agreement  (but not less than
all of them) by written  notice to  Optionee  given at any time  between May 16,
1998 and June 1, 1998 and  before  the date upon  which  the City  executes  the
Development  Agreement.  Such termination  shall be effective upon and as of the
sixth (6th)  business day following the date upon which  Optionee  receives such
notice from Optionor,  unless Optionee  exercises the First Option prior to such
effective date of the  termination.  In the event that Optionee so exercises the
First Option,  then Optionee shall purchase the PG&E Option Property (subject to
the  provisions of Section 2.13) from  Optionor in its then  condition,  "as is,
with all faults",  and Optionor  shall have no further  obligation to obtain the
approval of the Development Agreement or any other approval from the City or any
other governmental agency.

                  C. In the event that  Optionor  has  obtained the approval and
execution of the Development Agreement on or before May 1, 1998, or in the event
that execution of the  Development  Agreement has not occurred on or before such
date  but  neither  Optionor  nor  Optionee  has  duly  executed  any  right  of
termination  of this Option  Agreement,  the Lease,  the Leasehold  Improvements
Agreement and the Phase II Purchase Agreement,  and prior to the Closing Date an
action is filed challenging the validity of any approvals for the Project issued
by the  City or any  other  governmental  agency  having  jurisdiction  over the
Project,  Optionor may request that Optionee  notify  Optionor,  within five (5)
days of the receipt by Optionee of such request from Optionor,  whether Optionee
will agree to pay all costs incurred by Optionor in connection  with the defense
of  such  action  and/or  in  connection  with  any  additional   processing  of
applications (including,  without limitation,  any further environmental review)
by the City or any  other  governmental  entity  required  as a  result  of such
action.  Optionee shall respond to the request of Optionor  within five (5) days
of the receipt by Optionee of such request.  In the event that Optionee fails to
respond to such request  within such period of five (5) days,  then Optionor may
give to Optionee a second request  stating the failure of Optionee to respond to
the first  request and further  stating that if Optionee does not respond to the
second  request  within  five (5) days of the receipt by Optionee of such second
request, Optionee will conclusively be deemed to have agreed to pay, in the same
manner as Phase II  Current  Costs,  all such costs of  defense  and  additional
processing.  In the event that Optionee  fails to respond to such request within
such  period  of five (5) days,  Optionee  will  conclusively  be deemed to have
agreed to pay all such costs of defense and additional  processing.  If Optionee
agrees (or is deemed to have agreed) to pay such costs, then the close of Escrow
shall be delayed until the fiftieth  (50th) day after the later to occur of: (i)
the issuance of a final, non-appealable judgment or order in such action (or the
expiration  of the  period  for the  appeal of any such  order or  judgment  has
expired  without  an appeal  having  been  filed)  denying  and  rejecting  such
challenge;  or, (ii) if such challenge is found in such action to be meritorious
and additional processing of applications  (including,  without limitation,  any
further  environmental  required  review) by the City or any other  governmental
entity is required,  all such additional processing has been completed,  and the
City has executed, or affirmed the validity of, the Development Agreement.




                  D. In the event that  Optionor  has  obtained the approval and
execution of the Development Agreement on or before May 1, 1998, or in the event
that execution of the  Development  Agreement has not occurred on or before such
date  but  neither  Optionor  nor  Optionee  has  duly  executed  any  right  of
termination  of this Option  Agreement,  the Lease,  the Leasehold  Improvements
Agreement and the Phase II Purchase Agreement,  and prior to the Closing Date an
action is filed challenging the validity of any approvals for the Project issued
by the  City or any  other  governmental  agency  having  jurisdiction  over the
Project,  and  Optionee  has not agreed (or is not deemed to have agreed) to pay
the costs described in Section 20.C, then Optionor may, in its sole  discretion,
give a written  notice to Optionee  delaying the closing of the Escrow until the
fiftieth  (50th) day after the later to occur of: (i) the  issuance  of a final,
non-appealable judgment or order in such action (or the expiration of the period
for the  appeal of any such  order or  judgment  has  expired  without an appeal
having  been filed)  denying  and  rejecting  such  challenge;  or, (ii) if such
challenge is found in such action to be meritorious and additional processing of
applications (including,  without limitation, any further environmental required
review)  by the City or any  other  governmental  entity is  required,  all such
additional processing has been completed, and the City has executed, or affirmed
the validity of, the Development Agreement.

                  E. In the event that  Optionor  has  obtained the approval and
execution of the Development Agreement on or before May 1, 1998, or in the event
that execution of the  Development  Agreement has not occurred on or before such
date  but  neither  Optionor  nor  Optionee  has  duly  executed  any  right  of
termination  of this Option  Agreement,  the Lease,  the Leasehold  Improvements
Agreement  and  the  Phase  II  Purchase  Agreement,  and  an  action  is  filed
challenging  the validity of any approvals for the Project issued by the City or
any  other  governmental  agency  having  jurisdiction  over the  Project,  then
Optionor  may  terminate  this  Option  Agreement,   the  Lease,  the  Leasehold
Improvements  Agreement and the Phase II Purchase  Agreement  (but not less than
all of them) by written  notice to Optionee  given at any time after May 1, 1998
and before the later of the date upon a final,  non-appealable judgment or order
has been  entered  in such  action (or the period for the appeal of any order or
judgment has expired  without an appeal  having been filed) or the date the City
executes the Development Agreement. Such termination shall be effective upon and
as of the sixth  (6th)  business  day  following  the date upon  which  Optionee
receives such notice from Optionor,  unless Optionee  exercises the First Option
prior to such effective date of the  termination.  In the event that Optionee so
exercises the First Option,  then: (i) Optionee shall purchase the PG&E Property
(subject to the provisions of Section 2.13) from Optionor in its then condition,
"as is, with all faults";  (ii)  Optionor  shall have no further  obligation  to
obtain the approval of the Development  Agreement or any other approval from the
City or any other governmental  agency or to defend any pending or future action
in respect of any such approval;  (iii) Optionee may elect, by written notice to
Optionor  given at least  forty (40) days prior to the Closing  Date,  either to
require that Optionor obtain from PG&E, and convey to Optionee at the closing of
the Escrow,  title to the PG&E  Property or to require that  Optionor  assign to
Optionee at the closing of the escrow, in lieu of the conveyance of title to the
PG&E Property to Optionee, all right, title and interest which Optionor then has
under the existing  agreements  between Optionor and PG&E for the acquisition of
the PG&E  Property  by  Optionor.  In the  event  that  Optionee  elects to have
Optionor  assign to Optionee all right,  title and interest  which Optionor then
has under the existing  agreements between Optionor and PG&E for the acquisition
of the PG&E Property by Optionor,  Optionor shall attempt to obtain the approval
of PG&E to such an assignment.  In the event that Optionor has not obtained such
approval on or before the Closing Date,  then Optionor  shall, in lieu of making
such an assignment at the closing of the Escrow,  agree in writing with Optionee
that Optionor will use all commercially reasonable efforts, when requested to do
so by Optionee,  to acquire and convey to Optionee  title to the PG&E  Property;
provided,  however,  that the  costs of all such  effort  shall be paid in their
entirety by Optionee.

                  F. In the event that  Optionor,  at the  closing of the Escrow
and in lieu of making at the closing of the Escrow an  assignment  of all right,
title and interest which Optionor then has





under the existing  agreements  between Optionor and PG&E for the acquisition of
the PG&E  Property by  Optionor,  agrees in writing  with  Optionee  pursuant to
Section 19.E that Optionor will use all commercially  reasonable  efforts,  when
requested to do so by Optionee,  to acquire and convey to Optionee  title to the
PG&E  Property,  but  Optionee  has not given such a request to  Optionor  on or
before the  forty-fifth  (45th) day  preceding  the day upon which the rights of
Optionor to purchase the PG&E Property  pursuant to such agreement would expire,
then Optionor may, in its sole  discretion,  give to Optionee an written  notice
terminating  the  obligation of Optionor to acquire and convey to Optionee title
to the PG&E Property,  and Optionor may thereafter purchase the PG&E Property at
its own cost and for its own account,  without any obligation to convey the PG&E
Property to  Optionee  or to  reimburse  to  Optionee  any  expense  incurred by
Optionee.


        20.   ASSUMPTION AND INDEMNITY WITH RESPECT TO OBLIGATIONS OF OPTIONOR.

                 20.1.  Assignment and Assumption of Obligations.

                         A. Upon the  exercise by Optionee of the First  Option,
Optionor  shall  assign  to  Optionee,  and  Optionee  shall  assume  all of the
obligations of Optionor under, all agreements with service  providers,  mortgage
brokers (but not lenders) or others  pertaining to the design or construction of
improvements  pursuant to the Leasehold  Improvements  Agreement  (excluding any
such agreements which Optionee  specifically  requests not be so assigned),  but
only if and to the extent that the costs incurred or to be incurred  pursuant to
such agreements would be a part of Aggregate  Development  Cost.  Optionor shall
also be  entitled  to cease  its  efforts  at  proceeding  with the  design  and
construction  of the  Project.  In the event of any  default by  Optionee of its
obligation  to purchase  the PG&E Option  Property  following an exercise of the
First Option, Optionee shall, upon the written request of Optionor,  assign such
agreements  back to  Optionor  (excluding  any such  agreements  which  Optionor
specifically  requests  not be so  assigned  back) and shall pay all amounts due
pursuant to such  agreements  in respect of services  rendered or  consideration
provided after the  assignment to Optionee and prior to the  assignment  back to
Optionor.

                         B.  Following  the  exercise  by Optionee of the Second
Option,  Optionor  shall,  at and as of the  closing  of the  Escrow,  assign to
Optionee,  and  Optionee  shall then assume all of the  obligations  of Optionor
under,  all  agreements  pertaining  to the  pertaining  to the  Phase I  Option
Property.  The agreements to be so assumed by Optionee  shall  include,  without
limitation,  any  personal  guaranty of any  indebtedness  or other  obligations
pertaining to the Project.

                         C.  Following  the  exercise  by  Optionee of the Third
Option,  Optionor  shall,  at and as of the  closing  of the  Escrow,  assign to
Optionee,  and  Optionee  shall then assume all of the  obligations  of Optionor
under, all agreements pertaining to the Phase I Option Property.  The agreements
to be so assumed by Optionee shall  include,  without  limitation,  any personal
guaranty of any indebtedness or other obligations pertaining to the Project.

                  2.02.  Indemnity  by  Optionee.   Optionee  hereby  agrees  to
indemnify,  defend and hold Optionor harmless from any claim, loss, or liability
arising from or in connection with any failure by Optionee to perform any of the
obligations  assumed by Optionee in accordance with Section 20.1. Such agreement
by Optionee to indemnify, defend and hold Optionor harmless shall apply, without
limitation, to any litigation pertaining to the entitlements for the development
of the Project or Phase II or the  environmental  review which was  conducted in
connection with the applications filed by Optionor for such entitlements.






                  20.3.  Indemnity  by  Optionor.   Optionor  hereby  agrees  to
indemnify,  defend and hold Optionee harmless from any claim, loss, or liability
arising from or in connection with any default by Optionor arising prior to such
assignment  in the  performance  by  Optionor  of the  obligations  of  Optionor
pursuant to the agreements  assigned by Optionor to Optionee in accordance  with
Section  20.1.  The  foregoing  notwithstanding:  (i) to  the  extent  that  the
performance of any such obligation by Optionor would have resulted in an expense
which  would be or have been a part a Phase I Project  Cost or Phase II  Current
Costs,  then the amount  which would have been a part of Phase I Project Cost or
Phase II Current Costs shall nevertheless  remain a part of such Phase I Project
Cost or Phase II  Current  Costs  and shall  not be an  amount  covered  by this
indemnity;  and,  (ii) to the  extent  that any  default  by  Optionor  arose in
connection  with any material  breach by Optionee of its  obligations  under the
Lease or the Leasehold  Improvements Agreement or the letter agreements referred
to in Section 3.5 of the Leasehold  Improvements  Agreement,  Optionor shall not
have any obligation to indemnify,  defend or hold Optionee harmless with respect
to such  default.  Such  agreement  by  Optionor to  indemnify,  defend and hold
Optionee harmless shall apply, without limitation,  to any litigation pertaining
to the  entitlements  for the  development  of the  Project  or  Phase II or the
environmental  review which was  conducted in connection  with the  applications
filed by Optionor for such entitlements.


         21.      CERTAIN RIGHTS AND OBLIGATIONS OF LENDERS.

                  21.1. Subordination to Rights of Lenders. Within ten (10) days
of a written  request from  Optionor to Optionee,  Optionee  shall  execute such
other and further  instruments as may be required to  subordinate  the rights of
Optionee  pursuant to this Option Agreement to the interests of any lender under
any mortgage,  deed of trust or other instrument securing the repayment of funds
for purposes of Construction Financing or Take-Out Financing; provided, however,
that such lender shall agree in writing that,  in the event of a foreclosure  of
the mortgage, deed of trust or other instrument,  whether by action, pursuant to
an exercise of the power of sale therein contained or otherwise,  or delivery of
a deed to the PG&E Option Property or the Phase I Option  Property,  as the case
may be, or any part thereof or interest therein,  in lieu of foreclosure of such
mortgage,  deed of trust or other  instrument,  or other  proceeding  brought to
enforce the rights of the lender  thereunder or under any other related security
documents  (collectively,  a "Foreclosure Sale Event"), then the Options, to the
extent  that,  and for so as,  any one (1) or more of them have not  expired  by
their respective terms  unexercised,  shall continue in full force and effect as
direct options between  Optionee and the succeeding  owner who acquires title to
all or any portion of the PG&E Option  Property or the Phase I Option  Property,
as the case may be, as a result of such  Foreclosure Sale Event, or any interest
therein, upon and subject to the terms,  covenants and conditions of this Option
Agreement,  and  each  succeeding  owner  will  be  bound  by all of  Optionor's
obligations under this Option Agreement, except that each succeeding owner shall
not:

                         A. be liable  under this Option  Agreement  for damages
accruing  by reason of any  previous  act or  omission of any prior owner of the
PG&E  Option  Property  or the  Phase I  Option  Property,  as the  case may be,
(including, without limitation, the lender or any receiver appointed in any such
foreclosure action or proceeding,  although each prior owner shall remain liable
in damages for its own such acts or omissions) with respect to the Options;

                         B.  be  subject  to any  offsets,  defenses  or  claims
against the  Purchase  Price for the PG&E Option  Property or the Phase I Option
Property,  as the  case  may be,  thereafter  becoming  due  under  this  Option
Agreement  which have accrued to Optionee  against said prior owner with respect
to the Options;

                         C.  be  bound  by  any   modification  of  this  Option
Agreement  or by any  prepayment  of the  Purchase  Price  for the  PG&E  Option
Property  or the Phase I Option  Property,  as 





the  case may be  (other  than any  deposit  in  Escrow),  or by any  waiver  or
forbearance on the part of Optionee made  subsequent to the date the lender made
the loan  unless  such  modification,  prepayment,  waiver  or  forbearance  was
approved in writing by the lender;

                         D. be  required  to  construct,  install or pay for the
construction  or  installation  of  any  improvement,  whether  pursuant  to the
Leasehold Improvements Agreement or otherwise; or,

                         E. be bound for return of any  deposit  made on account
of the  Purchase  Price  for the  PG&E  Option  Property  or the  Phase I Option
Property,  as the case may be (other  than any deposit  held by such  succeeding
owner or any deposit in Escrow but only if such  succeeding  owner has succeeded
to the rights of Optionor with respect to such  Escrow),  unless the same either
has been  deposited  in Escrow and such  succeeding  owner has  succeeded to the
rights of Optionor with respect to such Escrow or  specifically  transferred  to
such succeeding owner.

         Optionee  agrees  that the  succeeding  owner's  failure to perform the
obligations of Optionor or any other prior  landlord from which such  succeeding
owner is  expressly  and  specifically  excused  pursuant to the  provisions  of
Sections 21.1.A through 21.1.E above, inclusive,  shall not constitute a default
by the succeeding owner under the Lease or the Leasehold  Improvements Agreement
and Optionee  shall have no rights against such  succeeding  owner on account of
any  such  failure,  except  as  otherwise  expressly  provided  in this  Option
Agreement.  Nothing contained in this Option Agreement shall, however,  limit or
otherwise adversely affect the rights or remedies of Optionee against Optionor.

                  21.2  Termination  of Option upon  Foreclosure. In the event a
lender  records a notice of  default  or notice of sale or  otherwise  commences
proceeding to obtain a judicial  declaration of foreclosure  under any mortgage,
deed of trust or other  instrument  securing the repayment of funds for purposes
of Construction Financing or Take-Out Financing, such lender shall give Optionee
written  notice  offering  to sell the loan of such  lender to  Optionee  for an
amount  equal to the then  outstanding  principal  balance  and all  accrued and
unpaid  interest,  charges,  fees  and  penalties  due  under  the  Construction
Financing  (or,  if the  Construction  Financing  is not then  outstanding,  the
Take-Out  Financing),  which  amount  shall be specified in the notice from such
lender to  Optionee.  Optionee  may accept such offer by written  notice to such
lender given  within  thirty (30) days of the receipt by Optionee of such notice
from the lender.  In the event that Optionee  accepts such offer,  then Optionee
shall purchase,  and such lender shall assign to Optionee,  all of such lender's
right,  title and interest in the loan documents and instruments,  and shall pay
the purchase  price thereof to lender.  The closing of the purchase  transaction
shall occur on the fifteenth (15th) day following the acceptance of the offer by
Optionee.  In the event that  Optionee  does not accept  such offer  within such
period of thirty (30) days,  then such lender may, in its sole discretion and by
written  notice to Optionee,  terminate any rights of Optionee  pursuant to this
Option  Agreement  or any  contract  resulting  from any  exercise of any of the
Options, all without compensation to Optionee. Upon such a termination,  neither
Optionor nor such lender shall have any further  obligations  to Optionee  under
this Option  Agreement,  and Optionee shall execute,  acknowledge and deliver to
such lender a quitclaim of the rights of Optionee under this Option Agreement.


         22.      ADDITIONAL TERMS AND CONDITIONS.

                  22.1.  Waiver and  Termination of Subsequent  Options.  In the
event that  Optionee  acquires  the PG&E Option  Property  pursuant to the First
Option, such acquisition shall constitute a waiver of, and shall terminate,  the
Second  Option and the Third Option.  In the event that  Optionee  exercises the
Second Option,  such exercise shall constitute a waiver of, and shall terminate,
the Third Option.



                  22.2.  Payable as Phase II Current  Costs.  Where this  Option
Agreement  provides  that an amount is  payable  in the same  manner as Phase II
Current Costs, such amounts shall be payable  irrespective of whether or not any
Phase II Current Costs are payable, either then or at any other time.

                  22.3.  Brokerage  Commissions  of  Optionor.  Optionor  hereby
warrants and represents to Optionee that Optionor has not employed any broker or
other party to whom a  commission  or finder's  fee is due with  respect to this
transaction.  Optionor  hereby  agrees  to and does  hereby  indemnify  and hold
Optionee free and harmless from and against all claims,  costs,  liabilities  or
causes of action by any broker, agent or finder, licensed or otherwise, claiming
through,  under or by reason of the conduct of Optionor in connection  with this
transaction.

                  22.4.  Brokerage  Commissions  of  Optionee.  Optionee  hereby
warrants and represents to Optionor that Optionee has not employed any broker or
other party to whom a  commission  or finder's  fee is due with  respect to this
transaction other than Sandy Greenblatt of H&L Commercial Real Estate, who shall
be compensated by Optionee pursuant to a separate  agreement between such broker
and  Optionee.  Optionee  hereby  agrees to and does hereby  indemnify  and hold
Optionor free and harmless from and against all claims,  costs,  liabilities  or
causes of action by any broker, agent or finder, licensed or otherwise, claiming
through,  under or by reason of the conduct of Optionee in connection  with this
transaction.

                  22.5.  Options  Personal to Optionee.  The First  Option,  the
Second Option and the Third Option are all personal to Fair,  Isaac and Company,
Inc.,  a Delaware  corporation,  and may not be assigned,  transferred  or sold,
either  directly or  indirectly,  to any other entity or person.  The  foregoing
notwithstanding,  Optionee may direct that Optionor  convey the Option  Property
directly to an entity which is  wholly-owned by Optionee or which is required to
effectuate  any  off-balance  sheet  financing  being  undertaken by Optionee in
connection with the development of the PG&E Property;  provided,  however, that:
(i) such entity  executes  and  delivers to Optionor an  agreement,  in form and
substance reasonably satisfactory to Optionor,  whereby such entity agrees to be
bound by all of the  elections  and  actions of  Optionee  with  respect to this
Option Agreement,  the Lease or the Leasehold Improvements Agreement;  (ii) such
entity  executes and delivers to Optionor an  agreement,  in form and  substance
reasonably  satisfactory  to  Optionor,  whereby  such entity  assumes,  for the
express benefit of Optionor,  all of the obligations of Optionor under the Lease
and the  Leasehold  Improvements  Agreement  and  all  other  obligations  which
Optionee would have been required to assume had the PG&E Option  Property or the
Phase I Option  Property,  as the case may be, been conveyed to Optionee;  (iii)
Optionee  shall not be released  from any  obligation  or  liability of Optionee
hereunder; and, (iv) Optionee shall indemnify, defend and hold Optionor harmless
from and any  claim,  cost,  liability  or cause of  action  arising  from or in
connection  with the fact that the PG&E  Option  Property  or the Phase I Option
Property, as the case may be, is conveyed to such entity.

                  22.6.  Foreign Investor Tax Reporting  Requirements.  Optionor
hereby  warrants  to  Optionee  that  such  Optionor  is not a  foreign  person,
non-resident alien, foreign corporation,  foreign partnership,  foreign trust or
foreign estate, within the meaning of those terms set forth in Sections 1445 and
7701 of the Internal  Revenue  Code of the United  States.  Optionor  shall also
warrant,  represent  and  certify to  Optionee at the closing of the Escrow that
Optionor is a foreign person,  non-resident alien, foreign corporation,  foreign
partnership,  foreign trust or foreign estate, within the meaning of those terms
set forth in Sections  1445 and 7701 of the Internal  Revenue Code of the United
States.  Optionor  shall also  certify to  Optionee  whether or not  Optionee is
required to withhold a portion of the sales price from Optionor  pursuant to the
provisions of Sections  18805 and 26131 of the  California  Revenue and Taxation
Code,  and shall  complete  and deliver to Optionee at the closing of the Escrow
Form 590 ("Withholding  Exemption  




Certificate") of the California Franchise Tax Board to establish such exemption.

                  22.7. Relationship. Nothing contained in this Option Agreement
shall be deemed or  construed  by the parties or by any third person to create a
relationship  of principal and agent or a  partnership  or a joint venture among
Optionee, Optionor or between any two or more of them and any third party.

                  22.8.  Time.  Time is of the essence of this Option  Agreement
and of each provision hereof. The time in which any act required or permitted by
this Option  Agreement is to be performed  shall be  determined by excluding the
day upon which the event occurs from whence the time commences.  If the last day
upon which  performance  would otherwise be required or permitted is a Saturday,
Sunday or holiday,  then the time for performance  shall be extended to the next
day which is not a Saturday,  Sunday or holiday.  The term "holiday"  shall mean
all and only mandatory  federal  holidays during which  deliveries by the United
States Postal Service are suspended.  All references herein to a particular time
of day shall be to pacific standard time or, if then in effect, pacific daylight
time.

                  22.9.  Condemnation.  In the event that the PG&E  Property (or
any portion  thereof,  the taking of which would  materially  interfere with the
operation,  use and enjoyment of the PG&E Property for purposes  consistent with
the  provisions  of the  Lease)  is  the  subject  of a  written  notice  from a
governmental  agency having the power of eminent  domain that the governing body
or board of such  agency has made a  preliminary  determination  that the agency
plans  to  acquire,  or has made a final  determination  that  the  agency  will
acquire,  the PG&E Property (or any portion  thereof,  the taking of which would
materially interfere with the operation,  use and enjoyment of the PG&E Property
for purposes  consistent with the provisions of the Lease) by an exercise of the
power of eminent  domain,  and Optionee  elects to  terminate  the Lease and the
Leasehold  Improvements  Agreement in accordance with their respective terms due
to such taking,  this Option  Agreement shall terminate as to the portion of the
PG&E Property as to which the Lease and the Lease Improvements Agreement were so
terminated.  In the event that this Option Agreement is terminated in accordance
with the provisions of this Section 22.9, the respective  rights and obligations
of Optionee and of Optionor  pursuant to this Option  Agreement  shall thereupon
terminate.  In the  event  that  this  Option  Agreement  is not  terminated  in
accordance  with the  provisions of this Section 22.9, the closing of the Escrow
following  an exercise of any of the Options  shall not be averted or delayed by
reason of any exercise of the power of eminent  domain with respect to a portion
of the PG&E  Property,  although  the award  paid or to be paid  respect of such
taking shall be assigned (or, if received by Optionor,  transferred) to Optionee
at the closing of the Escrow.  Optionor shall,  until the closing of the Escrow,
promptly notify Optionee of any condemnation or threat of condemnation  from any
governmental  entity with respect to the PG&E Property,  or any portion thereof,
but only if Optionor has actual notice of such condemnation or threat thereof.

                  22.10. Risk of Loss. In the event that Optionee duly exercises
one  of  the  Options  and  the  Site  and  Shell  Improvements  or  the  Tenant
Improvements or both are damaged or destroyed prior to the closing of the Escrow
(whether or not such damage or destruction  precedes or follows such  exercise),
then,  within  fifteen (15) days of written notice of such damage or destruction
from Optionor to Optionee,  Optionee shall elect either: (i) to proceed with the
closing of the Escrow and accept the Site and Shell  Improvements  or the Tenant
Improvements,  with the  Closing  Date being  extended  to permit  Optionor  and
Optionee  to perform  any  obligations  which  either of them may have under the
Lease or the Leasehold  Improvements Agreement to repair or replace the portions
of the Site and Shell  Improvements  or the  Tenant  Improvements  which were so
damaged or destroyed;  or, (ii) to accept the Site and Shell Improvements or the
Tenant Improvements in their then condition, "as is, with all faults",  together
with all insurance proceeds payable in respect of such damage or destruction, to
the extent that such  proceeds  are not claimed by the holder of any mortgage or
deed of trust  encumbering  the Phase I Land (in the event of which  



claim,  the Purchase  Price shall be reduced by an amount equal to the amount of
such proceeds so claimed by such holder).

                  22.11. Escrow Cancellation  Charges. If the Escrow should fail
to close by reason of a default by Optionor  hereunder,  Optionor  shall pay all
title policy or escrow cancellation  charges. If the Escrow should fail to close
by reason of a  default  by  Optionee  hereunder,  Optionee  shall pay all title
policy or escrow  cancellation  charges.  If the Escrow should fail to close for
any reason other than one of the  foregoing,  Optionee shall pay one-half of any
title policy or escrow  cancellation  charges and Optionor shall pay one-half of
any title policy or escrow cancellation charges.

                  22.12.  Supersedence.  This Option  Agreement  constitutes the
understanding  and agreement of the parties hereto pertaining to the Options and
all prior  agreements,  understandings  or  representations  pertaining to those
matters are hereby superseded in their entirety.

                  22.13.  Amendments.  This Option  Agreement  is not subject to
modification or amendment except by a writing executed by Optionee and Optionor.

                  22.14.   Severability.   Nothing  contained  herein  shall  be
construed  so as to require  the  commission  of any act  contrary  to law,  and
whenever there is any conflict  between any provision  herein and any present or
future statute,  law, ordinance or regulation contrary to which the parties have
no legal right to contract,  the latter shall prevail, but the provision of this
Option Agreement affected shall be limited only to the extent necessary to bring
it within the requirements of such statute, law, ordinance or regulation.

                  22.15.   Choice  of  Law.  This  Option  Agreement,   and  the
interpretation  and  enforcement  thereof,  shall be governed by the laws of the
State of California.

                  22.16.  Waivers.  No failure by Optionee or Optionor to insist
upon a strict  performance  by the others of any covenant,  term or condition of
this Option  Agreement  or to  exercise  any right or remedy  consequent  upon a
breach  thereof  shall  constitute  a  waiver  of any  other  breach  or of such
covenant,  term or condition. No waiver of any breach shall affect or alter this
Option Agreement, but each and every covenant, term and condition of this Option
Agreement  shall  continue  in full force and effect  with  respect to any other
existing or subsequent breach.

                  22.17.  Survival.  All covenants,  agreements and  indemnities
made and all  obligations  to be performed  under the  provisions of this Option
Agreement,  to the extent not  performed  at or before the closing of the Escrow
(including,  without limitation,  Optionor's obligation to execute,  acknowledge
and deliver to Optionee  quitclaim  deeds and other  documents  as  described in
Sections 8.4 and 23.2),  shall survive the closing of the Escrow,  and shall not
be deemed to merge with the Grant Deed upon delivery or acceptance thereof.

                  22.18.  Notices.  Any notice or other communication  hereunder
shall be in writing and shall be given personally, or by prepaid registered mail
with return  receipt  requested or by  commercial  airfreight  delivery  service
guaranteeing  next  day  delivery.  Notices  may  also  effectively  be given by
transmittal  over  electronic  transmitting  devices  such as telex or  telecopy
machine  if the party to whom the  notice is being sent has such a device in its
office, provided that a standard machine-printed  confirmation of the electronic
transmission is provided and also provided that a complete copy of any notice so
transmitted  shall also be mailed in the same  manner as  required  for a mailed
notice.  Notices which are mailed or forwarded by commercial airfreight delivery
service shall be addressed as follows:

                  If to Optionee:


                           Fair, Isaac and Company, Inc.
                           120 North Redwood Drive
                           San Rafael, CA  94903-1996
                           Attn:  Peter McCorkell, Esq.

                  If to Optionor:

                           Village Builders, L.P.
                           562 Mission St., Suite 201
                           San Francisco, CA  94105-2906
                           Attn:  Controller

                  If to the Title Company:

                           First American Title Company of Marin
                           650 Fifth Avenue
                           San Rafael, CA  94901

                  Any notice required or permitted to be given under this Option
Agreement shall be deemed given and received (i) when personally delivered, (ii)
upon transmission when sent by electronic  transmitting  device (provided that a
copy of such  notice  shall  also be  deposited  with the United  States  Postal
Service,  first-class  postage  prepaid  and return  receipt  requested,  within
twenty-four  (24) hours after such  transmission),  (iii) the next day following
the deposit of such notice with a commercial  airfreight  delivery service under
circumstances  where next day  delivery is  requested  or is  standard,  or (iv)
forty-eight  (48) hours after  deposit with the United  States  Postal  Service,
first-class postage prepaid and return receipt requested.

         The  address  to which  notices  shall be sent may be changed by giving
notice of such change in accordance with the provisions of this Section 22.18.

                  22.19.  Attorneys'  Fees.  If Optionor or Optionee  brings any
arbitration  or  action  for  any  relief  against  the  other,  declaratory  or
otherwise,  arising out of this Option Agreement,  the losing party shall pay to
the prevailing party a reasonable sum for attorneys' fees, which shall be deemed
to have accrued on the  commencement of such action and shall be paid whether or
not the arbitration or action is prosecuted to judgment.

                  22.20.  Further  Assurances.  Optionor and Optionee shall each
execute  such other and  further  agreements  as may  reasonably  be required to
effectuate the purposes of this Option Agreement,  provided that no such further
agreement shall  materially  alter the rights and the obligations of the parties
pursuant to this Option  Agreement.  Without  limiting the  foregoing,  Optionor
shall at all times  after the close of Escrow  cooperate  with  Optionee  in its
dealings with the City, the Agency and all  consultants  and other third parties
with  whom  Optionor  has  worked in  connection  with the  Project  (excluding,
however,  Mr.  Martin  Zemcik  and Mr. E.  Glenn  Isaacson),  without,  however,
Optionor being required to incur any cost in connection with that cooperation.

                  22.21.  Separate  Counterparts.  This Option  Agreement may be
executed in one or more separate counterparts,  each of which, when so executed,
shall be deemed to be an original. Such counterparts, together, shall constitute
the one and the same instrument.

                  22.22.  Exhibits.  All Exhibits  which are referred to in this
Option Agreement and are attached hereto,  are incorporated  herein by reference
and made a part hereof.



                  22.23. Captions,  Number and Gender. The captions appearing at
the commencement of the Sections and subsections hereof are descriptive only and
for convenience in reference.  Should there be any conflict between such caption
and the Section or subsection  at the head of which it appears,  the Section and
not such  caption  shall  control  and govern the  construction  of this  Option
Agreement.  Unless the context otherwise  requires,  singular nouns and pronouns
used in this  Option  Agreement  are to be  construed  as  including  the plural
thereof.  For  convenience  and brevity,  masculine  pronouns are used herein in
their generic sense as a reference to all persons, without regard to sex.

                  22.24.  Memorandum  of Option.  Concurrently  with  Optionor's
acquisition of fee title to the PG&E Property or any portion  thereof,  Optionor
and Optionee shall execute, acknowledge and record a Memorandum of Option in the
form of attached Exhibit G.

         23.      CONTINGENT PURCHASE PRICE.

                  23.1.  Payment  of  Contingent  Purchase  Price.  If  Optionee
exercises  the First  Option and  acquires  the PG&E  Option  Property  pursuant
thereto  and,  at any time prior to the third (3rd)  anniversary  of the Closing
Date,  Optionee  offers to sell,  transfer  or convey any  interest  in the PG&E
Option  Property or any part thereof to a purchaser or  transferee  which is not
either (a) a Synthetic Lease Lessor, or (b) directly or indirectly  wholly-owned
by  Optionee,  then  Optionee  shall  deliver  to  Optionor  written  notice  of
Optionee's  intention  or offer to sell,  transfer or convey any interest in the
PG&E Option Property or any part thereof.  Concurrently with the consummation of
such sale, transfer or conveyance, Optionee shall pay to Optionor the Contingent
Purchase Price in cash or immediately available funds.




                  23.2. Recordation of Memorandum of Agreement;  Quitclaim Deed.
On the  Closing  Date of  Optionee's  acquisition  of the PG&E  Option  Property
pursuant to an exercise of the First Option by  Optionee,  Optionor and Optionee
shall each execute, acknowledge and record a memorandum of agreement in the form
attached  hereto as  Exhibit  H. Upon the  earlier to occur of the date on which
Optionee pays to Optionor the Contingent  Purchase  Price,  or the date which is
five (5) days  after the  receipt by  Optionor  of a written  representation  by
Optionee that Optionee has not, at any time prior to the third (3rd) anniversary
of such Closing  Date,  offered to sell,  transfer or convey any interest in the
PG&E  Option  Property  or any part  thereof  in breach of  Section  23.1,  then
Optionor  shall execute,  acknowledge  and deliver to Optionee (or to such other
person or entity as Optionee  may  request) a quitclaim  deed (and/or such other
documents as may be reasonably required) expressly terminating the memorandum of
agreement  described  above  only  with  respect  to the  obligation  to pay the
Contingent  Purchase Price and quitclaiming to Optionee (or to such other person
or entity as Optionee may request) all of Optionor's  right,  title and interest
in and to the Contingent  Purchase Price.  Optionor's delivery of such quitclaim
deed (and/or such other  documents) shall be conditioned only on receipt of: (a)
the  Contingent  Purchase  Price,  if Optionee has offered to sell,  transfer or
convey any interest in the PG&E Option  Property in breach of Section  23.1;  or
(b) Optionee's written representation as described above in this Section 23.2.

         IN WITNESS  WHEREOF  the  parties  hereto  have  executed  this  Option
Agreement as of the date first written above.

                                    OPTIONOR:

                                    Village Builders, L.P.,
                                    a California limited partnership

                                    By   VPI, Inc., a California corporation,
                                         its General Partner



                                         By
                                            ------------------------------------
                                              
                                           Its
                                              ----------------------------------

                                    OPTIONEE:

                                    Fair, Isaac and Company, Inc.,
                                    a Delaware corporation


                                    By
                                         ---------------------------------------
                                              
                                       Its
                                            ----------------------------------




                                TABLE OF CONTENTS

Page RECITALS .........................................................................................................1 1. DEFINITIONS..............................................................................................2 1.1. "Access Agreement"............................................................................2 1.2. "Base Building Improvements"..................................................................2 1.3. "Break-Up Fee Maximum Amount".................................................................2 1.4. "Buildings"...................................................................................2 1.5. "City"........................................................................................2 1.6. "Closing Date"................................................................................2 1.7. "Construction Financing"......................................................................2 1.8. "Contingent Purchase Price"...................................................................2 1.9. "Declaration".................................................................................3 1.10. "Development Agreement".......................................................................3 1.11. "Development Management Fee"..................................................................3 1.12. "Escrow"......................................................................................3 1.13. "First Option"................................................................................3 1.14. "First Option Permitted Exceptions"...........................................................3 1.15. "First Option Purchase Price".................................................................3 1.16. "First Option Term Expiration Date"...........................................................3 1.17. "Hazardous Materials".........................................................................3 1.18. "Laws"........................................................................................3 1.19. "Lease".......................................................................................4 1.20. "Leasehold Improvements Agreement"............................................................4 1.21. "Option"......................................................................................4 1.22. "Optionee"....................................................................................4 1.23. "Optionor"....................................................................................4 1.24. "Parking Easement Agreement"..................................................................4 1.25. "Permitted Exceptions"........................................................................4 1.27. "PG&E Property"...............................................................................4 1.28. "Phase I Land"................................................................................5 1.29. "Phase I Option Property".....................................................................5 1.30. "Phase I Project Cost"........................................................................5 1.31. "Phase II"....................................................................................5 1.32. "Phase II Current Costs"......................................................................5 1.33. "Phase II Land"...............................................................................5 1.34. "Phase II Purchase Agreement".................................................................6 1.35. "Project".....................................................................................6 1.36. "Purchase Price"..............................................................................6 1.37. "Second Option"...............................................................................6 1.38. "Second Option Permitted Exceptions"..........................................................6 1.39. "Second Option Purchase Price"................................................................6 1.40. "Second Option Term Expiration Date"..........................................................6 1.41. "Site and Shell Improvements".................................................................6 1.42. "Substantial Completion"......................................................................6 1.43. "Synthetic Lease Lessor"......................................................................6 1.44. "Synthetic Lease Transaction".................................................................7 1.45. "Take-Out Financing"..........................................................................7 1.46. "Taking"......................................................................................7 1.47. "Tenant Improvements".........................................................................7 1.48. "Third Option"................................................................................7 1.49. "Third Option Permitted Exceptions"...........................................................7 1.50. "Third Option Purchase Price".................................................................7 1.51. "Third Option Term Expiration Date"...........................................................7 1.52. "Title Company"...............................................................................7 2. FIRST OPTION.............................................................................................8 -xlii- 2.1. Grant of First Option.........................................................................8 2.2. Term of First Option..........................................................................8 2.3. Method of Exercise of First Option............................................................8 2.4. Effect of Exercise of First Option............................................................8 2.5. Amount of First Option Purchase Price.........................................................9 2.6. Agreement of the Parties as to First Option Purchase Price....................................9 2.7. Payment of First Option Purchase Price...................................................... 10 2.8. Closing of the Escrow Following Exercise of First Option.................................... 10 2.9. Delays in Closing of the Escrow............................................................. 11 2.10. Condition of First Option Title............................................................. 11 2.11. LIQUIDATED DAMAGES FOR BREACH BY OPTIONEE FOLLOWING EXERCISE OF FIRST OPTION................ 12 2.12. Additional Costs............................................................................ 13 2.13. Assignment of Asset Sale Agreement.......................................................... 14 2.14. Right to Redesignate Designated Treasury Rate............................................... 14 3. SECOND OPTION.......................................................................................... 14 3.1. Grant of Second Option...................................................................... 14 3.2. Term of Second Option....................................................................... 14 3.3. Method of Exercise of Second Option......................................................... 15 3.4. Effect of Exercise of Second Option......................................................... 15 3.5. Amount of Second Option Purchase Price...................................................... 15 3.6. Agreement of the Parties as to Second Option Purchase Price................................. 16 3.7. Payment of Second Option Purchase Price..................................................... 16 3.8. Construction of Improvements................................................................ 16 3.9. Execution of Buy-Sell Agreement Following Exercise of Second Option......................... 17 3.10. Closing of the Escrow Following Exercise of Second Option................................... 17 3.11. Condition of Second Option Title............................................................ 17 3.12. LIQUIDATED DAMAGES FOR BREACH BY OPTIONEE FOLLOWING EXERCISE OF SECOND OPTION............... 18 3.13. Right to Redesignate Designated Treasury Date............................................... 19 4. THIRD OPTION........................................................................................... 20 4.1. Grant of Third Option....................................................................... 20 4.2. Term of Third Option........................................................................ 20 4.3. Method of Exercise of Third Option.......................................................... 20 4.4. Effect of Exercise of Third Option.......................................................... 20 4.5. Amount of Third Option Purchase Price....................................................... 21 4.6. Agreement of the Parties as to Third Option Purchase Price.................................. 21 4.7. Payment of Third Option Purchase Price...................................................... 21 4.8. Construction of Improvements................................................................ 22 4.9. Closing of the Escrow Following Exercise of Third Option.................................... 22 4.10. Condition of Third Option Title............................................................. 22 4.11. LIQUIDATED DAMAGES FOR BREACH BY OPTIONEE FOLLOWING EXERCISE OF THIRD OPTION................ 23 4.12. Right to Redesignate Designated Treasury Date............................................... 24 4.13. Termination of Third Option................................................................. 24 5. EXPIRATION OF OPTION................................................................................... 25 6. ARBITRATION OF DISPUTES; DETERMINATION OF PURCHASE PRICE............................................... 25 7. ADJUSTMENT TO REFLECT FINAL PHASE I PROJECT COST....................................................... 26 7.1. Determination of Revised Final Phase I Project Cost......................................... 26 -xliii- 7.2. Possible Review of Revised Final Aggregate Development Cost or Phase I Project Cost......... 27 7.3. Payment to Adjust Aggregate Development Cost or Phase I Project Cost........................ 27 8. TITLE AND DEED......................................................................................... 28 8.1. Condition of Title to Phase I Land.......................................................... 28 8.2. Grant Deed.................................................................................. 28 8.3. Title Insurance............................................................................. 28 8.4. Use Restriction............................................................................. 28 9. CLOSING OF THE ESCROW.................................................................................. 29 9.1. Retention of Title Company.................................................................. 29 9.2. Closing Date................................................................................ 29 9.3. Termination of the Lease and Leasehold Improvements Agreement............................... 29 9.4. Escrow Instructions......................................................................... 29 9.5. Conditions to Closing for Benefit of Optionor............................................... 29 9.6. Conditions to Closing for Benefit of Optionee............................................... 30 9.7. Compliance with Subdivision Map Act......................................................... 31 10. CLOSING PROCEDURES..................................................................................... 32 10.1. Order of Performance........................................................................ 32 10.2. Notice of Deficiencies...................................................................... 32 11. EXPENSES OF CONVEYANCE................................................................................. 33 11.1. Title Insurance............................................................................. 33 11.2. Deed Preparation............................................................................ 33 11.3. Prepayment Charges and Costs................................................................ 33 11.4. Recording Costs............................................................................. 33 11.5. Escrow Fees................................................................................. 33 11.6. Transfer Taxes.............................................................................. 33 12. PRORATIONS............................................................................................. 33 12.1. Real Estate Taxes and Personal Property Taxes............................................... 33 12.2. Rentals..................................................................................... 34 12.3. Utilities................................................................................... 34 12.4. Other Management Expenses................................................................... 34 13. POSSESSION............................................................................................. 34 14. CONDITION OF PROPERTY.................................................................................. 34 14.1. Representations by Optionor................................................................. 34 14.2. Property Sold "AS IS"....................................................................... 34 15. SPECIFIC PERFORMANCE................................................................................... 35 16. PERFORMANCE UNDER OTHER AGREEMENTS..................................................................... 35 17. WARRANTIES AND REPRESENTATIONS OF OPTIONOR............................................................. 35 17.1. Capacity.................................................................................... 35 17.2. Organization and Qualification.............................................................. 36 18. WARRANTIES AND REPRESENTATIONS OF OPTIONEE............................................................. 36 18.1. Capacity.................................................................................... 36 18.2. Organization and Qualification.............................................................. 36 -xliv- 19. DEVELOPMENT AGREEMENT.................................................................................. 36 20. ASSUMPTION AND INDEMNITY WITH RESPECT TO OBLIGATIONS OF OPTIONOR....................................... 39 20.1. Assignment and Assumption of Obligations.................................................... 39 20.2. Indemnity by Optionee....................................................................... 39 20.3. Indemnity by Optionor....................................................................... 40 21. CERTAIN RIGHTS AND OBLIGATIONS OF LENDERS.............................................................. 40 21.1. Subordination to Rights of Lenders.......................................................... 40 21.2. Termination of Option upon Foreclosure...................................................... 41 22. ADDITIONAL TERMS AND CONDITIONS........................................................................ 42 22.1. Waiver and Termination of Subsequent Options................................................ 42 22.2. Payable as Phase II Current Costs........................................................... 42 22.3. Brokerage Commissions of Optionor........................................................... 42 22.4. Brokerage Commissions of Optionee........................................................... 42 22.5. Options Personal to Optionee................................................................ 43 22.6. Foreign Investor Tax Reporting Requirements................................................. 43 22.7. Relationship................................................................................ 43 22.8. Time........................................................................................ 43 22.9. Condemnation................................................................................ 44 22.10. Risk of Loss................................................................................ 44 22.11. Escrow Cancellation Charges................................................................. 44 22.12. Supersedence................................................................................ 45 22.13. Amendments.................................................................................. 45 22.14. Severability................................................................................ 45 22.15. Choice of Law............................................................................... 45 22.16. Waivers..................................................................................... 45 22.17. Survival.................................................................................... 45 22.18. Notices..................................................................................... 45 22.19. Attorneys' Fees............................................................................. 46 22.20. Further Assurances.......................................................................... 46 22.21. Separate Counterparts....................................................................... 47 22.22. Exhibits.................................................................................... 47 22.23. Captions, Number and Gender................................................................. 47 22.24. Memorandum of Option........................................................................ 47 23. CONTINGENT PURCHASE PRICE.............................................................................. 47 23.1. Payment of Contingent Purchase Price........................................................ 47 23.2. Recordation of Memorandum of Agreement; Quitclaim Deed...................................... 47 * * * * * *
TABLE OF EXHIBIT REFERENCES -xlv-


                        LEASEHOLD IMPROVEMENTS AGREEMENT




                                 by and between



                             Village Builders, L.P.,
                        a California limited partnership


                                  ("Landlord")


                                       and


                         Fair, Isaac and Company, Inc.,
                             a Delaware corporation


                                   ("Tenant")


                          Dated as of November 26, 1997

                                                                  EXHIBIT 10.34


                        LEASEHOLD IMPROVEMENTS AGREEMENT


         THIS LEASEHOLD  IMPROVEMENTS  AGREEMENT (this  "Leasehold  Improvements
Agreement")  is made and entered into as of November  26,  1997,  by and between
Village  Builders,   L.P.,  a  California  limited  partnership  (herein  called
"Landlord"),  and Fair, Isaac and Company,  Inc., a Delaware corporation (herein
called "Tenant").


