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, 1998

         [ ]      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. [ ]

         As of December 7, 1998, the aggregate  market value of the Registrant's
common stock held by nonaffiliates  of the Registrant was $382,136,797  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 7, 1998
was 14,047,284 (excluding 10,690 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 2, 1999.





TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I

ITEM 1. Business.............................................................  3

ITEM 2. Properties........................................................... 13

ITEM 3. Legal Proceedings.................................................... 13

ITEM 4. Submission of Matters to a Vote of Security Holders.................. 13

EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 14


PART II

ITEM 5. Market for Registrant's Common Equity and Related
          Stockholder Matters................................................ 15

ITEM 6. Selected Financial Data.............................................. 16

ITEM 7. Management's Discussion and Analysis of Financial Condition
          and Results of Operations.......................................... 17

ITEM 7A.Quantitative and Qualitative Disclosures About Market Risks.......... 24

ITEM 8. Financial Statements and Supplementary Data.......................... 25

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure............................................... 44

PART III

ITEM 10. Directors and Executive Officers of the Registrant.................. 45

ITEM 11. Executive Compensation.............................................. 45

ITEM 12. Security Ownership of Certain Beneficial Owners and Management...... 45

ITEM 13. Certain Relationships and Related Transactions ..................... 45

PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 46

SIGNATURES   ................................................................ 51

Supplemental Information..................................................... 52

                                       2




                                     PART I

ITEM 1. BUSINESS

Development Of The Business

         Fair, Isaac and Company,  Incorporated (NYSE: FIC)("Fair, Isaac" or the
"Company") 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 1998  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 25 percent of revenues.

         In more recent  years Fair,  Isaac has expanded its product and service
offerings,  applying its proven risk/reward modeling  capabilities to automobile
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  $49.2  million or 20 percent of Fair,
Isaac's fiscal 1998 revenues.  The Company's  Insurance  business unit generated
revenues  in fiscal  1998 of $9.2  million or 4 percent of  revenues.  In fiscal
l997,  the  Company   recorded  its  first  revenues  from  its  new  Healthcare
Information  business  unit,  and  during  fiscal  1998  derived  revenues  from
providing analytical marketing services to a large pharmaceuticals  manufacturer
to help improve customer relationships and management of prescription compliance
(i.e., a patient's fulfillment of prescriptions and taking them to completion).

         In July 1997 the Company acquired Risk Management Technologies (RMT), a
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 l998 were $6.2 million,  or 3 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 nearly 30 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.

                                       3




         Approximately  17 percent of Fair,  Isaac's  fiscal 1998  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.

         Since 1993, Fair,  Isaac's revenues and diluted earnings per share have
increased  at a compound  rate of 30 percent and 35 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
businesses 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 73 percent
of the  Company's  revenues  in each of the  three  years  in the  period  ended
September  30,  1998.  Sales to  customers  in the  direct  marketing  business,
including the marketing arms of financial service  businesses,  accounted for 13
to 20  percent  of  revenues  in each of the  three  years in the  period  ended
September 30, 1998.  Revenues from sales to the insurance industry accounted for
3 to 4 percent  of  revenues  in each of the  three  years in the  period  ended
September  30, 1998. In fiscal 1997 the  Company's  recorded the first  revenues
from its new  Healthcare  Information  business  unit,  and during  fiscal  1998
derived  revenues  from  providing  analytical  marketing  services  to a  large
pharmaceuticals   manufacturer  to  help  improve  customer   relationships  and
management  of  prescription   compliance  (i.e.,  a  patient's  fulfillment  of
prescriptions and taking them to completion).

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

                                       4




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.

         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.

         ScoreNet(SM) 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'

                                       5




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  Corporation  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.

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,(R)  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  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
IBM-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.

                                       6




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
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(R), 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

                                       7




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 remain 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.  The
first revenue-generating contract for this product was signed in October 1998.

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

                                       8




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 42 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  computer  languages used
for coding.

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,  and  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 1998.  Revenues  generated  through the  Company's
alliances  with the three major credit  bureaus in the United  States,  Equifax,
Experian Information Solutions,  Inc. (formerly known as TRW Information Systems
& Services)  and Trans Union,  each  accounted  for  approximately  seven to ten
percent of the Company's total revenues in fiscal 1998.

         The percentage of revenues  derived from  customers  outside the United
States was  approximately 17 percent in each of fiscal 1998, 1997, and 1996. 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

                                       9




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 60 countries. The information set forth under the caption "Segment
Information" in Note 12 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.

         As of September 30, 1998,  the Company's  backlog,  which includes only
firm contracts,  was approximately  $68,517,000,  as compared with approximately
$70,168,000 as of September 30, 1997. Most usage-based revenues do not appear as
part of the backlog.  The Company believes that  approximately 25 percent of the
September 30, 1998 backlog will be delivered after the end of the current fiscal
year ending  September 30, 1999. 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.

                                       10




         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 Experian,  formerly
known as, 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). CCN has since been renamed "Experian".

         Both AMS and Experian  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 Experian 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  database 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 database.  The Company believes its technology is superior to expert
system  technology  where  sufficient  performance  data are  available.  Neural
networks,  on the other hand,  are an alternative  method of developing  scoring
algorithms  from a database 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 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.

                                       11




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.  Due to recent  changes in the
case  law and  Patent  and  Trademark  Office  Guidelines  with  respect  to the
patentability  of  software,  algorithms  and "methods of doing  business,"  the
Company is currently reevaluating the possibility of obtaining patent protection
for certain aspects of its technology.

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.

         In  addition  to 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.

Personnel

         As of September  30, 1998,  the Company  employed  approximately  1,487
persons.  None of its employees is covered by a collective  bargaining agreement
and no work stoppages have been experienced.

                                       12




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 2000 or later. It also leases approximately 5,884 square feet
of  warehouse  space in San Rafael for its hardware  operations  and for storage
under  month-to-month  leases.  In May 1998 the Company entered into a synthetic
lease agreement for an office complex with approximately  406,000 square feet in
San Rafael, California with an expected initial occupancy date in the year 2001.
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
2012. DynaMark has entered into a lease for a fourth building with approximately
50,407 square feet at the same location,  with an anticipated  occupancy date of
July 1999 and expiring in 2012. DynaMark also leases approximately 25,000 square
feet of office and data processing space in New York City under a lease expiring
in 2004  and  approximately  14,800  square feet for offices  in  Brookings  and
Madison, South Dakota and Shoreview,  Minnesota. RMT leases approximately 14,740
square feet of office space in Berkeley,  California.  The Company also leases a
total of  approximately  47,147  square  feet of  office  space for  offices  in
Baltimore,  Maryland; New Castle, Delaware; Atlanta, Georgia; Chicago, Illinois;
Toronto, Ontario; Birmingham, England; Tokyo, Japan; Paris, France; Mexico City,
Mexico;  Sao Paulo,  Brazil;  Milan,  Italy;  Johannesburg,  South  Africa;  and
Wiesbaden,  Germany. See Notes 5 and 11 in the Consolidated Financial Statements
for information  regarding the Company's  obligations under leases.  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.

                                       13




                      EXECUTIVE OFFICERS OF THE REGISTRANT

        Name                            Positions Held                     Age
        ----                            --------------                     ---

Larry E. Rosenberger        President and Chief Executive Officer          52
                            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          55
                            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          58
                            joining 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          44
                            1995;  Senior  Vice  President  1992-
                            1995;   Vice   President   1990-1992;
                            joined the Company in 1985.

H. Robert Heller            Executive   Vice   President    since          58
                            September  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,          49
                            Vice President  1980-1986.  Treasurer
                            1981-1983.  Joined  the   Company  in
                            1975.

Kenneth M. Rapp             Senior Vice  President  since  August          52
                            1994,   and   President   and   Chief
                            Operating  Officer of DynaMark,  Inc.
                            since it was founded in 1985.

Peter L. McCorkell          Senior Vice  President  since  August          52
                            1995; Vice  President,  Secretary and
                            General  Counsel  since  joining  the
                            Company in 1987.

Patricia Cole               Senior    Vice    President,    Chief          49
                            Financial Officer and Treasurer since
                            November   1996;   Controller   since
                            joining  the  Company  in   September
                            1995.  Vice  President and Controller
                            of Qwest Communications International
                            Inc.  1993-1995;  Controller  of  Los
                            Angeles  Cellular  Telephone  Company
                            1990-1992.