                                    RECITALS

         A. Landlord is the holder of an option to acquire those certain parcels
of real  property  commonly  known as 750 and 751  Lindaro  Street,  San Rafael,
California, more particularly described on Exhibit D hereto and described on the
tentative  site plan  attached  hereto as Exhibit G (the "PG&E  Property").  The
parties  acknowledge  that the legal  description  of the PG&E  Property  may be
revised in accordance  with the  provisions of the Option  Agreement (as defined
below).

         B. The City of San Rafael or its Redevelopment Agency (the "Agency") is
the owner of those  certain  parcels  of real  property  described  on Exhibit C
hereto  (the "City  Property").  The Agency has begun the process  necessary  to
dispose of the City Property, and it is Landlord's intention to obtain an option
to purchase the City Property from the Agency if possible.

         C. Landlord and Tenant are entering into a "Lease  Agreement (Phase I)"
of even date herewith (the "Lease"),  whereby Landlord will lease to Tenant, and
Tenant  will  lease from  Landlord,  upon and  subject to the terms,  covenants,
provisions  and  conditions  of the Lease,  certain real  property  described in
Exhibit  A hereto  and  certain  improvements  to be  constructed  on such  real
property in accordance with this Leasehold Improvements Agreement.

         D. Landlord and Tenant desire to enter into this Leasehold Improvements
Agreement for the purpose of establishing  the procedures  which they shall each
follow in the development and approval of plans and  specifications for the base
building  improvements  and the tenant  improvements  which are to be demised to
Tenant  pursuant to the Lease,  in the making and processing of  applications to
the  Agency  and  the  City  of San  Rafael  for the  approval  of the  proposed
construction of such base building improvements and the tenant improvements, and
for the actual  construction of such base building  improvements  and the tenant
improvements.


         NOW, THEREFORE,  for good and valuable  consideration,  the receipt and
sufficiency of which is hereby acknowledged,  Landlord and Tenant mutually agree
as follows:

         1.       DEFINITIONS.

                  Certain terms used in this  Leasehold  Improvements  Agreement
and the  Exhibits  hereto  shall have the  meaning set forth below for each such
term.  Certain  other terms shall have the meaning set forth  elsewhere  in this
Leasehold  Improvements  Agreement  and the Exhibits  hereto.  Unless  otherwise
defined in this  Leasehold  Improvements  Agreement or in the  Exhibits  hereto,
other terms shall have the meaning, if any, specifically ascribed to them in the
Lease.

                  1.1.  "Agreed Spread for Take-Out  Financing"  shall mean five
hundred  fifteen  (515) basis points,  unless Tenant  exercises the First Option
under  the  Option  Agreement,  in  which  event  "Agreed  Spread  for  Take-Out
Financing"  shall mean five  hundred  forty (540) basis  points.  The  foregoing
notwithstanding,  in the  event  that the  Construction  Financing  or  Take-Out
Financing or both selected by Landlord for the Project  requires that prevailing
wages be paid or that 

                                                                             -1-


union labor be used in  connection  with the  construction  of the  Project,  as
provided  in Section 0, the  "Agreed  Spread for  Take-Out  Financing"  shall be
reduced to five hundred five (505) basis  points,  unless  Tenant  exercises the
First  Option  under the Option  Agreement,  in which event  "Agreed  Spread for
Take-Out  Financing"  shall mean five  hundred  thirty (530) basis  points.  The
Agreed  Spread  for  Take-Out  Financing  shall  be  subject  to  adjustment  in
accordance with the provisions of Section 0.

                  1.2. "Agreed Take-Out  Financing Closing Costs" shall mean the
sum of Five Hundred Sixty-Five Thousand Dollars ($565,000.00).

                  1.3. "Aggregate  Development Cost" shall mean the aggregate of
all costs paid or to be paid, or reimbursed or to be reimbursed, by Landlord and
associated with the  development of the Project or improvements  upon or serving
the Phase II Land (but only to the extent that  improvements upon or serving the
Phase II Land  are  constructed  during  or  before  the  Construction  Period),
including without limitation: (i) a sum equal to the Net Stipulated Value of the
PG&E Property;  (ii) the actual cost to Landlord of arranging the acquisition of
the City Property;  (iii) all actual costs of the design and construction of the
Site  and  Shell  Improvements  and of all  improvements  to the  Phase II Land,
including without limitation parking areas,  landscaping,  walkways,  driveways;
(iv) the Tenant Improvement  Allowance;  (v) all fees and charges of architects,
engineers,  materials  testing  consultants  and other  design  or  construction
consultants;  (vi) any costs of  reproducing  plans;  (vii) any fees or costs of
providing  security to the Project or to the site of any  off-site  construction
during  the  Construction  Period;  (viii)  all  fees and  costs in  soliciting,
evaluating  and accepting  bids for any aspect of the work which  Landlord is to
cause to be performed pursuant to this Leasehold  Improvements  Agreement;  (ix)
all reasonable fees and costs (including, without limitation,  application fees,
commitment fees, appraisal fees, deposits, closing costs and loan fees) incurred
in connection with the Construction  Financing for the Project or any loan which
would have provided Construction Financing, even if such loan was not closed due
to the  expiration  for any reason of the lender's  commitment to make such loan
(provided,  however,  that if such  expiration  was solely  caused by Landlord's
failure to perform  obligations  under the commitment which were in the complete
control  of  Landlord,  then such fees and costs  with  respect  to the  expired
commitment  shall  not be  included  in  Aggregate  Development  Cost);  (x) all
reasonable fees and costs  (including,  without  limitation,  application  fees,
commitment  fees,  appraisal  fees and  deposits)  incurred in  connection  with
investigating or applying for and obtaining  Take-Out  Financing,  but only with
respect to a  particular  loan  which is not closed due to causes  which are not
completely  within the control of Landlord or if Tenant  requests  that Landlord
select the Designated  Treasury Rate in accordance with Section 19.2.A and, as a
result, Landlord must subsequently obtain by another loan commitment pursuant to
Section 19.2 (in which event break-up fees and other fees, costs, charges of the
kinds  and to the  extent  described  in  Section  1.3 of the  Option  Agreement
pertaining to Landlord's prior loan commitment shall also be a part of Aggregate
Development  Cost)  (except to the  extent  that such fees and costs are paid by
Tenant pursuant to Section 0); (xi) the Agreed Take-Out Financing Closing Costs;
(xii)  all  permit  fees and all fees  and  charges  for  services  rendered  by
employees of the City of San Rafael or consultants hired directly by the City of
San Rafael in connection with the application for, or issuance of, the necessary
demolition,  grading, building and similar permits required for the construction
of the Project; (xiii) all reasonable legal fees incurred in connection with the
Project, including,  without limitation,  legal fees incurred in connection with
the negotiation, documentation,  enforcement or interpretation of any agreement,
except:  (A) agreements  between  Landlord and Tenant,  (B)  agreements  between
Landlord and PG&E,  and (C) legal fees to obtain the  Development  Agreement (as
defined in the  Option  Agreement)  and the  entitlements  described  in section
8.2(j) of the Phase II Purchase Agreement, which legal fees are paid or incurred
on or  before  the date the  Development  Agreement  and such  entitlements  are
obtained  from all  applicable  governmental  agencies  (however,  the foregoing
clause (C) shall not exclude from Aggregate  Development  Costs reasonable legal
fees actually paid by Landlord to arrange the acquisition of the City Property);
(xiv) fees and costs of 

                                                                             -2-


audits or other reviews of financial  records  incurred in  connection  with any
review of  Aggregate  Development  Cost which  Tenant is permitted to conduct in
accordance  with the provisions of this Leasehold  Improvements  Agreement or in
connection  with the  requirements  of any lender of  Construction  Financing or
Take-Out Financing; (xv) premiums for, and other costs of, surety bonds or other
security required in connection with any aspect of the development of Phase I or
Phase II, to the extent that such  security  is provided by Landlord  and not by
Tenant;  (xvi) all costs reimbursed by Landlord to Tenant pursuant to Section 0;
(xvii) all fees and costs  incurred in connection  with  Hazardous  Materials or
environmental   mitigation  measures  undertaken  in  connection  with  Project,
including,  without limitation,  the obligations of Landlord with respect to the
"Operations and Maintenance of Groundwater Remedial System", as such obligations
are set forth in paragraph "6e.(1)" of the PG&E Environmental Agreement; (xviii)
all Real Estate Taxes payable, based upon a daily proration, with respect to the
Construction  Period (it being  agreed that all real estate  taxes  payable with
respect to such period shall be excluded from Real Estate Taxes, as that term is
defined in Section 0); (xix) all interest on Construction  Financing;  provided,
however, that interest on the amount by which the principal loan balance exceeds
an amount equal to  eighty-five  percent (85%) of all Phase I Project Cost shall
be  excluded  from  Phase I Project  Cost (for the  purpose of  determining  the
portion of interest  to be so  excluded,  if the  Construction  Financing  bears
interest at different  rates on different  tranches of the loan, the interest to
be so  excluded  shall be  determined  at the rate or  rates  applicable  to the
borrowing of the tranches which exceed eighty-five  percent (85%) of all Phase I
Project Cost, applying the rates on a tranche by tranche basis,  commencing with
the rate  applicable to the lowest  tranche,  provided  further,  however,  that
commencing on each Rent Commencement Date (as defined in the Lease),  the amount
of interest included in Aggregate Development Cost shall be reduced to an amount
equal to the  total  amount  of such  interest  multiplied  by a  fraction,  the
numerator of which is the Rentable  Area of the portions of the  Buildings  with
respect to which Tenant is not then paying rent, and the denominator of which is
the Rentable Area of all of the Buildings; (xx) all deposits (including, without
limitation,  deposits  in  connection  with  any  utility  service  or  Take-Out
Financing),  provided that the amount of any such deposits  returned to Landlord
shall be deducted from Aggregate Development Cost when received, but only to the
extent that such  deposits  were  previously  included in Aggregate  Development
Cost;  (xxi)  reasonable  fees and  expense  reimbursements,  if any,  paid to a
mortgage broker in connection with Construction Financing;  (xxii) in the event,
and during any period,  that the proceeds of Construction  Financing are, in the
aggregate,  less than eighty-five percent (85%) of all Phase I Project Cost then
incurred and paid,  then there shall be included in Phase I Project Cost imputed
interest at the rate of fifteen  percent  (15%) per annum on the amount by which
eighty-five  percent  (85%) of all Phase I  Project  Cost so  incurred  and paid
exceeds the then  advanced  proceeds  of the  Construction  Financing,  provided
further,  however, that commencing on each Rent Commencement Date (as defined in
the  Lease),   the  amount  of  such  imputed  interest  included  in  Aggregate
Development Cost shall be reduced to an amount equal to the total amount of such
imputed  interest  multiplied  by a  fraction,  the  numerator  of  which is the
Rentable Area of the portions of the  Buildings  with respect to which Tenant is
not then paying rent,  and the  denominator of which is the Rentable Area of all
of the Buildings;  (xxiii) all fees, costs and expenses  incurred by Landlord in
connection with the satisfaction of any condition or requirement  imposed by the
City of San  Rafael  or any other  governmental  agency  or  public  utility  in
connection  with any permit,  approval or agreement  (including the  development
agreement)  required  for the  development  of the Project,  including,  without
limitation,  any traffic or other impact fees,  traffic mitigation fees, utility
hook-up or service fee and improvements to, or adjacent to, Mahon Creek;  (xxiv)
all  amounts  expended  in  connection  with  site  work  and  on  and  off-site
improvements  required for the use or operation of the Project or required to be
constructed  or paid for as a  condition  to any permit,  approval or  agreement
(including the development  agreement)  necessary to the  construction or use of
the Base Building  Improvements  or Tenant  Improvements;  (xxv) all  reasonable
legal  fees and  reasonable  fees of other  technical  consultants  incurred  in
connection  with  the  negotiation  and   documentation  of  (A)  any  agreement
pertaining to the design and construction of the Project or any portion thereof,
or (B) any agreement  pertaining  to the design,  construction,  

                                                                             -3-


performance or security for any  improvement  or payment  imposed as a condition
upon any  approval by the City of San Rafael of any permit or approval  required
for the  development  of the Project,  but only to the extent the such agreement
would   typically  and  ordinarily  be  negotiated  and  documented   after  the
governmental  approval  of a  tentative  tract  map;  (xxvi)  all  premiums  for
insurance in force  following the  Commencement of  Construction,  excluding any
premiums  included in Expenses charged to Tenant pursuant to the Lease;  (xxvii)
title  insurance  premiums,  escrow fees and recording costs incurred during the
Construction  Period or incurred in connection with the  Construction  Financing
(but not Take-Out Financing),  except title insurance premiums,  escrow fees and
recording  costs in  connection  with the  acquisition  by  Landlord of the PG&E
Property;  (xxviii)  all costs paid to  contractors  or  materials  suppliers in
connection  with the  correction of Punch List,  Defect List or HVAC Defect List
items or other construction  defects, but only if Landlord has used commercially
reasonable  efforts to enforce its legal remedies  against the  contractors  and
suppliers which performed the original work to which the Punch List, Defect List
or HVAC Defect List items related to the extent such efforts were required to be
made by Landlord prior to any closing under the Option  Agreement;  and,  (xxix)
any other costs  which are  specifically  stated to be Phase I Project  Costs or
Phase II Current Costs elsewhere in this Leasehold Improvements Agreement.

                  _.Aggregate  Development Cost shall not include: (i) the price
paid by Landlord  for the  acquisition  of the PG&E  Property;  (ii)  Landlord's
ordinary  overhead;  (iii) the cost of preparing an environmental  impact report
for the Project, including, without limitation, the cost of preparing an initial
study and scoping the environmental impact report; (iv) fees and expenses of all
consultants  retained by Landlord for the purpose of  obtaining  approval by the
City  of San  Rafael  of any of the  permits  and  approvals  required  for  the
development of the Project (although fees and expenses of consultants whose work
pertains to the design or  engineering  of the Project or any part thereof or to
the obtaining of the necessary demolition, grading, building and similar permits
or to agreements or arrangements with utility providers,  shall be included as a
part of Aggregate  Development Cost, even if such work occurs in connection with
aspects of obtaining required permits and approvals from the City of San Rafael;
provided,  however,  that fees for appearances at meetings with officials of the
City of San  Rafael  pertaining  to  subjects  other than the  obtaining  of the
necessary demolition,  grading, building and similar permits or the obtaining of
agreements  or  arrangements  with  utility  providers  shall be  excluded  from
Aggregate  Development  Costs); (v) charges for the work or time of employees of
the City of San Rafael,  to the extent  pertaining to  environmental  review and
zoning  matters   (including,   but  not  limited  to,  the  preparation  of  an
environmental  impact report and the  negotiation  of a development  agreement),
other than as expressly  permitted  in Section 0; (vi) all expenses  incurred by
Landlord in connection with any election campaigns  pertaining to initiatives or
referenda pertaining to the Project;  (vii) all legal fees and fees and expenses
for public relations incurred directly in connection with obtaining the approval
by the City of San Rafael of the necessary  permits and  approvals  required for
the  development  of the  Project  other  than  necessary  demolition,  grading,
building    and   similar    permits    authorizing    the    commencement    of
construction-related  work (although fees and expenses of consultants whose work
pertains to the design or  engineering  of the Project or any part thereof shall
be included as a part of Aggregate Development Cost, even if such work occurs in
connection  with aspects of obtaining  required  permits and approvals  from the
City of San  Rafael);  (viii) all legal fees  incurred  in  connection  with the
negotiation or documentation  of the development  agreement with the City of San
Rafael,  the  acquisition  of the PG&E  Property,  and  agreements to the extent
pertaining to the environmental  condition of the PG&E Property;  (ix) all legal
fees incurred in connection with the resolution of disputes between Landlord and
Tenant under the Lease or this Leasehold Improvements Agreement;  (x) all costs,
if any,  incurred  in  connection  with the  relocation  of the  115KV  overhead
electrical  utility  line  from the  central  portion  of the  Phase I Land to a
location  further south,  to the extent that the cost of such relocation is paid
by Landlord;  (xi) costs  incurred by Landlord in connection  with the operation
and maintenance of the Phase I Land prior to the  Commencement of  Construction,
including Real Estate Taxes,  insurance  premiums,  and 

                                                                             -4-


other costs of ownership  not related to  obtaining  the approval by the City of
San  Rafael of any of the  necessary  permits  and  approvals  required  for the
development of the Project  (although all fees and expenses of consultants whose
work pertains to the design or planning of the Project or any part thereof shall
be included as a part of Aggregate Development Cost, even if such work occurs in
connection  with aspects of obtaining  required  permits and approvals  from the
City of San Rafael);  (xii) costs paid directly by Tenant in connection with any
Modifications;  (xiii) costs paid  directly by Tenant as a result of any Delays;
(xiv) any costs  paid by Tenant  directly  to a vendor or service  supplier  and
without  credit  against  Rent or  against  any  other  sum due from  Tenant  to
Landlord, even if such costs would otherwise have been a part of Phase I Project
Cost;  (xv)  salaries  and  other  compensation  paid to  Martin  Zemcik,  Glenn
Isaacson,  Conversion Management Associates,  Inc. or any other person or entity
providing  similar  general  development   consulting  services  or  third-party
development   management   services;   and  (xvi)  any  other  costs  which  are
specifically stated to be excluded from Aggregate  Development Cost elsewhere in
this Leasehold Improvements Agreement.

                  1.4. "Base Building  Improvements" shall mean the improvements
described in Section 0.

                  1.5.   "Budget"  shall  mean  that  budget  attached  to  this
Leasehold Improvements Agreement as Exhibit H hereto, as hereafter modified from
time to time in accordance  with this Leasehold  Improvements  Agreement,  based
upon  additional  information  or analyses  received or generated by Landlord or
Tenant. Landlord and Tenant acknowledge and agree that Estimated Phase I Project
Cost, as set forth in such budget,  represents a reasonable  estimate of Phase I
Project Cost,  based on the information  available to each of them, and is to be
used for the  convenience  of the parties in arranging  Take-Out  Financing  (as
provided in Section 0), but shall not be used or cited as a  limitation  for the
purpose  of  determining  actual  Aggregate  Development  Cost,  as that term is
defined in Section 0.

                  1.6.  "Commencement  of  Construction"  shall mean the time at
which Landlord  instructs its  contractor to commence,  pursuant to a grading or
building  permit  which has then been issued by the City of San Rafael,  grading
necessary to permit the construction of the improvements  which are to be a part
of Phase I.

                  1.7. "Common Area" shall mean all areas and facilities  within
the Project  located outside the Premises and intended for the use of tenants of
the Buildings,  including the landscaped  areas,  service areas,  parking areas,
recreation areas,  trash enclosures,  plazas,  walkways,  driveways,  sidewalks,
access and perimeter roads, and the like; but excluding from the Common Area the
Containment  Facilities  (as  those  are  defined  in the  Lease)  and any  area
contained within the boundaries of an exclusive easement granted to PG&E.

                  1.8. "Conceptual Plans for the Tenant Improvements" shall mean
and refer to the  conceptual  plans for the Tenant  Improvements  referred to in
Section 0.

                  1.9. "Construction  Financing" shall mean any loan arranged by
Landlord the proceeds of which loan are primarily  used or to be used for any or
all of the following  purposes:  (i) the acquisition of the PG&E Property;  (ii)
the  payment of any costs  incurred or to be  incurred  in  connection  with the
design or  construction  of the  Project  or other  improvements  in  connection
therewith;  or,  (iii)  the  reimbursement  to  Landlord  of funds  expended  or
reimbursed by Landlord in connection  with the  acquisition of the PG&E Property
or the design,  construction or development of the Project or other improvements
in connection  therewith.  In the event that Landlord does not elect to obtain a
loan  secured by a Mortgage  to provide  funds for such  purposes,  but  instead
obtains funds for those general  purposes from a source of capital which charges
interest or other fees for the use of such funds during the Construction Period,
then the  funds so  obtained  shall be  deemed  

                                                                             -5-


Construction Financing for the purposes of this Leasehold Improvements Agreement
during  the  period  prior to the Last Rent  Commencement  Date (but only to the
extent  that  such  funds do not  exceed  eighty-five  percent  (85%) of Phase I
Project  Cost) and shall be deemed to bear interest at the lowest rate for which
a conventional  construction loan to have been secured by a mortgage was offered
to Landlord in connection with the Project.

                  1.10.  "Construction  Period" shall mean the period commencing
with the  Commencement of Construction  and continuing to and including the Last
Rent Commencement Date.

                  1.11.  "Criteria for Take-Out Financing" shall mean all of the
following  terms (any of which may be waived by Landlord in the  exercise of its
sole discretion):  (i) the Take-Out Financing would provide actual proceeds (net
of fees,  closing  expenses and points) in an aggregate amount equal to not less
than  seventy-five  percent (75%) of the then current  Estimated Phase I Project
Cost;  (ii) the Take-Out  Financing  would require  payment of not more than one
hundred  (100) basis points as a loan fee at the closing of the loan;  (iii) the
Take-Out  Financing  would  require  payment  of a deposit  of not more than two
hundred  (200) basis points prior to the closing of the loan;  (iv) the Take-Out
Financing  would  be for a term,  including  possible  extensions,  of at  least
fifteen (15) years; (v) the Take-Out  Financing would be amortized over a period
of not more than thirty (30)  years;  (vi) no tranche of the loan would  require
any balloon  payment;  (vii) each  tranche  would be at a fixed rate of interest
over its term; (viii) the Take-Out Financing would impose no potential liability
on Landlord and its constituent partners,  nor require any guarantees;  (ix) the
lender would  consent to the parking for Phase I being  located upon the Parking
Easement  Area or such  other  area  within  Phase  II as to which  the  parking
easement  could be moved from the Parking  Easement Area pursuant to the Parking
Easement  Agreement;  (x) the Take-Out  Financing would not require any security
other than a Mortgage  encumbering  the Project,  a related  assignment of rents
from the  Project  and a security  interest  in the right of Tenant to park on a
portion of the Phase II Land; (xi) the Take-Out Financing would be from a lender
whose reputation and financial  position provide  reasonable  assurance that the
lender will perform all of its  obligations  under the loan in a timely  manner;
(xii) if the  lender  intends  to sell the loan or if the loan is subject to any
condition  requiring a third party  credit  review or rating,  such lender shall
have  stated  in  writing  that its chief  underwriter  has  consulted  with the
prospective  purchaser of the loan or the third party credit  reviewer or rating
agency  regarding  the  Hazardous  Materials  present  on the  Phase I Land  and
regarding the credit of Tenant;  (xiii) the Take-Out  Financing  would be from a
lender  other  than  Tenant or any entity  related  to Tenant or any  affiliate,
subsidiary,  parent entity or successor by merger to Tenant;  (xiv) the Take-Out
Financing would accept Tenant as a potential borrower under the loan; (xv) would
be consistent with the arrangements  concerning  subordination,  non-disturbance
and recognition set forth in the Lease, this Leasehold Improvements Agreement or
the Option  Agreement;  and, (xvi) the Take-Out  Financing would coordinate with
the  Construction  Financing  to be selected  by  Landlord,  including,  without
limitation,  the  execution  of any buy-sell  agreement  or tri-party  agreement
required by the lender of the Construction Financing.  Landlord, in the exercise
of its sole discretion, may, by written notice to Tenant, waive one or more such
criteria or agree that a particular  criterion can be modified in a manner which
is adverse to Landlord  without  being waived in its entirety.  Landlord  shall,
however,  consult  reasonably  with  Tenant as to, but shall not be  required to
accept, the modification of such criteria if no loan is found which meets all of
the criteria, except those which Landlord is prepared to waive.

                  1.12.  "Defect  List" shall mean a written list to be given by
Tenant to Landlord in accordance with the provisions of Section 0.

                  1.13.  "Delays" shall mean certain delays in the  construction
of the Site and  Shell  Improvements  or the  Tenant  Improvements  or both,  as
described in Section 0.

                                                                             -6-


                  1.14.  "Designated  Treasury  Rate"  shall mean the yield rate
determined in accordance with the provisions of Section 0.

                  1.15.  "Development  Constant"  shall mean the sum of: (i) the
Designated Treasury Rate; plus, (ii) the Agreed Spread for Take-Out Financing.

                  1.16.   "Descriptive  Base  Specifications"   shall  mean  the
descriptive  specifications attached to this Leasehold Improvements Agreement as
Exhibit E, as referred to in Section 0.

                  1.17.  "Draft  Working  Drawings for the Tenant  Improvements"
shall mean and refer to those  certain  draft  working  drawings  for the Tenant
Improvements referred to in Section 0.

                  1.18. "Estimated Phase I Project Cost" shall mean the estimate
of Phase I Project Cost set forth in the Budget.

                  1.19.  "Event  of  Default"  shall  mean an Event of  Landlord
Default or an Event of Tenant Default,  without inherent specificity as to which
of them.

                  1.20.   "Event  of   Landlord   Default"   shall   mean  those
circumstances so described in Section 0.

                  1.21. "Event of Tenant Default" shall mean those circumstances
so described in Section 0.

                  1.22.  "Final  Working  Drawings for the Tenant  Improvements"
shall mean and refer to those  certain  final  working  drawings  for the Tenant
Improvements referred to in Section 0. 

/// 
/// 
/// 
/// 
/// 
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                                                                             -7-


                  1.23. "Floor" shall mean any one of the interior floors of the
Buildings.

                  1.24.  "Floor  Substantial  Completion  Notice" shall mean and
refer to a notice from  Landlord to Tenant  that the Tenant  Improvements  for a
particular Floor within a Building are  Substantially  Complete,  as provided in
Section 0.

                  1.25.  "Force  Majeure  Events"  shall mean acts of God or the
elements, acts of the government, labor disturbances of any character, and other
similar   conditions,   beyond  the  reasonable   control  of  the  party  whose
performance, obligation or liability is excused or delayed by such event.

                  1.26.  "Gross Building Area" shall be determined in accordance
with the  "Standard  Method  for  Measuring  Floor  Area in  Office  Buildings",
approved as of June 7, 1996 by the American National Standards  Institute,  Inc.
(ANSI/BOMA Z65.1-1996).

                  1.27.  "Hazardous  Materials"  shall  mean  and  refer  to any
substance or material now or hereafter defined or regulated by any Environmental
Law as "hazardous substance," "hazardous waste," hazardous material," "extremely
hazardous  waste,"  "designated  waste,"  "restricted  hazardous  waste," "toxic
substance," or similar term. As used herein, the term "Hazardous Materials" also
means and includes any substance or material: (1) which is explosive, corrosive,
infectious, radioactive,  carcinogenic, mutagenic, or otherwise hazardous and is
regulated by any appropriate  governmental authority as a hazardous material; or
(2)  which  is or  contains  oil,  gasoline,  diesel  fuel  or  other  petroleum
hydrocarbons;  or (3) which is or contains polychlorinated biphenyls,  asbestos,
urea formaldehyde foam insulation,  radioactive materials; or (4) which is radon
gas.  The  term  "Hazardous  Substances"  may  include  without  limitation  raw
materials, building components, wastes, and the products of any manufacturing or
other activities on the Project.

                  1.28. "HVAC Defect List" shall mean a written list to be given
by Tenant to Landlord in accordance with the provisions of Section 0.

                  1.29. "Laws" shall mean all present and future laws, statutes,
ordinances, resolutions, regulations, codes, proclamations, orders or decrees of
any municipal,  county,  state or federal  government or other  governmental  or
regulatory  authority or special district with jurisdiction over the Project, or
any portion  thereof,  whether  currently in effect or adopted in the future and
whether or not in the contemplation of the parties hereto.

                  1.30.  "Modifications" shall mean and refer to certain changes
to the Final Working Drawings for the Tenant  Improvements which Tenant may make
in accordance with Section 0.

                  1.31.  "Mortgage"  shall mean any  mortgage,  deed of trust or
similar  security  instrument now or hereafter  encumbering  Phase I or any part
thereof (whether alone or together with other properties).

                  1.32.  "Necessary  Approvals"  shall  mean and  refer to those
certain  governmental permits and approvals necessary to permit the construction
of the Site and Shell Improvements and the Tenant  Improvements,  as referred to
in Section 0.

                  1.33.  "Necessary  Changes" shall mean and refer to changes to
the plans and  specifications for the Site and Shell Improvements and the Tenant
Improvements made for the purposes referred to in Section 0.

                  1.34. "Net  Stipulated  Value of the PG&E Property" shall mean
the sum of 

                                                                             -8-


Nine Million Three Hundred Fifty Thousand Dollars ($9,350,000.00).

                  1.35.  "Option  Agreement"  shall  mean that  certain  "Option
Agreement" between Landlord and Tenant of even date herewith.

                  1.36.  "Parking Easement" shall mean that certain easement for
vehicular parking to be granted in the Parking Easement Agreement.

                  1.37.  "Parking  Easement  Agreement"  shall mean that certain
"Parking Easement  Agreement" to be executed by Landlord and Tenant, as referred
to in the Phase II Purchase Agreement.

                  1.38.  "Parking  Easement Area" shall mean that portion of the
Phase II Land  located  within the  easement  granted  pursuant  to the  Parking
Easement Agreement.

                  1.39.  "PG&E"  shall mean and refer to Pacific  Gas & Electric
Company.

                  1.40. "PG&E  Environmental  Agreement" shall mean that certain
"Amended and Restated  Environmental  Agreement"  to be executed by Landlord and
PG&E.

                  1.41.  "PG&E  Property"  shall mean that certain real property
owned  by  Pacific  Gas &  Electric  Company  as of the  date of this  Leasehold
Improvements Agreement and more particularly described in Exhibit D. The parties
acknowledge  that the legal  description  of the PG&E Property may be revised in
accordance with the Option Agreement.

                  1.42. "Phase I" shall mean the Phase I Land, the Buildings and
the other  improvements  to be  constructed  by  Landlord on the Phase I Land in
accordance  with the  provisions  of the Lease and this  Leasehold  Improvements
Agreement,  together with the  landscaping  and paving  improvements  within the
Parking  Easement Area necessary to provide parking on the Phase II Land for the
use of Phase I. A tentative site plan for Phase I is attached  hereto as Exhibit
G.

                  1.43.  "Phase I  Buildings"  shall  mean the  Buildings  to be
constructed  by  Landlord  on  the  Phase  I Land  pursuant  to  this  Leasehold
Improvements Agreement. Subject to obtaining required permits and approvals from
the City of San Rafael and other governmental  agencies having jurisdiction over
the  Project,  it is the  intention of Landlord and Tenant that there be two (2)
office Buildings located on the Phase I Land, together containing  approximately
one hundred forty-nine thousand six hundred eighty-six  (149,686) square feet of
Rentable  Area,  with one such  Building  (known  as  "Building  A")  containing
approximately  eighty-one thousand six hundred seventy-one  (81,671) square feet
of Rentable Area and the other (known as "Building B") containing  approximately
sixty-eight thousand fifteen (68,015) square feet of Rentable Area.

                  1.44.  "Phase I Land" shall mean those certain parcels of real
property  described  in  Exhibit  A. The  parties  acknowledge  that  the  legal
description  of the Phase I Land may be  revised in  accordance  with the Option
Agreement.

                  1.45.  "Phase I Project Cost" shall mean the aggregate of: (i)
the difference  between the Aggregate  Development Cost and the Phase II Current
Costs  paid by  Tenant  pursuant  to  Section  0; and  (ii) a basic  development
management  fee in the  amount  of  Thirty-Two  Thousand  Five  Hundred  Dollars
($32,500.00)  per  month,  commencing  as of  the  month  of  January  1998  and
continuing for a period of twenty-three (23) additional months  thereafter.  Any
other provision of this Agreement notwithstanding,  in no event shall any amount
actually  paid by  Tenant  (whether  as a part of  Phase  II  Current  Costs  or
otherwise)  be  deemed a part of  Phase I  Project  Cost,  unless  Landlord  has
actually reimbursed such amount to Tenant.

                                                                             -9-



                  1.46.  "Phase  II" shall  mean the Phase II Land and the other
improvements  to be  constructed  by Landlord on the Phase II Land in accordance
with the  provisions of this  Leasehold  Improvements  Agreement  (including the
landscaping  and  paving  improvements  within the  Parking  Easement  Area).  A
tentative site plan for Phase II is attached hereto as Exhibit G.

                  1.47. "Phase II Current Costs" shall mean the aggregate of the
following costs, all of which are a portion of the Aggregate  Development  Cost:
(i) the purchase price for the Phase II Land paid by Tenant to Landlord pursuant
to the  Phase  II  Purchase  Agreement;  (ii) the  actual  cost to  Landlord  of
arranging  the  acquisition  of the City  Property;  (iii) all actual  costs and
expenses  of the design and  construction  of all  improvements  in the  Parking
Easement Area;  (iv) the cost of all fill materials  placed on the Phase II Land
by Landlord;  (v) the cost of all utilities  installed for the present or future
benefit of the Phase II Land or any  improvements  constructed  thereon or which
may be  constructed  thereon  in the  future;  (vi)  all  fees  and  charges  of
architects,  engineers,  materials  testing  consultants  and  other  design  or
construction consultants, to the extent that such fees and charges relate to the
design of buildings and other improvements to the Phase II Land; (vii) any other
component  of  Aggregate  Development  Cost,  to the extent that such  component
relates to the improvements to be installed on the Phase II Land,  whether at or
about  the same  time as the Site and  Shell  Improvements  or at a later  time,
allocating any costs which pertain both to Phase I and to Phase II in accordance
with the schedule of  allocations  set forth in Exhibit H; (viii) the  aggregate
cost of the design and  construction of the common area entrance and plaza areas
to the extent located on Phase II; (ix) all permit fees and all fees and charges
for  services  rendered by  employees  of the City of San Rafael or  consultants
hired directly by the City of San Rafael in connection with the application for,
or issuance of, the Necessary  Approvals  required for the  construction  of the
improvements  to be located upon the Phase II Land; (x) all costs  reimbursed by
Landlord to Tenant  pursuant to Section 0, to the extent that such costs pertain
to  improvements  to be located upon, or to serve,  the Phase II Land;  (xi) all
fees and costs incurred in connection  with  environmental  mitigation  measures
undertaken in connection with the Phase II Land; (xii) all deposits  (including,
without  limitation,  deposits  in  connection  with any  utility  service,  but
excluding  deposits in connection  with any Take-Out  Financing),  to the extent
that such  deposits  pertain to Phase II,  provided  that the amount of any such
deposits returned to Landlord shall be deducted from Aggregate  Development Cost
and Phase II Current  Costs  when  received,  but only to the  extent  that such
deposits were  previously  included in Aggregate  Development  Cost and Phase II
Current  Costs;  (xiii) all fees,  costs and  expenses  incurred  by Landlord in
connection with the satisfaction of any condition or requirement  imposed by the
City of San  Rafael  or any other  governmental  agency  or  public  utility  in
connection  with any permit,  approval or agreement  (including the  development
agreement)  required  for the  development  of the Project,  including,  without
limitation,  any traffic impact,  traffic  mitigation  fees,  utility hook-up or
service fee and  improvements to, or adjacent to, Mahon Creek, all to the extent
that such condition or requirement  was imposed in respect of improvements to be
constructed  upon the  Phase II Land,  whether  at or about the same time as the
Site and Shell  Improvements or at a later time;  (xiv) all amounts  expended in
connection with site work and on and off-site  improvements required for the use
or operation of improvements to be constructed  upon the Phase II Land,  whether
at or about the same time as the Site and Shell Improvements or at a later time,
or  required  to be  constructed  or paid for as a  condition  to any  permit or
approval  necessary  to  the  construction  or use of  such  improvements;  (xv)
premiums  for, and other costs of,  surety bonds or other  security  required in
connection  with  any  aspect  of  the  development  of  Phase  II  or  off-site
improvements  (allocating the cost of such bonds between Phase I and Phase II in
accordance with the schedule for such allocations set forth in Exhibit H, to the
extent that such  security is provided by Landlord and not by Tenant;  (xvi) all
reasonable  legal  fees  and  reasonable  fees of  other  technical  consultants
incurred in connection with the negotiation and  documentation  of any agreement
pertaining to the design and  construction of the improvements to be constructed
upon the Phase II Land or any portion thereof, whether at or about the same time
as the  Site  and  Shell  Improvements  or at a  later  time,  or any  agreement
pertaining  to the design,  

                                                                            -10-


construction  or security for any  improvement or payment imposed as a condition
upon any  approval  by the City of San  Rafael or any  utility  provider  of any
permit or agreement to provide utility services  required for the development of
such  improvements  (it  being  agreed  that  where  such fees are  incurred  in
connection  with an agreement  which pertains to both Phase I and Phase II, then
there shall be an  equitable  allocation  of such fees among the Phases based on
Rentable Area of the Buildings  approved for  construction on each of them, with
the share  allocated to Phase II constituting a part of Phase II Current Costs);
(xvii) all  premiums  for  insurance  in force  following  the  Commencement  of
Construction,  excluding  any  premiums  included in Expenses  charged to Tenant
pursuant to the Lease;  and,  (xviii)  any other  costs  which are  specifically
stated to be Phase II Current  Costs  elsewhere in this  Leasehold  Improvements
Agreement.  To the extent  that any  component  of  Aggregate  Development  Cost
pertains  both to the  Project  and to the Phase II Land or  improvements  to be
constructed  upon the  Phase II Land,  whether  at or about the same time as the
Site and Shell  Improvements  or at a later time,  the amount of such  component
shall be allocated  between  Phase I Project Cost and Phase II Current  Costs in
accordance with the provisions of Exhibit H.

                  1.48. "Phase II Land" shall mean those certain parcels of real
property  described  in  Exhibit  B. The  parties  acknowledge  that  the  legal
description  of the Phase II Land may be revised in  accordance  with the Option
Agreement.

                  1.49.  "Phase II Purchase  Agreement"  shall mean that certain
"Purchase  Agreement"  between  Village  Builders,  L.P.,  and  Fair,  Isaac and
Company, Inc. of even date herewith.

                  1.50. "Premises" shall mean the Buildings to be constructed by
Landlord on the Phase I Land as a part of the Project pursuant to this Leasehold
Improvements Agreement.

                  1.51.  "Project" shall mean the Phase I Land and the Buildings
and all other improvements to be constructed  thereon pursuant to this Leasehold
Improvements Agreement or which are hereafter constructed thereon by Landlord or
Tenant  in  accordance  with  the  provisions  of the  Lease  or this  Leasehold
Improvements Agreement.

                  1.52. "Project  Substantial  Completion Notice" shall mean and
refer to a notice from  Landlord  to Tenant  that the  Project is  Substantially
Complete, as provided in Section 0.

                  1.53.  "Punch  List" shall mean a written  list to be given by
Tenant to Landlord in accordance with the provisions of Section 0.

                  1.54.  "Real Estate  Taxes" shall have the meaning  given that
term in Section 5.10(A)(i) of the Lease.

                  1.55.  "Rentable  Area" shall be determined in accordance with
the "Standard Method for Measuring Floor Area in Office Buildings",  approved as
of June 7, 1996 by the American National Standards  Institute,  Inc.  (ANSI/BOMA
Z65.1-1996).

                  1.56.  "Review  Notice" shall mean a notice  pertaining to the
Phase I Project Cost which may be given by Tenant to Landlord in accordance with
Section 0.

                  1.57.  "Site  Improvements"  shall  mean  and  refer  to those
improvements  to be  constructed  on the Phase I Land and the Phase II Land,  as
described in Section 0.

                  1.58.  "Site and Shell  Improvements"  shall mean and refer to
the Site Improvements and the Base Building Improvements, taken together.