David M. LaCross            President, Chief Executive Officer of          46
                            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.

                                       14




                                    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
7,  1998,  Fair,  Isaac  had 340 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, 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
October 1 - December 31, 1997         46             30 1/4
January 1 - March 31, 1998            38 5/8         28 3/16
April 1 - June 30, 1998               40 9/16        31 1/2
July 1 - September 30, 1998           41 1/2         29 1/4

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 the 1997
and 1998 fiscal years. There are no current plans to change the cash dividend or
to issue any further stock dividend.

Recent Sales of Unregistered Securities

         On July 21, 1997,  the Company  acquired all the  outstanding  stock of
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 number of shares of the Company's
common stock and option equivalents issued by the Company in connection with the
Merger was 1,252,655.

         At the  time  of the  transaction,  the  issuance of the  shares of the
Company's  common stock and the options to purchase the Company  common stock to
the former RMT  security  holders  in the  Merger was 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.

         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.  Part of
the  consideration  paid for  Printronic  and CRMA  consisted of 84,735  Company
shares of common stock. At the time of each of these transactions,  the issuance
of the shares of the Company's  common stock was  not registered  under 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.

                                       15





ITEM 6.    Selected Financial Data

(dollars in thousands, except per share data) Fiscal year ended September 30, 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Revenues $245,545 $199,009 $155,913 $117,089 $92,046 Income from operations 40,432 37,756 29,518 19,828 16,420 Income before income taxes 42,105 35,546 28,704 21,390 17,178 Net income 24,327 20,686 17,423 12,753 10,559 Earnings per share: Diluted $ 1.68 $ 1.46 $ 1.25 $ .93 $ .79 Basic $ 1.77 $ 1.55 $ 1.32 $ .99 $ .85 Dividends per share* $ .08 $ .08 $ .08 $ .055 $ .07 At September 30, 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Working capital $ 54,852 $ 47,727 $ 34,699 $ 23,448 $ 17,436 Total assets 189,614 145,228 118,023 91,009 72,056 Long-term obligations 789 1,183 1,552 1,930 2,333 Stockholders' equity 133,451 103,189 79,654 56,176 42,929 * 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, 1994 through 1996 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. 16 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. The Company's Risk Management Technologies subsidiary provides enterprise-wide risk management and performance measurement solutions to major financial institutions. 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. 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. 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 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 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. 17
Percentage of Period-to-period revenue percentage changes ---------------------- ------------------ Years ended 1997 1996 September 30, to to 1998 1997 1996 1998 1997 - --------------------------------------------------------------------------------------------- Credit: Fixed-price 25 29 29 9 28 Usage-priced 48 48 50 21 23 DynaMark 20 15 13 65 41 RMT 3 4 5 (26) 18 Insurance 4 3 3 58 27 Healthcare Less than 1 1 -- (4) NM* ---- ---- ---- Total revenues 100 100 100 23 28 ==== ==== ==== *Not meaningful
Revenues from credit application scoring products increased by 22 percent in fiscal 1997 compared with fiscal 1996, and decreased by 12 percent in fiscal 1998 compared with fiscal 1997. The increase in fiscal 1997 was due primarily to the Company's sales of new products and increased sales of small business loan scoring products. The decrease in revenues in fiscal 1998 reflected the impact of bank consolidations. ASAP revenues increased by 47 percent in fiscal 1997 compared with fiscal 1996, and by 14 percent in fiscal 1998 compared with fiscal 1997, primarily due to increased sales of PC-based ASAP products (CreditDesk) and sales of the StrategyWare(R) decision support system. Revenues from sales of credit account management systems (TRIAD) sold to end-users decreased by 5 percent from fiscal 1996 to fiscal 1997, and increased by 18 percent from fiscal l997 to fiscal l998. 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. The increase in fiscal 1998 was due primarily to the release of the next version of TRIAD (TRIAD 5.0) 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. The Company provides credit risk management consulting services primarily through CRMA, which it acquired in September 1996. CRMA completed its second year as part of the Credit business unit on September 30, l998. CRMA's revenues increased by 62 percent in fiscal l998 compared with fiscal 1997 and comprised approximately 4 percent of the Company's Credit revenues in fiscal 1998 as compared to 3 percent in fiscal l997. 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 22 percent in both fiscal l997 and fiscal 1998 and accounted for approximately 35 percent of revenues in fiscal 1997 and 1998. 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. Revenues derived from alliances with credit bureaus and credit card processors have accounted for much of the Company's revenue growth in 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 8 to 10 percent of the Company's total revenues in fiscal 1996 and 1997, and approximately 7 to 10 percent of the Company's total revenues in fiscal 1998. 18 In 1996 Experian was 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 1997 and l998. 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 $21.2 million in fiscal 1996 to $29.8 million in fiscal 1997 and to $49.2 million in fiscal 1998. The increases in DynaMark's revenues (excluding intercompany revenues) were due primarily to increased revenues from customers in the financial services industry. Gross margins for fiscal 1996, 1997 and 1998 were approximately 39, 42 and 51 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 each of fiscal 1996 and 1997, such intercompany revenue represented approximately 14 percent of DynaMark's total revenues, and in fiscal 1998 such revenue represented approximately 8 percent of DynaMark's total revenues. Accordingly, DynaMark's externally reported revenues may tend to understate DynaMark's growth and contribution to the Company as a whole. RMT's revenues for fiscal l997 increased by 18 percent compared with fiscal l996, and in fiscal 1998 decreased by 26 percent compared with fiscal 1997, due primarily to the impact of bank consolidations. Increases in insurance revenues for fiscal l998, compared with fiscal 1997, were due to strong growth in both insurance products sold to end-users and in the insurance scoring services offered through consumer reporting agencies. In fiscal 1997, the Company recorded its first revenues from its Healthcare business unit, and during fiscal 1998 derived revenues from providing analytical marketing services to a large pharmaceuticals manufacturer to help improve customer relationships and management of prescription compliance (i.e., a patient's fulfillment of prescriptions and taking them to completion). The Company's revenues derived from clients outside the United States increased from $26.1 million in 1996 to $33.9 million in fiscal l997 and to $42.9 million in fiscal 1998. RMT contributed $4.3 million, $4.6 million and $3.7 million to the Company's non-U.S. revenues for fiscal years 1996, l997 and l998, respectively. DynaMark has not had significant non-U.S. revenues. Sales of software products, including TRIAD and CreditDesk, increased usage of credit bureau scores in Canada, 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 1997 and 1998. Gains or losses due to fluctuations in currency exchange rates have not been significant to date but may become more important if, as expected, the proportion of the Company's revenues denominated in foreign currencies increases in the future. 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, 1998, 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: (a) develop new, high-value products, (b) increase its penetration of established or emerging credit markets outside the U.S. and Canada and (c) 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 19 management. During fiscal 1998, the Company's backlog of orders for fixed-priced products declined slightly. This indicates that revenue growth in fiscal 1999 and later years may depend to a large extent on sales of newly developed products. 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 Statements 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 1997 1996 September 30, to to 1998 1997 1996 1998 1997 - --------------------------------------------------------------------------------------------- Total revenues 100 100 100 23 28 ----- ----- ----- Costs and expenses: Cost of revenues 35 36 37 17 26 Sales and marketing 15 15 17 28 13 Research and development 12 9 6 66 90 General and administrative 21 20 21 28 23 Amortization of intangibles 1 1 -- 9 74 ----- ----- ----- Total costs and expenses 84 81 81 27 28 ----- ----- ----- Income from operations 16 19 19 7 28 Other income (expense) 1 (1) (1) NM* NM* ----- ----- ----- Income before income taxes 17 18 18 18 24 Provision for income taxes 7 8 7 20 32 ----- ----- ----- Net income 10 10 11 18 19 ===== ===== ===== *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, declined slightly in the periods from fiscal l996 to fiscal 1997 and from fiscal l997 to fiscal 1998. The decrease in both fiscal l997 and fiscal 1998 was due primarily to the reassignment to research and development activities of certain personnel whose primary assignment had been production and delivery. 20 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 1997 compared with fiscal 1996 due primarily to a reduction in media advertising and remained essentially unchanged from fiscal 1997 to fiscal 1998. 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 l996 to fiscal 1997 and from fiscal 1997 to fiscal 1998. 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. In fiscal 1998, the Company continued to emphasize development of new technologies. Research and development expenditures in fiscal 1998 were primarily related to new bankruptcy scoring products for Visa (Integrated Solutions Concepts) and Trans Union, new fraud-detection software products, joint product development projects with Deluxe Financial Services, Inc., healthcare receivables management and Year 2000 compliance work. 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 l996, l997 and l998. 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 13 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, 1998, the Company had approximately $46.5 million invested in U.S. treasury securities and other interest-bearing instruments. Interest income increased in both fiscal 1997 and 1998 due to higher average cash balances in interest-bearing accounts and instruments. 