                                                                            -11-


                  1.59. "Substantial Completion" shall mean, with respect to the
entire portion of the Premises  located on a particular  Floor within one of the
Buildings,  (and such  portion of the  Premises  shall be deemed  "Substantially
Complete") when (i) installation of the Tenant  Improvements by Landlord on such
Floor has been  substantially  completed in  accordance  with the plans for such
Tenant  Improvements,  as certified by Tenant's architect  (provided that Tenant
shall use all  commercially  reasonable  efforts to cause Tenant's  architect to
cooperate  promptly  with  Landlord in  inspecting  the work and issuing  such a
certificate  immediately upon the occurrence of such  substantial  completion of
the Tenant  Improvements,  (ii) Tenant has direct  access from the street to the
lobby of such Building, (iii) sewer,  electricity,  water, gas (if required) and
standard telephone services are available to such Building,  (iv) at least three
(3) parking  spaces are  available  for the use of Tenant for each one  thousand
(1,000)  square feet of Gross  Building  Area located  upon such Floor,  (v) the
lobby of the Building in which the Floor is located is  Substantially  Complete,
(vi) any items  identified by Tenant in accordance with Section 0 as critical to
the use of  such  Floor  are  substantially  completed,  and  (vii)  appropriate
governmental  authorities have issued a temporary  certificate of occupancy with
respect to such Floor or have given an equivalent approval for occupancy of such
Floor.  "Substantial Completion" shall mean, with respect to the main lobby of a
Building,  (and such lobby shall be deemed  "Substantially  Complete")  when (i)
installation of the Tenant  Improvements by Landlord in such lobby has occurred,
(ii) Tenant has direct access from the street to such lobby,  (iii)  lighting is
available to such lobby,  (iv) at least one of the elevators  from such lobby to
the  Floors  above  are in  working  order,  and  (v)  appropriate  governmental
authorities  have made their final  inspections  of such lobby as  evidenced  by
signed final inspection  reports on file with said  authorities.  In all events,
Substantial  Completion  shall be  deemed  to have  occurred  notwithstanding  a
requirement to complete "Punch List" or similar  corrective work,  provided that
the lack of  completion  of such Punch List work would not  prevent  Tenant from
using the Premises for the Permitted Use without material interference.

                  1.60.  "Substantial Completion Notice" shall mean and refer to
a notice from Landlord to Tenant that the Site and Shell Improvements and Tenant
Improvements for Phase I are complete, as provided in Section 0.

                  1.61.  "Take-Out  Financing" shall mean any financing arranged
by Landlord,  the proceeds of which are primarily  used or to be used for either
or  both  of the  following  purposes:  (i) the  repayment  of any  Construction
Financing;  or,  (ii)  the  reimbursement  to  Landlord  of  funds  expended  or
reimbursed by Landlord in connection  with the  acquisition of the PG&E Property
or the City Property or the design,  construction  or development of the Project
or  improvements on the Phase II Land. In the event that Landlord does not elect
to obtain a loan secured by a Mortgage to provide funds for such  purposes,  but
instead obtains funds for those general  purposes from a source of capital which
charges  interest  or other  fees for the use of such  funds,  then the funds so
obtained shall be deemed  Take-Out  Financing for the purposes of this Leasehold
Improvements Agreement.

                  1.62.  "Tenant Caused Delays" shall mean certain delays in the
construction of the Site and Shell  Improvements  or the Tenant  Improvements or
both caused by Tenant, as described in Section 0.

                  1.63.  "Tenant  Improvements"  shall  mean and  refer to those
certain building interior  improvements  required by Tenant for its occupancy of
the Phase I Buildings and to be constructed on the Phase I Land, as described in
Section 0, but shall in all events exclude the Base Building Improvements.

                  1.64. "Tenant Improvement Allowance" shall mean a sum equal to
Twenty-Eight  Dollars  ($28.00)  per  square  foot of Net  Rentable  Area in the
Premises.

                                                                            -12-


                  1.65.  "Tentative  Site  Plan"  shall  mean and  refer to that
certain tentative site plan for the development of Phase I and Phase II attached
hereto as Exhibit G and referred to in Section 0.

                  1.66. "Work" shall mean the construction of the Site and Shell
Improvements  and the Tenant  Improvements  by Landlord in accordance  with this
Leasehold Improvements Agreement.

                  1.67.  "Working Drawings for the Site and Shell  Improvements"
shall mean and refer to those certain  final  working  drawings for the Site and
Shell Improvements referred to in Section 0.


                  2. GENERAL  DESCRIPTION OF THE IMPROVEMENTS TO BE DESIGNED AND
CONSTRUCTED BY LANDLORD.

                  2.1. General  Description of Site  Improvements.  Landlord and
Tenant intend that the Phase I Buildings shall contain approximately one hundred
sixty  thousand  (160,000)  square  feet of Gross  Building  Area,  and that the
Project  will  include  not less than  three  (3)  parking  spaces  for each one
thousand (1,000) square feet of Gross Building Area.  Landlord shall provide all
required  on-site  improvements  for the  Project  and all  base  hardscape  and
landscape features on the Phase I Land,  including  grading,  paving for parking
areas and drive aisles, sidewalks and street improvements,  utilities stubbed in
or to the shell of each Building,  landscaping,  monuments for Tenant's signage,
directional  signage,  exterior  lighting  in the  Common  Area and  other  site
improvements  which may be  required  by the City of San  Rafael or which may be
reasonably  necessary  to the use and  enjoyment of the  Buildings  for ordinary
office purposes.  Landlord shall also provide such off-site improvements outside
the boundaries of the PG&E Property as may be required by the City of San Rafael
or which may be  reasonably  necessary to the use and enjoyment of the Buildings
for ordinary office purposes.  Landlord shall also construct,  contemporaneously
with the  Project  and as a part of  Phase  II  Current  Costs:  (i) all  common
entrance  areas,  plazas,  parking,   associated  parking  access  walkways  and
landscaping within the parking areas, all to the extent such improvements are to
be located upon the Phase II Land for the purpose of providing parking or access
for the Project;  (ii) all  additional  landscaping  required by the City of San
Rafael to be installed on Phase II or reasonably  requested by Tenant;  (iii) to
the  extent  that  utilities  for the  planned  Phase II  buildings  would  most
conveniently and cost  effectively be provided by lines,  wires or pipes passing
through Phase I, then such lines,  wires and pipes, from the point of connection
to a  Phase  I  Building  nearest  to the  Phase  II Land  (or to the  point  of
connection  to the  lines,  wires  and  pipes  of the  utility  provider,  if no
connections to a Phase I Building lie along the lateral  lines,  wires and pipes
serving  Phase II) to points  which are  within  ten (10) feet of the  projected
locations of each the Phase II  buildings;  (iv) the pads and rough  grading for
the Phase II buildings,  to the extent not located  within the Parking  Easement
Area to serve Phase I; and, (v) conduits for  inter-building  telecommunications
among the Phase II buildings in their planned  locations,  stubbed to within ten
(10) feet of each such location.  The foregoing  improvements are referred to in
this  Leasehold  Improvements  Agreement  as the "Site  Improvements".  The Site
Improvements  shall be constructed  by Landlord in accordance  with the "Working
Drawings for the Site and Shell Improvements", as referred to in Section 0 below
and as developed in accordance with this Leasehold Improvements Agreement.

                  2.2.  General  Description  of  Base  Building   Improvements.
Landlord shall also construct each of the Phase I Building shells (collectively,
the "Base Building Improvements"), which shall include the following:

                        A.  The structural  elements and  weathertight  exterior
                            walls (including

                                                                            -13-


                            glazing),  exterior  doors  and  roof of the Phase I
                            Buildings;

                        B.  The main  ground  floor  lobby  area of each Phase I
                            Building;

                        C.  Smooth   concrete   floors,   based  on  reasonable,
                            good-quality   commercial   construction   standards
                            (ready for carpet or resilient tile);

                        D.  Ceilings in toilet rooms and in other rooms  located
                            within  the  cores  of the  Buildings  (not in other
                            areas), but only to the extent that ceilings in such
                            other rooms are required by applicable codes;

                        E.  The core area on each  Floor,  including  elevators,
                            toilet  rooms,  electrical  closets  (one (1) in the
                            smaller   Building  and  two  (2)  in  the  larger),
                            telecommunications    closets,   mechanical   rooms,
                            janitorial  closets,  exit  stairs,  hold  open door
                            assemblies  at  lobby  perimeter  doors,  mechanical
                            shafts, HVAC (as defined and required by Section 0),
                            electrical  power systems (as required by Section 0)
                            life safety  systems (as  required by Section 0) and
                            sprinkler systems (as required by Section 0);

                        F.  Dry wall, paint ready  (finish-taped and sanded, but
                            not painted) around surfaces of walls in core areas,
                            on interior portions of exterior walls below ceiling
                            level (and fire-taped  drywall on interior  portions
                            of exterior  walls above ceiling level to the extent
                            required by applicable  Laws),  and around  interior
                            columns;

                        G.  An  operating  primary  system to  provide  heating,
                            ventilating and air conditioning service ("HVAC") to
                            the  toilet  rooms and  electrical  closets  of each
                            Floor and to the edge of each Phase I Building  core
                            at each Floor,  not including  main loops and branch
                            distribution,  on-Floor  controls,  mixing boxes and
                            fire dampers, except to the extent that fire dampers
                            are required in core areas by applicable Laws for an
                            undivided occupancy;

                        H.  Primary electrical distribution system to each Phase
                            I Building core, including one (1) 480 volt panel on
                            each Floor, step down transformers, one (1) 120 volt
                            convenience panel on each Floor and one (1) lighting
                            panel on each Floor;

                        I.  Exits to the extent required by code;

                        J.  Metal window assembly  details  necessary to achieve
                            closure to interior drywall (or, where required,  to
                            the acoustic  ceiling) at the window head,  sill and
                            jamb;

                        K.  One  standard  telecommunications  point of presence
                            location (with standard  telephone line connections)
                            at each Building, and,

                        L.  Life  safety  systems  as  required  by  code  for a
                            building in shell  condition,  including  sprinklers
                            with heads  necessary to meet  current  requirements
                            for space in such shell condition.

The Base Building  Improvements  shall be  constructed by Landlord in accordance
with the Working 

                                                                            -14-


Drawings for the Site and Shell  Improvements,  as developed in accordance  with
this Leasehold Improvements Agreement.  Notwithstanding the foregoing, any items
specifically  identified or designated in this Leasehold  Improvements Agreement
or in the Exhibits hereto as Tenant  Improvements shall not be included in or be
a part of the Site and Shell Improvements.

                  2.3. General Description of Tenant  Improvements.  In addition
to the Site and Shell  Improvements,  for each Phase I Building  Landlord  shall
furnish all building interior  improvements required by Tenant for its occupancy
of the Phase I Buildings and security fencing and enclosures (collectively,  the
"Tenant  Improvements").  The Tenant  Improvements  shall exclude all telephone,
telecommunications  and  security  equipment  and cabling,  uninterrupted  power
supplies  and  fire  suppression  systems  for  electronic  equipment  (although
Landlord shall construct all ordinary building-wide  sprinkler systems as a part
of the Tenant  Improvements),  unless  Landlord  and Tenant  hereafter  agree in
writing  that  such  work  or some  part  of it  will  be a part  of the  Tenant
Improvements.  The Tenant  Improvements  shall be  constructed  by  Landlord  in
accordance  with the "Final Working  Drawings for the Tenant  Improvements",  as
referred  to in  Section  0 below  and as  developed  in  accordance  with  this
Leasehold Improvements Agreement.

                  2.4.  Design  of  Site  and  Shell  Improvements.   Except  as
otherwise  provided in Sections 0, 0 and 0,  Landlord  shall design the Site and
Shell  Improvements in accordance with: (i) the Descriptive Base  Specifications
attached  hereto as Exhibit E; (ii) the basic  conceptual  design  drawings (the
"Preliminary  Drawings")  listed on Exhibit F attached  hereto;  and,  (iii) the
tentative site plan (the "Tentative Site Plan") attached hereto as Exhibit G.


         3.       PREPARATION  AND  APPROVAL  OF APPLICATIONS TO THE CITY OF SAN
RAFAEL.

                  3.1. Applications. Certain permits and approvals from the City
of San Rafael  and other  governmental  agencies  having  jurisdiction  over the
Project  or the Phase I Land or Phase II Land  will be  required  to permit  the
development  and  construction  of the  Project and the work to be paid for as a
Phase II Current Cost (the "Necessary Approvals"). Landlord, in cooperation with
Tenant,  has prepared and submitted to the City of San Rafael an application for
certain of the Necessary Approvals,  including without limitation,  applications
for: (i) development plan approval;  (ii) vesting tentative map approval;  (iii)
approval of a  development  agreement;  and (iv) such  environmental  and design
review approvals as may be required.

                  3.2. Changes in Plans and Specifications.  Landlord and Tenant
acknowledge  that changes in the design,  configuration,  materials and building
systems (collectively,  "Necessary Changes") may: (i) be necessary to obtain one
or more of the  governmental  approvals  required to permit the construction and
occupancy of the Phase I Buildings or any part of Phase II; (ii) be necessary as
a result  of  conditions  imposed  upon one or more  such  approvals  or, in the
judgment of Landlord,  may be necessary to expedite the  obtaining of any one or
more  such  Necessary  Approvals;  (iii) be  required  to  comply  with any site
constraints  imposed  by PG&E;  or,  (iv) be deemed  necessary  by  Landlord  to
decrease  the  Estimated  Phase I Project  Cost if and to the extent  that it is
greater than One Hundred Eighty-Three Dollars ($183.00) per square foot of Gross
Building Area. In the event that a Necessary Change involves the reconfiguration
of a Phase I Building or a change to the  ornamentation  or other  decorative or
design   characteristics  of  the  Building,   Landlord  shall,  to  the  extent
commercially reasonable in the circumstances:  (i) make such Necessary Change in
a manner  which,  in the  reasonable  opinion of Landlord,  does not  materially
interfere with Tenant's intended uses of the Premises, except to the extent that
such changes are necessary to comply with any governmentally imposed restriction
or  requirement;  (ii) make such  Necessary  Change in a manner  which would not
cause  the  Gross  Building  Area in the  Phase  I  Buildings  to be  less  than
approximately  one hundred forty  thousand  (140,000)  square feet;  

                                                                            -15-


and, (iii) consult  reasonably  with Tenant before  agreeing or deciding to make
such  changes,  although the  decision of Landlord as to such  changes  shall be
final and  binding on the  parties.  Landlord  shall  deliver to Tenant  written
notice of each  Necessary  Change,  which  notice shall  describe the  Necessary
Change in  reasonable  detail and shall state the  objectives  of such  proposed
change.  In the  event  that  Tenant  desires  to have  another  change  made to
accomplish the objectives of the Necessary  Change proposed by Landlord,  Tenant
shall describe such  alternative  change in writing to Landlord  within ten (10)
days of the receipt by Tenant of a written  notice  from  Landlord of a proposed
Necessary  Change,  which  alternative  change shall be sufficient to obtain the
objectives  of the  Necessary  Change  proposed by  Landlord.  In the event that
Tenant proposes an alternative  change which  accomplishes the objectives of the
Necessary Change proposed by Landlord, but Landlord does not wish to accept such
alternative  change  in lieu  of the  Necessary  Change  proposed  by  Landlord,
Landlord or Tenant may cause such matter to be submitted to arbitration pursuant
to the  provisions  of Section 0. In the event that any of the Phase I Buildings
are  reconfigured,  the  description  of the  Premises  for the purposes of this
Leasehold  Improvements  Agreement  shall be modified in a reasonable  manner by
written  notice from  Landlord to Tenant to reflect the  reconfiguration  of the
Phase I  Building(s).  In the event that  Landlord  determines  that a Necessary
Change is to be made,  Landlord  may amend the  applications  to the City of San
Rafael to reflect appropriately such Necessary Change.

                  3.3.  Consistency with Descriptive  Base  Specifications.  The
provisions of Section 0 to the contrary  notwithstanding,  in no event shall any
Necessary  Change cause the Base Building  Improvements to be inconsistent  with
the Descriptive Base Specifications,  except to the extent:_. (i) such Necessary
Change  is  required  as a result  of any  governmentally  mandated  requirement
applicable to the Project; (ii) such Necessary Change is required as a result of
any  requirement  imposed  by a lender or  prospective  lender  of  Construction
Financing or Take-Out Financing;  or, (iii) Landlord reasonably  determines that
equipment  or  materials   necessary   to  conform  to  the   Descriptive   Base
Specifications  cannot be obtained  within the time periods  necessary to permit
Landlord  to  perform  in a  timely  manner  its  obligations  pursuant  to this
Leasehold Improvements Agreement or the Lease. In any such event, Landlord shall
use commercially reasonable efforts in the circumstances to substitute equipment
or materials  capable of  substantially  equivalent  performance to any building
equipment or materials specified in the Descriptive Base Specifications.

                  3.4.  Fees  and  Expenses  Incurred  in  Connection  with  the
Applications.  Subject to the  provisions of Section 0,  Landlord  shall pay all
fees and costs incurred in connection with the preparation,  filing,  amendment,
processing  and  approval of the  applications  referred to in Section 0 (except
that Tenant shall bear any cost incurred by it in connection  with its review of
the  applications  and the  cost of any  attorney  or  consultant  who  makes an
appearance on behalf of Tenant at any  governmental  hearings or meetings  where
such  consultant  or  attorney  is there at the request of Tenant and not at the
request of Landlord),  including the cost of any environmental  impact report or
other documents or studies  required to satisfy the  requirements of the City of
San Rafael.  Subject to the provisions of Section 0, Landlord shall also pay the
entire cost of satisfying  any  conditions  imposed by the City of San Rafael on
the  approval  of such  applications,  all of which cost shall be a part of both
Aggregate  Development  Cost and either Phase I Project Cost or Phase II Current
Costs, as appropriate.

                  3.5. Letter Agreements Pertaining to Certain Fees and Expenses
Incurred in Connection with the  Applications.  Landlord and Tenant have entered
into three letter agreements, one executed by both of them on August 28, 1996, a
second executed by Landlord on April 18, 1997 and by Tenant on May 16, 1997, and
a third  executed by Tenant on September 17, 1997, all three of which pertain to
the payment of certain  expenses  incurred or to be incurred in connection  with
the design and planning for the Project and other  improvements  on the Phase II
Land. Notwithstanding the provisions of such September 17, 1997 letter regarding
limitation upon 

                                                                            -16-


amount and  termination of the  obligations  thereunder,  it is the intention of
Landlord  and Tenant that  Tenant  shall  continue  to pay all such  expenses as
described in such letter agreement  through January 12, 1998, and thereafter all
such  letter  agreements  shall be  superseded  by this  Leasehold  Improvements
Agreement,  but only to the extent that such letter agreements  pertain to costs
incurred  after  January  12,  1998.  In the event  that  Tenant  elects to have
Landlord  reimburse  Tenant,  in  accordance  with the  provisions of the letter
agreements, for certain of the costs incurred and paid by Tenant pursuant to the
letter  agreements,  such costs shall be reimbursed by Landlord to Tenant within
thirty (30) days of the Commencement of Construction, without interest, and such
costs shall be Phase I Project Cost to the full extent so reimbursed by Landlord
to Tenant.


         4. COOPERATION IN PLANNING PROCESS. Tenant and Landlord shall cooperate
reasonably  with one  another  in a good  faith  effort to obtain  all  permits,
approvals  and  entitlements  necessary  to develop the Project  pursuant to the
applications previously filed with the City of San Rafael.


         5. PREPARATION OF PLANS AND SPECIFICATIONS  FOR OFF-SITE  IMPROVEMENTS.
As promptly as is reasonable in the circumstances following both the issuance by
the  City  of  San  Rafael  of all  permits  and  approvals  necessary  for  the
construction  of the Project  (excluding  building and grading  permits) and the
time at which the extent of all off-site  improvements which are required by the
City of San Rafael in connection with the Site  Improvements can be ascertained,
Landlord  shall  cause  plans  and   specifications  to  be  prepared  for  such
improvements. Such plans and specifications shall not be subject to the approval
of Tenant, but shall be submitted to Tenant for its information.


         6. PREPARATION OF WORKING DRAWINGS FOR THE SITE AND SHELL IMPROVEMENTS.

                  6.1. Initial  Preparation.  Promptly following the issuance by
the  City  of  San  Rafael  of all  permits  and  approvals  necessary  for  the
construction of the Site and Shell Improvements  (excluding building and grading
permits),  or at such earlier time as Landlord may elect in its sole discretion,
Landlord shall,  at its expense,  cause its architects and engineers to commence
preparation  of  working  drawings  for the Site  and  Shell  Improvements  (the
"Working  Drawings  for the  Site  and  Shell  Improvements"),  which  shall  be
consistent with the Descriptive  Base  Specifications  and generally  consistent
with the  Preliminary  Drawings and  Tentative  Site Plan,  except for Necessary
Changes.  Landlord and Tenant  acknowledge  that Landlord may, in its reasonable
discretion,  incorporate features in the Base Building  Improvements to make the
Building   more  readily   adaptable   for   multi-tenant   use.  The  foregoing
notwithstanding,  the Working  Drawings for the Site and Shell  Improvements may
deviate  from  the  Preliminary  Drawings  and  Tentative  Site  Plan  (but  not
Descriptive Base  Specifications) if required as a result of: (i) engineering or
environmental considerations necessary to the structural integrity of a Building
or  other  improvements  which  first  become  apparent  in  the  course  of the
preparation  of the Working  Drawings for the Site and Shell  Improvements;  or,
(ii) if reasonably  deemed necessary by Landlord to decrease the Estimated Phase
I  Project  Cost  if and to the  extent  that it is  greater  than  One  Hundred
Eighty-Three Dollars ($183.00) per square foot of Gross Building Area.

                  6.2.  Submission to Tenant for Review.  Landlord  shall submit
the  Working  Drawings  for the Site and Shell  Improvements  to Tenant  for its
review, and may make such submissions in increments the review of which does not
require  other  portions  of  the  Working  Drawings  for  the  Site  and  Shell
Improvements  which  Landlord  has not then  submitted  to Tenant.  Tenant shall
notify  Landlord  within  ten (10) days from the  receipt  by Tenant of any such

                                                                            -17-


submission whether or not Tenant agrees that the portion of the Working Drawings
for the Site and Shell  Improvements  included in such  submission is consistent
with the  Descriptive  Base  Specifications.  In the event that Tenant  fails to
respond to such  submission  within such period of ten (10) days,  Landlord  may
give to Tenant a second notice stating such failure and further  stating that if
Tenant  does not  respond  within five (5) days of the receipt by Tenant of such
second  notice  from  Landlord,  Tenant  will be deemed to have  agreed that the
portion of the  Working  Drawings  for the Site and Shell  Improvements  in such
submission is consistent with the Descriptive Base Specifications.  In the event
that Tenant fails to respond to such  submission  within such period of five (5)
days of the receipt by Tenant of such second notice from Landlord,  Tenant shall
for all  purposes  be deemed to have agreed that the portion of such the Working
Drawings  for the Site and Shell  Improvements  included in such  submission  is
consistent with the Descriptive Base  Specifications.  In the event of a dispute
between  Landlord  and Tenant with regard to the  question of whether or not the
Working  Drawings for the Site and Shell  Improvements  are consistent  with the
Descriptive Base  Specifications or as to any variances required to decrease the
Estimated  Phase I Project Cost if and to the extent that it is greater than One
Hundred  Eighty-Three  Dollars ($183.00) per square foot of Gross Building Area,
either  Landlord or Tenant may require by written  notice to the other that such
dispute be resolved by arbitration  conducted in accordance  with the provisions
of Section 0.

                  6.3.  Tenant's  Review  Responsibilities.  Landlord agrees and
understands  that the  review  of the  Working  Drawings  for the Site and Shell
Improvements by Tenant is solely to protect the interests of Tenant,  and Tenant
shall not be the guarantor of, nor in any way or to any extent  responsible for,
the correctness or accuracy of any such Working  Drawings for the Site and Shell
Improvements  or of the  compliance  of such  Working  Drawings for the Site and
Shell  Improvements  with  applicable  Laws.  Approval  by Tenant of the Working
Drawings  for the Site and Shell  Improvements  prepared by  Landlord  shall not
imply approval by Tenant as to compliance of such Working  Drawings for the Site
and Shell Improvements with applicable Laws.

                  6.4. Submission to the City of San Rafael. Upon the completion
of the Working  Drawings  for the Site and Shell  Improvements  (or such part or
parts  thereof as the City of San Rafael may be willing to accept as  sufficient
to constitute an application for a building permit),  Landlord shall submit such
working drawings to the City of San Rafael together with all other documents and
fees necessary to constitute an  application  for a building  permit.  If only a
portion  of the  Working  Drawings  for the Site  and  Shell  Improvements  were
submitted  to the  City  of San  Rafael  at the  time of the  application  for a
building permit,  Landlord shall cause its architects and its engineers promptly
to complete any additional  necessary parts of the Working Drawings for the Site
and Shell  Improvements  and shall  submit them to the City of San Rafael and to
Tenant.

                                                                            -18-


         7.       TENANT'S ARCHITECT AND ENGINEERS.

                  7.1. Submission of List of Consultants. Within sixty (60) days
of the date of this  Leasehold  Improvements  Agreement,  Tenant shall submit to
Landlord for its approval,  which shall not be unreasonably withheld or delayed,
a list of architects,  engineers and other  consultants to be used in connection
with the  design of the  Tenant  Improvements.  Landlord  shall  respond to such
request for approval from Tenant within fifteen (15) days of the receipt of such
list by Landlord.  In the event that  Landlord  fails to respond to such request
within  such period of fifteen  (15) days,  Tenant may give to Landlord a second
notice  stating  such  failure and  further  stating  that if Landlord  does not
respond within five (5) days of the receipt by Tenant of such second notice from
Landlord,  Tenant  will be  deemed  to have  approved  the  list of  architects,
engineers and other consultants  submitted by Tenant. In the event that Landlord
fails to  respond to such  request  within  such  period of five (5) days of the
receipt by Landlord of such second  notice from Tenant,  Landlord  shall for all
purposes be deemed to have  approved the list  architects,  engineers  and other
consultants submitted by Tenant.  Tenant shall select architects,  engineers and
other  consultants  for the design of the Tenant  Improvements  from among those
approved by Landlord in response to such request from Tenant.

                  7.2. Cost of Preparation.  The cost of preparing all plans and
specifications  for the Tenant  Improvements  (including  without limitation the
Conceptual  Plans for the Tenant  Improvements  referred to in Section 0 and the
Draft Working Drawings for the Tenant Improvements  referred to in Section 0 and
the Final Working  Drawings for the Tenant  Improvements  referred to in Section
0), and the cost of preparing any change thereto shall be paid by Tenant.


         8.       SUBMITTAL OF CONCEPTUAL PLANS FOR THE TENANT IMPROVEMENTS.

                  8.1. Preliminary  Submission.  Tenant has previously submitted
to Landlord, and Landlord acknowledges receipt of, a preliminary conceptual plan
for the Tenant  Improvements  which indicates all of Tenant's  requirements  for
meeting rooms, kitchen facilities, office locations, corridor locations, general
arrangement  of uses on  particular  Floors and any other  special  requirements
which  would  reasonably  be expected to affect any aspect of the Site and Shell
Improvements.

                  8.2. First  Submission.  On or before January 1, 1998,  Tenant
shall submit to Landlord  conceptual  plans for the Tenant  Improvements  in the
Phase I Buildings  ("Conceptual Plans for the Tenant  Improvements"),  including
architectural,  mechanical and electrical,  telecommunications and security, and
reflected  ceiling  drawings.  The Conceptual Plans for the Tenant  Improvements
shall be consistent  with the  preliminary  plan submitted by Tenant pursuant to
Section 0 and shall provide for corridors,  lobbies,  bathrooms,  mechanical and
electrical  systems,  and fire exits which are designed to accommodate single or
multi-tenant  configurations of each Floor in each Building (including,  without
limitation,  separate  metering for utilities),  in conformance with the Working
Drawings for the Site and Shell  Improvements  (to the extent that  Landlord has
previously delivered the same to Tenant), and in a design reasonably  acceptable
to Landlord. At the time that Tenant submits such plans to Landlord,  Tenant may
identify particular elements of the Base Building  Improvements or of the Tenant
Improvements  or both  which are  critical  to the use by  Tenant of  particular
Floors and which must  therefore be  Substantially  Completed  before Tenant can
accept as  Substantially  Complete those particular  Floors,  which Floors shall
also then be identified by Tenant.

                  8.3. Purpose of Conceptual Plans for the Tenant  Improvements.
Such  

                                                                            -19-


Conceptual  Plans for the  Tenant  Improvements  shall be for the  general
information  of Landlord,  and to assist in the  coordination  of the design and
construction of the Tenant  Improvements,  but receipt of such Conceptual  Plans
for the Tenant  Improvements  by Landlord  shall not  constitute  an approval by
Landlord of the design or specifications  shown thereon.  Landlord shall, within
fifteen  (15) days  following  receipt by  Landlord  of such plans from  Tenant,
review,  comment on and return the Conceptual Plans for the Tenant  Improvements
to Tenant,  marked  "Approved",  "Approved as Noted" or  "Disapproved  as Noted,
Revise and Resubmit." If the Conceptual  Plans for the Tenant  Improvements  are
returned to Tenant marked  "Disapproved as Noted,  Revise and Resubmit,"  Tenant
shall  cause such plans to be  revised  within  twenty  (20) days,  taking  into
account the reasons for Landlord's disapproval, and shall resubmit revised plans
to Landlord for review.  The same  procedure  shall be repeated  until  Landlord
fully approves the Conceptual Plans for the Tenant Improvements.  Landlord shall
only refuse to consent to such Conceptual  Plans for the Tenant  Improvements on
the  grounds  that they are  inconsistent  with the plans for the Base  Building
Improvements or with the requirements of any applicable Laws.


         9. PREPARATION OF WORKING DRAWINGS FOR THE TENANT  IMPROVEMENTS.  On or
before February 15, 1998, Landlord shall deliver to Tenant those portions of the
Working  Drawings  for the Site and  Shell  Improvements  which  are  reasonably
required  to  permit  Tenant  to  prepare   working   drawings  for  the  Tenant
Improvements.  Within ninety (90) days after Tenant's  receipt  thereof,  Tenant
shall deliver to Landlord one (1) set of  reproducible  sepia and three (3) sets
of  blue-lined  prints  of  working  drawings  and  specifications  (hereinafter
referred  to  collectively  as  the  "Draft  Working  Drawings  for  the  Tenant
Improvements") for such Tenant Improvements  prepared, at Tenant's sole cost and
expense,  by an  architect  ("Tenant's  Architect")  licensed  in the  State  of
California  and selected by Tenant and approved by Landlord in  accordance  with
Section 0 above or  otherwise  specifically  approved  in writing  by  Landlord.
Landlord  shall  cooperate   reasonably  with  Tenant  in  connection  with  the
preparation of the Working Drawings for the Tenant  Improvements,  provided that
the production of such drawings shall be the sole  responsibility  of Tenant and
further provided that such cooperation  shall not limit the right of Landlord to
review and approve such Working  Drawings,  as herein  provided.  Landlord shall
only refuse to consent to such  Working  Drawings  on the grounds  that they are
inconsistent  with the  plans  for the Base  Building  Improvements  or with the
requirements  of any applicable  Laws.  Within fifteen (15) business days of the
receipt by Landlord of the Draft  Working  Drawings for the Tenant  Improvements
from  Tenant,  Landlord  shall  return to Tenant  one (1) sepia set of the Draft
Working Drawings for the Tenant  Improvements  marked  "Approved",  "Approved as
Noted" or  "Disapproved  as Noted,  Revise and  Resubmit."  If the Draft Working
Drawings for the Tenant  Improvements are returned to Tenant marked "Disapproved
as Noted,  Revise and Resubmit,"  Tenant shall cause such Draft Working Drawings
for the Tenant  Improvements to be revised,  taking into account the reasons for
Landlord's  disapproval and shall resubmit revised plans to Landlord for review.
The same  procedure  shall be repeated  until  Landlord fully approves the Final
Working  Drawings for the Tenant  Improvements.  It is understood that the Draft
Working Drawings for the Tenant  Improvements and the Final Working Drawings for
the Tenant  Improvements are to be consistent with, and a logical  extension of,
the  Conceptual  Plans for the  Tenant  Improvements  approved  by  Landlord  in
accordance  with  Section 0 above.  Tenant shall be solely  responsible  for the
completeness of the Draft Working  Drawings for the Tenant  Improvements and the
Final Working  Drawings for the Tenant  Improvements  and for  conformity of the
Final Working Drawings for the Tenant Improvements with the Working Drawings for
the Site and Shell Improvements  provided by Landlord to Tenant.  When the Final
Working  Drawings  for the Tenant  Improvements  are  approved by  Landlord  and
Tenant:  (i) they shall be  acknowledged  as such by Landlord and Tenant signing
each sheet of the Final Working Drawings for the Tenant Improvements;  and, (ii)
no changes shall be made to the approved  Final Working  Drawings for the Tenant
Improvements without the prior written consent of Landlord, which consent may be
withheld if such changes  would affect the schedule or cost of the  construction
of the Site and Shell

                                                                            -20-


Improvements or Tenant Improvements.

         10. LANDLORD'S REVIEW  RESPONSIBILITIES.  Tenant agrees and understands
that the review of the Conceptual Plans for the Tenant  Improvements,  the Draft
Working Drawings for the Tenant  Improvements and the Final Working Drawings for
the Tenant  Improvements  by  Landlord  is solely to protect  the  interests  of
Landlord  in the  Building  and the  Premises,  and  Landlord  shall  not be the
guarantor of, nor in any way or to any extent  responsible  for, the correctness
or accuracy of any such Draft Working  Drawings for the Tenant  Improvements  or
Final Working Drawings for the Tenant  Improvements or of the compliance of such
Draft Working Drawings for the Tenant Improvements or Final Working Drawings for
the Tenant Improvements with applicable Laws or of the conformance of such Draft
Working  Drawings for the Tenant  Improvements or Final Working Drawings for the
Tenant   Improvements   with  the  Working  Drawings  for  the  Site  and  Shell
Improvements  provided  by  Landlord  to Tenant.  Approval  by  Landlord  of the
Conceptual Plans for the Tenant Improvements, the Draft Working Drawings for the
Tenant  Improvements or the Final Working  Drawings for the Tenant  Improvements
prepared by Tenant shall not: (i) imply approval by Landlord as to compliance of
such  Draft  Working  Drawings  for the  Tenant  Improvements  or Final  Working
Drawings  for the  Tenant  Improvements  with  applicable  Laws;  (ii) imply the
compatibility of the Draft Working Drawings for the Tenant Improvements or Final
Working Drawings for the Tenant  Improvements  with the shell or the core or the
Working Drawings for the Site and Shell Improvements;  or (iii) limit Landlord's
right to require  changes in  portions  of the Final  Working  Drawings  for the
Tenant  Improvements  which are  incompatible  with or which,  in the reasonable
opinion of Landlord,  adversely affect the Building structure or the electrical,
plumbing,  life safety or mechanical systems of the Building or which affect the
availability to Landlord of third party warranties. In the event that, after the
approval by Landlord of the Final Working Drawings for the Tenant  Improvements,
Landlord modifies the Working Drawings for the Site and Shell  Improvements in a
manner which will require  modification  to the Final  Working  Drawings for the
Tenant  Improvements,  Landlord shall promptly so notify Tenant and Tenant shall
cause any such  required  modifications  to the Final  Working  Drawings for the
Tenant Improvements to be promptly made;  provided,  however, to the extent that
the  modifications to the Working  Drawings for the Site and Shell  Improvements
requested by Landlord are the result of the failure by  Landlord's  employees or
construction  managers (but not  Landlord's  architect) to use customary care in
coordinating  the  work  of the  architect  in the  preparation  of the  Working
Drawings for the Site and Shell Improvements,  then Landlord shall pay all costs
and  expenses  incurred  by  Tenant  as a result  thereof.  Landlord  shall  use
commercially  reasonable  efforts to cause the  agreement  with the architect to
require  that  such  architect  use  the  prevailing  standard  of  care  in the
architectural profession in the preparation of the Working Drawings for the Site
and Shell Improvements,  and Landlord shall use commercially  reasonable efforts
to enforce such agreement.


         11. COST OF TENANT  IMPROVEMENTS.  Upon the approval by Landlord of the
Final Working Drawings for the Tenant  Improvements,  Landlord shall obtain from
the contractor  selected by Landlord for the  construction  of the Base Building
Improvements a fixed-price for the construction of the Tenant  Improvements.  In
the event that such bid exceeds a sum equal to the Tenant Improvement Allowance,
Landlord shall so notify Tenant, and Tenant shall deposit,  in the manner herein
required,  immediately  available  funds  equal to the  amount by which such bid
exceeds  the  Tenant  Improvement  Allowance,  which  deposit  shall be held for
disbursement  to  Landlord  to  pay  expenses  of  construction  of  the  Tenant
Improvements  after the expenditure of the Tenant  Improvement  Allowance.  Such
deposit shall be made in the following manner:  (i) if required by lender of the
Construction  Financing,  such  deposit  shall be made into an account with such
lender at least five (5) days prior to the Commencement of  Construction,  as to
which account  Landlord  shall require the lender to pay interest to Tenant at a
reasonable  deposit rate;  or, (ii) in all 

                                                                            -21-


other  events,  such  deposit  shall  be  made  to an  escrow  agent  reasonably
satisfactory to both Landlord and Tenant on or before the later of the day which
is the tenth  (10th) day  following  the receipt by Tenant of a written  request
from Landlord for such deposit or the day which is the tenth (10th) day prior to
the commencement of construction of any of the Tenant  Improvements,  to be held
in an interest bearing account, with interest to be paid periodically to Tenant.
Expenses  paid  directly  from  such  funds  shall be  excluded  from  Aggregate
Development Cost, to the extent of the amount so paid.


         12.      CONSTRUCTION OF SITE AND SHELL IMPROVEMENTS.

                  12.1.  Construction  and  Substitutions.  The Site  and  Shell
Improvements shall be constructed by Landlord in substantial compliance with the
Working Drawings for the Site and Shell Improvements, although Landlord reserves
the right to make  substitutions  of  equipment or  materials  for  equipment or
materials  which are  specified  in the Working  Drawings for the Site and Shell
Improvements,  provided that all such substitutions shall be consistent with the
Descriptive  Base  Specifications.  Any  details  or  materials  which  are  not
specified in the Working Drawings for the Site and Shell  Improvements  shall be
completed  by  Landlord in a manner  consistent  with the  standards  of similar
buildings in Marin County, California. In the event Landlord so elects, Landlord
may commence  grading of the PG&E Property and other on- and off-site work prior
to the completion of the Working  Drawings for the Site and Shell  Improvements.
Landlord  shall use  commercially  reasonable  efforts to cause all  contractors
performing  any  portion  of the  Site  and  Shell  Improvements  or the  Tenant
Improvements to comply in all material respects with their respective contracts,
and  Landlord  shall  use  commercially   reasonable  efforts  to  enforce  such
contracts;  provided,  however,  that nothing  herein shall be deemed to prevent
Landlord  from using its  reasonable  judgment  in settling  disputes  with such
contractors or in accepting or permitting  variances  from the Working  Drawings
where such variances do not materially  affect the  performance or appearance of
the area of the Project where such variance occurs.  Nothing herein is, however,
intended  to  impose  upon  Landlord  any  liability  for  deficiencies  in  the
performance of any contractor, subcontractor or supplier.

                  12.2.  Changes  to  Working  Drawings  for the Site and  Shell
Improvements. Landlord may make changes to the Working Drawings for the Site and
Shell  Improvements,  provided  that each such change is approved by the City of
San Rafael and any lender or  prospective  lender of  Construction  Financing or
Take-Out  Financing,  if such  approval is required.  In the event that Landlord
plans a change to the  Working  Drawings  for the Site and  Shell  Improvements,
Landlord  shall so notify Tenant in writing,  which  writing  shall  describe in
detail the nature,  extent and location of the changes which  Landlord  plans to
make.  Tenant  shall  notify  Landlord  within five (5) days from the receipt by
Tenant of any such  submission  whether or not Tenant  agrees that the change to
the Working  Drawings for the Site and Shell  Improvements  would be  consistent
with the  Descriptive  Base  Specifications.  In the event that Tenant  fails to
respond to such  submission  within such period of five (5) days,  Landlord  may
give to Tenant a second notice stating such failure and further  stating that if
Tenant  does not  respond  within five (5) days of the receipt by Tenant of such
second  notice  from  Landlord,  Tenant  will be deemed to have  agreed that the
proposed change to the Working  Drawings for the Site and Shell  Improvements is
consistent with the Descriptive  Base  Specifications.  In the event that Tenant
fails to respond to such  submission  within such period of five (5) days of the
receipt by Tenant of such second  notice  from  Landlord,  Tenant  shall for all
purposes  be deemed  to have  agreed  that the  proposed  change to the  Working
Drawings for the Site and Shell  Improvements is consistent with the Descriptive
Base Specifications.  In the event of a dispute between Landlord and Tenant with
regard to the  question  of  whether  or not a  proposed  change to the  Working
Drawings  for the Site and  Shell  Improvements  would  be  consistent  with the
Descriptive Base  Specifications or as to any variances required to decrease the
Estimated  Phase I Project Cost if and to the extent that it is greater than One
Hundred  

                                                                            -22-


Eighty-Three  Dollars  ($183.00) per square foot of Gross Building Area,  either
Landlord or Tenant may require by written  notice to the other that such dispute
be resolved by  arbitration  conducted  in  accordance  with the  provisions  of
Section 0.


         13. INSPECTION BY TENANT. During the course of construction of the Site
and  Shell  Improvements  and  the  Tenant  Improvements,   Tenant  or  Tenant's
representative  shall, at Tenant's sole cost and expense,  at all times have the
right to inspect the construction; provided that Tenant, in the exercise of such
right,  shall not  unreasonably  interfere with or delay the prosecution of such
work  (except to the extent such work is delayed by the  necessity  of remedying
defective or incorrect work discovered by Tenant).  No exercise by Tenant of its
right to  inspect  the  construction  shall be deemed to affect  the  rights and
obligations  of  Landlord  and Tenant  with  respect to the work or any  defects
therein,  nor shall  such  exercise  be deemed  an  assumption  by Tenant of any
responsibility for the quality of the work.


         14.      CHANGE ORDERS.

                  14.1.  Right of Tenant to  Request  Modifications.  Tenant may
make  modifications  ("Modifications")  to the Final  Working  Drawings  for the
Tenant  Improvements  and/or to request that Landlord make  Modifications to the
Working  Drawings for the Site and Shell  Improvements,  provided that each such
Modification is approved by the City of San Rafael and any lender or prospective
lender of  Construction  Financing or Take-Out  Financing,  if such  approval is
required, and is made sufficiently prior to the construction of the part of work
to  which  the  Modification  would  be  made so that  the  Modification  can be
accommodated without resulting in a Tenant Caused Delay.  Modifications relating
to the Site and Shell Improvements or the Tenant Improvements or both shall only
be made with the consent of Landlord,  which consent  shall not be  unreasonably
withheld or delayed.  Any request by Tenant for  Modifications  shall be made in
writing to Landlord,  which writing shall describe in detail the nature,  extent
and location of the Modifications that Tenant requests be made.

                  14.2.  Preparation  of Plans for  Modifications.  In the event
that Tenant  requests a  Modification  to the Working  Drawings for the Site and
Shell Improvements,  Landlord shall cause its architect and other consultants to
prepare  drafts of revisions to those  portions of the Working  Drawings for the
Site and Shell  Improvements  which  Tenant has  requested  be the  subject of a
Modification,  and shall deliver to Tenant a copy of such draft, together with a
statement of  Landlord's  best  estimates  (made in good faith and in accordance
with  reasonably  competitive  prices and  reasonable  design  plans;  provided,
however,  that Tenant  recognizes  that  estimates will have to be provided in a
relatively short period of time, that there is some inherent  uncertainty in the
process of providing estimates, that estimates may be based on incomplete design
details due to time  constraints and that only one contractor will be negotiated
with)  of (i)  the  additional  cost  of  construction  of the  Site  and  Shell
Improvements or the Tenant  Improvements (which shall include without limitation
increased design costs,  increased  construction  costs and increased  financing
costs arising by reason of the resulting  Tenant Caused  Delays,  if any, in the
construction  schedule)  which  Tenant  will be required to pay by reason of the
proposed  Modification (the "Modification  Cost"); and, (ii) the duration of any
Tenant  Caused  Delay (as that term is defined  in  Section 0 below)  which will
arise by reason of such  Modification.  Landlord  shall also deliver to Tenant a
copy of any bids upon which  Landlord  based its  estimates.  Tenant shall elect
either to require  Landlord to proceed with the  Modification  or not to require
Landlord  to so proceed by written  notice to  Landlord  given  within  five (5)
business days of the receipt by Tenant of the draft of the modified  portions of
the Working Drawings for the Site and Shell Improvements and Landlord's estimate
of resulting costs and Tenant Caused Delays.  The failure by Tenant to make such
election in writing within such five (5) business day period shall  conclusively
be deemed to be an election by Tenant not to proceed 

                                                                            -23-


with the  Modification.  In the event that  Tenant  elects to  proceed  with the
Modification:  (i) Tenant shall, at least five (5) business days before the date
upon which Landlord,  in its reasonable judgment,  must direct the contractor to
proceed with the  Modification  (of which date  Landlord  shall notify Tenant in
writing at least two (2) days  before  such  date),  deposit  with  Landlord  or
Landlord's lender (as Landlord may direct)  immediately  available funds (or, if
the  lender of the  Construction  Financing  will so permit  without  additional
requirements upon Landlord,  a letter of credit) equal to Landlord's estimate of
the  Modification  Cost; and, (ii) Landlord shall cause the Working Drawings for
the Site  and  Shell  Improvements  to be  modified  as set  forth in the  draft
portions thereof given to Tenant in response to its request and shall thereafter
construct the Site and Shell Improvements in accordance with such Modifications.
In the event that the actual Modification Cost differs from the amount estimated
by Landlord,  Landlord shall so notify Tenant,  and, within five (5) days of the
receipt by Tenant of such notice, Landlord shall refund to Tenant the amount (if
any) by which the  actual  Modification  Cost was less than  that  estimated  by
Landlord,  or Tenant  shall pay to  Landlord  the  amount  (if any) by which the
actual Modification Cost exceeded that estimated by Landlord.  In the event that
Tenant  elects not to proceed  with the  Modification,  Tenant  shall  reimburse
Landlord upon demand for all reasonable  architect's  fees and other  reasonable
costs  incurred by Landlord as a result of the  preparation  of the draft of the
modified  portions of the Working Drawings for the Site and Shell  Improvements,
and, if any Tenant  Caused Delay has resulted  from the request,  Tenant  shall,
within five (5) business days of the receipt by Tenant of a written request from
Landlord  accompanied by a reasonably detailed  explanation of costs incurred or
to be incurred,  reimburse  Landlord for the cost of such Tenant  Caused  Delay.
Landlord shall,  however, use all reasonable efforts to minimize the duration of
any Tenant Caused Delays resulting solely from the necessity of Landlord causing
drafts and estimates to be prepared in response to Tenant's request.


         15.      CONSTRUCTION RELATED MATTERS.

                  15.1. Target Date For Commencement.  Landlord and Tenant agree
to use commercially  reasonable  efforts to obtain all Necessary  Approvals,  to
prepare  and  approve  plans,   specifications   and  working   drawings,   hire
contractors, and take such other steps as may be required so that Landlord is in
a position to commence  construction of the Site and Shell  Improvements by June
1, 1998. Landlord and Tenant both acknowledge and agree, however, that such date
is a target for  commencement  of  construction  and that such  commencement  is
subject to numerous factors beyond the control of either Landlord or Tenant.  In
the  event  that  Landlord  is  unable,  despite  the  use of  its  commercially
reasonable  efforts in the  circumstances,  to obtain all required  governmental
approvals,  to prepare and approve plans,  specifications  and working drawings,
hire contractors,  and take such other steps as may be required so that Landlord
is in a position to commence  construction of the Site and Shell Improvements by
June 15, 1998,  Landlord may defer the  Commencement  of Construction to June 1,
1999 by written notice to Tenant.

                  15.2.   Schedule   Requirements  in  Construction   Contracts.
Landlord  shall  require  that the  contract  between  Landlord  and its general
contractor for the  construction  of the Site and Shell  Improvements  contain a
commercially  reasonable schedule for the Substantial  Completion of each of the
Floors within the  Buildings,  which  schedule will be subject to the consent of
Tenant,  which  consent  shall not be  unreasonably  withheld or  delayed.  Such
contract  shall also  provide  for the  contractor  to pay a  reasonable  sum as
liquidated  damages for each day that Substantial  Completion is not achieved in
accordance with the approved  schedule,  although such contract may also provide
for the  schedule to be extended  without the payment of such damages for delays
which are caused by Force Majeure Events.

                  15.3.  Notice  of  Substantial  Completion.  When  Substantial
Completion of a particular Floor within a Building has occurred,  Landlord shall
give Tenant written notice thereof (a "Floor  Substantial  Completion  Notice").
The  fact  that the  landscaping,  exterior  plazas,  parking  

                                                                            -24-


lots,  driveways,  walkways,  or other Floors of the Project or another  Phase I
Building have not been completed  shall not prevent  Landlord from  delivering a
Floor Substantial  Completion Notice to Tenant and delivering the Floor which is
Substantially Complete.  Landlord and Tenant shall prepare a Punch List of items
pertaining  to the Floor which is then  Substantially  Complete  within ten (10)
business  days after the receipt by Tenant of the Floor  Substantial  Completion
Notice,  which  Punch List shall  specify  the items of work on such Floor which
have not been completed. Landlord shall use all reasonable diligence to complete
the items on such Punch List within thirty (30) days thereafter.

         16.      NOTICES OF COMPLETION AND DEFECTS.

                  16.1.  Project  Substantial  Completion Notice and Acceptance.
Upon the Substantial  Completion of all of the Site and Shell  Improvements  and
the Tenant  Improvements,  Landlord  shall give  Tenant  written  notice of such
completion  (a "Project  Substantial  Completion  Notice"),  and Tenant shall be
deemed to have fully accepted the Work as satisfactorily completed in accordance
with all requirements of this Leasehold Improvements Agreement and shall further
be deemed to have  waived any  defects  in any such  Work,  except to the extent
that:

                           A. Tenant  shall  furnish  Landlord  with a list (the
         "Punch List") within ten (10) business days after the receipt by Tenant
         of the Project  Substantial  Completion Notice,  which Punch List shall
         specify the items of work which have not been completed;

                           B. Tenant  shall  furnish  Landlord  with a list (the
         "Defect List") within three (3) months after the date of the receipt by
         Tenant of the Project  Substantial  Completion  Notice,  specifying any
         defects in the  construction of Work which were discovered prior to the
         end of such three (3) month  period  (provided  that Tenant  shall also
         notify  Landlord  of any such  defect  within a  reasonable  time after
         discovering it); and,

                           C. Tenant  shall  furnish  Landlord  with a list (the
         "HVAC  Defect  List")  within  twelve (12) months after the date of the
         receipt  by  Tenant  of  the  Project  Substantial  Completion  Notice,
         specifying  any defects in the  construction  of those  portions of the
         HVAC system  serving the Project which are a part of the Work and which
         were  discovered  prior to the end of such  twelve  (12)  month  period
         (provided  that Tenant  shall also  notify  Landlord of any such defect
         within a reasonable time after discovering it).

                  16.2.  Assignment of Warranty Rights by Landlord.  Within five
(5)  days of the  delivery  of the  Project  Substantial  Completion  Notice  by
Landlord to Tenant,  Landlord shall assign to Tenant,  pursuant to an assignment
agreement in a form reasonably acceptable to Landlord and Tenant, all warranties
and  guarantees  from all  manufacturers,  equipment  suppliers and  contractors
related to the Project; provided,  however, that such assignment agreement shall
also permit Landlord to retain the right to enforce any such warranties.

                  16.3.  Corrections  by Landlord.  Landlord  shall commence the
correction of each of the items on the Punch List, the Defect List, and the HVAC
Defect  List  within  twenty  (20) days of the receipt by Landlord of such Punch
List or earlier  notice of such defect  (unless a particular  defect  materially
interferes  with the use by Tenant of any of the  Buildings or other  portion of
the Work,  in which event  Landlord  shall  commence the required  correction as
promptly as is reasonably  feasible in the  circumstances  and shall  thereafter
diligently  prosecute  such  correction  to  completion).  The cost,  if any, to
Landlord of such corrections shall be a part of Phase I Project Cost, or, if the
final Phase I Project Cost has been established  under the Lease, then such cost
shall be an Expense under the Lease.  Landlord shall, if reasonably  possible in
the circumstances,  complete any required correction within thirty (30) business
days of the receipt by Landlord of such list or earlier notice of such defect.

                                                                            -25-


         17.      DELAYS.

                  17.1.  Tenant Caused Delays.  To the extent that a delay shall
occur in the  Substantial  Completion of a Floor or of the Project as the direct
or indirect  result of a delay with regard to one or more  critical path aspects
of the Project fairly attributable to the acts or omissions of Tenant; then: (i)
any such delay shall extend the date for the completion by Landlord of that part
of the Work  which is delayed  by one (1) day for each day of such  delay;  and,
(ii) Tenant shall reimburse Landlord on demand for all additional costs incurred
by Landlord  as a result of such  delays  (including,  without  limitation:  (a)
increased  design  costs,  (b)  increased   construction  costs,  (c)  increased
development  management  costs,  and (d)  increased  financing  costs or fees in
connection  with  loan  extensions  or  replacements  required  by reason of the
resulting delays, if any, in the construction schedule;  provided, however, that
any amount so reimbursed by Tenant shall be excluded from Aggregate  Development
Cost). In addition, any such delay in the Substantial Completion of construction
shall extend all dates for the Substantial Completion by Landlord of any work to
be  performed  by it on the  Phase I Land,  the  Phase  II Land or a  particular
Building  by one (1) day for each day of such delay in  Substantial  Completion;
and,  the Rent  Commencement  Dates under the Lease shall each be deemed to have
occurred  one (1) day  sooner  than the day upon  which the  conditions  for the
occurrence of each such date are actually  fulfilled for each day of such delay.
The following is a  non-exclusive  list of the kinds of acts or omissions  which
could, depending on the applicable facts and circumstances, result in a delay in
the  Substantial  Completion  of a Floor:  (i) any delay of  Tenant,  beyond the
periods  provided in this Leasehold  Improvements  Agreement for the response of
Tenant,  in giving any  consent or approval  which is required  pursuant to this
Leasehold Improvements Agreement; (ii) any request by Tenant that Landlord delay
any element, or the completion, of construction; (iii) any request by Tenant for
a Modification  or any  Modification  undertaken at the request of Tenant or any
change to any of the Final Working  Drawings for the Tenant  Improvements  after
such Final Working Drawings for the Tenant Improvements have been approved; (iv)
any event of default by Tenant under the Lease, the Option Agreement,  the Phase
II  Purchase  Agreement  or any Event of Tenant  Default  under  this  Leasehold
Improvements  Agreement;  (v)  any  interference  by  Tenant  or its  agents  or
contractors  with the  prosecution by Landlord of the Work;  (vi) any reasonably
necessary  displacement  of  any  construction  from  its  place  in  Landlord's
construction schedule resulting from any of the causes for delay described above
and the fitting of such construction back into such schedule; or (vii) any delay
in  obtaining  any  approval  or permit from the City of San Rafael or any other
governmental  entity or any utility company or district resulting from any other
delay referred to in this Section 0. Following a determination  by Landlord that
a Tenant Caused Delay is  reasonably  likely to result from an event of the kind
referred to in this Section 0, Landlord  shall give written notice of such event
to Tenant.  Landlord  shall use  Landlord's  reasonable  efforts to minimize the
length of any such delay and to mitigate or eliminate  the effects of such delay
in subsequent parts of the work,  which reasonable  efforts may include overtime
to the extent  reasonably  requested by Tenant to minimize the adverse  economic
consequences  to  Tenant of such  delay,  but only if and to the  extent  Tenant
agrees to reimburse  Landlord  upon demand for any  incremental  increase in the
cost of  performing  the work as to which  such  overtime  is used.  The  delays
described  in this  Section 0 are  referred  to in this  Leasehold  Improvements
Agreement as "Tenant Caused Delays".  Tenant  acknowledges that, because grading
of the site will only be  permitted  during  certain  months,  relatively  brief
delays may result in a lengthy postponement of the commencement of grading until
it can be  undertaken  during a month in which  grading  is  permitted,  and the
duration  of any such  delay in such  grading  shall be taken  into  account  in
determining the duration of any Tenant Caused Delay.

                  17.2.  Force  Majeure  Delays.  To the extent that Landlord or
Tenant shall be delayed in or prevented  from the  performance of any act (other
than Tenant's  obligation to make  payments of rent,  additional  rent and other
charges  required  hereunder or under the Lease) solely by 

                                                                            -26-


reason of restrictive  governmental  laws or  regulations,  governmental  delays
beyond a reasonable and customary period for the issuance of any required permit
or approval,  actions  initiated by a third party  resulting in a judicial order
which restrains or enjoins activity  necessary to the completion of the Site and
Shell  Improvements  and/or the Tenant  Improvements  or which would prevent the
accrual of vested rights to complete the Project,  industry-wide  craft strikes,
unavailability  of  materials,  riots,  insurrections,   epidemics,   quarantine
restrictions, acts of God, an Event of Default on the part of the other party to
this  Leasehold  Improvements  Agreement,  war or damage to work in  process  by
reason of fire,  flood,  earthquake or other casualty,  then performance of such
act  shall be  excused  for the  period  of the  delay  and the  period  for the
performance of such act shall be extended for a period  equivalent to the period
of such delay.  Notwithstanding the foregoing, lack of funds shall not be deemed
to be a cause beyond the control of either party.  Landlord shall use Landlord's
reasonable  efforts  to  minimize  the  length  of any such  delay.  The  delays
(including,  without limitation, Tenant Caused Delays) described in this Section
0 are referred to in this Leasehold Improvements Agreement as "Delays".

                  17.3.  Statements  of Landlord  as to Delays.  Within ten (10)
business days of a written request from Tenant,  Landlord shall give to Tenant a
written  statement setting forth a description of the cause for and duration (by
dates of  commencement  and cessation or, as to Delays which have not yet ended,
estimated date of cessation) of all Delays in the Work which  Landlord  contends
have  occurred  prior to the date of such  statement or which are  continuing to
occur  as of the date of such  statement.  Such  statement  shall  also  specify
whether or not Landlord  contends a particular  Delay was a Tenant  Caused Delay
and shall  specify  the extent  (if any) to which  Landlord  contends  that each
particular  Delay has  affected  the  Substantial  Completion  (or,  for a Delay
occurring  after  Substantial  Completion,  affected the final  completion) of a
particular Building through the date of such statement.  Landlord shall be bound
by, and Tenant  shall be entitled to rely on, such  statements  for all purposes
(except with respect to estimated dates of cessation in the case of Delays which
have not  ended  as of the date of such  statement),  although  nothing  in such
statements  shall be deemed to bind  Tenant  with  respect to the  existence  or
duration of any Delay  claimed by Landlord or to bind  Landlord  with respect to
Delays  caused by events of which  Landlord  is not aware as of the date of such
statement.  Tenant  shall not be  entitled  to  request  such a  statement  from
Landlord more than once in any period of thirty (30) consecutive days.

                  17.4.  Minimization  of Delays.  Upon the receipt by Tenant of
any notice of Delay from  Landlord,  Tenant may elect to direct  Landlord to use
such  overtime as may  reasonably  be  required  in the  judgment of Landlord to
minimize the duration of any Delay. Such request shall be deemed a request for a
Modification  by  Tenant,  and the  parties  shall  have  the  same  rights  and
responsibilities  with respect to such a request as they would have with respect
to any other requested Modification.


         18.      PROJECT FINANCING

                  18.1. Right and Obligation to Arrange. Landlord shall have the
sole and  exclusive  right to arrange for  Construction  Financing  and Take-Out
Financing for the Project,  in accordance with the provisions of this Section 0.
Except as  otherwise  provided  in Section 0,  Landlord  shall be  obligated  to
arrange for or provide all equity and loan proceeds  required to pay the Phase I
Project Cost.

                  18.2.  Retaining  a  Mortgage  Broker  to  Arrange  Financing.
Landlord shall, at such time as Landlord may select, retain a mortgage broker of
Landlord's choosing for the purpose of researching and negotiating  Construction
Financing  for the Project.  Tenant shall not,  either  directly or  indirectly,
solicit  or  respond  to  quotations  from  potential  lenders  with  respect to
conventional  real  estate  financing  at any time prior to the  exercise of the
"First Option" by Tenant  

                                                                            -27-


pursuant  to, and as defined  in, the Option  Agreement.  Tenant  may,  however,
inquire directly from potential lenders only as to the availability to Tenant of
off-balance sheet financing.

                  18.3.  Selection  of Lender and  Negotiation  of  Construction
Financing.  Landlord  shall  choose,  from among  those who give  quotations  to
Landlord,  one or more of the potential  lenders with which to negotiate for the
Construction Financing which Landlord then desires to obtain, the costs of which
shall not  exceed in the  aggregate  the  amount  which is then  reasonable  for
construction  financing  for a project  of the type,  size,  location  and other
characteristics of the Project.

                  18.4.   Selection  of  Lender  and   Negotiation  of  Take-Out
Financing. Landlord shall select and arrange Take-Out Financing for the Project.

                  18.5.  Inability to Obtain Commitment for Take-Out  Financing.
In the  event  that  Landlord  elects  by  written  notice to Tenant to obtain a
commitment for Take-Out  Financing  meeting the Criteria for Take-Out  Financing
and thereafter uses commercially  reasonable efforts to obtain a commitment from
the lender offering such Take-Out Financing,  but thereafter reasonably believes
that it will not be able for any reason not within the  control of  Landlord  to
obtain a binding  commitment which satisfies the Criteria for Take-Out Financing
and which is otherwise  acceptable to Landlord in the exercise of its reasonable
discretion,  Landlord shall so notify Tenant.  During the immediately  following
fifteen (15) days,  Landlord and Tenant shall meet and  negotiate to agree on an
alternative  basis for consummating the transaction  which is acceptable to both
of them in the exercise of their  respective  sole  discretion.  If Landlord and
Tenant fail to so agree within such fifteen (15) day period,  then Landlord may,
in its sole  discretion,  elect by  written  notice to Tenant to  terminate  the
Lease, this Leasehold Improvements Agreement, the Option Agreement and the Phase
II  Purchase  Agreement  (but not less  than all of them) by  written  notice to
Tenant.  Such  termination  shall be  effective  upon and as of the sixth  (6th)
business  day  following  the date upon which Tenant  receives  such notice from
Landlord,  unless Tenant  exercises the First Option under the Option  Agreement
prior to the  effective  date of such  termination.  In the event that Tenant so
exercises  the First Option,  then Tenant shall  purchase the PG&E Property from
Landlord in its then condition,  "as is, with all faults",  except that Landlord
shall have the right set forth in Section 2.13 of the Option Agreement.

                  18.6.  Other  Funds.  Landlord  may,  in its sole  discretion,
choose to provide funds for the purposes of Take-Out  Financing  from sources or
loans which do not meet the Criteria for Take-Out Financing,  which funds may be
greater in amount than those stated in the Criteria for Take-Out Financing.

                  18.7.  Contribution  of  Tenant.  In the event  that  Landlord
estimates that the Estimated Phase I Project Cost will exceed an amount equal to
One Hundred  Eighty-Three  Dollars  ($183.00) per square foot of Gross  Building
Area in the Buildings to be located in Phase I, Landlord may so notify Tenant in
writing and request  that Tenant  provide  Construction  Financing  and Take-Out
Financing for the Project in an amount equal to the lesser of: (i)  seventy-five
percent of the amount by which the Phase I Project Cost exceeds the amount equal
to One Hundred  Eighty-Three Dollars ($183.00) per square foot of Gross Building
Area in the  Buildings  to be located in Phase I; or,  (ii) Seven and  50/100ths
Dollars  ($7.50) per square foot of Gross  Building  Area in the Buildings to be
located  in Phase I.  _.In the event  that  Landlord  delivers  such a notice to
Tenant: (i) Tenant shall provide such funds to Landlord as and when requested by
Landlord,  but only  after  Landlord  has  invested  in the  Project  an  equity
contribution equal to fifteen percent (15%) of the Phase I Project Cost, as such
Phase I Project Cost is  estimated in good faith by Landlord;  (ii) Tenant shall
be entitled to receive monthly  payments of interest only at the rate of fifteen
percent (15%) per annum,  commencing as of the Last Rent  Commencement  Date and
continuing  during the Term of the Lease;  (iii)  interest shall accrue from the
time that such  funds are paid by Tenant to the 

                                                                            -28-


day immediately preceding the Last Rent Commencement Date at the rate of fifteen
percent  (15%)  per  annum,  and the  amount  so  accrued  shall be added to the
principal;  (iv) such loan shall be secured by a Deed of Trust  encumbering  the
Project in the standard form used by First American Title Company of Marin as of
the date of the  making of such  loan or,  if such a deed of trust  would not be
acceptable to any  Mortgagee of a Mortgage  securing  Construction  Financing or
Take-Out Financing, then by other security reasonably acceptable to Landlord and
Tenant and acceptable to such Mortgagee;  and, (v) Tenant shall  unconditionally
subordinate  its  interest  under  such  Deed of Trust to the  interests  of the
mortgagee  of any  mortgage or the holder of any other deed of trust  securing a
loan  against the  Project,  provided  that the  aggregate  amount of  principal
indebtedness secured by all such mortgages and deeds of trust to which Tenant is
required  to be  subordinate  at any time is equal to or less  than the  Phase I
Project  Cost.  Any funds so advanced by Tenant,  together  with any accrued and
unpaid interest  thereon,  shall be due and payable by Landlord to Tenant on the
fifth (5th) anniversary of the Last Rent Commencement Date.

                  18.8.  Cooperation  of Tenant in  Construction  Financing  and
Take-Out Financing.

                         A.  Because of the rights of Tenant to acquire the PG&E
Property pursuant to the Option Agreement, Tenant may be required by the lenders
of the Construction  Financing or the Take-Out  Financing or both to execute the
loan  documents as a prospective  borrower or successor  borrower.  Tenant shall
execute,  within  five  (5)  days  of  a  written  request  from  Landlord,  any
commercially  reasonable  loan documents  which the lender  requires that Tenant
execute,  provided  that no such loan  document  shall  require that Tenant have
personal liability for the repayment of any indebtedness on such loan, except in
an amount equal to the aggregate monetary  obligations of Tenant under the Lease
during the then  remaining  Term and any Extended  Terms as to which Tenant then
has an unexpired  right to extend the Term of the Lease and except for customary
personal liability exceptions,  such as those pertaining to Hazardous Materials,
misapplication  of funds  and  misrepresentation.  Without  limiting  any  other
provision of such loan documents, such loan documents may condition the right of
Tenant  to  exercise  its  option  pursuant  to  the  Option  Agreement  on  the
maintenance  by Tenant of  reasonable  net worth or other  financial  standards,
provided  that such  standards  are  reasonably  related to, and less than,  the
financial  condition  of  Tenant as of the date of this  Leasehold  Improvements
Agreement.  Tenant shall also execute such instruments  subordinating its rights
and  interests  pursuant to the Option  Agreement to the rights and interests of
the lender pursuant to the loan documents, provided that such lender shall agree
in  writing  to  recognize  the  rights of Tenant  under  the  Option  Agreement
following a foreclosure  of the Mortgage,  subject to such  restrictions  on the
liability and obligations of the lender as the lender may reasonably  require in
the circumstances.

                         B. If required by a  Mortgagee  of Take-Out  Financing,
Tenant shall agree to such commercially  reasonable amendments to the provisions
of the Lease and this  Leasehold  Improvements  Agreement as such  Mortgagee may
require,  provided that the amount of Basic Monthly Rent,  Real Estate Taxes and
Expense for which  Tenant is liable  shall not be affected by reason of any such
amendment and the  Permitted  Use and the other rights and  privileges of Tenant
under the Lease and this  Leasehold  Improvements  Agreement are not  materially
impaired or reduced.

                  18.9.  Financial  Covenants  of  Tenant.  In the  event of any
material  diminution in the financial  condition or  creditworthiness  of Tenant
occurring  after the date of this Leasehold  Improvements  Agreement which could
reasonably be expected to result, or which has then resulted, in increased costs
of  financing  or other  economic  losses to Landlord  which would not have been
incurred had no such diminution occurred,  Landlord may notify Tenant in writing
that Landlord proposes to increase the Agreed Spread for Take-Out Financing by a
specified  amount to take into  account the amount of increase in rate caused by
such diminution or to require that Tenant pay to 

                                                                            -29-


Landlord the increased costs of financing or other economic losses. Such written
notice to Tenant (a  "Creditworthiness  Adjustment  Notice") from Landlord shall
state the  grounds on which  Landlord  has  concluded  that  increased  costs of
financing  or other  economic  losses  will result or has  resulted  from such a
diminution.  In the  event  that  Tenant  contends  that no  increased  costs of
financing or other  economic  losses will result or has  resulted  from any such
diminution  or that the  amount of the  increased  costs of  financing  or other
economic  losses  described by Landlord is greater than that  required to fairly
reflect the increased costs of financing or other economic losses caused by such
diminution, Tenant may give to Landlord a written notice (a "Contention Notice")
stating  such  contention  within  fifteen (15) days of the receipt by Tenant of
such a notice  from  Landlord,  which  notice  shall  state the grounds on which
Tenant has  concluded  that no increased  costs of  financing or other  economic
losses will result or has resulted  from such a diminution or that the amount of
the increased costs of financing or other economic losses  described by Landlord
is  greater  than that which will  occur or has  occurred.  Upon the  receipt by
Landlord of such a notice from Tenant  within such  period,  Landlord and Tenant
shall  meet and confer  for a period of ten (10) days  regarding  whether or not
increased  costs of financing or other economic losses will or has resulted from
such a diminution  and as to the amount of the  adjustment  to the Agreed Spread
for Take-Out Financing or other payments, if any, required to fairly reflect the
increased  costs of  financing  or other  economic  losses.  In the  event  that
Landlord and Tenant are unable to agree as to whether or not increased  costs of
financing or other  economic  losses will or has resulted from such a diminution
and as to the amount of the adjustment or payments,  if any,  required to fairly
reflect  such  increase or losses,  then  either may require  that the matter be
resolved by arbitration  conducted in accordance  with the provisions of Section
0. In the event that such  arbitration  results in an award  determining that an
increase in the Agreed  Spread for Take-Out  Financing  would be required in the
circumstances  to fairly reflect the increase in rate caused by such diminution,
then the Agreed Spread for Take-Out  Financing  shall be increased in the manner
so  determined  in the  arbitration  award.  In the event that such  arbitration
results in an award  determining that Tenant should pay to Landlord an amount to
compensate  Landlord for increased costs of financing or other economic  losses,
then Tenant  shall make such  payments to Landlord in the manner and at the time
described in the  arbitration  award.  In the event that Tenant fails to give to
Landlord  a  Contention  Notice  within  the time  period for the giving of such
notice  provided in this Section 0,  Landlord may give to Tenant a second notice
stating  such  failure and further  stating  that if Tenant does not give such a
Contention  Notice  within five (5) days of the receipt by Tenant of such second
notice from Landlord,  the  adjustments or payments or both proposed by Landlord
will become final.  In the event that Tenant fails to respond to such submission
within  such  period of five (5) days of the  receipt  by Tenant of such  second
notice from  Landlord,  then the  adjustments  or  payments or both  proposed by
Landlord will become final and not subject to challenge by Tenant.

                  18.10.   Prevailing   Wages.   Landlord   and  Tenant   hereby
acknowledge  that a lender of  Construction  Financing or Take-Out  Financing or
both may require  that  prevailing  wages be paid or that union labor be used in
connection with the construction of the Project,  and Landlord and Tenant hereby
agree that Landlord and Tenant shall comply with any such  requirements  imposed
by such a lender.

                  18.11.  Security  Deposit.  In the  event  that  the  terms of
Take-Out  Financing  require that Tenant  deliver to Landlord a deposit or other
security for the  performance  by Tenant of its  obligations  under the Lease or
this Leasehold  Improvements  Agreement (or both),  then Tenant shall so deliver
the required deposit or other security in the form and amount,  which deposit or
other security shall be held,  applied and disbursed by Landlord pursuant to the
provisions of Section 34 of the Lease.


         19.      DETERMINATION OF MONTHLY BASE RENT

                                                                            -30-


                  19.1. Initial Monthly Base Rent. The Initial Monthly Base Rent
shall be in an amount  equal to the product of: _. (i) the total Phase I Project
Cost; multiplied by, (ii) the Development Constant.

                  19.2.  Selection of Designated Treasury Rate.

                         A. The Designated  Treasury Rate shall be determined on
a date  selected by  Landlord,  which date must fall no later than  fifteen (15)
days  after the date on which  the first of the  following  events  occurs:  (i)
Landlord enters into a binding agreement to sell,  convey or otherwise  transfer
in the  aggregate  fifty  percent  (50%) of the  interests in the Project to any
person or entity  other than  Tenant  (except a  conveyance  or  transfer to any
person  who is a  constituent  partner  in  Landlord  or the holder of an equity
interest  in a  constituent  partner  in  Landlord);  (ii)  Landlord  receives a
commitment  from a lender to provide the  Take-Out  Financing at a fixed rate of
interest (as opposed to a fixed spread over an index); (iii) Landlord receives a
commitment  from any other person or entity to provide  funds at a fixed rate of
interest in an amount greater than Eight Million Dollars ($8,000,000.00) for the
purposes of Take-Out  Financing  pursuant to Section 0. For the purposes of this
Section 19.2,  the term "fixed" shall mean set at unvarying rate for a period of
at least one (1) year.  Notwithstanding the foregoing provisions of this Section
0, Landlord shall select the Designated Treasury Rate not later than the earlier
to occur of the date upon which  Landlord  designates  the Initial  Monthly Base
Rent in accordance with Section  19.3(iii) or the date which is ninety (90) days
after Tenant  delivers to Landlord a written  request that  Landlord  select the
Designated Treasury Rate. If Tenant delivers such written request, then Landlord
may, at its option,  purchase a forward  commitment  to fix the rate of interest
(as  opposed  to fixing a spread  over an index)  under the  Take-Out  Financing
covering  the period  commencing  on the date  Landlord  selects the  Designated
Treasury Rate in response to Tenant's  request and ending on the date upon which
Landlord  reasonably  estimates it will be designating  the Initial Monthly Base
Rent  in  accordance  with  Section  19.3(iii),  and the  cost  of such  forward
commitment  shall be included in Phase I Project Cost.  For the purposes of this
Section 19.2.A.  only: (i) the cost of such forward  commitment shall be paid to
the lender of the Take-Out  Financing in points and not by increasing the spread
of the  interest  rate  applicable  thereunder;  (ii) the  cost of such  forward
commitment  shall not be  subject  to the  limitations  on the cost of  Take-Out
Financing  set  forth in the other  provisions  of this  Leasehold  Improvements
Agreement; and, (iii) the cost of such forward commitment shall not be deemed to
be included in costs reimbursed as a part of Agreed Take-Out  Financing  Closing
Costs. The Designated  Treasury Rate shall be an approximation of the rate which
would be quoted  forward in the futures  markets  for the sale of United  States
Treasury  Bonds with  maturities  of  fifteen  (15)  years,  which rate shall be
determined by extrapolating  between the quoted rates for United States Treasury
Bonds with maturities of ten (10) and thirty (30) years as of the date for which
a quote  can be  obtained  that is  closest  to the  date  upon  which  Landlord
reasonably predicts that the Last Term Commencement Date will occur.

                         B.  Landlord  shall  deliver to Tenant,  within one (1)
business day after the  occurrence  of the  applicable  event  described  above,
written  notice (a "Rate  Designation  Notice")  of the date on which such event
occurred, and within two (2) business days after Landlord selects the Designated
Treasury  Rate in  accordance  with this Section 0,  Landlord  shall  deliver to
Tenant written  notice of such selection date and the Designated  Treasury Rate.
Failure  by  Landlord  to  deliver  either  or both of such  notices  shall  not
constitute  a  waiver  of the  right  of to set the  Designated  Treasury  Rate,
although  a failure  by  Landlord  to  select a date as of which the  Designated
Treasury  Rate is to be  established  on or  before  the last day of the  period
during  which such date  could  occur,  as such  period is  provided  in Section
19.2.A,  shall result in the date as of which the Designated Treasury Rate is to
be established being the last day of such period.

                         C. In the event that  Landlord has  previously  given a
Rate  Designation  Notice to Tenant,  but  Commencement of Construction  has not
occurred on or before August 1, 

                                                                            -31-


1998,  Landlord may give to Tenant a second Rate Designation  Notice at any time
thereafter  and prior to the Last Rent  Commencement  Date,  and the  Designated
Treasury Rate shall be  determined as of the date  specified by Landlord in such
second  Rate  Designation  Notice;  provided,  however,  that if the  failure to
achieve  Commencement  of  Construction  was  solely  due to causes  within  the
complete  control of Landlord,  then the Designated  Treasury Rate shall be that
selected  by reason of the prior Rate  Designation  Notice  given by Landlord to
Tenant.

                         D. In accordance  with Sections 2.14,  3.13 and 4.12 of
the Option  Agreement,  in the event that Landlord has  previously  given a Rate
Designation Notice to Tenant, but Tenant exercises one of the options granted in
the Option  Agreement but thereafter  defaults in its obligation to purchase the
PG&E Property in accordance with the terms of the Option Agreement, Landlord may
give to Tenant another Rate Designation Notice in accordance with the provisions
of Section 0, and the  Designated  Treasury  Rate shall be  determined as of the
date specified by Landlord in such other Rate Designation Notice.

                  19.3.  Estimation and  Redetermination of Initial Monthly Base
Rent.

                                (i)   As  of  the   date   of   this   Leasehold
Improvements  Agreement,  and based on the information available to Landlord and
Tenant as of that date,  Landlord and Tenant  estimate that the Initial  Monthly
Base Rent will be  approximately  Three  Hundred Five Thousand Two Hundred Fifty
Dollars  ($305,250.00)  per month,  based upon an  estimate  that total  Phase I
Project Cost will be in the approximate  amount of Thirty-Three  Million Dollars
($33,000,000.00)  and that the Development Constant will be approximately eleven
and one-tenth percent (11.1%).

                                (ii) In the event that the  Designated  Treasury
Rate has not been  determined  on or before  the First Rent  Commencement  Date,
Landlord shall, on or before the First Rent Commencement  Date, notify Tenant in
writing  of  Landlord's  revised  estimate  of the  Initial  Monthly  Base Rent,
specifying both Landlord's  revised good faith estimate of total Phase I Project
Cost and of the Development Constant as of the date of such notice. Such revised
estimate  shall  constitute  the  Initial  Monthly  Base Rent until the  Initial
Monthly Base Rent is finally determined in accordance with Section 0.

                                (iii) Within sixty (60) days  following the Last
Rent  Commencement  Date,  Landlord shall notify Tenant in writing of Landlord's
determination of the final Initial Monthly Base Rent, specifying both Landlord's
then  current  good  faith  estimate  of total  Phase I Project  Cost and of the
Development  Constant  upon  which  Landlord's  determination  of final  Initial
Monthly Base Rent shall be based.  Such  estimates of total Phase I Project Cost
and of the Development  Constant shall be based on the most current  information
then available to Landlord, and shall include an explanation of any changes from
the estimate (if any) given in accordance with Section 0.

                                (iv) Tenant  acknowledges  that the estimates to
be  given  by  Landlord  to  Tenant  in  accordance  with  this  Section  0 will
necessarily be based on incomplete  information and will therefore be subject to
inherent uncertainties.  Landlord shall make such estimates in good faith, based
on the information available to Landlord at the time the estimate is to be made.
Tenant  hereby  acknowledges  that Landlord will not be bound by any estimate so
given,  and  that no  previous  estimate  shall  be taken  into  account  in any
redetermination  of Initial  Monthly  Base Rent  required by this  Section 0. No
failure by Landlord to give to Tenant a revised estimate of Initial Monthly Base
Rent, or to  redetermine  the Initial  Monthly Base Rent within the time periods
herein  required  shall  constitute  a waiver by  Landlord of the right to do so
thereafter. The foregoing  notwithstanding,  in the event that Landlord fails to
notify  Tenant of a  redetermination  within the time  period  provided  herein,
Tenant shall give to Landlord a notice stating such failure 

                                                                            -32-


and  warning  Landlord  that a failure to give such a notice  could  result in a
waiver of the right to do so. If Landlord  does not give to Tenant a notice of a
redetermination  of Initial  Monthly  Base Rent  within  thirty (30) days of the
receipt by Landlord of such  notice from  Tenant,  Tenant may give to Landlord a
second notice stating such failure and further stating that if Landlord does not
give such a notice  of  redetermination  within  ten (10)  business  days of the
receipt by Landlord of such second  notice from Tenant,  Landlord will be deemed
to have waived the right to such a  redetermination.  In the event that Landlord
fails to respond to such notice  within such period of ten (10) business days of
the receipt by Landlord of such second  notice from  Tenant,  Landlord  shall be
deemed to have waived the right to such a  redetermination,  unless such failure
was caused by a Force Majeure Event, in which event Landlord shall not be deemed
to  have  waived  such  a   redetermination   if  Landlord  gives  a  notice  of
redetermination within one (1) year.

                                (v)  Within  five  (5)  business  days  from the
receipt by Tenant of a written  request from  Landlord,  Tenant shall  execute a
certificate in a form reasonably required by Landlord or a lender  acknowledging
the amount of the Initial Monthly Base Rent as so estimated by Landlord, subject
to the effect of any  redetermination  of Initial  Monthly  Base Rent  permitted
hereunder.  It is the  intention of Landlord and Tenant that any lender shall be
fully entitled to rely on the  statements set forth in such  certificate as true
and correct.  The execution of such a certificate by Tenant shall not,  however,
be a  condition  to the  obligation  of Tenant to pay  Monthly  Base Rent in the
amounts determined by Landlord nor excuse in any manner any failure by Tenant to
make payments of Monthly Base Rent as and when due.

                                (vi)  During the period  between  the First Rent
Commencement  Date and the  determination of the final Initial Monthly Base Rent
in accordance  with Section 0, Tenant shall pay Initial Monthly Base Rent at the
rate  determined  by the  estimate  of  Landlord  given in  accordance  with the
provisions of Sections 0 or, if applicable,  0. Upon the final  determination of
the Initial  Monthly  Base Rent  pursuant to Section 0,  Landlord  shall  notify
Tenant in  writing  of any amount by which the  Initial  Monthly  Base Rent then
previously paid by Tenant is more or less than that which would have been due at
the rate determined under Section 0. In the event that Tenant has paid more than
that which  would  have been due at the rate  determined  under  Section 0, then
Landlord  shall  refund the amount of the overage to Tenant  within  twenty (20)
days of the receipt by Tenant of such notice  from  Landlord.  In the event that
Tenant has paid less than that which would have been due at the rate  determined
under  Section  0,  then  Tenant  shall  pay  to  Landlord  the  amount  of  the
underpayment  within  twenty  (20) days of the  receipt by Tenant of such notice
from Landlord.

                                (vii)  Throughout  the  process  of the  design,
bidding and  construction of the Project,  Landlord shall  undertake  reasonable
efforts to keep Tenant apprised of the status of all Aggregate Development Cost.
Tenant shall be entitled to receive copies of all bid  documents,  contracts and
subcontracts  and all change orders agreed to by Landlord.  Without limiting the
foregoing,  Landlord  agrees to deliver to Tenant:  (A) a monthly  report  which
describes,  in reasonable detail, the Aggregate Development Cost paid during the
preceding   month  and  compares  such   Aggregate   Development   Cost  to  the
corresponding  amounts  set  forth  in the  Budget  and in any  budget  or other
document  used  by  the  lender  of  the  Construction  Financing  in  approving
disbursements of the proceeds of the Construction  Financing;  (B) a copy of the
summary of each request to disburse Construction  Financing proceeds to pay hard
costs  of the  Project,  together  with  copies  of  invoices  submitted  by the
architect and engineers for amounts due to such parties;  (C) written  notice as
promptly as possible after  Landlord  realizes that funds reserved in the Budget
for  contingencies  will need to be  expended  in the  future,  together  with a
reasonably detailed,  written explanation of the use thereof; and, (D) copies of
such supporting documentation to any of the foregoing as Tenant may request from
time to time.

                                                                            -33-


         20.      FIRST ADJUSTMENT TO REFLECT FINAL PHASE I PROJECT COST

                  2.01.  Determination  of Final  Phase I Project  Cost.  Within
thirty (30) days of the date upon which Landlord has the  information  necessary
to  determine  the final  Phase I Project  Cost,  but not later than one hundred
twenty (120) days  following the Last Rent  Commencement  Date,  Landlord  shall
notify Tenant in writing of the final Phase I Project Cost.  Such written notice
shall be accompanied  by a detailed  statement of final Phase I Project Cost. 


                  20.2 Possible  Review of Final Phase I Project Cost by Tenant.
Within  twenty (20) days of the  receipt by Tenant of the notice  from  Landlord
setting forth final Phase I Project Cost,  Tenant may notify Landlord in writing
(a "Review  Notice")  that  Tenant  desires to review  the  records of  Landlord
pertaining to the  determination of Phase I Project Cost. If Tenant gives such a
notice to Landlord  within such period,  Landlord  shall permit Tenant to review
all of the records of Landlord  relevant to the determination of Phase I Project
Cost.  Such review shall be performed at the offices of Landlord  during regular
business hours, and Landlord shall permit Tenant to make copies, at its expense,
of such portions of such records as Tenant may elect. Tenant shall undertake and
complete  such review  within  sixty (60) days of the receipt by Landlord of the
Review  Notice.  In the event that Tenant  concludes that the  determination  by
Landlord  of Phase I Project  Cost is  incorrect,  it shall so  notify  Landlord
within  seventy  (70) days of the receipt by Landlord of the Review  Notice from
Tenant,  which notice from Tenant shall: (i) state with  particularity the items
of Phase I Project Cost as to which Tenant  believes that the  determination  of
Landlord was incorrect; and, (ii) state the election of Tenant to have the final
Phase I Project Cost determined by arbitration in accordance with Section 0.