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 fiscal year ended September 30, l997, the Company wrote off non-marketable investments with an equity basis of $773,000, primarily related to an Italian start-up venture that was adversely affected by a new privacy law. In fiscal year ended September 30, 1998, the Company liquidated its share of this non-marketable security resulting in a gain of $165,000 and has no further financial commitments in connection with this investment. Note 4 to the Consolidated Financial Statements describes the Company's investment in such companies. In fiscal 1998, the difference between the increase in operating income (7 percent) and the increase in net income (18 percent) was primarily due to the interest income derived from investments in U.S. treasury securities and other interest-bearing instruments, and the absence of losses from investments in start-ups. 21 Provision for income taxes The Company's effective tax rate was 39.3, 41.8 and 42.2 percent in fiscal l996, 1997 and l998, respectively. The increase to 42.2 percent in fiscal 1998 was due primarily to the nondeductible nature of goodwill, deferred compensation and an increase in the effective state tax rate. The Company expects its effective tax rate in fiscal 1999 to be approximately 42 percent, barring any change in the tax laws. Capital Resources and Liquidity Working capital increased from $34,699,000 at September 30, 1996, to $47,727,000 at September 30, l997, and to $54,852,000 at September 30, 1998. 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 increase in fiscal 1998 was due primarily to increases in short-term investments, unbilled work in progress and accounts receivable, which more than offset the increase in accounts payable and other accrued liabilities and accrued compensation and employee benefits. 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 increases in accounts receivable and billings in excess of earned revenues were proportional to the increase in revenues. The greater increase in unbilled work in progress was due primarily to changes in product mix and contract terms. During fiscal 1998, the increase in accounts receivable was proportionally much less than the increase in revenues due to improved collection efforts by the Company, and the increases in unbilled work in progress and billings in excess of earned revenues were proportional to the increase in revenues. The Company capitalized $45,000 as goodwill relating to amounts due to the former stockholders of CRMA under the CRMA purchase agreement based upon its financial results in fiscal 1997, and has capitalized $263,000 based upon CRMA's financial results in fiscal 1998. An additional payment to the former stockholders of CRMA based upon CRMA's financial results in fiscal 1999 may also be required. That amount, which will be paid 55 percent in Company stock and 45 percent in cash, will not exceed $1,833,000. 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. In fiscal 1998, cash provided by operations resulted primarily from net income before depreciation and amortization, and increases in accounts payable and other accrued liabilities and accrued compensation and employee benefits, partially offset by the increases in accounts receivable, other assets and unbilled work in progress. Cash was used in investing activities primarily for additions to property and equipment, and purchases of interest-bearing investments, partially offset by the maturities of interest-bearing investments. Cash was provided by financing activities primarily from the exercise of stock options, partially offset by cash used for the payment of dividends and the reduction of capital lease obligations. 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, 1998, the Company had no significant capital commitments other than those obligations described in Notes 2, 5 and 11 of the Consolidated Financial Statements. On December 1, 1997, the Company purchased undeveloped land in San Rafael, California, with the intention of constructing an office complex to accommodate future growth. Development has commenced, and on May 15, 1998, the Company entered into a synthetic lease arrangement, which will materially increase the Company's future operating lease expenses. Rental payments will commence upon completion of construction, which is expected to 22 occur in the second quarter of fiscal 2001. With this external financing, 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. Year 2000 The Company is performing Year 2000 remediation work and compliance testing on its software products marketed to customers. The updated versions of most of its software products currently being shipped to customers are Year 2000 compliant. Certain international versions of the Company's software products are not yet Year 2000 compliant, but the Company expects to be prepared to ship upgrade "patches" for these products by the end of calendar 1998. Year 2000 remediation work, including compliance testing, for most 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. Prior to the end of calendar 1999, the Company will discontinue support for some software products that have been replaced by other products, and Year 2000 upgrades for these products will not be available. Revenues from such products are not significant. There are no assurances that the Company's current products do not contain undetected errors or defects associated with Year 2000 date functions that may result in material costs to the Company. However, the Company currently does not expect significant disruption of its revenues or operations from the Year 2000 issues associated with its products. The Company has not made an assessment of the potential impact of failing to complete its own Year 2000 remediation work nor has it developed any contingency plans for such an event. Additionally, the Company has substantially completed its Year 2000 inventory and assessment of internal information technology (IT) and non-IT systems and applications and expects all major internal systems to be fully compliant by the end of December 1998. The Company has determined that the majority of its internally developed systems are Year 2000 compliant. All applications supplied to Company by third parties are either Year 2000 compliant today or have "patches" currently available to bring them into compliance. Extensive compliance testing has commenced and will continue through most of the calendar year 1999. The most reasonably likely worst-case scenarios would include: (a) corruption of data contained in the Company's internal information systems, and (b) hardware/operating system failure. The Company is in the process of completing its contingency plans for business-critical IT and non-IT internal systems as an extension of its existing disaster recovery plan and expects to complete such planning by June 30, 1999. The Company estimates that the costs of Year 2000 remediation (including compliance testing) for its products and internal systems will be in the range of $4 million to $5 million. Approximately two-thirds of these estimated costs have been expended as of September 30, 1998. These costs principally consist of both internal staff costs and expenses for external consultants, software and hardware, which have been or will be expensed by the Company during the period they are incurred. Expected costs for the Year 2000 remediation work (including compliance testing) and projected completion dates are based on the Company's management's estimates and assumptions and actual results may vary materially from those anticipated. The Company has also initiated communications with third parties on which it is dependent for essential services and for the distribution of its significant services to determine how they are addressing Year 2000 issues and to evaluate any impact on the Company's operations. The Company is working with these third parties to resolve Year 2000 issues and information received to date indicates that these parties are in the process of implementing and/or testing remediation strategies to ensure Year 2000 compliance of systems, services and/or products. However, the lack of resolution of Year 2000 issues by these parties--especially the credit bureaus and credit card processors through which the Company distributes credit scoring and account management services--could have a material adverse impact on the Company's future business operations, financial condition and results of operations. The Company anticipates that the most reasonably likely worst-case scenarios involving third-party Year 2000 issues would include: (a) failure of infrastructure services provided by government agencies and third parties (e.g., transportation, electricity, telephone, Internet services, etc.) and (b) failure of one or more of the credit bureaus or credit card processors through which the Company distributes its credit scoring and account management services to achieve timely and successful Year 2000 compliance. Contingency plans to address these most reasonably likely 23 worst-case scenarios are under development and are expected to be completed by June 30, 1999. At this time the Company cannot quantify the potential impact of third-party Year 2000 issues. The foregoing information and statements regarding the Company's Year 2000 capabilities and readiness are "Year 2000 Information and Readiness Disclosures" in conformance with the Year 2000 Information and Readiness Disclosure Act of 1998 enacted on October 19, 1998. European Economic and Monetary Union (EMU) Under the European Union's plan for Economic and Monetary Union (EMU), the euro becomes the sole accounting currency of EMU countries on January 1, 2002. Its initial phase goes into effect on January 1, 1999, in 11 participating countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. In this initial phase the EMU mandates that key financial systems be able to triangulate conversion rates so that any amount booked will be logged and processed simultaneously in both the local currency and euros. The Company believes that its computer systems and programs are euro-compliant. Costs associated with compliance were not material and were expensed by the Company as they were incurred. Quarterly Results The table in Note 15 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 Risk Market Risk Disclosures. The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates, foreign currency exchange rates and equity security price risk. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity. The Company maintains a short-term investment portfolio consisting mainly of income securities with an average maturity of less than one year. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10 percent from levels at September 30, 1998, the fair value of the portfolio would decline by an immaterial amount. The Company has the ability to hold its fixed income investments until maturity, and therefore the Company would not expect its operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on its securities portfolio. The Company believes foreign currency and equity risk is not material. 24 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1998, in conformity with generally accepted accounting principles. San Francisco, California October 29, 1998 25 CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Years ended September 30, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $ 245,545 $ 199,009 $ 155,913 Costs and expenses: Cost of revenues 84,980 72,566 57,732 Sales and marketing 37,470 29,162 25,722 Research and development 29,136 17,572 9,265 General and administrative 52,132 40,679 32,942 Amortization of intangibles 1,395 1,274 734 ------------ ------------ ------------ Total costs and expenses 205,113 161,253 126,395 ------------ ------------ ------------ Income from operations 40,432 37,756 29,518 Other income (expense), net 1,673 (2,210) (814) ------------ ------------ ------------ Income before income taxes 42,105 35,546 28,704 Provision for income taxes 17,778 14,860 11,281 ------------ ------------ ------------ Net income $ 24,327 $ 20,686 $ 17,423 ============ ============ ============ Earnings per share: Diluted $ 1.68 $ 1.46 $ 1.25 ============ ============ ============ Basic $ 1.77 $ 1.55 $ 1.32 ============ ============ ============ Shares used in computing earnings per share: Diluted 14,463,000 14,202,000 13,922,000 ============ ============ ============ Basic 13,763,000 13,386,000 13,161,000 ============ ============ ============ See accompanying notes to the consolidated financial statements.