                  20.3.  Payment to Adjust Phase I Project Cost. The final Phase
I Project  Cost stated by Landlord in its notice to Tenant  given in  accordance
with  Section 0 shall be deemed to have been  accepted  and  approved  by Tenant
unless:  (i) Landlord and Tenant agree in writing to a different Phase I Project
Cost within  seventy  (70) days of the receipt by Landlord of the Review  Notice
from Tenant;  or, Tenant gives to Landlord within such seventy (70) day period a
notice  electing to have final Phase I Project Cost determined by arbitration in
accordance  with  Section 0. Within  thirty (30) days of the date upon which the
final Phase I Project Cost is  established  (whether by Landlord's  statement of
final  Phase I Project  Cost being  deemed  accepted  and  approved by Tenant in
accordance with this Section 0 or by a written  agreement  between  Landlord and
Tenant  establishing a different final Phase I Project Cost or by an arbitration
resulting  from an  election  by Tenant  made  within  seventy  (70) days of the
receipt by Landlord of the Review Notice from Tenant):  _.(i) if the final Phase
I  Project  Cost is less  than the Phase I  Project  Cost  used by  Landlord  in
determining  the Initial Monthly Base Rent pursuant to Section 0, Landlord shall
pay to Tenant a sum equal to the  difference  between  the Phase I Project  Cost
used by  Landlord  in  determining  the Initial  Monthly  Base Rent  pursuant to
Section 0 and the final Phase I Project Cost,  together  with, if the difference
is greater than two percent (2%) of Phase I Project Cost, an amount equal to ten
percent (10%) of the amount by which such difference exceeds two (2%) of Phase I
Project  Cost;  or, (ii) if the final Phase I Project  Cost is greater  than the
Phase I Project Cost used by Landlord in  determining  the Initial  Monthly Base
Rent  pursuant  to Section 0,  Tenant  shall pay to  Landlord a sum equal to the
difference  between the final Phase I Project  Cost and the Phase I Project Cost
used by  Landlord  in  determining  the Initial  Monthly  Base Rent  pursuant to
Section 0. Any claim by Tenant  pertaining  to a payment  due from  Landlord  to
Tenant pursuant to this Section 0 shall be subject and subordinate to the claims
and rights of any lender with respect to the  Project,  the Phase I Land and any
appurtenances  thereto,  including,  without  limitation,  the right to  receive
monthly installment payments of principal and interest. Upon the written request
of  Landlord,  Tenant  shall  execute  such  documents  as  the  lender  of  the
Construction  Financing or Take-Out  Financing may reasonably require to further
evidence or implement such subordination.

                                                                            -34-


         21.      SECOND ADJUSTMENT TO REFLECT FINAL PHASE I PROJECT COST

                  21.1.  Determination of Revised Final Phase I Project Cost. In
the event that any items of Phase I Project Cost could not have been  reasonably
ascertained with precision within ninety (90) days of the Last Rent Commencement
Date, then within one (1) year of the Last Rent Commencement Date,  Landlord may
notify Tenant in writing of a revised  final Phase I Project Cost.  Such written
notice shall be accompanied by a detailed  statement of such revised final Phase
I Project Cost.

                  21.2. Possible Review of Revised Final Phase I Project Cost by
Tenant.  Within  twenty  (20) days of the  receipt by Tenant of the notice  from
Landlord  given in  accordance  with Section 0 and setting forth a revised final
Phase I Project  Cost,  Tenant may  notify  Landlord  in writing (a  "Difference
Review Notice") that Tenant desires to review the records of Landlord pertaining
to those items (the "Difference Items") which account for the difference between
the  revised  final Phase I Project  Cost and the final Phase I Project  Cost as
determined  pursuant  to the  provisions  of Section  0. If Tenant  gives such a
notice to Landlord  within such period,  Landlord  shall permit Tenant to review
all of the records of Landlord  relevant to the determination of such Difference
Items.  Such review shall be performed at the offices of Landlord during regular
business hours, and Landlord shall permit Tenant to make copies, at its expense,
of such portions of such records as Tenant may elect. Tenant shall undertake and
complete  such review  within  sixty (60) days of the receipt by Landlord of the
Difference   Review  Notice.  In  the  event  that  Tenant  concludes  that  the
determination  by Landlord of the  Difference  Items is  incorrect,  it shall so
notify  Landlord  within  seventy  (70) days of the  receipt by  Landlord of the
Difference Review Notice from Tenant,  which notice from Tenant shall: (i) state
with  particularity  the Difference  Items as to which Tenant  believes that the
determination of Landlord was incorrect;  and, (ii) state the election of Tenant
to have the revised  final Phase I Project Cost  determined  by  arbitration  in
accordance with Section 0.

                  21.3.  Payment to Adjust  Phase I Project  Cost.  The  revised
final Phase I Project  Cost stated by Landlord in its notice to Tenant  given in
accordance  with Section 0 shall be deemed to have been accepted and approved by
Tenant unless:  (i) Landlord and Tenant agree in writing to a different  Phase I
Project  Cost  within  seventy  (70)  days of the  receipt  by  Landlord  of the
Difference  Review Notice from Tenant;  or, (ii) Tenant gives to Landlord within
such seventy (70) day period a notice electing to have the revised final Phase I
Project Cost  determined by  arbitration  in  accordance  with Section 0. Within
thirty (30) days of the date upon which the revised  final Phase I Project  Cost
is established (whether by Landlord's statement of revised final Phase I Project
Cost being  deemed  accepted  and  approved  by Tenant in  accordance  with this
Section 0 or by a written agreement  between Landlord and Tenant  establishing a
different revised final Phase I Project Cost or by an arbitration resulting from
an election by Tenant made within  seventy  (70) days of the receipt by Landlord
of the Difference Review Notice from Tenant): _.(i) if the revised final Phase I
Project  Cost is  less  than  the  final  Phase I  Project  Cost  determined  in
accordance  with  Section  0,  Landlord  shall  pay to Tenant a sum equal to the
difference  between the final Phase I Project Cost determined in accordance with
Section 0 and the revised  final Phase I Project  Cost;  or, (ii) if the revised
final Phase I Project Cost is greater  than the Phase I Project Cost  determined
in  accordance  with  Section 0, Tenant shall pay to Landlord a sum equal to the
difference  between  the  revised  final  Phase I  Project  Cost and the Phase I
Project  Cost  determined  in  accordance  with  Section  0. Any claim by Tenant
pertaining to a payment due from  Landlord to Tenant  pursuant to this Section 0
shall be subject  and  subordinate  to the claims and rights of any lender  with
respect  to the  Project,  the  Phase  I Land  and  any  appurtenances  thereto,
including, without limitation, the right to receive monthly installment payments
of principal and interest.  Upon the written  request of Landlord,  Tenant shall
execute such documents as the lender of the  Construction  Financing or Take-Out
Financing  may  reasonably   require  to  further  evidence  or  implement  such
subordination.

                                                                            -35-


         22.      PAYMENT OF PHASE II CURRENT COSTS

                  22.1.   Payment   of  Certain   Phase  II  Current   Costs  at
Acquisition. As provided in the Phase II Purchase Agreement, Tenant shall pay to
Landlord at the closing of the escrow for the  acquisition  of the Phase II Land
by Tenant from Landlord the purchase price for the Phase II Land.

                  22.2.  Payment of  Certain  Phase II  Current  Costs  Prior to
Construction  Financing. On or before the earlier of the date required by lender
of the Construction Financing or the date which is five (5) business days before
the  date on  which  Landlord,  in its  reasonable  judgment,  must  direct  the
contractor  to proceed with the  applicable  portion of the work on the Phase II
Land (of which date  Landlord  shall  notify  Tenant in writing at least two (2)
business days before such date), Tenant shall pay to Landlord an amount equal to
Landlord's  reasonable  estimate of any of the following  Phase II Current Costs
which have then been incurred (but not  necessarily  paid) by Landlord:  (i) the
actual cost to Landlord of arranging the acquisition of the City Property;  (ii)
all fees and charges of architects, engineers, materials testing consultants and
other  design or  construction  consultants,  to the  extent  that such fees and
charges relate to the design of buildings and other improvements to the Phase II
Land;  (iii) all permit fees and all fees and charges for  services  rendered by
employees of the City of San Rafael or consultants hired directly by the City of
San Rafael in connection with the application for, or issuance of, the Necessary
Approvals  required for the  construction of the improvements to be located upon
the Phase II Land;  (iv) all costs  reimbursed by Landlord to Tenant pursuant to
Section 0, to the extent that such costs pertain to  improvements  to be located
upon,  or to serve,  the Phase II Land;  (v) all  deposits  (including,  without
limitation,  deposits in  connection  with any utility  service,  but  excluding
deposits in  connection  with any Take-Out  Financing),  to the extent that such
deposits  pertain to Phase II,  provided  that the  amount of any such  deposits
returned to Landlord shall be deducted from Aggregate Development Cost and Phase
II Current  Costs when  received  (and  returned  to Tenant,  to the extent then
previously  paid by  Tenant  to  Landlord),  but only to the  extent  that  such
deposits were  previously  included in Aggregate  Development  Cost and Phase II
Current  Costs;  (vi)  premiums  for, and other costs of,  surety bonds or other
security  required in connection  with any aspect of the development of Phase II
or off-site improvements  (allocating the cost of such bonds between Phase I and
Phase II in  accordance  with the  schedule  for such  allocations  set forth in
Exhibit H, to the extent that such  security is provided by Landlord  and not by
Tenant;  and,  (vii) all  reasonable  legal  fees and  reasonable  fees of other
technical   consultants   incurred  in  connection   with  the  negotiation  and
documentation of any agreement  pertaining to the design and construction of the
improvements  to be constructed  upon the Phase II Land or any portion  thereof,
whether  at or about the same time as the Site and  Shell  Improvements  or at a
later time, or any agreement pertaining to the design,  construction or security
for of any  improvement  or payment  imposed as a condition upon any approval by
the City of San Rafael of any permit or approval required for the development of
such improvements.

                  22.3.  Payment  of  Remainder  of  Phase II  Current  Costs at
Construction  Financing. On or before the later of the day immediately preceding
the funding of the  Construction  Financing  or fifteen (15) days from a written
request by Landlord,  Tenant shall  deposit with the lender of the  Construction
Financing  an amount  equal to  Landlord's  reasonable  estimate of all Phase II
Current  Costs which have not then been paid by Tenant to  Landlord  pursuant to
Sections 0 or 0. At the  request  of Tenant,  Landlord  shall  request  that the
lender enter into an agreement with Tenant requiring that the deposit be applied
only in payment of Phase II Current Costs,  which  agreement  shall be in a form
reasonably  satisfactory to such lender.  In the event that such lender will not
enter into such an agreement,  then Tenant may, as the alternative to depositing
such funds with such lender,  elect to pay such funds to Landlord,  and Landlord
shall  enter  into  the  required  agreement  with  Tenant.   Tenant  shall  not
unreasonably  withhold or delay the 

                                                                            -36-


execution of such an agreement. Such lender may disburse such funds to pay Phase
II  Current  Costs or to  reimburse  Landlord  for any  Phase II  Current  Costs
incurred  and  paid by  Landlord.  In the  event  that  the  amount  so paid and
deposited  by Tenant is less than Phase II Current  Costs,  Landlord may request
that  Tenant  make an  additional  deposit  in an  amount  equal  to  Landlord's
reasonable  estimate of the  additional  funds  required to pay or reimburse all
Phase II Current  Costs then  unpaid  (whether  or not then yet  incurred),  and
Tenant shall make such deposit  within ten (10) days of the receipt by Tenant of
such a request  from  Landlord.  In the event  that the amount so  deposited  by
Tenant is more than  Phase II  Current  Costs,  after all such  Phase II Current
Costs have been paid or  reimbursed,  the excess  amount so  deposited  shall be
returned to Tenant by the party then holding the excess  funds.  No component of
Phase II Current  Costs so deposited or otherwise  paid or  reimbursed by Tenant
shall be included  within  Phase I Project  Cost,  to the full extent so paid or
reimbursed.


         23.  PAYMENT FOR DESIGN AND  CONSTRUCTION  OF PARKING LOT. On or before
the  later of May 1,  1998 or  fifteen  (15)  days  from a  written  request  by
Landlord,  Tenant shall deposit with the lender of the Construction Financing an
amount equal to  Landlord's  reasonable  estimate of all costs of the design and
construction  of all the  parking  lot which is to be located  upon the Phase II
Land. The obligation of Tenant to make the deposit to a lender  required by this
Section 0 may be  conditioned,  at the request of Tenant,  upon the execution by
Tenant and such  lender of an  agreement  requiring  that the deposit be applied
only in payment of the cost of the design and  construction  of all the  parking
lot which is to be located upon the Phase II Land, which agreement shall be in a
form  reasonably  satisfactory  to such lender.  Tenant  shall not  unreasonably
withhold or delay the execution of such an  agreement.  Such lender may disburse
such  funds  to pay such  costs  or to  reimburse  Landlord  for any such  costs
incurred  and paid by  Landlord.  In the event that the amount so  deposited  by
Tenant is less than the  aggregate  of such  costs of design  and  construction,
Landlord may request that Tenant make an  additional  deposit in an amount equal
to Landlord's  reasonable  estimate of the  additional  funds required to pay or
reimburse all such costs then unpaid (whether or not then yet incurred).  In the
event that the amount so deposited by Tenant is more than the  aggregate of such
costs,  after all such costs have been paid or reimbursed,  the excess amount so
deposited  shall be  returned  to Tenant by the party  then  holding  the excess
funds.  No component of such costs so deposited or otherwise  paid or reimbursed
by Tenant  shall be included  within Phase I Project Cost or in Phase II Current
Costs, to the full extent so paid or reimbursed.


         24.      ARBITRATION OF DISPUTES

         EXCEPT FOR DISPUTES  WHICH ARE TO BE DETERMINED IN ACCORDANCE  WITH THE
PROVISIONS OF SECTION 0, ANY DISPUTE  ARISING UNDER THIS LEASEHOLD  IMPROVEMENTS
AGREEMENT  SHALL BE DETERMINED BY ARBITRATION  UPON THE REQUEST OF EITHER PARTY.
THE PARTY REQUESTING  ARBITRATION SHALL DO SO BY GIVING NOTICE TO THAT EFFECT TO
THE OTHER PARTY,  SPECIFYING IN SAID NOTICE IN  REASONABLE  DETAIL THE NATURE OF
THE  DISPUTE.  WITHIN THE FIVE (5) DAY PERIOD  AFTER SUCH  NOTICE IS GIVEN,  THE
PARTIES SHALL MEET AND CONFER AS OFTEN AS IS  REASONABLY  POSSIBLE TO ATTEMPT IN
GOOD  FAITH TO AGREE ON A SINGLE  ARBITRATOR  TO  RESOLVE  THE  DISPUTE.  IF THE
PARTIES  FAIL TO SO AGREE  WITHIN THAT FIVE (5) DAY PERIOD,  THE MATTER SHALL BE
REFERRED TO THE AMERICAN  ARBITRATION  ASSOCIATION,  WHICH SHALL SELECT A SINGLE
ARBITRATOR TO RESOLVE SUCH DISPUTE. WITHIN FIVE (5) DAYS AFTER THE ARBITRATOR IS
SELECTED,  THE  ARBITRATOR  SHALL NOTIFY EACH OF THE PARTIES OF THE LOCATION AND
TIME OF A HEARING OF THEIR  RESPECTIVE  POSITIONS  WITH  RESPECT TO THE DISPUTE,

                                                                            -37-


WHICH SHALL BE HELD NOT LATER THAN  FIFTEEN  (15) DAYS AFTER THE NOTICE FROM THE
PARTY  INITIATING  THE  ARBITRATION.  THE  ARBITRATOR  SHALL  RENDER  HIS OR HER
DECISION WITHIN SEVEN (7) DAYS OF CONCLUSION OF THE HEARING. THE DECISION OF THE
ARBITRATOR  SHALL BE BINDING AND CONCLUSIVE  UPON THE PARTIES.  IF AN ARBITRATOR
SHALL FAIL OR REFUSE TO ACT  WITHIN THE TIME  PERIODS  PROVIDED  HEREIN,  THEN A
SUBSTITUTE ARBITRATOR SHALL BE APPOINTED UPON THE APPLICATION OF EITHER PARTY BY
THE PRESIDING JUDGE OF THE SUPERIOR COURT IN AND FOR THE COUNTY OF MARIN, ACTING
IN HIS OR HER  PERSONAL,  RATHER  THAN  JUDICIAL,  CAPACITY.  THE  AWARD IN SUCH
ARBITRATION MAY BE ENFORCED,  ON THE APPLICATION OF EITHER PARTY THERETO, BY THE
ORDER OR JUDGMENT OF A COURT OF COMPETENT JURISDICTION. THE FEES AND EXPENSES OF
THE ARBITRATOR SHALL BE BORNE BY THE PARTIES EQUALLY,  BUT EACH PARTY SHALL BEAR
THE EXPENSE OF ITS OWN  ATTORNEYS  AND EXPERTS  AND THE  ADDITIONAL  EXPENSES OF
PRESENTING ITS OWN PROOF.

         NOTICE: BY INITIALLING IN THE SPACE BELOW, YOU ARE AGREEING TO HAVE ANY
         DISPUTE  ARISING OUT OF THE MATTERS  INCLUDED  IN THE  "ARBITRATION  OF
         DISPUTES"  PROVISION  DECIDED BY NEUTRAL  ARBITRATION  AS  PROVIDED  BY
         CALIFORNIA  LAW AND YOU ARE GIVING UP ANY  RIGHTS YOU MIGHT  POSSESS TO
         HAVE THE DISPUTE  LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING IN
         THE SPACE BELOW,  YOU ARE GIVING UP YOUR  JUDICIAL  RIGHTS TO DISCOVERY
         AND  APPEAL,  UNLESS  THOSE  RIGHTS ARE  SPECIFICALLY  INCLUDED  IN THE
         "ARBITRATION  OF  DISPUTES"  PROVISION.  IF YOU  REFUSE  TO  SUBMIT  TO
         ARBITRATION  AFTER AGREEING TO THIS PROVISION,  YOU MAY BE COMPELLED TO
         ARBITRATE   UNDER  THE  AUTHORITY  OF  THE  CALIFORNIA  CODE  OF  CIVIL
         PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.

         WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT  DISPUTES
         ARISING OUT OF THE MATTERS  INCLUDED IN THE  "ARBITRATION  OF DISPUTES"
         PROVISION TO NEUTRAL ARBITRATION.

                               LANDLORD

                               Village Builders, L.P.,
                               a California limited partnership

                                      By:   VPI, Inc., a California corporation,
                                                   Its General Partner



                                      By:
                                            ------------------------------------
                                      Its:
                                            ------------------------------------

                                                                            -38-


                               TENANT

                               Fair, Isaac and Company, Inc.,
                               a Delaware corporation


                               By:
                                    --------------------------------------------

                               Its:
                                    --------------------------------------------


         25.      ALTERNATIVE PROCEDURE FOR ARBITRATION OF CERTAIN DISPUTES.

         ANY DISPUTE  ARISING UNDER A PROVISION OF THIS  LEASEHOLD  IMPROVEMENTS
AGREEMENT  WHICH  SPECIFICALLY  STATES THAT SUCH DISPUTES SHALL BE DETERMINED BY
ARBITRATION  IN  ACCORDANCE  WITH  THIS  SECTION  0 SHALL BE  DETERMINED  BY THE
FOLLOWING  PROCEDURES.  THE PARTY REQUESTING  ARBITRATION  SHALL DO SO BY GIVING
NOTICE  TO  THAT  EFFECT  TO THE  OTHER  PARTY,  SPECIFYING  IN SAID  NOTICE  IN
REASONABLE DETAIL THE NATURE OF THE DISPUTE. WITHIN THE TWO (2) DAY PERIOD AFTER
SUCH  NOTICE  IS  GIVEN,  THE  PARTIES  SHALL  MEET  AND  CONFER  AS OFTEN AS IS
REASONABLY  POSSIBLE TO ATTEMPT IN GOOD FAITH TO AGREE ON A SINGLE ARBITRATOR TO
RESOLVE THE  DISPUTE.  IF THE PARTIES  FAIL TO SO AGREE  WITHIN THAT TWO (2) DAY
PERIOD, THEN BY 5:00 P.M. ON SUCH SECOND DAY, EACH PARTY SHALL LIST THE NAMES OF
TWO (2)  ARBITRATORS ON A PIECE OF PAPER AND SHALL PROVIDE A COPY THEREOF TO THE
OTHER PARTY. IF THE NAME OF AN ARBITRATOR  APPEARS ON BOTH PIECES OF PAPER, SUCH
PERSON  SHALL  ARBITRATE  THE  DISPUTE.  OTHERWISE,  THE  NAMES  OF THE FOUR (4)
ARBITRATORS  SHALL  BE  SUBMITTED  ON THE  FOLLOWING  MORNING  TO  THE  AMERICAN
ARBITRATION  ASSOCIATION SOLELY FOR THE PURPOSE OF SELECTING WHICH OF THOSE FOUR
(4)  INDIVIDUALS   SHALL  ARBITRATE  THE  DISPUTE.   THE  AMERICAN   ARBITRATION
ASSOCIATION SHALL BE REQUESTED TO SELECT SUCH AN ARBITRATOR WITHIN TWO (2) DAYS.
WITHIN FIVE (5) DAYS OF THE SELECTION OF THE  ARBITRATOR,  THE ARBITRATOR  SHALL
NOTIFY  EACH OF THE  PARTIES  OF THE  LOCATION  AND TIME OF A  HEARING  OF THEIR
RESPECTIVE POSITIONS WITH RESPECT TO THE DISPUTE,  WHICH SHALL BE HELD NOT LATER
THAN TEN (10) DAYS AFTER THE NOTICE FROM THE PARTY  INITIATING THE  ARBITRATION.
THE ARBITRATOR  SHALL RENDER HIS OR HER DECISION WITHIN TWO (2) BUSINESS DAYS OF
CONCLUSION OF THE HEARING.  THE DECISION OF THE ARBITRATOR  SHALL BE BINDING AND
CONCLUSIVE UPON THE PARTIES. IF AN ARBITRATOR SHALL FAIL OR REFUSE TO ACT WITHIN
THE  TIME  PERIODS  PROVIDED  HEREIN,  THEN A  SUBSTITUTE  ARBITRATOR  SHALL  BE
APPOINTED  UPON THE  APPLICATION  OF EITHER PARTY BY THE PRESIDING  JUDGE OF THE
SUPERIOR  COURT IN AND FOR THE COUNTY OF MARIN,  ACTING IN HIS OR HER  PERSONAL,
RATHER THAN JUDICIAL,  CAPACITY.  THE AWARD IN SUCH ARBITRATION MAY BE ENFORCED,
ON THE APPLICATION OF EITHER PARTY THERETO,  BY THE ORDER OR JUDGMENT OF A COURT
OF  COMPETENT  JURISDICTION.  THE FEES AND EXPENSES OF THE  ARBITRATOR  SHALL BE
BORNE BY THE PARTIES  EQUALLY,  BUT EACH PARTY SHALL BEAR THE EXPENSE OF ITS OWN
ATTORNEYS AND EXPERTS AND THE ADDITIONAL EXPENSES OF PRESENTING ITS OWN PROOF.

         NOTICE: BY INITIALLING IN THE SPACE BELOW, YOU ARE AGREEING

                                                                            -39-


         TO  HAVE  ANY  DISPUTE  ARISING  OUT OF  THE  MATTERS  INCLUDED  IN THE
         "ARBITRATION OF DISPUTES"  PROVISION DECIDED BY NEUTRAL  ARBITRATION AS
         PROVIDED BY  CALIFORNIA  LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT
         POSSESS TO HAVE THE  DISPUTE  LITIGATED  IN A COURT OR JURY  TRIAL.  BY
         INITIALLING IN THE SPACE BELOW,  YOU ARE GIVING UP YOUR JUDICIAL RIGHTS
         TO DISCOVERY AND APPEAL,  UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED
         IN THE "ARBITRATION OF DISPUTES" PROVISION.  IF YOU REFUSE TO SUBMIT TO
         ARBITRATION  AFTER AGREEING TO THIS PROVISION,  YOU MAY BE COMPELLED TO
         ARBITRATE   UNDER  THE  AUTHORITY  OF  THE  CALIFORNIA  CODE  OF  CIVIL
         PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.

         WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT  DISPUTES
         ARISING OUT OF THE MATTERS  INCLUDED IN THE  "ARBITRATION  OF DISPUTES"
         PROVISION TO NEUTRAL ARBITRATION.

                               LANDLORD

                               Village Builders, L.P.,
                               a California limited partnership

                               By:   VPI, Inc., a California corporation,
                                           Its General Partner



                                  By:
                                     -------------------------------------------
                                  Its:
                                     -------------------------------------------


                               TENANT

                               Fair, Isaac and Company, Inc.,
                               a Delaware corporation


                               By:
                                    --------------------------------------------

                               Its:
                                    --------------------------------------------


         26. NOTICES.  Except as otherwise  expressly provided in this Leasehold
Improvements Agreement, any bills,  statements,  notices,  demands,  requests or
other  communications  given  or  required  to be  given  under  this  Leasehold
Improvements  Agreement shall be effective only if rendered or given in writing,
sent by certified mail (return receipt requested),  reputable overnight carrier,
or  delivered  personally,  (i) to Tenant at  Tenant's  address set forth in the
Basic Lease Information of the Lease, or (ii) to Landlord at Landlord's  address
set forth in the Basic Lease  Information  of the Lease;  or (iii) to such other
address as either  Landlord or Tenant may  designate as its new address for such
purpose by notice given to the other in accordance  with the  provisions of this
Section 0. Any bill, statement,  notice,  demand, request or other communication

                                                                            -40-


shall be deemed to have been  rendered  or given on the date the return  receipt
indicates  delivery of or refusal of delivery if sent by certified mail, the day
upon which recipient  accepts and signs for delivery from a reputable  overnight
carrier  or on the date a  reputable  overnight  carrier  indicates  refusal  of
delivery,  upon the date  personal  delivery  is made,  or three (3) days  after
mailed by first class U.S. mail. Any bill, statement, notice, demand, request or
other communication under this Leasehold  Improvements Agreement may be given on
behalf of a party by the attorney for such party.


         27.  EFFECT  OF  EXERCISE  OF  OPTION.  The  other  provisions  of this
Leasehold  Improvements  Agreement  notwithstanding,  in the event  that  Tenant
exercises the "First  Option" (as that term is defined in the Option  Agreement)
in accordance with the provisions of the Option Agreement, Landlord shall assign
to Tenant the agreements required to be so assigned by the Option Agreement, and
Landlord may thereafter cease to perform any obligation of Landlord  pursuant to
this   Leasehold   Improvements   Agreement  with  respect  to  the  design  and
construction of any  improvements on the Phase I Land or the Phase II Land other
than any obligations of Landlord with respect to obtaining Necessary Approvals.


         28.      ASSIGNMENT.

                  28.1. By Tenant.  The rights of Tenant  hereunder shall not be
assigned by Tenant  except in  connection  with an  assignment  of the leasehold
interest of Tenant  under the Lease,  but only if such  assignment  is permitted
under the Lease or is made with the consent of Landlord, and any other purported
assignment by Tenant shall be null and void and of no force or effect.

                  28.2. By Landlord.  This Leasehold  Improvements Agreement and
the rights of Landlord (but not the obligations of Landlord)  hereunder shall be
assignable as collateral by Landlord without Tenant's consent or approval to any
lender of Construction  Financing or Take-Out Financing,  to constituent partner
in Landlord (or constituent partner of a constituent partner in Landlord), to an
entity in which Jim  Helfrich or Scott  Kepner hold  equity  interests  (or to a
constituent partner of such entity),  but any such assignment shall only be made
in connection with an assignment of the right of Landlord under the Lease.


         29. CONFLICTS AND CONFORMITY WITH OTHER DOCUMENTS.  To the extent which
this  Leasehold   Improvements   Agreement  fails  to  provide  the  rights  and
obligations  of  Landlord  and Tenant  relative  to any  matter,  the rights and
obligations  of each of them  relative to such  matter  shall be governed by the
Lease to the extent such matters are addressed in the Lease.


         30.      DESIGNATION OF AGENTS.

                  30.1.  Designation  of  Agent  by  Landlord.  Landlord  hereby
appoints as its respective  agents in connection with the matters referred to in
this Leasehold Improvements  Agreement Scott Kepner and Jim Helfrich,  with each
such agent  being  fully  authorized  to act for and bind  Landlord  without the
necessity  of  confirmation  or  ratification  by any other such agent or by any
other person or entity.  Such  appointment  shall be for the express  benefit of
Tenant.

                  30.2.  Designation of Agent by Tenant.  Tenant hereby appoints
as its  respective  agents in  connection  with the matters  referred to in this
Leasehold Improvements Agreement Stephen Gale and Michael Gordon, with each such
agent being fully authorized to act for and bind Tenant without the necessity of
confirmation  or  ratification by any other such agent or 

                                                                            -41-


by any other person or entity. Such appointment shall be for the express benefit
of Landlord.


         31.      EVENTS OF DEFAULT.

                  31.1.  Events of  Landlord  Default.  An  "Event  of  Landlord
Default"  shall be deemed to have  occurred  when:  (i)  Landlord  has failed to
perform any of its  obligations  or has  breached  any of its duties  under this
Leasehold Improvements  Agreement;  (ii) Tenant has given written notice of such
failure or breach to Landlord; and, (iii) Landlord has not cured such failure or
breach,  with  respect to any failure to pay or deposit  money,  within five (5)
business  days of the  receipt by  Landlord  of such notice from Tenant or, with
respect to any failure to perform any  obligation  or breach of any duty,  other
than an  obligation  to pay or deposit  money,  within thirty (30) days from the
receipt by Landlord of such  notice from Tenant or, if Landlord  has  diligently
commenced  and  endeavored  to cure such  failure or breach but such  failure or
breach  cannot by its nature be cured  within  such  period of thirty  (30) days
despite the diligent efforts of Landlord,  then within such additional period as
may  reasonably be required for the completion of such cure through the diligent
efforts of Landlord;  provided,  however,  that such additional period shall not
exceed  ninety (90) days beyond  such  thirty  (30) day  period.  The  foregoing
notwithstanding,  in the event that Tenant is  prevented or delayed by operation
of law or by injunction  from giving to Landlord notice that Landlord has failed
to perform any of its  obligations  or has breached  any of its duties,  then no
such  notice  shall be  required,  and an "Event of Landlord  Default"  shall be
deemed to have occurred when the  applicable  time period  referred to in clause
(iii) above has elapsed from the first occurrence of such failure of performance
or breach of duty  (rather  than from the  receipt by  Landlord of a notice from
Tenant).

                  31.2.  Events of Tenant Default.  An "Event of Tenant Default"
shall be deemed to have occurred  when:  (i) Tenant has failed to perform any of
its obligations or breached any of its duties under this Leasehold  Improvements
Agreement;  (ii) Landlord has given written  notice of such failure or breach to
Tenant;  and, (iii) Tenant has not cured such failure or breach, with respect to
any  failure to pay or  deposit  money,  within  five (5)  business  days of the
receipt by Tenant of such notice from  Landlord  or, with respect to any failure
to perform any obligation or breach of any duty, other than an obligation to pay
or deposit  money,  within  thirty  (30) days from the receipt by Tenant of such
notice from Landlord or, if Tenant has  diligently  commenced and  endeavored to
cure such  failure  or breach  but such  failure  cannot by its  nature be cured
within such period of thirty (30) days despite the  diligent  efforts of Tenant,
then  within  such  additional  period as may  reasonably  be  required  for the
completion  of such cure  through  the  diligent  efforts of  Tenant;  provided,
however,  that such  additional  period shall not exceed ninety (90) days beyond
such thirty (30) day period.  The foregoing  notwithstanding,  in the event that
Landlord is  prevented  or delayed by  operation  of law or by  injunction  from
giving to Tenant notice that Tenant has failed to perform any of its obligations
or has breached any of its duties, then no such notice shall be required, and an
"Event of Tenant  Default"  shall be deemed to have occurred when the applicable
time  period  referred  to in  clause  (iii)  above has  elapsed  from the first
occurrence  of such failure of  performance  or breach of duty (rather than from
the receipt by Tenant of a notice from Landlord).


         32. WAIVER.  If either Landlord or Tenant waives the performance of any
term, covenant or condition contained in this Leasehold Improvements  Agreement,
such waiver shall not be deemed to be a waiver of any  subsequent  breach of the
same or any other term, covenant or condition contained herein. Furthermore, the
acceptance  of  Monthly  Base  Rent or  Additional  Rent by  Landlord  shall not
constitute a waiver of any preceding  breach by Tenant of any term,  covenant or
condition  of this  Leasehold  Improvements  Agreement  or of any Tenant  Caused
Delay,  regardless of Landlord's  knowledge of such preceding breach at the time
Landlord accepted such Monthly Base Rent or Additional Rent. Failure by Landlord
or Tenant to enforce any of the terms, 

                                                                            -42-


covenants or conditions of this Leasehold  Improvements Agreement for any length
of time shall not be deemed to waive or to  decrease  the right of  Landlord  or
Tenant to  insist  thereafter  upon  strict  performance  by  Tenant.  Waiver by
Landlord  or  Tenant  of any  term,  covenant  or  condition  contained  in this
Leasehold  Improvements  Agreement may only be made by a written document signed
by the party to be charged with such waiver.


         33.  ATTORNEYS'  FEES. If Tenant or Landlord  brings any arbitration or
action for any relief against the other,  declaratory or otherwise,  arising out
of this  Leasehold  Improvements  Agreement,  the losing  party shall pay to the
prevailing  party a reasonable sum for attorneys' fees, which shall be deemed to
have accrued on the commencement of such action and shall be paid whether or not
the arbitration or action is prosecuted to judgment.


         34.      TERMINATION.

                  34.1.  Rights of  Landlord  to  Terminate.  In addition to any
other  rights to  terminate  this  Leasehold  Improvements  Agreement  set forth
herein,  but subject to the  provisions of Section 0.D,  Landlord shall have the
following rights:

                         A. In the  event  that  Landlord  is  unable  to obtain
Construction  Financing or Take-Out  Financing  (on the terms  described in this
Leasehold Improvements Agreement and otherwise on terms which, if less favorable
to  Landlord,  shall be  satisfactory  to Landlord  in the  exercise of its sole
discretion) in sufficient time to permit the  Commencement  of Construction  for
the  Project  on or  before  June 1,  1998,  after  Landlord  has  followed  the
procedures  set forth in this  Leasehold  Improvements  Agreement to obtain such
financing,  Landlord  may  terminate  the  Lease,  this  Leasehold  Improvements
Agreement,  the Option  Agreement and the Phase II Purchase  Agreement  (but not
less than all of them) by written  notice to Tenant on or after June 2, 1998. In
addition,  if Landlord is unable to obtain binding  commitments for Construction
Financing  or  Take-Out  Financing  (on the  terms  described  in the  Leasehold
Improvements  Agreement  and  otherwise  on terms  which,  if less  favorable to
Landlord,  shall  be  satisfactory  to  Landlord  in the  exercise  of its  sole
discretion)  on or before  April 15,  1998,  after  Landlord  has  followed  the
procedures  set forth in the  Leasehold  Improvements  Agreement  to obtain such
commitments,  Landlord may  terminate  the Lease,  this  Leasehold  Improvements
Agreement,  the Option  Agreement and the Phase II Purchase  Agreement  (but not
less than all of them) by written notice to Tenant on or after April 16, 1998.

                         B. In the event that the City of San  Rafael  imposes a
condition  upon  the  issuance  of any  permit  or  approval  necessary  for the
development  of  the  Project  (including,  without  limitation,  a  development
agreement for the Project and the Phase II Land) which  Landlord  concludes,  in
the exercise of its reasonable  judgment,  would materially  impair the value or
usability  of the Project or which  would  cause Phase I Project  Cost to exceed
Estimated  Phase I Project Cost or which would impose upon Landlord  costs which
are not Phase I Project  Costs and which are  materially  in excess of the costs
projected  by  Landlord  for  those  purposes,  or in the  event  that  Landlord
reasonably  believes that the City of San Rafael is likely to impose one or more
such conditions in the future,  Landlord may terminate the Lease, this Leasehold
Improvements Agreement, the Option Agreement and the Phase II Purchase Agreement
(but not less than all of them) by written  notice to Tenant.  Landlord may also
terminate the Lease, this Leasehold Improvements Agreement, the Option Agreement
and the Phase II Purchase  Agreement  (but not less than all of them) by written
notice  to Tenant if  Landlord  reasonably  concludes  that no  solution  to the
relocation of the existing  115KV  powerline will be approved by the City of San
Rafael  which is  acceptable  to Tenant and, in the sole  judgment of  Landlord,
economically feasible in the circumstances.

                                                                            -43-


                         C. In the  event  that the City of San  Rafael  for any
reason  fails or  refuses  to grant on or  before  May 1, 1998 all  permits  and
approvals  necessary to permit the  development  of the Project and the Phase II
Land with not less than three hundred fifty  thousand  (350,000)  square feet of
Gross Building Area and otherwise in accordance  with the terms of the Lease and
this  Leasehold  Improvements  Agreement  (including,   without  limitation,   a
development  agreement  for the  Project  and the Phase II Land),  Landlord  may
terminate the Lease, this Leasehold Improvements Agreement, the Option Agreement
and the Phase II Purchase  Agreement  (but not less than all of them) by written
notice to Tenant on or after May 2, 1998.

                         D.  Notwithstanding  the  foregoing  provisions of this
Section 0 to the contrary, if Tenant exercises the First Option under the Option
Agreement  prior to Landlord's  exercise of any right under this Section 0, then
the following  provisions  shall apply:  (i) with respect to  Landlord's  rights
under  Sections  0.A and 0.B,  Landlord's  rights under such  Sections  shall be
suspended  until the earlier to occur of: (a) the date on which Tenant  acquires
the PG&E Property pursuant to the First Option (in which event Landlord's rights
under such Sections  shall  automatically  terminate);  or (b) the date on which
Tenant fails, for any reason, to acquire the PG&E Property pursuant to the First
Option (in which event, with respect to Section 0.A only, the dates set forth in
Section 0.A shall be deemed to be the same dates in 1999); and (ii) with respect
to  Landlord's  right under Section 0.C, if on or before May 1, 1998 both Tenant
has not acquired the PG&E Property  pursuant to the First Option and the permits
and approvals  described in Section 0.C have not been granted by the City of San
Rafael,  then Landlord may elect to deliver to Tenant  written  notice  advising
Tenant that it must  either  acquire  title to the PG&E  Property in its "as is"
condition on or before a date  specified  by Landlord in its notice  (which date
shall not be less than fifteen (15) days after the date of Landlord's notice) or
permitting  Landlord  to  terminate  the  Lease,  this  Leasehold   Improvements
Agreement,  the Option  Agreement and the Phase II Purchase  Agreement  (but not
less than all of them) effective as of the date which is five (5) days after the
date of  Landlord's  notice.  With respect to clause (ii) above only,  if Tenant
fails to deliver to Landlord,  within that five (5) day period,  written  notice
agreeing  to so  acquire  title  to the PG&E  Property,  then  the  Lease,  this
Leasehold Improvements Agreement, the Option Agreement and the Phase II Purchase
Agreement (but not less than all of them) shall so terminate.

                  34.2.  Termination of Multiple Agreements.  In those instances
where either Landlord or Tenant or both of them are given the right to terminate
more than one agreement between them by reason of the occurrence of a particular
event or  circumstance,  it is the  intention  of  Landlord  and Tenant that any
termination  resulting  from the  exercise  of such right shall be of all of the
agreements as to which the right is so given and all rights arising  thereunder,
but not less than all of them,  except that  termination of the Option Agreement
shall not ipso facto  terminate  the Lease  under this  Section 0. If the Lease,
this Leasehold  Improvements  Agreement,  the Option  Agreement and the Phase II
Purchase  Agreement are terminated  for any reason,  that  termination  shall be
without  prejudice  to any rights  either  party may have against the other with
respect to sums which became due under the Lease,  this  Leasehold  Improvements
Agreement, the Option Agreement or the Phase II Purchase Agreement prior to such
termination.   The  provisions  of  this  Section  0  shall  apply  to  all  the
aforementioned documents notwithstanding any provision to the contrary in them.

                  34.3.  Effect of Termination  of the Lease.  In the event that
the  Lease is  terminated  for any  reason,  then  this  Leasehold  Improvements
Agreement shall also be deemed to have simultaneously  been terminated,  without
further  act of the  parties.  In the event of the  termination  of the Lease by
reason  of a default  by Tenant  thereunder,  then this  Leasehold  Improvements
Agreement  shall  conclusively  be deemed also to have been  terminated due to a
default by Tenant.

                                                                            -44-


         35.  PAYMENTS BY LANDLORD.  Provisions of this  Leasehold  Improvements
Agreement  which  require  that  Landlord pay an expense or provide a service or
thing at its expense are not  intended to affect,  or to exclude  such  expenses
from,  the  definition  of "Aggregate  Development  Cost" set forth in the Lease
(upon which Monthly Base Rent is to be based,  as therein  provided) or to imply
that Landlord is not entitled to obtain  reimbursement  for such expenses to the
extent provided herein or in the Lease.


         36.  INTEREST ON DEPOSITS OR PAYMENTS BY LANDLORD.  In instances  where
Tenant is required  to pay a deposit or other sum to  Landlord  pursuant to this
Leasehold Improvements  Agreement,  if Landlord does not intend to promptly make
the  expenditure to which the payment  related and is permitted by the lender of
the  Construction  Financing  to invest the funds so paid by Tenant at interest,
Landlord shall so invest the funds at rates then applicable to insured accounts,
and shall pay to Tenant  the  interest  earned  thereon  when such  interest  is
received by Landlord.  In instances where Tenant is required to pay a deposit or
other sum to the lender of the Construction Financing pursuant to this Leasehold
Improvements  Agreement,  Landlord  shall use  reasonable  efforts to cause such
lender to deposit  such sum in an  interest-bearing  account  with all  interest
earned thereon to be paid to Tenant when received.


         37.  MISCELLANEOUS  MATTERS.  Time is of the essence of this  Leasehold
Improvements  Agreement and all of its provisions.  This Leasehold  Improvements
Agreement  shall  in all  respects  be  governed  by the  laws of the  State  of
California.  This Leasehold Improvements Agreement,  together with its exhibits,
contains all the  agreements  of the parties  hereto  pertaining  to the subject
matter of this  Leasehold  Improvements  Agreement,  and supersedes any previous
negotiations  regarding that subject matter.  There have been no representations
made by Landlord or understandings made between the parties other than those set
forth in this Leasehold Improvements Agreement and its exhibits.  This Leasehold
Improvements  Agreement may be executed in counterparts,  each of which shall be
deemed an original.  This Leasehold  Improvements  Agreement may not be modified
except by a written  instrument  by the parties  hereto.  The  Section  headings
herein are for  convenience  of reference and shall in no way define,  increase,
limit or  describe  the  scope or  intent  of any  provision  of this  Leasehold
Improvements Agreement.


         IN WITNESS  WHEREOF,  the parties  hereto have executed this  Leasehold
Improvements Agreement as of the day and year first above written.

                                 LANDLORD

                                 Village Builders, L.P.,
                                 a California limited partnership

                                      By:   VPI, Inc., a California corporation,
                                              Its General Partner



                                 By:
                                     -------------------------------------------
                                 Its:
                                     -------------------------------------------

                                 TENANT

                                                                            -45-


                                 Fair, Isaac and Company, Inc.,
                                 a Delaware corporation


                                 By:
                                    --------------------------------------------
               
                                 Its:
                                    --------------------------------------------

                                                                            -46-



                                TABLE OF CONTENTS
Page ---- 1. DEFINITIONS..............................................................................................1 1.1. "Agreed Spread for Take-Out Financing"..........................................................2 1.2. "Agreed Take-Out Financing Closing Costs".......................................................2 1.3. "Aggregate Development Cost"....................................................................2 1.4. "Base Building Improvements"....................................................................6 1.5. "Budget"........................................................................................6 1.6. "Commencement of Construction"..................................................................6 1.7. "Common Area"...................................................................................6 1.8. "Conceptual Plans for the Tenant Improvements"..................................................6 1.9. "Construction Financing"........................................................................6 1.10. "Construction Period"...........................................................................7 1.11. "Criteria for Take-Out Financing"...............................................................7 1.12. "Defect List"...................................................................................8 1.13. "Delays"........................................................................................8 1.14. "Designated Treasury Rate"......................................................................8 1.15. "Development Constant"..........................................................................8 1.16. "Descriptive Base Specifications"...............................................................8 1.17. "Draft Working Drawings for the Tenant Improvements"............................................8 1.18. "Estimated Phase I Project Cost"................................................................8 1.19. "Event of Default"..............................................................................8 1.20. "Event of Landlord Default".....................................................................8 1.21. "Event of Tenant Default".......................................................................8 1.22. "Final Working Drawings for the Tenant Improvements"............................................8 1.23. "Floor".........................................................................................9 1.24. "Floor Substantial Completion Notice"...........................................................9 1.25. "Force Majeure Events"..........................................................................9 1.26. "Gross Building Area"...........................................................................9 1.27. "Hazardous Materials"...........................................................................9 1.28. "HVAC Defect List"..............................................................................9 1.29. "Laws"..........................................................................................9 1.30. "Modifications".................................................................................9 1.31. "Mortgage"......................................................................................9 1.32. "Necessary Approvals"......................................................................... 10 1.33. "Necessary Changes"........................................................................... 10 1.34. "Net Stipulated Value of the PG&E Property"................................................... 10 1.35. "Option Agreement"............................................................................ 10 1.36. "Parking Easement"............................................................................ 10 1.37. "Parking Easement Agreement".................................................................. 10 1.38. "Parking Easement Area"....................................................................... 10 1.39. "PG&E" ....................................................................................... 10 1.40. "PG&E Environmental Agreement" ............................................................... 10 1.41. "PG&E Property"............................................................................... 10 1.42. "Phase I"..................................................................................... 10 1.43. "Phase I Buildings"........................................................................... 10 1.44. "Phase I Land"................................................................................ 11 1.45. "Phase I Project Cost"........................................................................ 11 1.46. "Phase II".................................................................................... 11 1.47. "Phase II Current Costs"...................................................................... 11 1.48. "Phase II Land"............................................................................... 13 -i- 1.49. "Phase II Purchase Agreement" ................................................................ 13 1.50. "Premises".................................................................................... 13 1.51. "Project"..................................................................................... 13 1.52. "Project Substantial Completion Notice"....................................................... 13 1.53. "Punch List".................................................................................. 13 1.54. "Real Estate Taxes"........................................................................... 13 1.55. "Rentable Area"............................................................................... 13 1.56. "Review Notice"............................................................................... 13 1.57. "Site Improvements"........................................................................... 13 1.58. "Site and Shell Improvements"................................................................. 13 1.59. "Substantial Completion"...................................................................... 13 1.60. "Substantial Completion Notice"............................................................... 14 1.61. "Take-Out Financing".......................................................................... 14 1.62. "Tenant Caused Delays"........................................................................ 14 1.63. "Tenant Improvements"......................................................................... 14 1.64. "Tenant Improvement Allowance"................................................................ 15 1.65. "Tentative Site Plan"......................................................................... 15 1.66. "Work"........................................................................................ 15 1.67. "Working Drawings for the Site and Shell Improvements"........................................ 15 2. GENERAL DESCRIPTION OF THE IMPROVEMENTS TO BE DESIGNED AND CONSTRUCTED BY LANDLORD..................... 15 2.1. General Description of Site Improvements...................................................... 15 2.2. General Description of Base Building Improvements............................................. 16 2.3. General Description of Tenant Improvements.................................................... 17 2.4. Design of Site and Shell Improvements......................................................... 17 3. PREPARATION AND APPROVAL OF APPLICATIONS TO THE CITY OF SAN RAFAEL..................................... 18 3.1. Applications.................................................................................. 18 3.2. Changes in Plans and Specifications........................................................... 18 3.3. Consistency with Descriptive Base Specifications.............................................. 19 3.4. Fees and Expenses Incurred in Connection with the Applications................................ 19 3.5. Letter Agreements Pertaining to Certain Fees and Expenses Incurred in Connection with the Applications.............................................................................. 19 4. COOPERATION IN PLANNING PROCESS........................................................................ 20 5. PREPARATION OF PLANS AND SPECIFICATIONS FOR OFF-SITE IMPROVEMENTS...................................... 20 6. PREPARATION OF WORKING DRAWINGS FOR THE SITE AND SHELL IMPROVEMENTS.................................... 20 6.1. Initial Preparation........................................................................... 20 6.2. Submission to Tenant for Review............................................................... 21 6.3. Tenant's Review Responsibilities.............................................................. 21 6.4. Submission to the City of San Rafael.......................................................... 21 7. TENANT'S ARCHITECT AND ENGINEERS....................................................................... 22 7.1. Submission of List of Consultants............................................................. 22 7.2. Cost of Preparation........................................................................... 22 8. SUBMITTAL OF CONCEPTUAL PLANS FOR THE TENANT IMPROVEMENTS.............................................. 22 -ii- 8.1. Preliminary Submission........................................................................ 22 8.2. First Submission.............................................................................. 22 8.3. Purpose of Conceptual Plans for the Tenant Improvements....................................... 23 9. PREPARATION OF WORKING DRAWINGS FOR THE TENANT IMPROVEMENTS............................................ 23 10. LANDLORD'S REVIEW RESPONSIBILITIES..................................................................... 24 11. COST OF TENANT IMPROVEMENTS............................................................................ 25 12. CONSTRUCTION OF SITE AND SHELL IMPROVEMENTS............................................................ 25 12.1. Construction and Substitutions................................................................ 25 12.2. Changes to Working Drawings for the Site and Shell Improvements............................... 26 13. INSPECTION BY TENANT................................................................................... 26 14. CHANGE ORDERS.......................................................................................... 27 14.1. Right of Tenant to Request Modifications...................................................... 27 14.2. Preparation of Plans for Modifications........................................................ 27 15. CONSTRUCTION RELATED MATTERS........................................................................... 28 15.1. Target Date For Commencement.................................................................. 28 15.2. Schedule Requirements in Construction Contracts............................................... 28 15.3. Notice of Substantial Completion.............................................................. 29 16. NOTICES OF COMPLETION AND DEFECTS...................................................................... 29 16.1. Project Substantial Completion Notice and Acceptance.......................................... 29 16.2. Assignment of Warranty Rights by Landlord..................................................... 30 16.3. Corrections by Landlord....................................................................... 30 17. DELAYS................................................................................................. 30 17.1. Tenant Caused Delays.......................................................................... 30 17.2. Force Majeure Delays.......................................................................... 31 17.3. Statements of Landlord as to Delays........................................................... 31 17.4. Minimization of Delays........................................................................ 32 18. PROJECT FINANCING...................................................................................... 32 18.1. Right and Obligation to Arrange............................................................... 32 18.2. Retaining a Mortgage Broker to Arrange Financing.............................................. 32 18.3. Selection of Lender and Negotiation of Construction Financing................................. 32 18.4. Selection of Lender and Negotiation of Take-Out Financing..................................... 33 18.5. Inability to Obtain Commitment................................................................ 33 18.6. Other Funds................................................................................... 33 18.7. Contribution of Tenant........................................................................ 33 18.8. Cooperation of Tenant in Construction Financing and Take-Out Financing........................ 34 18.9. Financial Covenants of Tenant................................................................. 35 18.10. Prevailing Wages.............................................................................. 36 18.11. Security Deposit.............................................................................. 36 19. DETERMINATION OF MONTHLY BASE RENT..................................................................... 36 -iii- 20. FIRST ADJUSTMENT TO REFLECT FINAL PHASE I PROJECT COST................................................. 40 20.1. Determination of Final Phase I Project Cost................................................... 40 20.2. Possible Review of Final Phase I Project Cost................................................. 40 20.3. Payment to Adjust Phase I Project Cost........................................................ 40 21. SECOND ADJUSTMENT TO REFLECT FINAL PHASE I PROJECT COST................................................ 41 21.1. Determination of Revised Final Phase I Project Cost........................................... 41 21.2. Possible Review of Revised Final Phase I Project Cost......................................... 41 21.3. Payment to Adjust Phase I Project Cost........................................................ 41 22. PAYMENT OF PHASE II CURRENT COSTS...................................................................... 42 22.1. Payment of Certain Phase II Current Costs at Acquisition...................................... 42 22.2. Payment of Certain Phase II Current Costs Prior to Construction Financing..................... 42 22.3. Payment of Remainder of Phase II Current Costs at Construction Financing...................... 43 23. PAYMENT FOR DESIGN AND CONSTRUCTION OF PARKING LOT..................................................... 44 24. ARBITRATION OF DISPUTES................................................................................ 44 25. ALTERNATIVE PROCEDURE FOR ARBITRATION OF CERTAIN DISPUTES.............................................. 46 26. NOTICES................................................................................................ 48 27. EFFECT OF EXERCISE OF OPTION........................................................................... 48 28. ASSIGNMENT............................................................................................. 48 28.1. By Tenant..................................................................................... 48 28.2. By Landlord................................................................................... 49 29. CONFLICTS AND CONFORMITY WITH OTHER DOCUMENTS.......................................................... 49 30. DESIGNATION OF AGENTS.................................................................................. 49 30.1. Designation of Agent by Landlord.............................................................. 49 30.2. Designation of Agent by Tenant................................................................ 49 31. EVENTS OF DEFAULT...................................................................................... 49 31.1. Events of Landlord Default.................................................................... 49 31.2. Events of Tenant Default...................................................................... 50 32. WAIVER................................................................................................. 50 33. ATTORNEYS' FEES........................................................................................ 51 34. TERMINATION............................................................................................ 51 34.2. Termination of Multiple Agreements............................................................ 52 34.3. Effect of Termination of the Lease............................................................ 53 35. PAYMENTS BY LANDLORD................................................................................... 53 36. INTEREST ON DEPOSITS OR PAYMENTS BY LANDLORD........................................................... 53 37. MISCELLANEOUS MATTERS.................................................................................. 53
                                      LEASE

                             ARTICLE 1. LEASE TERMS

1.1   LANDLORD   AND  TENANT.   This  lease   ("Lease")  is  entered  into  this
_______________  day of March, 1997 by and between CSM CORPORATION,  a Minnesota
corporation,   ("Landlord")  and  DYNAMARK,   INC.,  a  Minnesota   corporation,
("Tenant").

1.2  PREMISES.  Landlord  hereby  rents,  leases  lets and demises to Tenant the
premises and building  ("Premises" and "Building")  illustrated on the site plan
attached  hereto as EXHIBIT A,  together  with the right of ingress,  egress and
access over and across the private  drive shown on EXHIBIT A. The  Premises  and
Building are located on the real property legally  described on attached EXHIBIT
B. The parties  acknowledge that the Tenant is leasing the entire Building,  and
that the Building and Premises consist of approximately 33,000 square feet.

1.3  IMPROVEMENTS.  Landlord shall  construct the Building,  improvements to the
Premises,  and site improvements  pursuant to plans and specifications agreed to
by Landlord and Tenant pursuant to Section 6.1 of this Lease.  An  architectural
plan  elevations  and  specifications  for  the  Building  and  Premises,  and a
description of the improvements to be constructed therein are attached hereto as
EXHIBITS C and D.

1.4      LEASE TERM.

         A.       Initial Term.  The term of this Lease shall commence on August
                  1, 1997 ("Commencement  Date") and shall terminate one hundred
                  thirteen (113) months  thereafter on December 31, 2006, unless
                  sooner terminated as hereinafter provided.

         B.       Option to Extend.  Tenant  shall have the option to extend the
                  term of this  Lease for two (2)  additional  sixty  (60) month
                  terms   ("Option   Terms")  upon  and  pursuant  to  the  same
                  conditions  contained herein.  This option may be exercised by
                  written  notice of exercise from Tenant to Landlord  given not
                  less  than  one  hundred   eighty  (180)  days  prior  to  the
                  expiration  of the then current term of this Lease.  If Tenant
                  fails to exercise  this option as  aforesaid,  this option and
                  all  subsequent  options  shall  be null  and  void  and of no
                  further force and effect.

         C.       Miscellaneous.  In the event that  Tenant  does not vacate the
                  Premises  upon the  expiration or  termination  of this Lease,
                  Tenant shall be a tenant at will for the  holdover  period and
                  all of the  terms  and  provisions  of  this  Lease  shall  be
                  applicable  during that  period,  except that Tenant shall pay
                  Landlord  as base  rental for the period of such  holdover  an
                  amount equal to one and one-quarter (1.25) times the base rent
                  which  would  have been  payable  by Tenant  had the  holdover
                  period  been a part  of  the  original  term  of  this

                                       1




                  Lease,  together with all additional  rent as provided in this
                  Lease.  During  any such  holdover  period,  Tenant  agrees to
                  vacate and deliver the  Premises  to  Landlord  upon  Tenant's
                  receipt of notice from Landlord to vacate.  The rental payable
                  during the  holdover  period  shall be payable to  Landlord on
                  demand. No holding over by Tenant, whether with or without the
                  consent of Landlord,  shall operate to extend the term of this
                  Lease.

1.5      BASE RENT.

         A.      Initial Base Rent.    Months    Monthly Base Rent   Per Sq. Ft.
                 -----------------     ------    -----------------   -----------

                 Initial Term:         1-60      $24,062.50          $8.75
                                       61-113    $25,437,50          $9.25

                 Option Terms:         114-173   $28,187.50          $10.25
                                       174-233   $30,250,00          $11.00

         B.       Adjustment of Base Rent. The initial base rent set forth above
                  has been  computed  at the per  square  foot  rates  set forth
                  above,  assuming  that the Premises  consist of 33,000  square
                  feet.  The actual number of square feet in the Premises  shall
                  be determined by Landlord from "As Built"  measurements of the
                  Building and Premises,  and shall be accomplished by measuring
                  from the exterior face of the exterior  walls of the Building.
                  Once such measurements are  accomplished,  Landlord and Tenant
                  shall  execute  an  addendum  to lease to  confirm  the actual
                  square  footage of the Premises  and to establish  the monthly
                  base rent for the Premises by  multiplying  the actual  square
                  footage of the  Premises  times the per  square  foot rent set
                  forth above.

1.6      PERMITTED USE: General office.

1.7      PRO-RATA  SHARE:  One  hundred  and no/100  percent  (100%)  subject to
adjustment as provided in Section 2.2 hereof.

1.8      ADDRESSES.      LANDLORD'S ADDRESS:            TENANT'S ADDRESS:
                         -------------------            -----------------
                         CSM INVESTORS, INC.            DYNAMARK, INC.
                         2561 TERRITORIAL ROAD          4290 FERNWOOD STREET
                         ST. PAUL, MN 55114-1500        ST. PAUL, MN 55112
                         (612) 646-1717                 ATTN: JIM SCHOELLER
                                                        SENIOR VICE PRESIDENT

                                       2




            ARTICLE 2. RENT, OPERATING EXPENSES AND SECURITY DEPOSIT

2.1 BASE RENT. Tenant agrees to pay monthly as Base Rent during the term of this
Lease the sum of money set forth in Section 1.5 of this Lease, which amount will
be payable to Landlord at the address shown above.  Monthly installments of Base
Rent shall be due and  payable,  in advance,  on or before the first day of each
calendar   month  during  the  term  of  this  Lease-   provided   that  if  the
Commencement-Date should be a date other than the first day of a calendar month,
the  monthly  Base Rent shall be  prorated  on a daily  basis to the end of that
calendar month, and shall be payable on or before the Commencement  Date of this
Lease.  Tenant  shall pay,  as  additional  rent,  all other sums due under this
Lease.  Based on Tenant's approval of the floor plan as depicted in EXHIBIT C by
March 17, 1997, the Landlord agrees that upon  Landlord's  receipt of a building
permit  allowing it to construct the Building,  Landlord will promptly  commence
construction  of  the  Building  and  Premises  and  shall   diligently   pursue
construction   thereof  in  order  to  have  the   Building   and  the  Premises
substantially  complete  on the  Commencement  Date.  For the  purposes  of this
provision,  substantially complete shall mean that the Building and Premises are
substantially  completed in accordance with the approved construction  documents
and the  requirements of the City of Arden Hills,  subject only to punchlist and
minor  completion  items  that  will  not  prevent  Tenant  from  occupying  and
commencing operations within the Premises,  which punchlist and minor completion
items Landlord agrees to promptly complete.

If,  prior to June 15,  1997,  Landlord  determines  that it will not be able to
deliver the  Building and  Premises to Tenant in the  condition  required by the
Commencement Date,  Landlord shall notify Tenant, in writing,  on or before June
15, 1997, and the Commencement Date shall be extended to the actual  substantial
completion date. In such event, Landlord shall provide Tenant with not less than
forty-five  (45)  days  prior  written  notice  of the  anticipated  substantial
completion date.

If, subject to force majeure or Tenant caused delays (including Tenant's failure
to approve the floor plan by March 17, 1997),  the Building and Premises are not
substantially  complete and ready for  Tenant's  occupancy by September 1, 1997,
Landlord shall pay to Tenant,  as a credit against the first installment of Base
Rent and additional rent payable hereunder,  an amount equal to $500.00 for each
day thereafter  until the Building and the Premises are  substantially  complete
and ready for Tenant's occupancy.  If, subject to force majeure or Tenant caused
delays (including  Tenant's failure to approve the floor plan by March 1, 1997),
the Building and Premises are not substantially  complete and ready for Tenant's
occupancy by November 1, 1997,  Tenant  shall have the option to terminate  this
Lease by  written  notice  to  Landlord  after  November  1,  1997 and  prior to
substantial completion of the Building and Premises.

2.2 OPERATING  EXPENSES.  Tenant shall also pay as additional  rent Tenant's pro
rata share of the operating expenses of Landlord for the Building.  Landlord may
invoice  Tenant  monthly for Tenant's pro rata share of the estimated  operation
expenses  for  each  calendar   year,   which  amount  shall  be  adjusted  from
time-to-time by Landlord based

                                       3




upon reasonably anticipated operating expenses.  Within six (6) months following
the close of each calendar  year,  Landlord  shall provide  Tenant an accounting
showing in reasonable  detail the computations of additional rent due under this
Section.  In the  event  the  accounting  shows  that the  total of the  monthly
payments  made by Tenant  exceeds  the amount of  additional  rent due by Tenant
under this Section,  the accounting shall be accompanied by evidence of a credit
to Tenant's  account.  In any event the  accounting  shows that the total of the
monthly  payments made by Tenant is less than the amount of additional  rent due
by Tenant under this Section,  the accounting shall be accompanied by an invoice
for the additional  rent. If this Lease shall  terminate on a day other than the
last day of a calendar year, the amount of any additional rent payable by Tenant
applicable to the year in which the termination shall occur shall be prorated on
the ratio that the number of days from the  commencement of the calendar year to
and  including  such  termination  date bears to 365.  Tenant  agrees to pay any
additional rent due under this Section within ten (10) days following receipt of
the invoice or accounting  showing  additional rent due. Tenant's pro rata share
set forth in Section 1.8 shall, subject to reasonable adjustment by Landlord, be
equal to a percentage based upon a fraction, the numerator of which is the total
area of the  Premises  as set forth in  Article 1 and the  denominator  of which
shall be the net rentable area of the Building, as the same may change from time
to time.

2.3 DEFINITION OF OPERATING EXPENSES. The term "operating expenses" includes all
expenses  incurred by Landlord with respect to the  maintenance and operation of
the Building, including, but not limited to, the following:  maintenance, repair
and replacement  costs;  electricity,  fuel, water,  sewer, gas and other common
Building  utility  charges;  equipment used for maintenance and operation of the
Building; operational expenses; exterior window washing and janitorial services;
trash and snow removal; landscaping and pest control; management fees, wages and
benefits  payable to employees of Landlord  whose duties are directly  connected
with the operation and  maintenance  of the  Building;  all services,  supplies,
repairs,  replacements  or other  expenses for  maintaining  and  operating  the
Building or project including parking and common areas; improvements made to the
Building which are required under any  governmental  law or regulation  that was
not applicable to the Building at the time it was  constructed;  installation of
any device or other  equipment  which  improves the operating  efficiency of any
system within the Premises and thereby  reduces  operating  expenses;  all other
expenses which would generally be regarded as operating, repair, replacement and
maintenance  expenses;  all real  property  taxes and  installments  of  special
assessments, including dues and assessments by means of deed restrictions and/or
owners'  associations  which accrue against the Building during the term of this
Lease and legal fees incurred in connection with actions to reduce the same; and
all insurance  premiums  Landlord is required to pay or deems  necessary to pay,
including  fire and  extended  coverage,  and rent  loss  and  public  liability
insurance, with respect to the Building.

Notwithstanding  the  foregoing,   operating  expenses  shall  not  include  any
expenditure  which must be capitalized  for federal income tax purposes,  except
that  operating  expenses  shall  include the  amortization  of any such capital
expenditures  (except capital

                                       4




expenditures  for  improvements  made to the  Building  without  the  consent of
Tenant,  or for  restoration  or  repair of  damage  to the  Building  caused by
casualty) on a straight-line basis over the reasonably estimated useful Life, at
an  amortization  rate equal to the rate of Treasury  Securities  of  comparable
term, plus two percent (2%).

Further, operating expenses shall not include:

         A.       Taxes  payable  by  reason  of any  "minimum  assessment":  or
                  similar  agreement  to the extent  exceeding  the taxes  which
                  otherwise  would be payable  with  respect to the  property of
                  which the Premises are a part; or

         B.       Special  assessments  levied  or  pending  on the date of this
                  Lease  or  levied  for  public  improvements   constructed  in
                  connection  with the initial  construction  of the Building or
                  any additional building; or

         C.       Expenses  of  contesting  taxes or the  assessed  value of the
                  property  of which  the  Premises  are a part in excess of the
                  savings achieved in such contest; or

         D.       Management  fees  exceeding  fifteen  percent  (15%)  of other
                  operating expenses except taxes and special assessments; or

         E.       Expenses  incurred by Landlord in satisfying  its  obligations
                  under Section 14.13 hereof.

2.4 INCREASE IN INSURANCE  PREMIUMS.  If an increase in any  insurance  premiums
paid by Landlord  for the  Building is caused by Tenant's use of the Premises or
if Tenant  vacates the  Premises and causes an increase in such  premiums,  then
Tenant shall pay as additional rent the amount of such increase to Landlord.


                          ARTICLE 3. OCCUPANCY AND USE

3.1 USE.  Tenant  warrants and represents to Landlord that the Premises shall be
used and occupied only for the purpose as set forth in Section 1.6. Tenant shall
occupy the  Premises,  conduct its business  and control its agents,  employees,
invitees  and  visitors  in such a manner as is lawful,  reputable  and will not
create a nuisance. Tenant shall not permit any operation which emits any odor or
matter which intrudes into other portions of the Building or otherwise interfere
with,  annoy or disturb any other lessee in its normal  business  operations  or
Landlord in its management of the Building. Tenant shall not permit any waste on
the  Premises to be used in any way which would in the opinion of  Landlord,  be
extra  hazardous  on account of fire or which  would,  in any way,  increase  or
render void the fife insurance on the Building.

3.2  SIGNS.  No sign of any type or  description  shall be  erected,  placed  or
painted in or about the Premises or Building which are visible from the exterior
of the Premises,  except

                                       5




those signs submitted to Landlord in writing, and which signs are in conformance
with Landlord's sign criteria, if any, established for the Building.

3.3 COMPLIANCE WITH LAWS, RULES AND REGULATIONS.  Tenant,  at Tenant's sole cost
and  expense,  shall  comply  with  aft  laws  ordinances,   orders,  rules  and
regulations  of state,  federal,  municipal or other  agencies or bodies  having
jurisdiction over the use, condition or occupancy of the Premises, provided that
Tenant shall not be obligated to make any material capital improvements required
by such laws,  ordinances,  orders,  rules and regulations,  (nor shall Landlord
have  such  obligation).   For  purposes  of  this  clause  a  material  capital
improvement shall mean any capital improvement or series of capital improvements
within any calendar  year,  costing in excess of  $1,500.00.  Tenant will comply
with the reasonable  rules and regulations of the Building  adopted by Landlord.
Landlord  shall  have the right at all  times to change  and amend the rules and
regulations in any reasonable  manner as may be deemed advisable fog the safety,
care,  cleanliness,  preservation  of good  order  and  operation  or use of the
Building or the Premises. All rules and regulations of the Building will be sent
by  Landlord  to Tenant in  writing  and shall  thereafter  be  carried  out and
observed by Tenant.

3.4  WARRANTY  OF  POSSESSION.  Landlord  warrants  that  it has the  right  and
authority to execute this Lease, and Tenant,  upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in this
Lease shall have  possession of the Premises  during the full term of this Lease
as well as any extension or renewal  thereof.  Landlord shall not be responsible
for the acts or omissions of any other lessee or third party that may  interfere
with Tenant's use and enjoyment of the Premises.

3.5 RIGHT OF ACCESS.  Landlord or its  authorized  agents shall,  at any and all
reasonable  times  and  upon  reasonable  notice,  have the  right to enter  the
Premises to inspect the same,  to show the Premises to  prospective  purchasers,
lessees,  mortgagees,  insureers  or other  interested  parties,  and to  alter,
improve or repair the  Premises  or any other  portion of the  Building.  Tenant
hereby  waives  any  claim  for  damages  for  injury  or  inconvenience  to  or
interference  with  Tenant's  business,  any  loss  of  occupancy  or use of the
Premises,  and any other loss occasioned thereby,  except as may result from the
negligent or willful misconduct of Landlord.  Tenant shall not change Landlord's
lock system or in any other manner prohibit Landlord from entering the Premises.
Landlord  shall have the right to use any and all means which  Landlord may deem
proper to open any door in an emergency without liability therefor. Tenant shall
permit  Landlord to erect,  use,  maintain and repair pipes,  cables,  conduits,
plumbing,  vents and wires in, to and through  the  Premises as often and to the
extent that  Landlord may now or hereafter  deem to be necessary or  appropriate
for the proper use,  operation and  maintenance  of the Building;  provided that
Landlord does not thereby materially interfere with the use and enjoyment of the
Premises by Tenant for general office purposes.

                     ARTICLE 4. UTILITIES AND ACTS OF OTHERS

                                       6



4.1 BUILDING  SERVICES.  Tenant  shall pay when due,  all charges for  utilities
furnished to or for the use or benefit of Tenant or the  Premises.  Tenant shall
have no claim for rebate of rent on account of any interruption in service.

4.2 THEFT OR  BURGLARY.  Landlord  shall not be liable to Tenant  for  losses to
Tenant's  property  or  personal  injury  cases  by  criminal  acts or  entry by
unauthorized persons into the Premises or the Building.


                       ARTICLE 5. REPAIRS AND MAINTENANCE

5.1. LANDLORD REPAIRS.  Landlord shall not be required to make any improvements,
replacements or repairs of any kind or character to the Premises or the Building
during the term of this Lease except as are set forth in this Section.  Landlord
shall  maintain  only the  roof,  foundation,  parking  and  common  areas,  the
structural  soundness  of  the  exterior  walls,  doors,  corridors,  and  other
structures  serving  the  Premises  in good  order and  repair,  provided,  that
Landlord's cost of  maintaining,  replacing and repairing the items set forth in
this Section are operating expenses subject to the additional rent provisions in
Section 2.2 and 2.3.  Landlord  shall correct any  deficiencies  in  maintenance
within thirty (30) days after written notice from Tenant; provided that for work
that  cannot be  completed  within  thirty  (30) days  Landlord  shall not be in
default  hereunder  if Landlord  commences  the work within such thirty (30) day
period and  diligently  proceeds to complete such work; and provided that in the
case of an  emergency,  Landlord  shall take action to correct  deficiencies  as
promptly  as  practicable.  Landlord  shall not be liable to  Tenant,  except as
expressly  provided in this Lease, for any damage or  inconvenience,  and Tenant
shall not be entitled to any  abatement  or  reduction  of rent by reason of any
repairs,  alterations or additions  made by Landlord under this Lease;  provided
that Landlord does not thereby  materially  interfere with the use and enjoyment
of the Premises by Tenant for general office purposes.

5.2 TENANT  REPAIRS.  Tenant  shall,  at all times  throughout  the term of this
Lease,  including  renewals and  extensions,  and at its sole expense,  keep and
maintain the Premises in a clean,  safe,  sanitary and first class condition and
in  compliance  with  all  applicable  laws,   codes,   ordinances,   rules  and
regulations,  provided  that Tenant  shall not be obligated to make any material
capital  improvements  required  by such  laws,  ordinances,  orders,  rules and
regulations,  (nor shall  Landlord have such  obligation).  For purposes of this
clause, a material  capital  improvement  shall mean any capital  improvement or
series of capital  improvements  within any calendar year,  costing in excess of
$1,500.00.  Tenant's obligations hereunder shall include, but not be limited to,
the  maintenance,   repair  and  replacement,  if  necessary,  of  all  heating,
ventilation,  air  conditioning,  lighting and plumbing  fixtures and equipment,
fixtures,  motors and  machinery,  all  interior  walls,  partitions,  doors and
windows,  including  the  regular  painting  thereof,  all  exterior  entrances,
windows,  doors and docks and the replacement of all broken glass.  When used in
this  provision,  the term repairs shall include  replacements  or renewals when
necessary, and all such repairs made by the Tenant shall be equal in quality and
class to the original work.  Notwithstanding the foregoing,  Tenant shall not

                                       7




be responsible  for major  non-recurring  repairs of or replacements to the HVAC
system,  except where caused by Tenant's failure to properly  utilize,  maintain
and secure said system- Tenant,  however, shall pay the amortization  (utilizing
the amortization  method for capital  expenditures  described in Section 2.3) of
the costs of such major  repairs or  replacements  performed  after the five (5)
year anniversary of the Commencement Date. For purposes of this paragraph, major
repairs or  replacement  of the HVAC system  shall mean  expenditures  for major
repairs to or replacement  of  compressors or exchangers.  The Tenant shall keep
and maintain  all portions of the Premises and the sidewalk and areas  adjoining
the  same in a clean  and  orderly  condition,  free of  accumulation  of  dirt,
rubbish,  snow and ice.  If Tenant  fails,  refuses or  neglects  to maintain or
repair the Premises as required in this Lease after notice shall have been given
Tenant,  in accordance  with this Lease,  Landlord may make such repairs without
liability  to  Tenant  for any  loss or  damage  that  may  accrue  to  Tenant's
merchandise,  fixtures  or other  property  or to  Tenant's  business  by reason
thereof,  and upon  completion  thereof,  Tenant shall pay to Landlord all costs
plus  fifteen  percent  (15%) for  overhead  incurred by Landlord in making such
repairs upon presentation to Tenant of bill therefor.

5.3.  TENANT  DAMAGES.  Tenant shall not allow any damage to be committed on any
portion of the Premises or Building or common areas,  and at the  termination of
this lease, by lapse of time or otherwise,  Tenant shall deliver the Premises to
Landlord in as good condition as existed at the Commencement Date of this Lease,
ordinary wear and tear and damage by casualty excepted.  The cost and expense of
repairs  necessary to restore the  condition  of the Premises  shall be borne by
Tenant.


                     ARTICLE 6. ALTERATIONS AND IMPROVEMENTS

6.1  LANDLORD   IMPROVEMENTS.   Landlord  will  complete   construction  of  the
improvements  to the Premises in  accordance  with the  architectural  plans and
specifications attached hereto as EXHIBITS C and D. Any changes or modifications
to the said plans and  specifications  shall be  accomplished  by written change
order  executed by both  Landlord  and Tenant.  In the event the net cost of all
approved change orders (i.e., change orders which create savings will be applied
against  change orders which  increase  costs)  exceeds  $10,000.00,  the Tenant
shall: i) reimburse  Landlord in equal monthly  installments on the first day of
each month during the initial five (5) year term in an amount necessary to fully
amortize  such excess cost together with interest at a rate of nine and one-half
percent (9.5%); or ii) within ten (10) days after receipt of Landlord's invoice,
reimburse  Landlord  for such excess cost.  For the purposes of this  provision,
cost shall mean the sum Landlord is actually  required to pay its contractor for
any particular change order.

6.2  TENANT  IMPROVEMENTS.  Tenant  shall  not  make or  allow  to be  made  any
alterations or physical  additions in or to the Premises without first obtaining
the written consent of Landlord, which consent may not be unreasonably withheld.
Any  alterations,  physical a Editions or  improvements  to the Premises made by
Tenant shall at once become the property of Landlord and shall be surrendered to
Landlord upon the

                                       8




termination of this Lease;  provided,  however,  Landlord, as a condition to its
consent to any proposed alteration or addition, may require Tenant to remove any
physical  additions  and/or  repair  any  alterations  in order to  restore  the
Premises to the  conditions  existing at the time  Tenant took  possession,  all
costs of removal and/or alterations to be borne by Tenant. This clause shall not
apply to moveable equipment or furniture owned by Tenant which Tenant shall have
the right to  mortgage,  and which may be removed by Tenant at any time and from
time to time.  Landlord  agrees to cooperate with Tenant in connection  with any
financing  Tenant  elects  to  place on its  equipment  and  personal  property,
including  execution of such  certificates  and documents as Tenant's lender may
reasonably request.


                        ARTICLE 7. CASUALTY AND INSURANCE

7.1 SUBSTANTIAL DESTRUCTION.  If all or a substantial portion of the Premises or
the Building should be totally  destroyed by fire or other  casualty,  or if the
Premises or the Building should be damaged so that rebuilding  cannot reasonably
be  completed  within one  hundred  fifty (150)  working  days after the date of
written  notification by Tenant to Landlord of the destruction,  or if insurance
proceeds are not made available to Landlord, or are inadequate, for restoration,
this Lease shall terminate at the option of Landlord or Tenant by written notice
within sixty (60) days  following the  occurrence,  and the rent shall be abated
for  the  unexpired  portion  of  the  Lease  effective  as of the  date  of the
occurrence.

7.2 PARTIAL DESTRUCTION.  If the Premises should be partially damaged by fire or
other casualty, and rebuilding or repairs can reasonably be completed within one
hundred fifty (150) working days from the date of written notification by Tenant
to  Landlord  of the  destruction,  and  insurance  proceeds  are  adequate  and
available  to Landlord  for  restoration,  this Lease shall not  terminate,  and
Landlord shall at its sole risk and expense proceed with reasonable diligence to
rebuild or repair the Building or other  improvements to substantially  the same
condition in which they existed  prior to the damage.  If the Premises are to be
rebuilt or  repaired  and are  untenantable  in whole or in part  following  the
damage,  the rent  payable  under  this  Lease  during  the period for which the
Premises are untenantable shall be adjusted to such an extent as may be fair and
reasonable  under the  circumstances.  Tenant shall not be obligated to pay rent
for any  portion  of the  Premises  which it does  not  actually  occupy  during
restoration, if such portion is not suitable for Tenant's business operations as
reasonably  determined by Tenant.  In the event that Landlord  fails to complete
the necessary  repairs or rebuilding within one hundred fifty (150) working days
from the date of written  notification by Tenant to Landlord of the destruction,
Tenant may at its option terminate this Lease by date of written notification by
Tenant to Landlord of the  destruction,  Tenant may at its option terminate this
Lease by delivering  written notice of  termination  to Landlord,  whereupon all
rights and obligations under this Lease shall cease to exist.

7.3 PROPERTY INSURANCE.  Landlord shall not be obligated in any way or manner to
insure any  personal  property  (including,  but not limited to, any  furniture,
machinery,

                                       9




goods or supplies) of Tenant upon or within the Premises, any fixtures installed
or paid for by Tenant upon or within the  Premises,  or any  improvements  which
Tenant may construct on the Premises.  Tenant shall maintain property  insurance
on its personal  property and shall also maintain plate glass insurance.  Tenant
shall  have no right in our claim to the  proceeds  of any  policy of  insurance
maintained by Landlord even if the cost of such  insurance is borne by Tenant as
set forth in Article 2.

7.4 WAIVER OF SUBROGATION.  Anything in this Lease to the contrary withstanding,
Landlord and Tenant  hereby waive and release each other of and from any and all
right of recovery,  claim, action or cause of action,  against each other, their
agents,  officers  and  employees,  for any loss or damage that may occur to the
Premises,  the  improvements  of the  Building or personal  property  within the
Building,  by  reason  of fire,  other  casualty  insurable  under an "all  risk
insurance  policy",  or the elements,  regardless of cause or origin,  including
negligence  of  Landlord or Tenant and their  agents,  officers  and  employees.
Landlord  and  Tenant  agree  immediately  to give  their  respective  insurance
companies  which have issued  policies of insurance  covering all risk of direct
physical loss,  written  notice of the terms of the mutual waivers  contained in
this Section.

7.5 HOLD HARMLESS.  Landlord shall not be liable to Tenant's employees,  agents,
invitees, licensees or visitors, or to any other person, for an injury to person
or damage to property on or about the Premises  caused by any act or omission of
Tenant, its agents,  servants or employees, or of any other person entering upon
the Premises  under express or implied  invitation  by Tenant,  or caused by the
improvements  located on the  Premises  becoming  out of repair,  the failure or
cessation of any service  provided by Landlord  (including  security service and
devices),  or caused by leakage of gas,  oil,  water or steam or by  electricity
emanating from the Premises,  provided that Landlord  shall be  responsible  for
loss  resulting  from its  negligence or willful  misconduct or from  Landlord's
failure to perform  repairs  within the time  required  by Section  5.1  hereof.
Tenant  agrees to  indemnify  and hold  harmless  Landlord of and from any loss,
attorney's  fees,  expenses or claims  arising out of any such damage or injury,
for which Landlord is not liable pursuant to the foregoing provisions.

7.6 PUBLIC LIABILITY INSURANCE. Tenant shall during the term hereof keep in full
force  and  effect  at its  expense a policy  or  policies  of public  liability
insurance with respect to the Premises and the business of Tenant,  on terms and
with  companies  approved  in writing  by  Landlord,  in which  both  Tenant and
Landlord  shall be covered by being named as insured  parties  under  reasonable
limits of  liability  not less than  $1,000,000,  or such  greater  coverage  as
Landlord may reasonably  require,  combined  single limit coverage for injury or
death.  Such  policy or policies  shall  provide  that thirty (30) days  written
notice must be given to Landlord  prior to  cancellation  thereof.  Tenant shall
furnish  evidence  satisfactory  to  Landlord at the time this Lease is executed
that such coverage is in full force and effect.

                             ARTICLE 8. CONDEMNATION

                                       10




8.1 SUBSTANTIAL  TAKING.  If all or a substantial part of the Premises are taken
for any public or  quasi-public  use under any  governmental  law,  ordinance or
regulation,  or by right of eminent  domain or by purchase in lieu thereof,  and
the taking would  prevent or materially  interfere  with the use of the Premises
for the purpose for which it is then being used,  this Lease shall terminate and
the rent shall be abated during the unexpired portion of this Lease effective on
the date physical possession is taken by the condemning authority.  Tenant shall
have no claim to the condemnation award or proceeds in lieu thereof, except that
Tenant shall be entitled to a separate award for the cost of removing and moving
its personal property.

8.2 PARTIAL TAKING.  If all or a substantial  part of the Premises are taken for
any  public or  quasi-public  use  under  any  governmental  law,  ordinance  or
regulation,  or by right of eminent  domain or by purchase in lieu thereof,  and
this Lease is not terminated as provided in Section 8.1 above,  the rent payable
under this Lease during the  unexpired  portion of the term shall be adjusted to
such an extent as may be fair and  reasonable  under the  circumstances.  Tenant
shall not be obligated to pay rent for any portion of the Premises which it does
not  actually  occupy  after such  taking,  if such  portion is not suitable for
Tenant's  business  operations  as reasonably  determined by Tenant,  and Tenant
shall have the option to  terminate  this  Lease by written  notice to  Landlord
given within sixty (60) days after possession is taken if the remaining  portion
of the Premises is not suitable for Tenant's  business  operation as  reasonably
determined by Tenant.  Tenant shall have no claim to the  condemnation  award or
proceeds in lieu  thereof,  except  that Tenant  shall be entitled to a separate
award for the cost of removing and moving its personal property.


                        ARTICLE 9. ASSIGNMENT OR SUBLEASE

9.1  LANDLORD  ASSIGNMENT.  Landlord  shall have the right to sell,  transfer or
assign,  in whole or in part, its rights and obligations under this Lease and in
the Building.  Any such sale,  transfer or  assignment  shall operate to release
Landlord from any and all liabilities under this Lease arising after the date of
such sale,  assignment  or transfer,  provided  that the  transferee or assignee
assumes such liabilities.

9.2 TENANT ASSIGNMENT. Tenant shall not assign, in whole or in part, this Lease,
or  allow  it to be  assigned,  in whole  or in  part,  by  operation  of law or
otherwise or mortgage or pledge the same, or sublet the Premises, in whole or in
part, without the prior written consent of Landlord,  which consent shall not be
unreasonably  withheld or  delayed.  In no event  shall any such  assignment  or
sublease ever release  Tenant or any guarantor  from any obligation or liability
hereunder.  Notwithstanding anything in this Lease to the contrary, in the event
of any assignment or sublease,  any option or right of first refusal  granted to
Tenant  shall not be  assignable  by Tenant to any  assignee  or  sublessee.  No
assignee or  sublessee  of the  Premises  or any  portion  thereof may assign or
sublet the Premises or any portion thereof.

                                       11




9.3 CONDITIONS OF  ASSIGNMENT.  If Tenant desires to assign or sublet all or any
part of the Premises,  it shall so notify  Landlord at least thirty (30) days in
advance of the date on which Tenant desires to make such assignment or sublease.
Tenant shall provide Landlord with a copy of the proposed assignment or sublease
and such information as Landlord might request concerning the proposed sublessee
or assignee to allow  Landlord to make  informed  judgments as to the  financial
condition,  reputation,  operations  and general  desirability  of the  proposed
sublessee or assignee.  Within seven (7) business days after Landlord's  receipt
of  Tenant's  proposed  assignment  or  sublease  and all  required  information
concerning the proposed sublease or assignee,  Landlord shall have the following
options:  (1) consent to the proposed  assignment or sublease,  and, if the rent
due and payable by any assignee or sublessee under any such permitted assignment
or sublease (or a  combination  of the rent  payable  under such  assignment  or
sublease  plus any  bonus or any other  consideration  or any  payment  incident
thereto) exceeds the rent payable under this Lease for such space,  Tenant shall
pay  to  Landlord   one-half   (1/2)  of  such  excess  rent  and  other  excess
consideration  within ten (10) days following  receipt thereof by Tenant; or (2)
refuse, subject to the limitations set forth in Section 9.2 above, to consent to
the proposed assignment or sublease,  which refusal shall be deemed to have been
exercised  unless  Landlord  gives Tenant written  notice  providing  otherwise.
Landlord shall, upon Tenant's request, provide the reasons for any refusal. Upon
the  occurrence  of an event of default,  if all or any part of the Premises are
then assigned or sublet, Landlord, in addition to any other remedies provided by
this Lease or provided by law,  may, at its option,  collect  directly  from the
assignee  or  sublessee  all  rents  becoming  due to  Tenant  by  reason of the
assignment or sublease. Any collection directly by Landlord from the assignee or
sublessee shall not be construed to constitute a notation or a release of Tenant
or any guarantor  from the further  performance  of its  obligations  under this
Lease.