26 CONSOLIDATED BALANCE SHEETS
(dollars in thousands) September 30, 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 14,242 $ 13,209 Short-term investments 18,283 6,108 Accounts receivable, net of allowance (1998: $1,163; 1997: $758) 39,028 36,147 Unbilled work in progress 22,004 18,176 Prepaid expenses and other current assets 4,040 3,673 Deferred income taxes 5,016 4,517 --------- --------- Total current assets 102,613 81,830 Long-term investments 24,368 13,261 Property and equipment, net 36,893 34,486 Intangibles, net 10,458 8,361 Deferred income taxes 6,398 3,369 Other assets 8,884 3,921 --------- --------- $ 189,614 $ 145,228 Liabilities and stockholders' equity Current liabilities: Accounts payable and other accrued liabilities $ 17,418 $ 8,228 Accrued compensation and employee benefits 22,065 19,160 Billings in excess of earned revenues 7,862 6,346 Capital lease obligations 416 369 --------- --------- Total current liabilities 47,761 34,103 Other liabilities 7,613 6,753 Capital lease obligations 789 1,183 --------- --------- Total liabilities 56,163 42,039 --------- --------- Stockholders' equity: Preferred stock -- -- Common stock 140 135 Paid in capital in excess of par value 32,454 26,025 Retained earnings 100,678 77,453 Less treasury stock (351) (433) Cumulative translation adjustments (170) (308) Unrealized gains on investments 700 317 --------- --------- Total stockholders' equity 133,451 103,189 --------- --------- $ 189,614 $ 145,228 See accompanying notes to the consolidated financial statements.
27 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from September 30, 1995, to September 30, 1998 (in thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Common stock Paid in Unrealized Total ------------- capital in Cumulative gains on stock- Par excess of Retained Treasury Pension translation Invest- holders' Share value par value earnings stock adjustments adjustments ments equity ------ ----- ---------- --------- -------- ----------- ----------- ---------- --------- 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 exercised 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 exercised stock options -- -- 1,474 -- -- -- -- -- 1,474 Contribution/sale to ESOP 41 -- 504 -- 105 -- -- -- 609 Deferred compensation -- -- 68 -- -- -- -- -- 68 Repurchase of company 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 Issuance of common stock 33 -- 1,468 -- -- -- -- -- 1,468 Vesting of restricted stock -- -- 185 -- -- -- -- -- 185 Exercise of stock options 487 5 2,726 -- -- -- -- -- 2,731 Tax benefit of exercised stock options -- -- 1,660 -- -- -- -- -- 1,660 Deferred compensation -- -- 472 -- -- -- -- -- 472 Repurchase of company stock (3) -- (82) -- (28) -- -- -- (110) Issuance of treasury stock 3 -- -- -- 110 -- -- -- 110 Net income -- -- -- 24,327 -- -- -- -- 24,327 Dividends declared -- -- -- (1,102) -- -- -- -- (1,102) Unrealized gains on investments -- -- -- -- -- -- -- 383 383 Cumulative translation adjustments -- -- -- -- -- -- 138 -- 138 ------ ----- -------- --------- ------- --------- ------- ------- -------- Balances at September 30, 1998 13,982 $ 140 $ 32,454 $ 100,678 $ (351) $ -- $ (170) $ 700 $133,451 ====== ===== ======== ========= ======= ========= ======= ======= ======== 28 See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands) Years ended September 30, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 24,327 $ 20,686 $ 17,423 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 14,948 11,753 7,928 Deferred compensation 472 -- -- Deferred income taxes (3,809) (2,824) 84 Equity loss in investments -- 2,082 821 Investment write-off -- 773 1,535 Charge to reflect change in RMT's fiscal year -- (214) -- Changes in operating assets and liabilities: (Increase) in accounts receivable (2,743) (8,104) (7,824) Decrease (increase) in unbilled work in progress (3,828) (7,611) 1,425 Decrease (increase) in prepaid expenses and other assets 473 2,945 (3,180) Decrease (increase) in other assets (4,963) 515 (40) Increase in accounts payable and other accrued liabilities 10,226 329 2,894 Increase in accrued compensation and employee benefits 4,413 3,659 5,105 Increase (decrease) in billings in excess of earned revenues 1,516 1,406 (1,244) Increase (decrease) in other liabilities 236 664 (1,002) -------- -------- -------- Net cash provided by operating activities 41,268 26,059 23,925 -------- -------- -------- Cash flows from investing activities Purchases of property and equipment (15,669) (21,653) (13,472) Proceeds from sale of property and equipment -- 340 -- Payments for acquisition of subsidiaries (3,347) (78) (2,811) Purchases of investments (33,491) (9,658) (10,781) Proceeds from maturities of investments 11,030 7,568 5,913 -------- -------- -------- Net cash used in investing activities (41,477) (23,481) (21,151) -------- -------- -------- Cash flows from financing activities Principal payments of capital lease obligations (387) (378) (391) Proceeds from the exercise of stock options and issuance of treasury stock 2,841 1,020 928 Dividends paid (1,102) (1,028) (991) Repurchase of company stock (110) (470) -- -------- -------- -------- Net cash provided by (used in) financing activities 1,242 (856) (454) -------- -------- -------- Increase in cash and cash equivalents 1,033 1,722 2,320 Cash and cash equivalents, beginning of year 13,209 11,487 9,167 -------- -------- -------- Cash and cash equivalents, end of year $ 14,242 $ 13,209 $ 11,487 ======== ======== ======== See accompanying notes to the consolidated financial statements.
29 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. In addition, an allowance for doubtful accounts is maintained at a level which management believes is sufficient to cover potential credit losses for accounts receivable. Actual losses 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. 30 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 that 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, 1998, 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 to five years. For the years ended September 30, 1998, 1997 and 1996, amortization of capitalized software was $528,000, $808,000 and $248,000, respectively. At September 30, 1998 and 1997, unamortized purchased computer software costs were $6,508,000 and $1,221,000, 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. 31 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. Earnings per share Diluted earnings per share are based on the weighted-average number of common shares outstanding and common stock equivalent shares. Common stock equivalent shares result from the assumed exercise of outstanding stock options that have a dilutive effect when applying the treasury stock method. Basic earnings per share is computed on the basis of the weighted average number of common stock shares outstanding. Accounting pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (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 balance sheet. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. Beginning with the first quarter of 1999, 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. Beginning with fiscal year 1999, management intends to conform its annual consolidated financial statements to this pronouncement. In October 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 97-2, "Software Revenue Recognition," which supersedes SOP 91-1. The Company will be required to adopt SOP 97-2 for software transactions entered into beginning October 1, 1998, and retroactive application to years prior to adoption is prohibited. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements (e.g., software products, upgrades/enhancements, postcontract customer support, installation, training, etc.) to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence, which is specific to the vendor. The revenue allocated to software products (including specified upgrades/enhancements) generally is recognized upon delivery of the products. The revenue allocated to postcontract customer support generally is recognized ratably over the term of the support and revenue allocated to service elements (such as training and installation) generally is recognized as the services are performed. If a vendor does not have evidence of the fair value for all elements in a multiple-element arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. The Company's management believes that the adoption of SOP 97-2 will not have a material impact on the Company's results of operations. Beginning with fiscal year 1999, management intends to conform its consolidated financial statements to this pronouncement. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." The statement standardizes the disclosure requirements for pension and other 32 postretirement benefits. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact of the disclosure. Beginning with fiscal year 1999, management intends to conform its consolidated financial statements to this pronouncement. In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. The SOP also requires that costs related to the preliminary project stage and the post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. This statement is effective for financial statements issued for fiscal years beginning after December 15, 1998. Beginning with fiscal year 2000, management intends to conform its consolidated financial statements to this pronouncement. 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 4. 2. 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 consolidated 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 Year ended (dollars in thousands) Unaudited September 30, 1996 - -------------------------------------------------------------------------------- Revenues Fair, Isaac and Company, Incorporated $137,031 $148,749 Risk Management Technologies 5,746 7,164 -------- -------- $142,777 $155,913 ======== ======== Net Income Fair, Isaac and Company, Incorporated $ 13,732 $ 16,179 Risk Management Technologies 630 1,244 -------- -------- $ 14,362 $ 17,423 ======== ======== 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. 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. 33 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. 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 years ended September 30, 1998 and 1997, an additional $265,000 and $45,000, respectively, were 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, assuming the acquisitions had been made as of October 1, 1995, are summarized below. Pro forma summary (unaudited) Year ended September 30, (dollars in thousands except per share data) 1996 - -------------------------------------------------------------------------------- Revenue $ 162,491 Net income $ 17,495 Earnings per share: Diluted $ 1.25 Basic $ 1.32 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, or of future results of operations of the consolidated entities. 3. Cash Flow Statement Supplemental disclosure of cash flow information:
Years ended September 30, (dollars in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Income tax payments $17,174 $14,278 $13,785 Interest paid $ 803 $ 336 $ 223 Non-cash investing and financing activities: Tax benefit of exercised stock options $ 1,660 $ 1,474 $ 1,124 Issuance of common stock to ESOP $ 1,323 $ 969 $ -- Vesting of restricted stock $ 185 $ 289 $ 115 Purchase of Printronic and CRMA with common stock $ 145 $ -- $ 3,572 Contributions of treasury stock to ESOP $ -- $ 609 $ 1,105
34 4. Investments The following is a summary of available-for-sale securities and other investments at September 30, 1998 and 1997:
1998 1997 ---------------------------------------- ---------------------------------------------- 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 $ 18,049 $ 234 $ -- $ 18,283 $ 6,069 $ 39 $ -- $ 6,108 ======== ======== ==== ======== ======== ======== ======== ======== Long-term investments: U.S. government obligations $ 20,051 $ 676 $ -- $ 20,727 $ 10,480 $ 93 $ -- $ 10,573 Non-marketable securities 382 -- -- 382 306 -- -- 306 Marketable equity securities 2,978 281 -- 3,259 1,987 716 (321) 2,382 -------- -------- ---- -------- -------- -------- -------- -------- $ 23,411 $ 957 $ -- $ 24,368 $ 12,773 $ 809 $ (321) $ 13,261 ======== ======== ==== ======== ======== ======== ======== ========
The long-term U.S. government obligations mature in one to five years. 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. During the year ended September 30, 1998, the Company liquidated its share of this non-marketable security for a gain of $165,000. The Company does not have any further financial commitments with respect to this investment. The Company also recognized its equity share of losses from this Italian venture of $2,082,000 and $821,000 for the years ended September 30, 1997 and 1996, 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. 5. Property and Equipment Property and equipment at September 30, 1998 and 1997 valued at cost, consist of the following: (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------- Data processing equipment $ 42,995 $ 34,248 Office furniture, vehicles and equipment 16,156 14,383 Leasehold improvements 13,777 12,003 Capitalized leases 2,841 2,841 Less accumulated depreciation and amortization (38,876) (28,989) -------- -------- Net property and equipment $ 36,893 $ 34,486 ======== ======== Depreciation and amortization charged to operations were $13,553,000, $10,479,000 and $7,194,000 for the years ended September 30, 1998, 1997 and 1996, respectively. 35 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, 1998: Years ended September 30, (dollars in thousands) - ------------------------------------------------------------------------------- 1999 $ 487 2000 467 2001 375 ------- 1,329 Less: Amount representing interest (124) ------- Present value of net minimum lease payments $ 1,205 ======= 6. Intangibles Intangibles at September 30, 1998 and 1997, consist of the following: (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------- Goodwill $ 13,430 $ 10,138 Other 2,470 2,270 Less accumulated amortization (5,442) (4,047) -------- -------- $ 10,458 $ 8,361 ======== ======== Amortization charged to operations was $1,395,000, $1,274,000 and $734,000 for the years ended September 30, 1998, 1997 and 1996, respectively. 7. Income Taxes The provision for income taxes consists of the following: Years ended September 30, (dollars in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------- Current: Federal $ 17,380 $ 14,685 $ 9,026 State 3,967 2,863 1,901 Foreign 240 136 270 -------- -------- -------- 21,587 17,684 11,197 -------- -------- -------- Deferred: Federal (3,152) (2,400) 183 State (657) (424) (99) -------- -------- -------- (3,809) (2,824) 84 -------- -------- -------- $ 17,778 $ 14,860 $ 11,281 ======== ======== ======== 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. 36 The tax effect of significant temporary differences resulting in deferred tax assets at September 30, 1998 and 1997, are as follows: (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------- Deferred tax assets: Depreciation and amortization $ 2,350 $ 2,637 Customer advances 2,198 -- Employee benefit plans 1,594 280 Deferred compensation 1,489 2,042 Compensated absences 1,455 1,070 State taxes 1,388 1,007 Capital loss carryforward 1,245 1,530 Bad debt provision 464 283 Capital lease obligations 197 201 Warranty reserves 140 26 Other 630 103 -------- -------- 13,150 9,179 Less valuation allowance (1,245) (1,083) -------- -------- 11,905 8,096 Deferred tax liabilities: Tax on net unrealized gains on available-for-sale securities (491) (210) -------- -------- Deferred tax assets, net $ 11,414 $ 7,886 ======== ======== The valuation allowance for deferred tax assets at September 30, 1998 and 1997, was $1,245,000 and $1,083,000, 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 carry forward. 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) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Income tax provision at federal statutory rates in 1998, 1997 and 1996 $ 14,737 $ 12,441 $ 10,031 State income taxes, net of federal benefit 2,152 1,586 1,190 Increase in valuation allowance 162 480 603 Other 727 353 (543) -------- -------- -------- $ 17,778 $ 14,860 $ 11,281 ======== ======== ========
37 8. 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, 1998 and 1997:
(dollars in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Vested benefit obligation $ 9,524 $ 7,578 Nonvested benefit obligation 1,457 479 Effect of projected future earnings 5,877 3,710 -------- -------- Projected benefit obligation 16,858 11,767 Fair value of plan assets (10,413) (10,266) -------- -------- Projected benefit obligation in excess of plan assets 6,445 1,501 Unrecognized prior service cost 59 68 Unrecognized net loss (5,895) (2,692) Unrecognized net obligation remaining to be amortized (138) (158) Additional minimum liability 97 -- -------- -------- (Prepaid) accrued pension cost $ 568 $ (1,281) ======== ========
The plan assets consist primarily of U.S. government and marketable equity securities. The projected benefit obligation includes an accumulated benefit obligation of $10,981,000 and $8,057,000 at September 30, 1998 and 1997, respectively. The projected benefit obligation exceeded the fair value of the pension plan assets for the years ended September 30, 1998 and 1997, respectively. 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 6.5% and 4.0%, respectively, at September 30, 1998, and 7.5% and 5.0%, respectively, at September 30, 1997. The expected long-term rate of return on assets was 8.5% at September 30, 1998 and 1997. The net pension cost for the fiscal years ended September 30, 1998 and 1997, included the following components: (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------- Service costs $ 1,516 $ 1,011 Interest cost on projected benefit obligation 943 745 Actual return on plan assets (840) (2,050) Net amortization and deferral 132 1,502 ------- ------- Net periodic pension plan cost $ 1,751 $ 1,208 ======= ======= 38 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 $1,803,000, $1,534,000 and $1,445,000 for the years ended September 30, 1998, 1997 and 1996, respectively. At September 30, 1998 and 1997, the ESOP held 835,693 and 970,566 shares of Company stock, respectively. The amount of dividends on ESOP shares were $75,212, $81,000 and $94,000 for the years ended September 30, 1998, 1997 and 1996, respectively. Company stock held and paid for by the ESOP is allocated annually to participants based on employee compensation levels. While employed by the Company, participants vest in the allocated shares at rates ranging from 0% to 30% over a period of 1 to 7 years until fully vested, depending on the plan. 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, depending on the plan. The Company contributions to 401(k) plans were $790,000, $673,000 and $470,000 for the years ended September 30, 1998, 1997 and 1996, respectively. In addition, the Company maintains a supplemental retirement and savings plan for certain officers and senior management employees. Company contributions to that plan were $247,000, $132,000 and $104,000 for the years ended September 30, 1998, 1997 and 1996, 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 $3,273,000, $3,842,000 and $3,560,000 for the years ended September 30, 1998, 1997 and 1996, 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, 1998 and 1997, the long-term officers' incentive plan payable was $3,066,000 and $3,475,000, 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 $5,537,000, $5,211,000 and $4,426,000 for the years ended September 30, 1998, 1997 and 1996, respectively. 9. Stock Common A total of 35,000,000 shares of common stock, $.01 par value, are authorized, of which 13,992,126 shares (including 9,787 shares of treasury stock) were outstanding at September 30, 1998, and 13,474,382 shares (including 12,114 shares of treasury stock) were outstanding at September 30, 1997. Preferred A total of 1,000,000 shares of preferred stock, $.01 par value, are authorized; no preferred stock has been issued. 39 10. 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 reserve shares of common stock for issuance to officers, key employees and non-employee directors. The Company has elected to continue to apply the provisions of APB No. 25, and provide the pro forma disclosures of SFAS No. 123, "Accounting for Stock-Based Compensation." Granted awards generally have a maximum term of ten years and vest over one to five years. Under this plan approved by the stockholders, a number of shares equal to 4% of the number of shares of the Company's common stock outstanding on the last day of the preceding fiscal year is added to the shares available under the plan each fiscal year, provided that the number of shares suitable for grants of incentive stock options for the remaining term of the plan shall not exceed 1,500,000 shares. 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: 1998 1997 1996 - ------------------------------------------------------------------------------- Expected life (years) 5 5 5 Interest rate 5.5% 6.5% 6.2% Volatility 43% 45% 45% Dividend yield 0% 0% 0% The following information regarding these option plans for the years ended September 30 is as follows:
1998 1997 1996 ---------------------- ------------------------ ---------------------- Weighted- Weighted- Weighted- average average average exercise exercise exercise Options price Options price Options price - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,843,000 $20.63 1,388,000 $12.21 1,324,000 $ 6.72 Granted 526,000 $38.02 613,000 $36.82 286,000 $ 32.57 Exercised (487,000) $ 5.61 (141,000) $ 7.19 (222,000) $ 5.62 Forfeited (86,000) $34.43 (17,000) $28.96 -- $ -- --------- --------- --------- Outstanding at end of year 1,796,000 $29.11 1,843,000 $20.63 1,388,000 $ 12.21 ========= ========= ========= Options exercisable at year end 541,000 $11.80 782,000 $ 5.33 694,000 $ 3.73 ========= ========= =========
The weighted-average fair value of options granted for the years ended September 30, 1998, 1997 and 1996, was $17.30, $17.47 and $15.35, respectively. 40 The following table summarizes information about significant fixed-price stock option groups outstanding September 30, 1998:
Options outstanding Options exercisable ------------------------------------------------ ---------------------------- Weighted average Weighted Weighted Number remaining average Number average Range of exercise prices outstanding contractural life exercise price outstanding exercise price - ------------------------------------------------------------------------------------------------------------------------ $ .92 to $ 3.50 238,000 1.27 $ 2.09 238,000 $ 2.09 $ 3.84 to $ 19.31 226,000 5.00 $ 11.95 209,000 $ 12.41 $20.75 to $ 36.94 430,000 6.22 $ 31.91 45,000 $ 27.11 $38.25 to $ 45.63 902,000 7.84 $ 39.22 49,000 $ 42.33 --------- ------- $ .92 to $ 45.63 1,796,000 6.22 $ 29.11 541,000 $ 11.80 ========= =======
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) 1998 1997 1996 - -------------------------------------------------------------------------------- Net income, as reported $ 24,327 $ 20,686 $ 17,423 ======== ======== ========== Pro forma net income $ 20,655 $ 18,091 $ 17,002 ======== ======== ========== Earnings per share, as reported: Diluted $ 1.68 $ 1.46 $ 1.25 ======== ======== ========== Basic $ 1.77 $ 1.55 $ 1.32 ======== ======== ========== Pro forma earnings per share: Diluted $ 1.43 $ 1.27 $ 1.22 ======== ======== ========== Basic $ 1.50 $ 1.35 $ 1.29 ======== ======== ========== The pro forma effect on net income for each of the years ended September 30, 1998, 1997 and 1996, may not be representative of the effects on reported net income in future years. 11. 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 generally provide for annual increases based upon the Consumer Price Index or fixed increments. In May 1998, the Company entered into a synthetic lease agreement to lease land in San Rafael, California, and improvements comprising the first phase of an office complex facility to be constructed on the land. A synthetic lease is asset-based financing structured to be treated as a lease for accounting purposes but as a loan for tax purposes. The office complex facility is intended to accommodate the future growth of the Company. The Company had an option (the "Option") to purchase the undeveloped land in December 1997, and the Option was assigned to the lessor in connection with the synthetic lease transaction. The lessor under the synthetic lease has committed to spend up to $55 million for the purchase of the land and construction of this first phase of the facility, and the Company will act as construction agent for the lessor. At September 30, 1998, the lessor's total accumulated cost for land and construction of the facility was $15.1 million. The lease term began in May 1998 and continues thereafter for five years for the land and, when they are constructed, will incorporate the buildings and other improvements that will comprise the first phase of the facility. Rental payments will commence on completion of construction, and at that time the rental payments will be based on the total construction costs for the facility and the one month LIBOR rate plus 0.75% or 1.00%. The completion of construction is expected to occur in January 2001. 41 With the approval of lessor, the Company may extend the lease term for up to three one-year periods or one three-year period. The Company has the option either to purchase the entire facility at a purchase price approximating lessor's then-accumulated total costs or only certain portions of the facility, at a pre-set price, at any time during the term or, at the expiration of the lease term to cause the facility to be sold to a third party. The synthetic lease requires the Company to maintain specified financial covenants, all of which the Company was in compliance with at September 30, 1998. Future minimum lease payments under the synthetic lease are not included in the schedule below. Minimum future rental commitments under operating leases are as follows: Year ending September 30, (dollars in thousands) - ------------------------------------------------------------------------------- 1999 $ 7,954 2000 8,198 2001 7,779 2002 7,544 2003 5,075 Thereafter 33,270 -------- $ 69,820 ======== Rent expense under operating leases, including month-to-month leases, was $8,298,000, $6,413,000 and $4,821,000 for the years ended September 30, 1998, 1997 and 1996, 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. 12. 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, production and service offices. Foreign sales are primarily exports. The Company's revenues from customers outside the United States were $42,894,000, $33,879,000 and $26,142,000 for the years ended September 30, 1998, 1997 and 1996, respectively. 13. Other Income (Expense) Other income (expense) consists of the following: Years ended September 30, (dollars in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Interest income $ 2,403 $ 2,040 $ 1,748 Interest expense (803) (336) (223) Foreign currency loss (278) (677) (97) Equity loss in investments -- (2,082) (821) Investment write-off -- (773) (1,535) Acquisition expenses -- (558) -- Other 351 176 114 ------- ------- ------- $ 1,673 $(2,210) $ (814) ======= ======= ======= 42 Earnings Per Share The following reconciles the numerators and denominators of diluted and basic earnings per share (EPS):
Years ended September 30, (dollars in thousands, except per share data) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Numerator - Net income $ 24,327 $ 20,686 $ 17,423 ======== ======== ======== Denominator - Shares: Diluted weighted-average shares and assumed conversions of stock options 14,463 14,202 13,922 Effect of dilutive securities - employee stock options (700) (816) (761) -------- -------- -------- Basic weighted-average shares 13,763 13,386 13,161 ======== ======== ======== Earnings per share: Diluted $ 1.68 $ 1.46 $ 1.25 ======== ======== ======== Basic $ 1.77 $ 1.55 $ 1.32 ======== ======== ========
Total options outstanding included 930,000, 474,000 and 59,000 options to purchase shares of common stock at prices ranging from $36.50 to $45.63, $38.25 to $45.63 and $40.00 to $41.88 at September 30, 1998, 1997 and 1996, respectively. These options were not included in the computation of diluted EPS because the exercise price for such options was greater than the average market price of the common shares for the years ended September 30, 1998, 1997 and 1996, respectively. 15. 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, 1998. 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 per share data) Dec. 31, 1996 Mar. 31, 1997 June 30, 1997 Sept. 30, 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: Diluted $ .33 $ .38 $ .30 $ .44 =========== =========== =========== =========== Basic $ .35 $ .40 $ .32 $ .47 =========== =========== =========== =========== Shares used in computing earnings per share: Diluted 14,155,000 14,228,000 14,325,000 14,452,000 =========== =========== =========== =========== Basic 13,291,000 13,361,000 13,395,000 13,449,000 =========== =========== =========== ===========
43
(in thousands, except per share data) Dec. 31, 1997 Mar. 31, 1998 June 30, 1998 Sept. 30, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 53,511 $ 59,655 $ 64,642 $ 67,737 Cost of revenues 19,865 21,206 21,946 21,963 ----------- ----------- ----------- ----------- Gross profit $ 33,646 $ 38,449 $ 42,696 $ 45,774 =========== =========== =========== =========== Net income $ 3,967 $ 5,488 $ 6,399 $ 8,473 =========== =========== =========== =========== Earnings per share: Diluted $ .28 $ .38 $ .45 $ .59 =========== =========== =========== =========== Basic $ .29 $ .40 $ .46 $ .61 =========== =========== =========== =========== Shares used in computing earnings per share: Diluted 14,346,000 14,304,000 14,359,000 14,449,000 =========== =========== =========== =========== Basic 13,489,000 13,707,000 13,894,000 13,964,000 =========== =========== =========== ===========
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. 44 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 2, 1999. 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 2, 1999. 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 2, 1999. 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 2, 1999. 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 2, 1999. 45 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................................ 25 Consolidated statements of income for each of the years in the three-year period ended September 30, 1998........ 26 Consolidated balance sheets at September 30, 1998 and September 30, 1997....................................... 27 Consolidated statements of stockholders' equity for each of the years in the three-year period ended September 30, 1998....................................... 28 Consolidated statements of cash flows for each of the years in the three-year period ended September 30, 1998.. 29 Notes to consolidated financial statements.................... 30 2. Financial statement schedule: Independent Auditor's Report on Financial Statement Schedule.... 52 II Valuation and qualifying accounts at September 30, 1998, 1997 and 1996............................................ 53 3. Exhibits: 2.1 Lease dated December 2, 1998, by and between DynaMark, Inc., and CSM Corporation. 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, filed as Exhibit 2.2 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference. Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules were 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, filed as Exhibit 2.3 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference.* 2.4 Amendment To Lease, dated December 2, 1998, by and between CSM Corporation (assignee) and DynaMark, Inc. amending lease dated May 1,1995 between DynaMark, Inc. and Control Data Systems Inc. 3.1 Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference. 