9.4 RIGHTS OF MORTGAGE. Tenant accepts this Lease subject and subordinate to any
recorded mortgage  presently existing or hereafter created upon the Building and
to all existing recorded restrictions,  covenants, easements and agreements with
respect to the Building.  Landlord is hereby  irrevocably vested with full power
and authority to  subordinate  Tenant's  interest  under this Lease to any first
mortgage lien hereafter placed on the Premises, and Tenant agrees upon demand to
execute additional instruments subordinating this Lease as Landlord may require.
If the interests of Landlord  under this Lease shall be transferred by reason of
foreclosure or other  proceedings  for enforcement of any first mortgage or deed
of trust on the  Premises,  Tenant shall be bound to the  transferee  (sometimes
called  the  "Purchaser")  at the  option of the  Purchaser,  under  the  terms,
covenants and  conditions  of this Lease for the balance of the term  remaining,
including any  extensions or renewals,  with the same force and effect as if the
Purchaser  were Landlord  under this Lease,  and, if requested by the Purchaser,
Tenant agrees to attorn to the Purchaser,  including the first  mortgagee  under
any such mortgage if it be the Purchaser,  as its Landlord.  Notwithstanding the
foregoing,  Tenant shall not be disturbed in its  possession  of the Premises so
long as Tenant is not in default hereunder.

                                       12




9.5 TENANT'S STATEMENT.  Tenant agrees to furnish,  from time to time within ten
(10) days after receipt of a request from Landlord or  Landlord's  mortgagee,  a
statement certifying, if applicable,  the following:  Tenant is in possession of
the  Premises;  the  Premises  are  acceptable;  the lease is in full  force and
effect; the lease is unmodified; Tenant claims no present charge, lien, or claim
or offset  against  rent;  the rent is paid for the  current  month,  but is not
prepaid  for more than one month and will not be prepaid for more than one month
in advance;  there is no  existing  default by reason of some act or omission by
Landlord;  and such other matters as may be  reasonably  required by Landlord or
Landlord's  mortgagee;  or specifying any  exceptions to such matters.  Tenant's
failure to deliver  such  statement,  in addition to being a default  under this
Lease,  shall be deemed to  establish  conclusively  that this  Lease is in full
force and effect expect as declared by Landlord, that Landlord is not in default
of any of its obligations  under this Lease,  and that Landlord has not received
more than one month's rent in advance.  Tenant  agrees to furnish,  from time to
time,  within ten (10) days after receipt of a request from  Landlord,  the most
recent financial statement of Tenant, certified as true and correct by Tenant.


               ARTICLE 10. LANDLORD'S LIEN AND SECURITY AGREEMENT
                             (Intentionally omitted)


                        ARTICLE 11. DEFAULT AND REMEDIES

11.1 DEFAULT BY TENANT.  The  following  shall be deemed to be events of default
("Default")  by Tenant  under this Lease:  (1) Tenant shall fail to pay when due
any installment of rent or any other payment required pursuant to this Lease and
such failure shall  continue for a period of five (5) days after written  notice
to Tenant; (2) Tenant shall abandon any substantial portion of the Premises; (3)
Tenant shall fail to comply with any term,  provision or covenant of this Lease,
other than the payment of rent,  and the failure is not cured within thirty (30)
days after written  notice to Tenant;  (4) Tenant shall file a petition or if an
involuntary  petition is filed against Tenant, or becomes  insolvent,  under any
applicable federal or state bankruptcy or insolvency law or admit that it cannot
meet its  financial  obligations  as they  become  due; or a receiver or trustee
shall be  appointed  for all or  substantially  all of the assets of Tenant;  or
Tenant shall make a transfer in fraud of  creditors or shall make an  assignment
for the benefit of  creditors;  or (5) Tenant  shall do or permit to be done any
act which  results in a lien being filed  against the  Premises or the  Building
and/or project of which the Premises are a part; and Tenant shall not cause such
lien to be released or bonded off within thirty (30) days after  written  notice
to Tenant.

In the event that an order for  relief is  entered  in any case under  Title 11,
U.S.C. (the "Bankruptcy  Code") in which Tenant is the debtor and: (A) Tenant as
debtor-in-possession,  or any  trustee  who may be  appointed  in the case  (the
"Trustee") seeks to assume the lease, then Tenant, or Trustee if applicable,  in
addition to providing adequate assurance  described in applicable  provisions of
the Bankruptcy Code,  shall provide  adequate  assurance to Landlord of Tenant's
future  performance  under the Lease by depositing  with Landlord a sum equal to
the lesser of twenty-five  percent (25%) of the rental and other charges due for
the  balance of the Lease term or six (6) months rent  ("Security"),  to be held
(without any allowance for interest thereon) to secure Tenant's obligation under
the Lease, and (B) Tenant,  or Trustee if applicable,  seeks to assign the Lease
after  assumption of the same,  then Tenant,  in addition to providing  adequate
assurance  described in applicable  provisions  of the  Bankruptcy  Code,  shall
provide  adequate  assurance  to  Landlord  of the  proposed  assignee's  future
performance  under  the Lease

                                       13




by depositing  with Landlord a sum equal to the Security to be held (without any
allowance or interest thereon) to secure  performance  under the Lease.  Nothing
contained  herein  expresses  or implies,  or shall be  construed  to express or
imply,  that Landlord is consenting to assumption and/or assignment of the Lease
by Tenant,  and Landlord  expressly  reserves all of its rights to object to any
assumption and/or assignment of the Lease.  Neither Tenant nor any Trustee shall
conduct  or permit  the  conduct  of any  "fire",  "bankruptcy",  "going  out of
business" or auction sale in or from the Premises.

11.2 REMEDIES FOR TENANT'S DEFAULT.  Upon the occurrence of a Default as defined
above, Landlord may elect either (i) to cancel and terminate this Lease and this
Lease shall not be treated as an asset of Tenant's  bankruptcy estate or (ii) to
terminate  Tenant's right to possession only without  cancelling and terminating
Tenant's  continued  liability under this Lease.  Notwithstanding  the fact that
initially  Landlord elects under (ii) to terminate  Tenant's right to possession
only,  Landlord  shall have the  continuing  right to cancel and terminate  this
Lease by  giving  three  (3) days  written  notice  to  Tenant  of such  further
election, and shall have the right to pursue any remedy at law or in equity that
may be available to Landlord.

In the event of election  under (ii) to terminate  Tenant's  right to possession
only,  Landlord may, at Landlord's option,  enter the Premises and take and hold
possession thereof, without such entry into possession terminating this Lease or
releasing Tenant in whole or in part from Tenant's obligation to pay all amounts
hereunder for the full stated term.  Upon such reentry,  Landlord may remove all
persons and  property  from the  Premises  and such  property may be removed and
stored in a public  warehouse  or  elsewhere  at the cost and for the account of
Tenant,  without  becoming liable for any loss or damage which may be occasioned
thereby. Such reentry shall be conducted in the following manner: without resort
to judicial process or notice of any kind if Tenant has abandoned or voluntarily
surrendered  possession of the Premises;  and, otherwise,  by resort to judicial
process.  Upon and after entry into possession without termination of the Lease,
Landlord may, but is not obligated to, relet the Premises,  or any part thereof,
to any one other than the Tenant, for such time and upon such terms as Landlord,
in Landlord's sole discretion shall determine. Landlord may make alterations and
repairs to the Premises to the extent deemed by Landlord  necessary of desirable
to relet the Premises.

Upon such reentry, Tenant shall be liable to Landlord as follows:

         A.       For all  reasonable  attorneys'  fees  incurred by Landlord in
                  connection with exercising any remedy hereunder;

                                       14



         B.       For the unpaid  installments of base rent,  additional rent or
                  other  unpaid  sums  which  were due  prior  to such  reentry,
                  including  interest and late payment fees, which sums shall be
                  payable immediately.

         C.       For the installments of base rent,  additional rent, and other
                  sums falling due pursuant to the  provisions of this Lease for
                  the period after  reentry  during  which the  Premises  remain
                  vacant,  including  late payment  charges and interest,  which
                  sums shall be payable as they become due hereunder.

         D.       For all expenses incurred in releasing the Premises, including
                  leasing  commissions,  reasonable attorneys fees, and costs of
                  alteration  or  repairs,  which  shall be payable by Tenant as
                  they are incurred by Landlord; and

         E.       While the Premises are subject to any new lease or leases made
                  pursuant to this Section,  for the amount by which the monthly
                  installments  payable  under  such new lease or leases is less
                  than the monthly  installment for all charges payable pursuant
                  to this Lease, which deficiencies shall be payable monthly.

Notwithstanding  Landlord's  election to terminate  Tenant's right to possession
only, and notwithstanding any reletting without  termination,  Landlord,  at any
time  thereafter,  may elect to terminate this Lease, and to recover (in lieu of
the amounts which would thereafter be payable pursuant to the foregoing, but not
in diminution of the amounts payable as provided above before  termination),  as
damages for loss of bargain and not as a penalty,  an aggregate sum equal to the
present value of the amount by which the rental value of the portion of the term
unexpired  at the time of such  election  is less  than an  amount  equal to the
unpaid base rent and  additional  rent,  and all other  charges which would have
been payable by Tenant for the unexpired portion of the term of this Lease which
deficiency and all expenses incident thereto,  including commissions,  attorneys
fees,  expenses of alterations  and repairs,  shall be due to Landlord as of the
time Landlord  exercises  said election,  notwithstanding  that the term had not
expired.  If Landlord,  after such reentry,  leases the Premises,  then the rent
payable under such new lease shall be conclusive evidence of the rental value of
the unexpired portion of the term of this Lease.

If this Lease shall be  terminated  by reason of  bankruptcy  or  insolvency  of
Tenant, Landlord shall be entitled to recover from Tenant or Tenant's estate, as
liquidated  damages  for  loss of  bargain  and  not as a  penalty,  the  amount
determined by the immediately preceding paragraph.

11.3  LANDLORD'S  RIGHT TO PERFORM FOR ACCOUNT OF TENANT.  If Tenant shall be in
Default  under this  Lease,  Landlord  may cure the  Default at any time for the
account and at the expense of Tenant. If Landlord cures a Default on the part of
Tenant,  Tenant shall reimburse  Landlord upon demand for any amount expended by
Landlord in connection with the cure, including, without limitation,  attorneys'
fees and interest.

                                       15




11.6  INTEREST,  ATTORNEY'S  FEES AND LATE CHARGE.  In the event of a Default by
Tenant:  (1) if a monetary  default,  interest  shall  accrue on any sum due and
unpaid  at the rate of the  lesser  of  fifteen  percent  (15%) per annum or the
highest  rate  permitted  by law and,  if  Landlord  places  in the  hands of an
attorney the enforcement of all or any part of this Lease, the collection of any
rent due or to become due or recovery of the possession of the Premises,  Tenant
agrees to pay Landlord's costs of collection,  including  reasonable  attorney's
fees for the services of the  attorney,  whether suit is actually  filed or not.
Other  remedies for  nonpayment of rent  notwithstanding,  if the monthly rental
payment or any other  payment due from  Tenant to  Landlord  is not  received by
Landlord  on or before  the tenth  (10th) day of the month for which the rent is
due, a late  payment  charge of five  percent (5%) of such past due amount shall
become due and payable in addition to such amounts owed under this Lease.

11.5     ADDITIONAL REMEDIES, WAIVERS, ETC.

         A.       The rights and  remedies of Landlord set forth herein shall be
                  in addition  to any other  right and remedy now and  hereafter
                  provided by law. All rights and remedies  shall be  cumulative
                  and not  exclusive  of each other.  Landlord  may exercise its
                  rights and remedies at any times, in any order, to any extent,
                  and as often as Landlord  deems  advisable  without  regard to
                  whether the exercise of one right or remedy precedes,  concurs
                  with or succeeds the exercise of another.

         B.       A single or partial  exercise  of a right or remedy  shall not
                  preclude  a  further  exercise  thereof,  or the  exercise  of
                  another right or remedy from time to time.

         C.       No delay or  omission by  Landlord  in  exercising  a right or
                  remedy shall exhaust or impair the same or constitute a waiver
                  of, or acquiesce to, a Default.

         D.       No  waiver of  Default  shall  extend  to or affect  any other
                  Default or impair any right or remedy with respect thereto.

         E.       No action or inaction by Landlord shall constitute a waiver of
                  Default.

         F.       No  waiver  of a Default  shalt be  effective  unless it is in
                  writing and signed by Landlord.


                  ARTICLE 12 RELOCATION (Intentionally Omitted)


               ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES

                                       16




13.1  ENTIRE  AGREEMENT.  IT  IS  EXPRESSLY  AGREED  BY  TENANT,  AS A  MATERIAL
CONSIDERATION  FOR THE  EXECUTION  OF THIS  LEASE,  THAT  THIS  LEASE,  WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC  DOCUMENTS,  IS THE ENTIRE AGREEMENT OF
THE  PARTIES;  AND  THAT  THERE  ARE,  AND  WERE,  NO  VERBAL   REPRESENTATIONS,
WARRANTIES,  UNDERSTANDINGS,  STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO
THIS LEASE, EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE.

13.2  AMENDMENT.  THIS LEASE MAY NOT BE  ALTERED,  WAIVED,  AMENDED OR  EXTENDED
EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT.

13.3  LIMITATION OF WARRANTIES.  LANDLORD AND TENANT  EXPRESSLY AGREE THAT THERE
ARE AND SHALL BE NO IMPLIED WARRANTIES OR MERCHANTABILITY, HABITABILITY, FITNESS
FOR A  PARTICULAR  PURPOSE OR OF ANY OTHER KIND  ARISING OUT OF THIS LEASE,  AND
THERE ARE NO WARRANTIES  WHICH EXTEND  BEYOND THOSE  EXPRESSLY SET FORTH IN THIS
LEASE.


                            ARTICLE 14. MISCELLANEOUS

14.1  SUCCESSORS AND ASSIGNS.  This Lease shall be binding upon and inure to the
benefit  of  Landlord   and  Tenant  and  their   respective   heirs,   personal
representatives, successors and assigns. It is hereby covenanted and agreed that
should Landlord's  interest in the Premises cease to exist for any reason during
this  Lease,  then  notwithstanding  the  happening  of such  event  this  Lease
nevertheless  shall remain  unimpaired and in full force and effect,  and Tenant
hereunder agrees to attorn to the then owner of the Premises.

14.2 USE OR RENT TAX. If applicable in the  jurisdiction  where the Premises are
issued,  Tenant  shall pay and be liable for all rental,  sales and use taxes or
other  similar  taxes,  if any,  levied or imposed by any city,  state county or
other governmental body having authority, such payments to be in addition to all
other  payments  required to be paid to Landlord  under the terms of this Lease.
Any such  payment  shalt be paid  concurrently  with the  payment  of the  rent,
additional rent,  operating expenses or other charge upon which the tax is based
as set forth above.

14.3 ACT OF GOD.  Landlord  shall not be  required  to perform  any  covenant or
obligation  in this  Lease,  or be liable in damages  to Tenant,  so long as the
performance or non-performance of the covenant or obligation is delayed,  caused
or prevented by an act of God, force majeure or by Tenant.

14.4 HEADINGS. The section headings appearing in this Lease are inserted only as
a matter of convenience  and in no way define,  limit,  Construe or describe the
scope or intent of any Section.

                                       17




14.5 NOTICE.  All rent and other payments required to be made by Tenant shall be
payable to  Landlord  at the  address  set forth in Section  1.8.  All  payments
required to be made by  Landlord  to Tenant  shall be payable at the address set
forth in Section 1.8, or at any other address within the United States as Tenant
may specify from time to time by written notice. Any notice or document required
or  permitted  to be  delivered by the terms of this Lease shalt be deemed to be
delivered  (whether or not actually  received) upon actual  delivery or 48 hours
after deposit in the United States Mail, postage prepaid, certified mail, return
receipt  requested,  addressed to the parties at the  respective  addresses  set
forth in Section 1.8.

14.6 TENANT'S AUTHORITY. If Tenant executes this Lease as a corporation, each of
the persons  executing  this Lease on behalf of Tenant  does  hereby  personally
represent and warrant that each such person signing on behalf of the corporation
is authorized to do so.

14.7 HAZARDOUS SUBSTANCES.  Tenant, its agents or employees,  shall not bring or
permit to  remain  on the  Premises  or  Building  any  asbestos,  petroleum  or
petroleum  products,  explosives,  toxic  materials,  or  substances  defined as
hazardous  wastes,  hazardous  materials,  or  hazardous  substances  under  any
federal,  state, or local law or regulation ("Hazardous  Materials"),  except in
compliance with applicable  environmental and other laws.  Tenant's violation of
the  foregoing  prohibition  shalt  constitute  a material  breach  and  default
hereunder and Tenant shall indemnify, hold harmless and defend Landlord from and
against  any  claims,  damages,  penalties,  liabilities,  and costs  (including
reasonable  attorney  fees and court  costs)  caused by or arising  out of (i) a
violation  of the  foregoing  prohibition  by Tenant or (ii) the presence of any
Hazardous  Materials on, under, or about the Premises or the Building during the
term of the Lease caused by or arising,  in whole or in part, out of the actions
of Tenant, its agents or employees. Tenant shall clean up, remove, remediate and
repair any soil or ground water  contamination and damage caused by the presence
and any release of any  Hazardous  Materials in, on, under or about the Premises
or the Building  during the term of the Lease caused by or arising,  in whole or
in part, out of the actions of Tenant,  its agents or employees,  in conformance
with the requirements of applicable law. Tenant shall  immediately give Landlord
written notice of any suspected  breach of this paragraph;  upon learning of the
presence of any  release of any  Hazardous  Materials,  and upon  receiving  any
notices from governmental  agencies  pertaining to Hazardous Materials which may
affect the Premises or the Building.  The obligations of Tenant  hereunder shalt
survive the expiration of earlier termination, for any reason, of this Lease.

14.8 SEVERABILITY.  If any provision of this Lease or the application thereof to
any person or circumstances shall be invalid or unenforceable to any extent, the
remainder of this Lease and the  application of such provisions to other persons
or  circumstances  shall not be  affected  thereby  and shall be enforced to the
greatest extent permitted by law.

14.9 LANDLORD'S LIABILITY. If Landlord shall be in default under this Lease and,
if as a  consequence  of such  default,  Tenant shalt  recover a money  judgment
against

                                       18




Landlord,  such  judgment  shall be satisfied  only out of the right,  title and
interest of Landlord in the Building, as the same may then be encumbered,  or by
offset against rents, and neither  Landlord nor any person or entity  comprising
Landlord shall be liable for any  deficiency.  In no event shall Tenant have the
right to levy  execution  against any  property  of  Landlord  nor any person or
entity comprising Landlord other than the rents and its interest in the Building
as herein expressly provided.

14.10  BROKERAGE.  Landlord and Tenant each represents and warrants to the other
that there is no obligation to pay any brokerage fee,  commission,  finder's fee
or other similar  charge in connection  with this Lease,  other than fees due to
PHIL SIMONET OF PARAMOUNT REAL ESTATE  CORPORATION which are the  responsibility
of  Landlord.  Each party  covenants  that it will  defend,  indemnify  and hold
harmless  the other party from and against  any loss or  liability  by reason of
brokerage or similar  services alleged to have been rendered to, at the instance
of, or agreed upon by said indemnifying party.  Notwithstanding  anything herein
to the contrary,  Landlord and Tenant agree that there shalt be no brokerage fee
or commission due on expansions, options or renewals by Tenant.

14.11  MANAGEMENT  AGENT.  Landlord  hereby  notifies  Tenant  that  the  person
authorized to execute this Lease and manage the Premises is CSM  Corporation , a
Minnesota  corporation,  which has been appointed to act as the agent in leasing
management  and  operation of the Building for owner and is authorized to accept
services  of process  and  receive or give  receipts  for notices and demands on
behalf of  Landlord.  Landlord  reserves  the right to change the  identity  and
status of its duly authorized agent upon written notice to Tenant.

14.12 SUBMISSION OF LEASE. Submission of this Lease to Tenant for signature does
not constitute a reservation  of space or an option to Lease.  This Lease is not
effective until execution by and delivery to both Landlord and Tenant.

14.13  CONSTRUCTION  PROVISIONS.  All of the work to be  performed  by  Landlord
pursuant to Section 1.3 hereof shall be performed in  accordance  with the plans
and specifications approved by Tenant in accordance with Section 6.1 hereof in a
good and workmanlike manner,  utilizing new and first-grade materials;  shall be
in conformity  with all applicable  federal,  state and local laws,  ordinances,
regulations,  building  codes  and  fire  regulations;  shall  comply  with  all
insurance  requirements  of Landlord and Tenant;  and shall be free of any liens
for labor and materials.  Landlord shall use all reasonable  efforts to complete
such construction on or before the Commencement Date.

For the period  commencing as of the Commencement Date and ending on the day one
(1) year thereafter Landlord will correct and/or repair or cause to be corrected
and/or repaired any latent or non-obvious defect malfunction or failure in or of
construction workmanship material or operation of the Premises provided any such
defect  malfunction or failure is not the result of any work performed by Tenant
or on Tenant's  behalf and is not caused by any act or  negligence of Tenant its
employees or contractors.

                                       19




At the expiration of the one (1) year period Landlord shall assign to Tenant all
guaranties and warranties  made by any contractor  subcontractor  or materialmen
with respect to the Premises and  thereafter  Tenant shall have the right at its
option to  enforce  all such  guaranties  and  warranties  in its name  directly
against the warrantor.  Landlord agrees to exercise good faith efforts to obtain
contractor/subcontractor  warranties  longer than one (1) year to the extent the
same are available without additional cost.

As to items which  Tenant has  notified  Landlord  are  defective  and which are
covered by referenced Landlord warranty Landlord shall proceed expeditiously and
in good faith to  complete  and repair any such items.  As a  condition  thereof
Tenant shall allow  Landlord  its  employees  or  contractors  to enter upon the
Premises  to  perform  any  remedial  work  required  to be  performed  and will
cooperate  with Landlord its employees or contractors so that such remedial work
can be accomplished as quickly as is reasonable under the circumstances and with
the least amount of interruption to the business of the Tenant.

Occupancy of the Premises by Tenant for conducting its business shall constitute
an acknowledgment by Tenant and shall be presumptive  evidence that the Premises
are in the  condition  called for by this Lease and that  Landlord has performed
all of the construction  work it is obligated to perform pursuant to Section 1.3
hereof  except for such items  which are not  completed  and as to which  Tenant
shall have given notice to Landlord  within  thirty (30) days after Tenant takes
possession  of the  Premises  (the  "Punchlist")  and  subject  to any latent or
non-obvious  defects  malfunctions or failures covered by the foregoing warranty
by Landlord.  Landlord shall proceed expeditiously and in good faith to complete
and repair all items set forth on the Punchlist.

In the event of any  dispute  between  Landlord  and  Tenant as to  whether  the
Premises are  substantially  complete and ready for  occupancy by Tenant for the
conduct  of  Tenant's  business  or as to any other  claim by Tenant  based upon
Landlord's warranties and construction obligations contained herein such dispute
shall be resolved by  arbitration  in accordance  with the rules of the American
Arbitration  Association or in accordance with such other procedures as shall be
mutually  approved  by the  parties.  In no event  shall the  Premises be deemed
substantially  complete and ready for occupancy by Tenant until a certificate of
occupancy  (temporary or  permanent)  (or if  certificates  of occupancy are not
issued by the  municipality an equivalent final  inspection  report  authorizing
Tenant's occupancy and use of the property) has been issued by the city in which
the Premises are located. Landlord agrees to exercise every reasonable effort to
obtain a final certificate of occupancy as soon as possible following completion
of the Premises.

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

LANDLORD:                                             TENANT:

CSM CORPORATION                                       DYNAMARK, INC.

                                       20




BY: ________________________                          BY: /s/ James R. Schoeller

ITS:  Vice President                                  ITS: Senior Vice President

                                       21

                            FIRST AMENDMENT TO LEASE


THIS  FIRST  AMENDMENT  TO LEASE  is made  and  entered  into  this  24th day of
September,  1997,  by and between  CSM  Corporation,  a  Minnesota  corporation,
("Landlord") and Dynamark, Inc., a Minnesota corporation, ("Tenant").


                                    RECITALS

First:  The  Landlord  and Tenant  entered  into a lease dated  March 11,  1997,
covering certain  premises located at 4265 Lexington Avenue North,  Arden Hills,
Minnesota (the "Lease").

Second:  The parties have  executed  this First  Amendment to Lease,  to confirm
their agreement concerning certain makers related thereto;


                                    AGREEMENT

In  consideration  of the above stated  premises,  the mutual  covenants  herein
contained,  and for other good and valuable  consideration,  Landlord and Tenant
hereby agree as follows:

1. Lease Term.  Notwithstanding anything in the Lease to the contrary,  Landlord
and Tenant agree that the Initial Term of the Lease commenced on August 14, 1997
("Commencement  Date") and will  terminate on December 31, 2006,  unless  sooner
terminated as provided in the Lease.

2. Landlord Improvements. The Landlord and Tenant agree that the total increased
costs incurred by Landlord, and to be reimbursed by Tenant,  pursuant to Section
6.1 of the Lease, were Ninety Thousand and no/100 ($90,000.00) Dollars, and that
the Tenant shall reimburse  Landlord for such increased costs by paying Landlord
three  installments  of Thirty  Thousand  and no/100  ($30,000.00)  each,  which
installments shall be paid on October 1, 1997,  November 1, 1997 and December 1,
1997.

3.  Miscellaneous.  Except as expressly  stated  herein,  the Lease shall remain
unchanged and in full force and effect.


LANDLORD:                                             TENANT:

CSM CORPORATION                                       DYNAMARK, INC.

BY:                                                   BY: /s/ James R. Schoeller
   ----------------------                                 ----------------------

ITS:  Vice President                                  ITS: Senior Vice President


                                                                   EXHIBIT 10.37



      The asterisks in this document indicate where the confidential portions
            have been omitted pursuant to a request for confidential
        treatment. The request for confidential treatment has been filed
                         separately with the Commission.

                                                                October 29, 1997
                                                                    Page 1 of 27


                            CHASE DATABASE AGREEMENT


         This  Agreement is made and entered into as of October 1, 1997,  by and
among  DynaMark,  Inc.  a  Minnesota  corporation  (hereinafter  referred  to as
"DynaMark"),  and Chase Manhattan Bank USA, National  Association,  (hereinafter
referred to as "Customer").

                                    RECITALS:

         WHEREAS,  DynaMark  will  design,  develop,  produce and operate as set
forth  herein a database  for use by  Customer  for  analysis  and  modeling  in
connection with targeting potential customers for its products and services (the
"Chase Database"). The Chase Database as further defined below, will be the sole
and  exclusive  property of Customer,  including but not limited to, any and all
intellectual  property rights inherent in and appurtenant to the Chase Database,
although the Chase Database  shall be physically  maintained at DynaMark as part
of the services DynaMark provides hereunder; and

         WHEREAS,  DynaMark will bear the costs of designing and  developing the
Chase Database in consideration of Customer's  agreement to utilize the services
of DynaMark,  in conjunction  with the Chase  Database,  for an initial five (5)
year term as set forth herein.

         WHEREAS,  Customer  during  the term of the  Agreement  desires to have
DynaMark design,  produce and operate the Chase Database and to obtain a license
to use DynaLink(R) Database Access PC software  (hereinafter  referred to as the
"DynaLink(R)  Software") and on-line analytical  processing ("OLAP") software to
access the data in the Chase Database.

         WHEREAS,  Customer  desires to license the  DynaLink(R)  Software which
DynaMark has  developed and which may be used by Customer in order to access the
Chase  Database at DynaMark as well as certain  other Third Party  software (the
DynaLink(R) Software and Third Party software sometimes  collectively called the
"Access Software") to access the data in the Chase Database;

         NOW,  THEREFORE,  in  consideration  of the foregoing  recitals and the
obligations  herein made and undertaken,  and intending to be legally bound, the
parties hereto covenant and agree as follows:


                                                                October 29, 1997
                                                                    Page 2 of 27

SECTION 1.      DEFINITIONS.

         1.1 Certain  Defined Terms.  The following terms used in this Agreement
shall have the following meanings:

         "Access  Software" means the Third Party software (*) or other software
developed by DynaMark that DynaMark  provides to Customer for use by Customer to
access data in the Chase  Database  maintained  at DynaMark.  The term  "access"
refers to Customer  extracting,  viewing or displaying data which resides in the
Chase  Database in such a way that supports data  analysis  and/or  selection of
marketing  populations,  but which  will not be  deemed to result in  Customer's
having  received any consumer  credit report or any  identifying  information on
individual consumers contained in any consumer credit report.

         "Affiliate"  means with respect to a person,  another person controlled
by, controlling or under common control with that person.  Control exists when a
person  directly  or  indirectly  owns  fifty  percent  (50%)  or  more  of  the
outstanding  shares  or  securities  (representing  the  right  to vote  for the
election of directors or other managing  authority) of another person,  but such
person shall be deemed an Affiliate only so long as such ownership exists.

         "Business Day" means a day Monday to Friday,  inclusive,  but excluding
holidays  recognized  by  DynaMark  and days on which  banks in New York are not
authorized  or  permitted  by law or  regulation  to be open for business to the
public.

         "Compiled Data" means all the data included in the Chase Database,  and
which is either (1) Imported Data stored without  modification from its original
source  (which may be either  Customer,  DynaMark  as agent for a Third Party or
Third Party) or (2) data calculated or derived from Imported Data.

         "Custom  Software" shall have the meaning ascribed to it in Section 8.2
hereof.

         "Customer's  Computer Site" refers to the Customer's  computer  network
system  located in a building from which  Customer  conducts its business in the
continental  United States of America or the Servicer's  computer network system
located in a building  from which  Servicer  conducts  its business and supports
Customer in the  continental  United  States of America.  The current  number of
Customer's  Computer Sites at which the Access Software may be used is set forth
on the Chase  Database  Fee Schedule  annexed as Exhibit C hereto,  which may be
amended  from time to time as  provided  in  Section 3  hereof.  The  Customer's
Computer  Site(s)  may  include  but is not  limited  to  Customer's  office  in
Hicksville, New York or Customer's office in Wilmington, Delaware.

         "Database Management Software" or "DBMS Software" means the Third Party
software in which the Chase  Database will be  implemented  and which resides on
the hardware located at DynaMark, and which executes within the 


                                                                October 29, 1997
                                                                    Page 3 of 27

operating system functioning on that hardware. DBMS Software is a type of Access
Software.

         "Date of Execution"  means,  as applicable,  the date or dates on which
this  document or any  subsequent  Addenda  shall have been signed by authorized
representatives of both parties.

         "Exported Data" means the data selected and obtained by or on behalf of
Customer from the Chase Database.

         "Imported  Data"  means the  agreed  upon data  which is  selected  and
obtained on behalf of or by Customer and  provided to DynaMark for  inclusion in
the Chase Database.

         "Party" refers to a party to this Agreement.

         "Person"   includes  any  individual,   company,   corporation,   firm,
partnership, joint venture, association, organization, trust, state or agency of
a state (in each case,  whether or not having separate legal  personality),  and
its successors and assigns.

         "Chase Database" means:

         (i)     all Compiled Data,

         (ii)    the atomic  database  in which  data is stored in its  smallest
                 discrete parts,

         (iii)   the business  relationships and rules by which the atomic parts
                 of the data may be reassembled,

         (iv)    the data tables and files,  into which data is  organized,  

         (v)     the data model consisting of the design of the database and the
                 tables  that will be  implemented  in the  Database  Management
                 Software,  

         (vi)    the set of  business  relationships  which  allow  Customer  to
                 further  review and analyze data (known as star  schema)  which
                 include the  metadata and the  analysis  which  resulted in the
                 metadata;  and 

         (vii)   those  portions  of Custom  Software  which  permit  data to be
                 loaded or extracted  from the Chase  Database and which perform
                 the editing and cleaning processes on the data within the Chase
                 Database.

         "*Software" means the Third Party Database Management Software in which
the Chase  Database  has been  implemented  and which  resides  on the  hardware
located at  DynaMark.  The * Software  is used to  organize  the data within the
Chase  Database and enables  communication  between the Access  Software and the
Chase Database.

         "Service  Request  Form"  refers  to a form to be used by  Customer  to
request additional services offered by DynaMark (current form is attached hereto
as Exhibit "A").


                                                                October 29, 1997
                                                                    Page 4 of 27

         "Servicer"  refers to The Chase  Manhattan  Bank and/or Chase  Bankcard
Services, Inc., each of which is an Affiliate of Customer that provides services
to Customer in support of its credit  related  products and services;  and, such
other Affiliate of Customer that provides services to Customer in support of its
credit  related  products and services  that  Customer  designates in writing to
DynaMark.

         "Third Party" refers to a Person who is not a Party to this Agreement.


SECTION 2.  CHASE DATABASE DEVELOPMENT.


         2.1 Chase  Database  Description.  (a)  DynaMark  will  develop for use
exclusively  by Customer and its Servicers on behalf of Customer (by the Date of
Execution)  the Chase Database which shall be organized into a set of modules as
described  in  Exhibit  B  hereto,  which is  incorporated  into and made a part
hereof,  populated  with data  supplied by or on behalf of  Customer  for use in
connection with Chase Database. * While maintained at DynaMark,  DynaMark agrees
that it shall provide  Customer  Access Software that can be used by Customer to
access the Chase Database.

                  (b)  Population  of Chase  Database.  The modules of the Chase
Database  shall be  populated  with  Imported  Data which  shall be  obtained by
Customer or at the request of and on behalf of Customer. The Imported Data shall
be provided to DynaMark by or on behalf of Customer in a format  mutually agreed
upon by the Parties and with agreed upon frequency.  Customer is responsible for
ensuring  that the  Third  Parties  from  which  Customer  obtains  data for use
hereunder,  including the Imported  Data,  transmit such data to DynaMark in the
agreed upon format.

                  (c) Agreements with National Consumer Reporting Agencies. *


         2.2  Additional  Modules.  Customer  may  request  to have  modules  in
addition  to those  listed on  Exhibit B  developed  by  DynaMark  for  Customer
pursuant to a written  request.  All terms and conditions set forth herein shall
apply to such additional modules to the Chase Database developed by DynaMark for
Customer, unless expressly agreed in writing otherwise.

         2.3 Project Description. The Chase Database project will consist of the
three (3) phases  described in the Task  Listing  attached as Appendix A hereto.
During the three  phases of the  project,  the  Parties  will  perform the tasks
listed on the Task  Listing  attached as Appendix A. The Parties  agree that the
dates in the Task  Listing  may  require  revisions  to the  date(s) of expected
completion  of  subsequent  tasks in the event  Customer  instructs  DynaMark to
undertake  additional or varied tasks or by delays  caused by Customer,  a Third
Party or any cause beyond DynaMark's reasonable control in completion of earlier
tasks.  The Parties  will use their best  efforts to honor any final  completion
date(s) mutually agreed upon by them in writing.



                                                                October 29, 1997
                                                                    Page 5 of 27


SECTION 3.  LICENSE.

         3.1 Software License.  From the Date of Execution,  through the term of
this  Agreement,  DynaMark  grants  Customer a  non-transferable,  non-exclusive
license for Customer,  its Servicers or persons performing services on behalf of
Customer to use the * software at  Customer's  Computer  Site to access only the
data in the  Chase  Database  at  DynaMark.  DynaMark  also  grants  Customer  a
non-transferable,  non-exclusive license for Customer,  its Servicers or persons
performing  services on behalf of  Customer  to use the * , the * software,  and
other Access Software  identified in Section C (Access  Software Access Charges)
of the Chase  Database  Fee  Schedule  annexed as Exhibit C hereto  installed at
DynaMark to access the Chase  Database at  DynaMark,  only.  This * software and
other Access Software  identified in Section C (Access  Software Access Charges)
of  Exhibit  C is  licensed  to  DynaMark  by Third  Parties.  The API front end
(personal  computer)  interface of the * software may be installed at Customer's
Computer Site and is hereby  sub-licensed  to Customer by DynaMark only for such
purpose. The number of employees of Customer or its Servicers who are authorized
to use the * Software, and/or the other Access Software, the number of computers
and sites on which said software may be used is set forth on the Chase  Database
Fee Schedule annexed as Exhibit C hereto,  which is incorporated into and made a
part  hereof.  Customer  agrees that the Access  Software  shall only be used as
expressly licensed in this Agreement. This license may be terminated by DynaMark
upon sixty days prior  written  notice to Customer if Customer  has breached any
material  provision of this Agreement and the breach  remains  unremedied at the
close of this notice period.  Upon such  termination of the license by DynaMark,
the Agreement also terminates and Customer may request transition services under
Section 6.4 (Termination For Cause-Transition Services).

         3.2 Limits on Usage.  The manner in which  Customer  and its  Servicers
access and  populate  the Chase  Database or direct  that the Chase  Database be
populated  shall comply with the FCRA.  Customer and its Servicers shall use the
Chase  Database in a manner  that  complies  with the FCRA and the Equal  Credit
Opportunity  Act and  Regulation B thereto.  Customer shall prohibit each of its
Servicers from accessing any data in the Chase Data which under the FCRA may not
be shared with  Customer's  Affiliate.  Customer  may make a back-up copy of the
Access  Software  provided to Customer  by  DynaMark  for use at the  Customer's
Computer Site and other than written materials for the DynaLink Software, agrees
not to make  copies  of any of the  written  material  for the  Access  Software
provided by DynaMark.  Customer and its Servicers shall not modify, disassemble,
decompile,  or reverse engineer any of the Access Software;  and may not attempt
to disclose, transfer, sell, sublease, assign or rent any of the Access Software
or any part or modification  thereof or work derived  therefrom.  Customer,  its
Servicers and Affiliates  shall not use any of the Access Software to access any
data at DynaMark which is not in the Chase Database.  Customer and its Servicers
shall not use any of the Access  Software in a  time-sharing  or service  bureau
environment,  which  shall  not  include  use by a  Servicer  on the  Servicer's



                                                                October 29, 1997
                                                                    Page 6 of 27

computer network system to support Customer, or for the processing,  tracking or
analysis of data  associated  with the accounts or  prospects of others  without
DynaMark's permission.

         3.3 Access  Software  Maintenance.  Customer  will  without  additional
charge receive prompt  corrections of any problems in the Access  Software,  the
DBMS Software and Custom Software as applicable,  and which significantly affect
the functioning of the Access Software, the DBMS Software and Custom Software as
applicable  in  accessing  data in the  Chase  Database  at  DynaMark  or  which
significantly  impair the Customer's use of the Chase Database at DynaMark while
it is maintained by DynaMark (an "Error"). DynaMark must be promptly notified of
the Error and Customer agrees to cooperate,  to the extent reasonably  possible,
with  DynaMark  and help  DynaMark  duplicate  the  problem.  DynaMark  will use
reasonable  efforts  to provide  Customer  with a cure to an Error in the Access
Software,  the DBMS  Software  and Custom  Software as  applicable,  provided to
Customer  hereunder  as soon  as is  reasonably  practicable  after  receipt  of
Customer's  notice  thereof.  Corrections  will be made by DynaMark  and must be
promptly  installed  once Customer  receives such  correction.  If repair of the
Error is not effective after three attempts, then DynaMark will use commercially
reasonable efforts to obtain replacement for such defective Access Software, the
DBMS Software or Custom  Software as  applicable,  and if it is unable to do so,
the  parties  will (to the extent  possible)  utilize a previous  release of the
affected  Access  Software,  the DBMS  Software or Custom  Software.  DynaMark's
obligation  to correct any Error in the Access  Software,  the DBMS Software and
Custom Software does not include, and Customer specifically assumes the cost of,
the  following:  (a) to the  extent  any loss is  attributable  to the  fault or
negligence  of Customer;  (b) failure to operate the Access  Software,  the DBMS
Software or Custom  Software in accordance with operating  instructions;  or (c)
problem affected by Customer-modified  portions of the Access Software, the DBMS
Software or Custom Software without DynaMark's  consent.  Corrections for Errors
substantially  caused by Customer's actions,  negligence or unauthorized changes
in the Access Software,  the DBMS Software or Custom Software shall be billed at
DynaMark's  standard  time and material  charges.  Customer may receive and must
promptly  install  any  updated  versions  of the  Access  Software  or the DBMS
Software it receives which do not  significantly  interfere with Customer's then
current  use of  such  Access  Software  ("Updates").  Should  Customer  fail to
implement such Updates, Customer shall, if requested by DynaMark, be required to
pay  some  additional  reasonable  fee to  resume  support  and  maintenance  of
back-level versions of the Access Software and the DBMS Software. Customer shall
be responsible  for acquiring and paying for the hardware and software  required
for it to use the Access  Software,  the DBMS  Software  and Custom  Software at
Customer's Computer Site and shall stop using the Access Software and return all
copies of the Access  Software and  associated  materials  to DynaMark  upon the
expiration or termination of this Agreement.

In the event that DynaMark is unable to repair an Error after three attempts, it
shall use all reasonable  efforts to obtain  replacement  Access Software,  DBMS
Software or Custom Software as applicable,  which performs substantially similar
functions as the Access Software,  DBMS Software or Custom Software replaced




                                                                October 29, 1997
                                                                    Page 7 of 27

and will not substantially disrupt Customer access of the Chase Database. In the
event an Error  attributable to DynaMark cannot be repaired after three attempts
or the Access Software DBMS Software or Custom  Software  replaced or a previous
release of the subject Access Software, DBMS Software or Custom Software can not
be utilized,  DynaMark shall be liable for direct damages actually  sustained by
Customer as a result of such Error attributable to DynaMark.

DynaMark  will as set forth in Section C (i)  Customer  Payment For Software and
Equipment of Exhibit C (Chase  Database  Fees) hereto,  arrange for  maintenance
including  Updates and Error  correction or hardware  malfunction  correction of
therein referenced software and dedicated hardware.

3.4 License and Use By Affiliates.  Customer reserves the right to request,  and
DynaMark  agrees  that it shall  grant,  additional  licenses  to use the Access
Software to any Affiliate of Customer for the sole purpose of that  Affiliate of
Customer accessing only the data in the Chase Database; provided, that any grant
of such license shall be conditioned upon the approval of the Third Party Access
Software  provider to so  increase or decrease  the number of licenses or sites;
payment by Customer  of agreed  amounts  for  additional  licenses to the Access
Software,  and written  agreement to be bound by the terms of this  Agreement by
each such  Affiliate of Customer,  including  provision  that  DynaMark can seek
redress directly from the applicable  Affiliate of Customer in event of material
breach of the terms of this  Agreement by said  Affiliate of Customer.  Customer
further  agrees  that it  reserves  the right by written  notice to  DynaMark to
request,  and  DynaMark  agrees that it shall agree to increase or decrease  the
number  of sites  and  Customer's  employees  with  access;  provided,  that its
agreement  to increase or decrease  the number of sites and  employees  shall be
conditioned  upon the  approval of the Third Party Access  Software  provider to
said increase or decrease and payment by Customer of agreed amount for increased
or  decreased  number of sites and  employees.  Exhibit C shall  then be amended
accordingly.  Customer  agrees  that it  shall  designate  a  representative  to
coordinate  requests for additional  licenses to the Access  Software as well as
requests for usage of or services  regarding the Chase Database by Affiliates of
Customer.

The  Customer's  Affiliates  shall be  permitted by Customer to access only that
data in the Chase  Database  which may be shared with its  Affiliates  under the
Fair Credit Reporting Act. All references to Customer in this Agreement shall be
deemed to include the  Affiliates of Customer who are licensed to use the Access
Software or to request services from DynaMark regarding the Chase Database.  The
Customer  representative  shall inform DynaMark,  in writing, if an Affiliate of
Customer  who is licensed to use the Access  Software  is  authorized  to obtain
services from DynaMark  regarding the Chase  Database and DynaMark shall subject
to the terms of this Agreement,  provide such Affiliate with such services which
shall be coordinated  through the  designated  Customer  representative.  Unless
otherwise  agreed by the parties,  Customer  shall be invoiced for and shall pay
all fees due for license, access and use of the Chase Database by the Affiliates
of Customer and for services from DynaMark regarding the Chase Database obtained
by the Affiliates of Customer.

                                                                October 29, 1997
                                                                    Page 8 of 27

SECTION 4.   CHASE DATABASE SERVICES.

         4.1 Chase  Database  Services.  The  "Chase  Database  Services"  shall
consist  of  DynaMark  loading  the  Imported  Data  received  into the  modules
described  in Exhibit B hereto  and  executing  the  directions  transmitted  to
DynaMark by Customer  with respect to the data actions set forth on Exhibit C to
be taken as well as providing  maintenance  services  specified above in Section
3.3.  DynaMark shall take action that Customer requests it to take in connection
with the Chase  Database and the data therein.  DynaMark also shall maintain the
Chase Database at DynaMark in accordance with the security  procedures set forth
in Section 13 and the obligations regarding confidentiality in Sections 8 and 9.
DynaMark  further agrees to maintain,  fix or arrange for the maintenance of the
environment  and equipment on which the Chase  Database  resides,  at Customer's
expense as set forth in subpart (i) of Section C (Access SoftwareAccess Charges)
of  Exhibit  C as well as  providing  maintenance  services  specified  above in
Section 3.3.  DynaMark shall have no  responsibility or liability to Customer or
its Affiliates  with respect to the execution of data actions in connection with
the Chase  Database by or on behalf of Customer or an Affiliate or the execution
by  DynaMark  of data  actions  requested  by or on  behalf  of  Customer  or an
Affiliate  including  data  actions  that were  transmitted  by  Customer  or an
Affiliate  to DynaMark but not  intended by Customer or the  Affiliate,  or with
respect to the  execution of data actions  transmitted  to DynaMark on behalf of
Customer or a Affiliate  that were changed from what  Customer or the  Affiliate
intended.  DynaMark may terminate this Agreement,  in whole or part, upon thirty
days notice to Customer if: (i) the Customer has failed to deliver the necessary
data or specifications for DynaMark to provide Chase Database  Service(s) within
sixty (60) days of its receipt of written notice from DynaMark  specifying  such
failure to deliver requisite data or specifications

         4.2 Change And Control. Customer will in writing advise DynaMark of the
positions,  titles  and or  names of  those  persons  employed  by  Customer  or
Servicers  who are  authorized  to direct  DynaMark to execute  data  actions on
behalf of Customer which substantially  change the modules in the Chase Database
described  in Exhibit B, which  substantially  change the  functionality  of the
Access  Software,  or who are  authorized to submit  requests for services under
this Agreement.

         4.3  Inspection  and  Review.  Following  completion  of any service or
obligation by DynaMark,  Customer shall promptly and carefully test the data and
inspect  said  service  and  associated  reports  or output  and shall  promptly
identify  and advise  DynaMark  of any errors in said data,  service,  report or
output  (and in no  event  more  than 30 days  after  receipt).  Customer  shall
carefully inspect the Chase Database  including  without  limitation the modules
described  in  Exhibit  B into  which  it is  organized,  prior  to the  Date of
Execution and  periodically  thereafter in order for Customer to satisfy  itself
that the Chase Database complies with the FCRA.


                                                                October 29, 1997
                                                                    Page 9 of 27

         4.4  Performance  Standards For Chase Database  Services.  Early in the
term  of  this   Agreement,   DynaMark  and   Customer   shall  each  appoint  a
representative  to discuss and use best  efforts to reach  mutual  agreement  on
performance standards for DynaMark's performance hereunder of the Chase Database
Services,  and means of measuring the agreed upon performance  standards as well
as identifying  any remedies  available for the failure to meet or maintain such
performance standards. Such performance standards, and methods of measurement of
them may be modified over time by mutual  agreement of the parties.  The parties
shall agree to, and document,  priorities  and  accomplishments.  If the parties
have agreed upon performance  standards for DynaMark's  performance hereunder of
the Chase Database Services (the" Performance  Standards"),  method of measuring
the Performance Standards (the "Measurement"), and means of advising one another
of the  ongoing  results of such,  each such  Performance  Standard  shall be so
measured on an  unofficial  basis for three (3) months,  during  which time such
Performance  Standard(s) may be adjusted by mutual  agreement of all the parties
as necessary.  At the conclusion of the three (3) month period, each Performance
Standard for DynaMark's performance hereunder of the Chase Database Services and
the  Measurement of it as modified,  shall be deemed  "Official".  Each Official
Performance Standard shall thereafter be measured by the Official Measurement.

In the event that in any quarter, DynaMark fails to meet an Official Performance
Standard(s)  measured against its corresponding  Official  Measurement as agreed
upon by the parties  pursuant to this  Section 4.4  (Performance  Standards  For
Chase Database  Services),  Customer shall promptly and  specifically in writing
advise DynaMark of its ongoing  deficient  results on such Official  Performance
Standard and then DynaMark  shall apply a credit on its next invoice to Customer
in the amount of ten (10)  percent of all charges  billed to  Customer  directly
related to said deficient Official Performance Standard for the quarter in which
such Official  Performance Standard was not met. If DynaMark has been so advised
by  Customer  of its  ongoing  deficient  results on such  Official  Performance
Standard,  then the failure of DynaMark to meet Official  Performance  Standards
for two consecutive calendar quarters,  shall entitle Customer to terminate this
Agreement  upon thirty days written  notice to DynaMark  provided in  accordance
with Section 6.3 (Termination For Cause). Upon such notification, Customer shall
pay DynaMark all amounts then  properly due for services  provided  under and in
accordance  with this  Agreement,  up to and  including  the  effective  date of
termination.

4.6 Customer  Provided  Software.  Customer may request  that  DynaMark  install
certain software  acquired by Customer from a Third Party ("Customer  Software")
on the  Dedicated  Equipment  as  defined  in  Section  C of  Exhibit  C for use
hereunder.  If mutually agreed upon by the parties and technically  feasible for
DynaMark to do so, then  DynaMark  will  install  the  Customer  Software on the
Dedicated  Equipment for use hereunder by DynaMark and its Affiliates and by and
on  behalf  of  Customer.  Customer  represents  and  warrants  that  it owns or
possesses all rights and interests in the Customer Software as are necessary for
DynaMark to install the Customer Software on the Dedicated  Equipment for use by
Customer, its Servicers and Affiliates and by DynaMark and its Affiliates




                                                                October 29, 1997
                                                                   Page 10 of 27

hereunder,  and that this  installation and use of the hereunder of the Customer
Software shall not infringe upon the legally protected proprietary rights of any
Third Party.  Customer  represents and warrants that Customer will indemnify and
hold DynaMark, its Affiliates, and their agents and employees, harmless from any
loss,   damage  or  liability   (including   reasonable   attorney's  fees)  for
infringement  of any United  States patent  right,  copyright,  or other legally
protected  proprietary  right with  respect to the  installation  and use of the
Customer Software  hereunder so long as Customer is notified promptly in writing
and is given  authority and information  reasonably  required for the defense of
same.  Customer shall pay DynaMark  rates  mutually  agreed upon by Customer and
DynaMark for such installation of the Customer Software,  plus expenses incurred
in connection with the installation of the Customer Software.  Customer shall be
solely  responsible  for obtaining the rights  necessary for DynaMark to install
the  Customer  Software on the  Dedicated  Equipment  for use by  Customer,  its
Servicers and Affiliates and by DynaMark and its Affiliates hereunder.  Customer
shall be solely  responsible  for the costs of  acquiring  and  maintaining  the
Customer Software and for arranging for maintenance  including Updates and Error
correction of the Customer  Software.  The provision in Section 11.3 (Limitation
of Liability - Customer)  shall not be construed to in any way limit  Customer's
indemnification obligations as provided above in this Section 4.6. The indemnity
and  hold  harmless  obligations  of  Customer  in this  Section  shall  survive
termination of this Agreement.


SECTION 5.            DYNAMARK START-UP SERVICES.

         5.1 Start-up  Training  Sessions.  Early in the term of this Agreement,
DynaMark shall conduct for Customer, at a site selected by Customer the training
sessions as described in the Chase Database Task Listing attached as Appendix A.
During the term of this Agreement,  DynaMark shall also conduct for Customer, at
a site selected by Customer and at mutually  agreed upon times,  the  additional
training  sessions as itemized in the Chase Database Task Listing  (Appendix A).
Customer  will  be   responsible   for  the  expense   incurred  in  having  its
representatives  attend such training session  including but not limited to, the
cost of travel,  lodging,  and meals. This training will occur in the time frame
set forth in the Task  Listing  attached  as  Appendix  A,  unless  the  parties
mutually agree otherwise.

         5.2  DynaLink  Software  Documentation.  Within  60 days of the Date of
Execution,  DynaMark  shall  furnish  to  Customer  the  DynaLink  Software  and
documentation describing the features and functions of DynaLink Software.

         5.3 Assistance with Initial Chase Database  Access and  Implementation.
DynaMark  shall  supply to  Customer  telephone  assistance  in  installing  the
DynaLink  Software  and other  Access  Software and using it to access the Chase
Database.  Such telephone assistance shall be for * within 90 days subsequent to
the  Date  of  Commencement.   Thereafter,  a  reasonable  amount  of  telephone
assistance in using the Access Software to access the Chase  Database,  



                                                                October 29, 1997
                                                                   Page 11 of 27

shall be available to Customer  through the DynaMark  Technical  Helpline during
DynaMark's normal business hours on Business Days, at no additional charge.


SECTION 6.    TERM

         6.1 Term.  The  initial  term of this  Agreement  shall be from Date of
Execution  until five (5) years  from the Date of  Execution.  Thereafter,  this
Agreement shall automatically renew for successive terms of one year each unless
and until one party shall give to the other party written  notice of termination
at least  sixty  (60) days prior to the  conclusion  of the  then-current  term.
Notwithstanding anything in this Agreement to the contrary,  licenses granted to
Customer  for  use of  data  from a Third  Party  or  Third  Party  software  in
connection with this Agreement shall terminate  immediately  upon the expiration
or termination of the agreement  between DynaMark and the Third Party for use of
said  data  or  software.  In  event  of such  termination,  DynaMark  will  use
reasonable efforts to obtain replacement for such data or software.

*

The  parties  agree  that  these  Termination  Fees  are  reasonable  under  the
circumstances and that these termination fees have been carefully considered and
agreed  to by the  Parties  in view of the  difficulty  in  ascertaining  actual
damages  because of the  complexities  of the  transaction  and the  substantial
initial investment borne by DynaMark prior to the Date of Execution.


         6.2 Termination Due To Bankruptcy. Either party shall have the right to
immediately  suspend  or  terminate  this  Agreement  at  anytime  prior  to the
expiration  of its stated term with notice to the other party if the other party
ceases  operations or commences a voluntary  case under the  Bankruptcy  Code or
consents to or fails to contest in a timely and appropriate  manner any petition
filed  against  it in an  involuntary  case under the  Bankruptcy  Code or makes
assignments for the benefit of creditors or is unable to fulfill its obligations
under this  Agreement  due to  bankruptcy,  insolvency,  receivership,  or other
cessation  of its  activities  as an ongoing  business.  Termination  under this
Section 6.2 shall be effective  upon the other party's  receipt of notice issued
by the terminating party in accordance with this Section.

         6.3  Termination  For Cause.  (a) Either  party shall have the right to
immediately  terminate  this Agreement upon written notice to the other party in
event of the other party's material breach of its confidentiality obligations in
Section 8 (Confidential Treatment of Information) of this Agreement.

         (b) Additionally this Agreement may be terminated for cause pursuant to
and in  accordance  with  Section  3.1  (Software  License),  Section 4.1 (Chase
Database  Services),  Section  4.4  (Performance  Standards  For Chase  Database
Services)  and Section 7.3  (Payment)  upon written  notice issued in accordance
with Section 3.1, 4.1, 4.4 or 7.3 from the party  specified in Section 3.1, 4.1,
4.4 or 7.3 to the other.



                                                                October 29, 1997
                                                                   Page 12 of 27

         (c)  Termination  under this  Section 6.3 shall be  effective  upon the
other party's  receipt of notice issued by the  terminating  party in accordance
with this Section 6.3.  Termination  of this  Agreement in  accordance  with its
terms shall not, unless expressly  otherwise provided in this Agreement,  affect
any right accruing to or obligation of either party arising prior to termination
which by their terms are intended to survive.

         6.4  Termination  For  Cause-Transition  Services.  In the  event  of a
termination  of this  Agreement  by Customer  pursuant to Section 6.1 (Term) for
failure of DynaMark to to enter into at least one DynaMark  Agency  Agreement or
failure of DynaMark to maintain in effect at least one DynaMark Agency Agreement
during the term hereof while Customer  maintains in effect at least one National
Consumer   Reporting   Agency  -Chase  Agreement  or  pursuant  to  Section  6.2
(Termination  Due To Bankruptcy) or Section 6.3  (Termination  For Cause) above,
DynaMark shall upon receipt of Customer's written request,  furnish Customer all
copies,  in what ever  media,  partial or  complete,  of the Chase  Database  at
DynaMark, which shall include without limitation, the data in the Chase Database
from  DynaMark's  mainframe  computer  system  which will be  downloaded  to the
dedicated  hardware  equipment  described  in  Section  C of  Exhibit  C and the
Compiled Data in the Chase Database modules,  in the format compiled at the time
of such  termination.  DynaMark's  obligation  to  furnish  Customer  this Chase
Database data is subject to the Third Party data suppliers  express  approval of
such  provision  of such  portion  of the  Compiled  Data,  if  applicable;  and
DynaMark's  receipt of all payment properly due under and in accordance with the
terms of this Agreement,  up to and including the effective date of termination.
Such  payment  shall  include,  without  limitation,  full  payment of all costs
incurred or which  DynaMark is  contractually  committed to incur in  acquiring,
maintaining  and  updating  the  Dedicated  Equipment  and any  Other  Dedicated
Equipment  as those  terms are defined in Section C of Exhibit C which is leased
or  otherwise  acquired by DynaMark  under  Section C of Exhibit C that have not
already been billed to and paid by Customer,  including any payment required for
Customer to assume  assignment or ownership of the  Dedicated  Equipment and any
Other  Dedicated  Equipment or all costs related to acquiring,  maintaining  and
updating the Dedicated  Equipment and any Other  Dedicated  Equipment  that have
already been contractually committed to by DynaMark in accordance with the terms
hereof, if assignment or ownership  transfer is not permitted by the Third Party
provider. Customer agrees that it shall reimburse DynaMark for DynaMark's actual
cost to produce the Compiled  Data,  plus  expenses.  Upon  termination  of this
Agreement  pursuant to Section 6.2 or Section  6.3 above,  DynaMark  shall (upon
written  request from Customer) also provide  Customer with a copy of the Source
Code for the most  recent  version of any  Custom  Software;  provided  that the
payment  then  properly  due for the Custom  Software has been fully paid for by
Customer.   Additionally,   if  requested  by  Customer,  DynaMark  may  provide
assistance in the relocation of the Chase Database in a manner which facilitates
Customer's use of the Chase Database. Customer shall reimburse DynaMark's actual
reasonable  costs for all time spent by DynaMark  assisting in the relocation of
the Compiled Data from the Chase Database,  plus all reasonable  travel expenses
incurred by DynaMark in connection  therewith for travel that is  preapproved by
Customer.


                                                                October 29, 1997
                                                                   Page 13 of 27

         6.5  Other  Early  Termination.   In  circumstances  other  than  those
described  above in Section  6.1 (Term) for failure of DynaMark to to enter into
at least one  DynaMark  Agency  Agreement  or failure of DynaMark to maintain in
effect at least one DynaMark Agency  Agreement  during such time during the term
hereof  that  Customer  maintains  in  effect  at least  one  National  Consumer
Reporting  Agency  -Chase  Agreement  or in  Section  6.2  (Termination  Due  To
Bankruptcy)  or Section 6.3  (Termination  For  Cause),  this  Agreement  may be
terminated  prior to the  expiration  of its stated term by  Customer  providing
DynaMark  at  least  sixty  days  prior  written  notice  of  termination.  This
termination  shall  become  effective  within a mutually  agreed time  following
notification. In the event of termination under this Section 6.5, DynaMark shall
be, and  following  such  termination,  shall  remain  entitled to receive:  the
Termination Fee as set forth in Section 6.6 below,  payment from Customer of all
fees and charges  properly due  hereunder at the time of such  termination,  and
full payment of all costs incurred or which DynaMark is contractually  committed
to incur in acquiring,  maintaining and updating the Dedicated Equipment and any
Other  Dedicated  Equipment as those terms are defined in Section C of Exhibit C
which is leased or otherwise  acquired by DynaMark  under Section C of Exhibit C
that have not already been billed to and paid by Customer, including any payment
required  for  Customer  to assume  assignment  or  ownership  of the  Dedicated
Equipment and any Other  Dedicated  Equipment or all costs related to acquiring,
maintaining  and  updating  the  Dedicated  Equipment  and any  Other  Dedicated
Equipment  that have  already  been  contractually  committed  to by DynaMark in
accordance  with the terms hereof,  if  assignment or ownership  transfer is not
permitted by the Third Party provider.

6.6      Termination Fee. *

The  parties  agree  that  these  Termination  Fees  are  reasonable  under  the
circumstances and that these termination fees have been carefully considered and
agreed  to by the  Parties  in view of the  difficulty  in  ascertaining  actual
damages  because of the  complexities  of the  transaction  and the  substantial
initial investment borne by DynaMark prior to the Date of Execution. The parties
agree that the Termination Fees set forth above in this Section 6.6 (Termination
Fee) will not apply in the event that this  Agreement is  terminated by Customer
pursuant  to Section  6.1 (Term) for  failure of DynaMark to enter into at least
one  DynaMark  Agency  Agreement or failure of DynaMark to maintain in effect at
least one DynaMark Agency Agreement during such time during the term hereof that
Customer  maintains in effect at least one National  Consumer  Reporting  Agency
- -Chase Agreement.

         6.7  Additional  Transition  Services.  Upon  the  termination  of this
Agreement for whatever  reasons,  DynaMark agrees that it shall provide Customer
reasonably requested assistance,  at Customer's expense, in obtaining permission
of the Third Party  Access  Software  provider for Customer to have the right to
the Third Party  Access  Software  necessary  for  Customer to utilize the Chase
Database in another  environment.  Customer agrees to cooperate with DynaMark in
the provision of such  services and to reimburse  DynaMark for its 



                                                                October 29, 1997
                                                                   Page 14 of 27

time  expended at  consulting  rates to be mutually  agreed upon by Customer and
DynaMark plus expenses incurred in the provision of such services. Additionally,
if requested by Customer, DynaMark may provide a reasonable amount of assistance
in the relocation of the Compiled Data from the Chase  Database.  Customer shall
pay DynaMark a reasonable mutually agreed upon amount for DynaMark's  assistance
in the relocation of the Compiled  Data,  plus all  reasonable  travel  expenses
incurred by DynaMark in connection  therewith for travel that is  preapproved by
Customer.

SECTION 7.   FEES.

         7.1 Chase Database Fees.  Beginning on the Date of Execution and during
the term of this  Agreement,  Customer  shall pay to DynaMark the Chase Database
fees set forth on Exhibit C attached hereto,  as it may be modified from time to
time as provided in this Agreement.  The initial Chase Database Fee Schedule set
forth on Exhibit C shall remain in effect for the first year of the initial term
of this Agreement. Thereafter, the rates and charges on Exhibit C are subject to
increase once per calendar  year upon ninety (90) days prior  written  notice to
Customer. *

         7.2 Additional Service Fees. DynaMark will issue and Customer shall pay
monthly  invoices for the  additional  services  provided to Customer  including
those  provided  pursuant  to a Service  Request or any  addendum  or  amendment
hereto.  Supporting  documentation for amounts invoiced for additional  services
shall be provided to Customer upon request.

         7.3  Payment.  All  payments  for  services  rendered  pursuant to this
Agreement shall be due on the date of the invoice. The amount of any invoice not
paid  within 60 days after the date of the  invoice  shall  incur  interest at a
monthly rate of 1% from the date of the invoice until paid. Customer also agrees
to pay reasonable  attorney's fees and other costs incurred in collection of any
amounts not paid when due.

Should  Customer  fail to pay any  invoice,  which is not  subject to prior good
faith dispute, within 75 days of the date of the invoice,  DynaMark, at its sole
option,  may suspend  providing  services  hereunder to  Customer,  all invoiced
amounts  remaining  due and  payable.  Should  Customer  fail to pay any invoice
within  90  days  of the  date  of the  invoice,  DynaMark  may  terminate  this
Agreement,  in whole or part, upon thirty days notice to Customer,  all invoiced
amounts remaining due and payable.

         7.4 Taxes.  In addition  to the prices  provided  for herein,  Customer
shall pay DynaMark the amount of any sales,  use or other taxes now or hereafter
imposed by any  federal  state or local  authority  upon or with  respect to the
transactions  under this  Agreement or a Service  Request  hereunder  other than
taxes imposed on the net income of DynaMark and personal property taxes.


SECTION 8.            OWNERSHIP OF SYSTEMS AND MATERIALS.



                                                                October 29, 1997
                                                                   Page 15 of 27

         8.1 DynaMark Materials. All DynaLink Software, DynaMatch(R) merge/purge
software  and other  software  of  DynaMark  used in  connection  with the Chase
Database,  including all custom Access Software,  software,  systems,  programs,
operating instructions and associated documentation prepared by DynaMark and all
proprietary  information  provided by DynaMark  about its  pricing,  systems and
business  plans shall be and remain the  property  of  DynaMark ( the  "DynaMark
Materials").

         8.2 Customer  Materials.  * Any and all Customer  Materials produced by
DynaMark at the request of Customer hereunder shall be the property of Customer,
to the  extent  that such  work may be  designated  a work  made for  hire,  and
DynaMark  hereby  transfers  and assigns to Customer in  perpetuity  any and all
copyrights and other  proprietary  rights and ownership in and to such works, to
which  DynaMark may otherwise be entitled  effective upon receipt by DynaMark of
full payment due hereunder.  * DynaMark agrees to provide  reasonable  requested
assistance  to Customer,  at  Customer's  expense,  to obtain such rights to the
extent  possible.  Upon  termination of this  Agreement all data,  materials and
property belonging to one party shall be returned to that party.

         8.3 Third Party Materials. All Third Party software used or provided by
DynaMark in connection  with the Chase  Database,  including the Access Software
and DBMS Software licensed to DynaMark by Third Parties, i.e., any * Software of
*, * software and any * Software,  is and shall remain the property of the Third
Party.


SECTION 9.    CONFIDENTIAL TREATMENT OF INFORMATION.

         9.1  Customer  Information.   (a)  DynaMark  will  safeguard  and  hold
confidential  from  disclosure to any Third Party or entity,  except a person or
entity approved in writing in advance by Customer at Customer's sole discretion,
the Chase  Database,  including  any data  therein,  all  Custom  Software,  all
Imported  Data,  all  Depersonalized   Attributes  and  Prescreen   Information,
proprietary  marketing  strategies,  programs,   specifications  and  associated
documentation,  promotion  plans and promotion  tracking  results which DynaMark
receives for use  hereunder  from or on behalf of Customer  during the course of
this Agreement (hereinafter,  the "Confidential  Information").  The use of such
Confidential  Information  by DynaMark shall be solely limited to the purpose(s)
specified in this  Agreement  or Service  Request  Forms and DynaMark  shall not
otherwise transfer, sell, reveal or otherwise communicate directly or indirectly
any of Customer's Confidential Information,  except as authorized by Customer or
Servicer in writing.  DynaMark agrees to hold Customer harmless from and against
any claim,  loss or expense that  Customer may suffer as a result of  DynaMark's
negligent failure to safeguard Customer's  Confidential  Information through use
of the same standard of care that DynaMark uses to protect its own  confidential
information,  which  standard  of care  shall  not be less  than a  standard  of
reasonable care. The Compiled Data in the Chase Database and the Custom Software
shall be provided to Customer upon  termination  of this Agreement in 




                                                                October 29, 1997
                                                                   Page 16 of 27

accordance  with the  Subsections  of Section 6 (Term).  All other  Confidential
Information  which  DynaMark  receives  from or on behalf of  Customer  shall be
returned to Customer upon  termination of this Agreement or earlier if requested
by  Customer  and no longer  needed for  purposes of this  Agreement  or Service
Request Forms.  Confidential  Information  subject to this  paragraph  shall not
include information: which is or becomes part of the public domain other than by
an act or omission of  DynaMark;  or, which is demanded by lawful order from any
court or any body empowered to issue such an order;  or, which is  independently
developed by personnel of  DynaMark;  or is or becomes  known to DynaMark  other
than through DynaMark's receipt of Confidential Information hereunder; or, which
is or becomes  known to DynaMark  from third  parties not under an obligation of
confidence to Customer.  DynaMark's obligations under this Subsection 9.1(a) are
limited  to  diligent  compliance  with the same  methods  and  procedures  that
DynaMark uses to protect its own confidential  information from disclosure.  The
provisions of this Section 9.1 (Customer  Information)  and subsections  thereto
shall  survive any  termination  of this  Agreement  and shall bind the parties,
their successors and assigns.

(b) If DynaMark is  requested  or required  (by  subpoena,  civil  investigative
demand or similar  legal  process) to  disclose  any  Confidential  Information,
DynaMark will promptly  notify  Customer of such request or  requirement so that
Customer  may at its expense  seek an  appropriate  protective  order;  however,
DynaMark shall have no obligation to obtain such  protective  order or otherwise
contest such legal process. Then, DynaMark may disclose Confidential Information
of Customer if still compelled to do so pursuant to legal process.

(c)  Customer  agrees that  auditors  from or  retained  by a National  Consumer
Reporting  Agency  with whom  Customer  has  entered  into a  National  Consumer
Reporting   Agency  -Chase  Agreement  may  be  permitted  to  audit  DynaMark's
procedures for handling and processing of data in connection  with the PreScreen
Services,  including without limitation  DynaMark's  procedures  relating to the
handling and processing of Depersonalized  Attributes and PreScreen  Information
upon reasonable notice. Customer shall reasonably cooperate with respect to such
audit.

         9.2 DynaMark Information. Customer and its Servicers will safeguard the
DynaMark  Materials  and the Access  Software  and hold them  confidential  from
disclosure to any Third Party or entity,  except a person or entity  approved in
writing in advance by DynaMark. No aspects of the DynaMark Materials,  including
the DynaLink  Software,  or the other Access Software,  and without  limitation,
programs,  specifications,  documentation  and methods of  processing,  shall be
sold, revealed,  disclosed or otherwise communicated,  directly or indirectly by
Customer or its  Servicers  to any person,  company or  institution  whatsoever.
Customer  agrees to hold DynaMark  harmless from and against any claim,  loss or
expense that  DynaMark  may suffer as a result of  Customer's  or its  Servicers
negligent failure to so safeguard the DynaMark Materials and the Access Software
through use of the same  standard of care that  Customer uses to protect its own
Confidential  Information  which  standard  of care  shall  not be  less  than a
standard  of  reasonable  care.  It is  understood  that  except for the License



                                                                October 29, 1997
                                                                   Page 17 of 27

described herein,  no title to or rights in the DynaMark  Materials or the other
Access  Software,  or any part  thereof,  is  transferred  to Customer or to its
Servicer  by  this  Agreement.  However,  Customer  and  its  Servicers  have no
obligation to safeguard any material provided by DynaMark if such material is or
becomes  publicly  available  other than by an act or omission of  Customer;  is
independently  developed  by  personnel  of  Customer;  is or  becomes  known to
Customer other than through  Customer's receipt of the DynaMark Materials or the
Access  Software  provided by DynaMark  hereunder;  which is or becomes known to
Customer  from third  parties not under an obligation of confidence to DynaMark;
or, is demanded by a lawful order from any court or any body  empowered to issue
such an order. Customer agrees to notify DynaMark promptly of the receipt of any
such  order,  and to  provide  DynaMark  with a copy  of the  order.  Customer's
obligations  under this  Subsection 9.2 are limited to diligent  compliance with
the  same  methods  and  procedures  that  Customer  uses  to  protect  its  own
Confidential Information from disclosure. The provisions of this paragraph shall
survive any  termination  of this  Agreement  and shall bind the parties,  their
successors and assigns.

         9.3 Injunctive  Relief.  In the event of any breach of the  obligations
under  this  Section 9  (Confidential  Treatment  of  Information),  each  party
acknowledges  that the other party would have no adequate  remedy at law,  since
the harm caused by such a breach would not be easily  measured  and  compensated
for in damages,  and that in addition to such other remedies as may be available
to the other party, the other party may obtain injunctive relief including,  but
not limited to, specific performance.

         9.4  Non-exclusive  Agreement.  Nothing in this Section 9 (Confidential
Treatment of Information)  or in this Agreement is intended to prevent  Customer
from  obtaining  database,  products or services of a same or similar  nature to
those  obtained by it from DynaMark under this Agreement from parties other than
DynaMark;  nor is anything in this Agreement  intended to prevent  DynaMark from
providing a database,  products and services of a same or similar nature to that
provided by it to Customer  under this Agreement to parties other than Customer.
Further, nothing in this Section 9 (Confidential Treatment of Information) or in
this Agreement is intended to prevent  DynaMark from developing and subsequently
utilizing with others any constituent elements of the Chase Database,  including
but without  limitation:  the structure of data tables and files, the data model
consisting  of the  design  of the  database  and of the  tables  that  will  be
implemented  in the  database  management  system,  the  star  schema,  and  the
metatdata, even if they are the same or similar to those in the Chase Database.


SECTION 10.           WARRANTIES.

         10.1  Software.  DynaMark  warrants  that the  DynaLink  Software  will
perform the technical  functions  described in DynaLink Software Users Guide and
can be used by  Customer  to access  data in the  modules of the Chase  Database
described  on Exhibit B,  provided  that  Customer has not modified the DynaLink



                                                                October 29, 1997
                                                                   Page 18 of 27

Software.  DynaMark  does not warrant  that the  DynaLink  Software or the other
Access Software is or will be totally error free or its operation uninterrupted.
DynaMark  does not  warrant  that the  DynaLink  Software  or the  other  Access
Software will run on every computer, network, or operating system. To the extent
permitted by its agreement(s)  with the Third Party software  licensor(s) of the
other Access  Software,  DynaMark  warrants  that such other Access  Software as
delivered will  substantially  perform the technical  functions set forth in the
documentation  related thereto  provided by the respective  Third Party software
licensor. Nothing in this section is intended to derogate DynaMark's obligations
to provide maintenance services as set forth in Section 3.3 of this Agreement.

         10.2 Patent, Copyright or Trade Secret Infringement.  DynaMark warrants
that it owns or possesses all rights and interests in the DynaLink  Software and
the other Access  Software,  as are necessary to enter into this Agreement,  and
that Services  DynaMark  provides  hereunder shall not infringe upon the legally
protected  proprietary  rights of any Third Party and that it will indemnify and
hold  Customer,  its agents and  employees,  harmless  from any loss,  damage or
liability (including  reasonable attorney's fees) for infringement of any United
States patent right,  copyright,  or other legally  protected  proprietary right
with  respect to the  DynaLink  Software  as  provided  so long as  DynaMark  is
notified  promptly in writing and is given authority and information  reasonably
required  for the defense of same.  DynaMark  shall not be  responsible  for any
cost, expense, or compromise incurred or made by the Customer without DynaMark's
prior  written  approval.  If, at any time,  DynaMark is of the opinion that the
DynaLink  Software is likely to become the subject of any such action,  DynaMark
may, at its sole option and expense, (a) obtain the right to continue to use the
software; or if (a) is not commercially feasible then (b) replace or modify such
software,  provided that no such  replacement or  modification  shall impair the
performance of software,  and if (a) and (b) are not commercially  feasible then
(c) remove such software;  provided,  however,  that if such removal  materially
impairs  the  services  to be  provided  to  Customer  hereunder,  Customer  may
terminate  this  Agreement  and  DynaMark  shall  refund  Customer all fees paid
hereunder  for use of the Chase  Database  for each full  calendar  month  after
removal of such software.  Notwithstanding the foregoing, the parties agree that
DynaMark  shall have no  obligation  hereunder  to indemnify  and hold  harmless
Customer for an alleged  infringement  related,  directly or indirectly,  to the
interconnection  by Customer of the DynaLink  Software with hardware or software
not provided by DynaMark. The provision in Section 11.2 (Limitation of Liability
- -DynaMark) shall not be construed to in any way limit DynaMark's indemnification
obligations  as provided  above in this Section  10.2.  The  indemnity  and hold
harmless  obligations  of DynaMark in this Section shall survive  termination of
this Agreement.

         10.3 Accuracy. DynaMark will use reasonable efforts to accurately input
the Imported  Data into the Chase  Database and will use  reasonable  efforts to
accurately transmit the Exported Data to Customer.  DynaMark does not warrant or
guarantee that any  information  or data it utilizes or provides,  including the
Imported Data and the Exported Data, is accurate or up-to-date.  DynaMark cannot
and does not  guarantee  the  accuracy  or  completeness  of the  



                                                                October 29, 1997
                                                                Page  19  of  31

Depersonalized  Attributes  or  PreScreen  Information  or of any of the  credit
bureau records which are prescreened or used incident hereto. Further,  DynaMark
cannot  and does not  guarantee  the  accuracy  or  completeness  of the data or
information of any type  communicated by a Third Party, be it a credit bureau or
other vendor incident hereto or otherwise  associated with Customer's  marketing
programs.

         10.4 Warranty. THE WARRANTIES AND REMEDIES STATED IN THIS AGREEMENT ARE
IN LIEU OF ALL  OTHERS,  WHETHER  EXPRESSED  OR IMPLIED,  INCLUDING  ANY IMPLIED
WARRANTIES  OF  MERCHANTABILITY  OR FITNESS FOR A PARTICULAR  PURPOSE  WHICH ARE
HEREBY DISCLAIMED.


SECTION 11.    LIABILITY.

         11.1  Liability.  DynaMark  will use due  diligence in  performing  its
obligations  under this  Agreement  and the  performance  by DynaMark of all its
services  provided  under  this  Agreement  shall be  consistent  with  industry
standards. DynaMark shall indemnify and hold harmless Customer and its employees
from and against any and all liability,  loss or damage Customer may suffer as a
result of claims,  demands,  costs or judgments  against Customer arising out of
DynaMark's  negligent  failure to comply  with the  performance  standard in the
first  sentence  of  this  Section;  provided,  that  DynaMark's  obligation  to
indemnify  Customer shall be limited to the actual losses by Customer  resulting
from  DynaMark's  negligent  failure to comply and shall  exclude any  indirect,
special,  consequential,  or punitive damages. The liability of DynaMark for any
claims,  losses or damages  arising out of or related to this  Agreement  or the
Chase  Database  shall  be  limited  as  provided  in  Subsection  11.2  of this
Agreement.  The liability of Customer for any claims,  losses or damages arising
out of or related to this  Agreement or the Chase  Database  shall be limited as
provided in Subsection 11.3 of this Agreement.  Neither Party shall be liable to
the other Party or any  Affiliates  of the other Party for any claims,  damages,
losses  or  expenses  arising  out of the  performance  of  the  services  to be
performed by it pursuant to this  Agreement if such claims,  damages,  losses or
expenses are due to causes that are beyond its reasonable control.

         11.2  Limitation of Liability - DynaMark.  DynaMark shall not be liable
for any loss,  cost, or expense of Customer,  any  Affiliates of Customer or any
Third Party  resulting from or related to the data with which the Chase Database
is populated  or the manner in which the Chase  Database is used  provided  that
DynaMark has acted in  accordance  with the terms hereof or at the  direction of
Customer, its Servicers or authorized  Affiliates.  Notwithstanding any contrary
provision contained in this Agreement, in no event other than for fulfillment by
DynaMark of its indemnification obligation under Section 10.2 (Patent, Copyright
or Trade Secret Infringement) or for liability with respect to use of the Access
Software  by DynaMark in willful  breach of its  Agreement  with the Third Party
Access Software  Provider or for liability  resulting from its willful breach of
its confidentiality  obligations under Section 9.1(a), shall the total liability
of 



                                                                October 29, 1997
                                                                   Page 20 of 27

DynaMark  for any  claims,  losses or damages  arising out of or related to this
Agreement,  the Chase  Database or its services  hereunder or from breach of its
warranties in this Agreement exceed the total amount of fees and charges paid by
Customer  pursuant to this  Agreement  during the 6-month  period  preceding the
claim for the product,  service or module to which the liability relates.  IN NO
EVENT OTHER THAN FOR FULFILLMENT BY DYNAMARK OF ITS  INDEMNIFICATION  OBLIGATION
UNDER  SECTION 10.2  (PATENT,  COPYRIGHT OR TRADE  SECRET  INFRINGEMENT)  OR FOR
LIABILITY RESULTING FROM ITS WILLFUL BREACH OF ITS  CONFIDENTIALITY  OBLIGATIONS
UNDER SECTION 9.1(A), SHALL DYNAMARK'S, ITS OFFICERS',  DIRECTORS' OR EMPLOYEES'
LIABILITY OF ANY KIND FOR ANY MATTER OR THING WHATSOEVER,  BASED UPON,  RELATING
TO, OR ARISING OUT OF THIS AGREEMENT, INCLUDE ANY SPECIAL, INDIRECT, INCIDENTAL,
OR CONSEQUENTIAL DAMAGES,  INCLUDING LOSS OF PROFITS, REVENUE, DATA OR USE, EVEN
IF DYNAMARK  SHALL HAVE BEEN ADVISED OF THE  POSSIBILITY  OR  LIKELIHOOD OF SUCH
POTENTIAL LOSS OR DAMAGE.

11.3 Limitation of Liability - Customer.  Notwithstanding any contrary provision
contained in this Agreement,  except for  fulfillment of its payment  obligation
under the  Subsections of Section 6 (Term) and  Subsections of Section 7 (Fees),
under Section 15.6 (Customer Responsibility),  for liability with respect to use
of the Access Software by Customer or a Customer  Affiliate in willful breach of
the Agreement,  for  fulfillment by Customer of its  indemnification  obligation
under Section 4.6 (Customer Provided  Software) or for liability  resulting from
its willful breach of its  confidentiality  obligations under Section 9.2, in no
other event shall the total  liability  of  Customer  for any claims,  losses or
damages arising out of or related to this Agreement,  the Chase Database or from
breach of its obligations in this Agreement  exceed the total amount of fees and
charges to be paid by  Customer  pursuant to this  Agreement  during the 6-month
period  preceding  the claim  for the  product,  service  or module to which the
liability  relates.  IN NO EVENT OTHER THAN FOR  FULFILLMENT  BY CUSTOMER OF ITS
INDEMNIFICATION   OBLIGATION  UNDER  SECTION  4.6  (CUSTOMER  SOFTWARE)  OR  FOR
LIABILITY RESULTING FROM ITS WILLFUL BREACH OF ITS  CONFIDENTIALITY  OBLIGATIONS
UNDER SECTION 9.2, SHALL  CUSTOMER'S,  ITS  OFFICERS',  DIRECTORS' OR EMPLOYEES'
LIABILITY OF ANY KIND FOR ANY MATTER OR THING WHATSOEVER,  BASED UPON,  RELATING
TO, OR ARISING OUT OF THIS AGREEMENT, INCLUDE ANY SPECIAL, INDIRECT, INCIDENTAL,
OR CONSEQUENTIAL DAMAGES,  INCLUDING LOSS OF PROFITS, REVENUE, DATA OR USE, EVEN
IF CUSTOMER  SHALL HAVE BEEN ADVISED OF THE  POSSIBILITY  OR  LIKELIHOOD OF SUCH
POTENTIAL LOSS OR DAMAGE. The foregoing Section shall not be construed to in any
way limit  Customer's  indemnification  obligations  as provided in Section 15.6
(Customer Responsibility).




                                                                October 29, 1997
                                                                   Page 21 of 27
SECTION 12.           FAILURE OF PERFORMANCE.

         12.1  DynaMark  shall not be liable  for any  failure  to  perform  its
obligations under this Agreement if prevented from doing so by a cause or causes
beyond its reasonable control. Without limiting the generality of the foregoing,
such causes  include acts of God or the public  enemy,  nature,  fires,  floods,
storms,  tornadoes,   earthquakes,   riots,  strikes,  blackouts,  wars  or  war
operations,  restraints  of  government,  walkouts or  shortages or inability to
obtain materials, labor, fuel, energy, or machinery at reasonable prices or from
regular  sources,  the  failure of  Customer  or a Third  Party to  perform  its
obligations  related to this  Agreement or other cause or causes which could not
with  reasonable  diligence be  controlled  or  prevented  by  DynaMark.  Should
DynaMark at any time be unable,  due to any of the aforesaid  causes,  to supply
its own and all of its Customers'  requirements  (including  customers not under
contract),  DynaMark  will  allocate its  available  production  capacity to its
customers  on such terms as it may deem  advisable  and in such event  Customer,
upon  written  notice to  DynaMark,  may withdraw  Service  Requests  upon which
DynaMark has not begun preparation.  For purposes hereof,  DynaMark's  Customers
shall be deemed to include  Affiliates of DynaMark.  DynaMark  shall  maintain a
Contingency  Plan for site backup in case of natural disaster or other disaster.
This  Contingency  Plan shall provide for a fully  operational  site back-up for
batch processing within 72 hours of the occurrence of the disaster, provided the
backup site is not disrupted by disaster.


SECTION 13.       SECURITY PROCEDURES

         13.1 DynaMark shall, during the term of this Agreement, maintain at its
sole expense the following Security Procedures:

         a)       No visitor is to be  permitted  on DynaMark  premises  without
                  first signing in and receiving a visitor's badge;

         b)       All  visitors  must be  escorted  while  on  secured  areas of
                  DynaMark's premises;

         c)       On weekends and holidays,  an employee of DynaMark or a bonded
                  guard must be present at secured areas of DynaMark's premises;

         d)       Upon receipt of any tape containing Confidential  Information,
                  DynaMark  shall  secure  it  immediately  in a  card  accessed
                  control