46 3.2 Restated By-laws of the Company, filed as Exhibit 3.2 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference. 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, filed as Exhibit 4.1 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference.* 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. 10.1 Certificate of Resolution Changing Officers' Incentive Plan, Exempt Employees Bonus Plan and other Company Plan Parameters.* 10.2 Company's 1987 Stock Option Plan, originally filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Commission File No. 33-14491) (the "Registration Statement").* 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), originally filed as Exhibit 10.4 to the Company's report on Form 10-K for the fiscal year ended September 30, 1994.* 10.5 Lease, dated October 30, 1983, between S.R.P. Limited Partnership and the Company, as amended, originally filed as Exhibit 10.7 to the Registration Statement. 10.6 Stock Option Plan for Non-Employee Directors, originally filed as Exhibit 10.8 to the Company's report on Form 10-K for the fiscal year ended September 30, 1988.* 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, originally filed as Exhibit 10.11 to the Company's report on Form 10-K for the fiscal year ended September 30, 1989.* 10.9 First Amendment to the Company's Stock Option Plan for Non-Employee Directors, originally filed as Exhibit 10.12 to the Company's report on Form 10-K for the fiscal year ended September 30, 1989.* 10.10 Amendment No.1 to the Company's 1992 Long-Term Incentive Plan (as amended and restated effective November 21, 1995), filed as Exhibit 10.10 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference.* 10.11 Addendum Number Seven to lease between S.R.P. Limited Partnership and the Company, originally filed as Exhibit 10.15 to the Company's report on Form 10-K for the fiscal year ended September 30, 1990. 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. 47 10.13 Lease, dated September 5, 1991, between 111 Partners, a California general partnership, and the Company originally filed as Exhibit 10.20 to the Company's report on Form 10-K for the fiscal year ended September 30, 1991. 10.14 Construction Loan Agreement, dated September 5, 1991, between 111 Partners and the Company originally filed as Exhibit 10.21 to the Company's report on Form 10-K for the fiscal year ended September 30, 1991. 10.15 Amendment No.2 to the Company's 1992 Long-Term Incentive Plan (as amended and restated effective November 21, 1995) filed as exhibit 10.15 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference.* 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, filed as Exhibit 10.17 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference.* 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 Second Amendment to Lease dated December 2, 1998, between CSM Corporation and DynaMark, Inc. amending lease between the parties dated March 11, 1997. 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. 48 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. 10.32 First Addendum to Lease, dated August 13, l997, by and between the Company and Regency Center, filed as Exhibit 10.32 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference. 10.33 Option Agreement, dated November 26, l997, by and between the Company and Village Builders, L.P., filed as Exhibit 10.33 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference. 10.34 Leasehold Improvements Agreement, dated November 26, l997, by and between the Company and Village Builders, L.P., filed as Exhibit 10.34 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference. 10.35 Lease, dated March 11, l997, by and between DynaMark, Inc. and CSM, filed as Exhibit 10.35 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference. 10.36 First Amendment to Lease, dated September 24, l997, by and between DynaMark, Inc. and CSM, filed as Exhibit 10.36 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference. 10.37 Chase Database Agreement, dated October 29, l997, by and among DynaMark, Inc. and Chase Manhattan Bank USA, National Association, filed as Exhibit 10.37 to the Company's report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference. 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. 10.38 Participation Agreement, dated May 15, 1998, between Company, Lease Plan North America, Inc., ABN Amro Bank N.V. and other participants named therein. 49 10.39 Lease Agreement, Construction Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, dated May 15, 1998, between Company and Lease Plan North America, Inc. 10.40 Purchase Agreement dated May 15, 1998, between Company and Lease Plan North America, Inc. 10.41 Third Amendment to Lease Dated December 2, 1998, by and between CSM Corporation and DynaMark, Inc. amending lease between the parties dated April 28, 1995. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP (see page 54 of this Form 10-K). 24.1 Power of Attorney (see page 51 of this Form 10-K). 27 Financial Data Schedule. * Management contract or compensatory plan or arrangement. (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, 1998. 50 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 28, 1998 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.
/s/ Larry E. Rosenberger - ------------------------------------ President, Chief Executive Officer December 28, 1998 Larry E. Rosenberger (Principal Executive Officer) and Director /s/ Patricia Cole - ------------------------------------ Senior Vice President and December 28, 1998 Patricia Cole Chief Financial Officer (Principal Financial and Accounting Officer) /s/ A. George Battle - ------------------------------------ Director December 28, 1998 A. George Battle /s/ Bryant J. Brooks - ------------------------------------ Director December 28, 1998 Bryant J. Brooks /s/ H. Robert Heller - ------------------------------------ Director December 28, 1998 H. Robert Heller /s/ Guy R. Henshaw - ------------------------------------ Director December 28, 1998 Guy R. Henshaw /s/ David S. P. Hopkins - ------------------------------------ Director December 28, 1998 David S. P. Hopkins /s/ Robert M. Oliver - ------------------------------------ Director December 28, 1998 Robert M. Oliver /s/ Robert D. Sanderson - ------------------------------------ Director December 28, 1998 Robert D. Sanderson /s/ John D. Woldrich - ------------------------------------ Director December 28, 1998 John D. Woldrich
51 The Board of Directors Fair, Isaac and Company, Incorporated: Under date of October 29, 1998, we reported on the consolidated balance sheets of Fair, Isaac and Company, Incorporated and subsidiaries as of September 30, 1998 and 1997, 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, 1998, which are included in the 1998 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule in the 1998 annual report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. San Francisco, California October 29, 1998 52 Schedule II Fair, Isaac and Company, Incorporated VALUATION AND QUALIFYING ACCOUNTS Rule 12-09 September 30, 1998, 1997 and 1996
Additions Balance at -------------------- Balance at Beginning Charged End of Description of Period to Expense Other(1) Write-offs Period ----------- ---------- ---------- ---------- ---------- ---------- September 30, 1998: Allowance for Doubtful Accounts $ 758,000 $ 677,000 $ -- $ (272,000) $1,163,000 September 30, 1997: Allowance for Doubtful Accounts $ 485,000 $ 438,000 $ -- $ (165,000) $ 758,000 September 30, 1996: Allowance for Doubtful Accounts $ 332,000 $ 600,000 $ 11,000 $ (458,000) $ 485,000 (1) Amount represents the allowance recorded due to the acquisition of Credit & Risk Management Associates, Inc.
53 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. 333-20537) on Form S-3, the registration statement (No. 333-42473) on Form S-3 of Fair, Isaac and Company, Incorporated and subsidiaries of our reports dated October 29, 1998, relating to the consolidated balance sheets of Fair, Isaac and Company, Incorporated and subsidiaries as of September 30, 1998 and 1997, 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, 1998, which reports appear in the September 30, 1998 annual report on Form 10-K of Fair, Isaac and Company, Incorporated, and subsidiaries. San Francisco, California December 28, 1998 54 EXHIBIT INDEX TO FAIR, ISAAC AND COMPANY, INCORPORATED REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 Exhibit No. Exhibit - ----------- ------- 2.1 Lease dated December 2, 1998, by and between DynaMark, Inc. and CSM Corporation. 2.4 Amendment To Lease, dated December 2, 1998, by and between CSM Corporation (assignee) and DynaMark, Inc. amending lease dated May 1,1995 between DynaMark, Inc. and Control Data Systems Inc. 10.1 Certificate of Resolution Changing Officers' Incentive Plan, Exempt Employees Bonus Plan and other Company Plan Parameters. 10.2 Company's 1987 Stock Option Plan, originally filed as Exhibit 10.2 to the Registration Statement. 10.5 Lease, dated October 30, 1983, between S.R.P. Limited Partnership and the Company, as amended, originally filed as Exhibit 10.7 to the Registration Statement. 10.6 Stock Option Plan for Non-Employee Directors, originally filed as Exhibit 10.8 to the Company's report on Form 10-K for the fiscal year ended September 30, 1988. 10.8 First Amendment to the Company's 1987 Stock Option Plan, originally filed as Exhibit 10.11 to the Company's report on Form 10-K for the fiscal year ended September 30, 1989. 10.9 First Amendment to the Company's Stock Option Plan for Non-Employee Directors, originally filed as Exhibit 10.12 to the Company's report on Form 10-K for the fiscal year ended September 30, 1989. 10.11 Addendum Number Seven to lease between S.R.P. Limited Partnership and the Company, originally filed as Exhibit 10.15 to the Company's report on Form 10-K for the fiscal year ended September 30, 1990. 10.13 Lease, dated September 5, 1991, between 111 Partners, a California general partnership, and the Company originally filed as Exhibit 10.20 to the Company's report on Form 10-K for the fiscal year ended September 30, 1991. 10.14 Construction Loan Agreement, dated September 5, 1991, between 111 Partners and the Company originally filed as Exhibit 10.21 to the Company's report on Form 10-K for the fiscal year ended September 30, 1991. 10.23 Second Amendment to Lease dated December 2, 1998 between CSM Corporation and DynaMark, Inc. amending lease between the parties dated March 11, 1997. 10.38 Participation Agreement, dated May 15, 1998, between Company, Lease Plan North America, Inc., ABN Amro Bank N.V. and other participants named therein. 55 10.39 Lease Agreement, Construction Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, dated May 15, 1998, between Company and Lease Plan North America, Inc. 10.40 Purchase Agreement dated May 15, 1998, between Company and Lease Plan North America, Inc. 10.41 Third Amendment To Lease, dated December 2, 1998, by and between CSM Corporation and DynaMark, Inc. amending lease between the parties dated April 28, 1995. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP (see page 54 of this Form 10-K). 24.1 Power of Attorney (see page 51 of this Form 10-K). 27 Financial Data Schedule. 56


                                    L E A S E

                             ARTICLE 1. LEASE TERMS

1.1  LANDLORD AND TENANT.  This lease  ("Lease") is entered into this 2nd day of
December,  1998  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 (sometimes  hereinafter  referred to as the "Premises" and
"Building",  or  collectively  as the  "Premises")  illustrated on the site plan
attached  hereto as EXHIBIT A,  together with a  nonexclusive  right of ingress,
egress and access  over and across the  private  drives  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
50,407 square feet.

The Tenant  acknowledges  that the Premises are a part of a  development  which,
with the addition of the Premises,  will include four  buildings and  associated
appurtenant  improvements,  all as shown on the site plan attached as EXHIBIT A.
The Tenant  acknowledges  and agrees  that the  Premises  will be subject to and
benefited by various non-exclusive easements for ingress, egress and access over
the private  drives  serving the Project,  and certain  exclusive  easements for
utilities,  and other  purposes  provided that the same shall not interfere with
the use and enjoyment of the Premises, as contemplated herein.

1.3      IMPROVEMENTS.  Landlord shall diligently pursue the construction of 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.  Architectural  plans and  specifications
         describing the  improvements  to be constructed  are attached hereto as
         EXHIBITS C and D.

1.4      LEASE TERM.

         A.       Term.  The term of this  Lease  shall  be for a period  of one
                  hundred  fifty-six (156) months ("Lease Term"),  commencing on
                  the commencement date hereinafter specified

         B.       Commencement   Date.   The  Lease  Term  shall  commence  (the
                  "Commencement  Date") on the date that  Landlord  delivers the
                  Premises  to  Tenant  substantially  complete  and  ready  for
                  occupancy by Tenant.  The parties anticipate that the Premises
                  will be  delivered  to Tenant  on or about  July 1,  1999.  If
                  Landlord,  despite its diligent efforts,  is unable to deliver
                  the Premises to Tenant on or before such date this Lease shall
                  nevertheless  remain in full force and  effect,  and  Landlord
                  shall exercise diligent and reasonable  efforts to deliver the
                  Premises  to  Tenant  as  soon  thereafter  as  is  reasonably
                  possible.  If the Landlord's  failure to deliver possession of
                  the  Premises  on July 1, 1999  results in the  Tenant  paying
                  holdover rent at its "Churchill" facility,  the Landlord shall
                  reimburse the Tenant for its actual holdover  costs,  provided
                  that the Landlord's

                                       1                             Exhibit 2.1




                  reimbursement shall in no case exceed $5,000.00.  In addition,
                  the Landlord  shall also reimburse the Tenant for "overlap" of
                  any rent that the Tenant pays at the Churchill facility due to
                  Landlord's failure to deliver the Premises by the first of the
                  month.  For  example,  if the  Tenant  must pay the  Churchill
                  landlord $15,000.00 for July rental,  which includes $5,000.00
                  of holdover rent,  due to the  Landlord's  failure to complete
                  the Premises,  and the Tenant ultimately vacates the Churchill
                  facility on July 15th, but is not entitled to a refund for the
                  balance  of the July rent,  the  Landlord's  penalty  would be
                  $10,161.00,  which represents a $5,000.00 holdover penalty and
                  $5,161.00  for 16/31 of the  month  for  which  the  Tenant is
                  obligated to pay rent at two  facilities.  Any penalty owed by
                  the Landlord may be paid by crediting  the Tenant's  next rent
                  obligation. When the Commencement Date has been established as
                  above provided, the parties shall execute an Addendum to Lease
                  in the form  attached  hereto as  EXHIBIT  E,  which  Addendum
                  shall,  among other things,  confirm the Commencement Date. If
                  the  Commencement  Date  is  other  than  the  first  day of a
                  calendar month,  this Lease shall continue in force and effect
                  for the full  Lease  Term  from and after the first day of the
                  calendar month next succeeding the Commencement Date.

         C.       Subject  to the terms and  conditions  hereinafter  set forth,
                  Tenant  shall have the option to extend the term of this Lease
                  for one (1) additional  sixty (60) month term ("Option  Term")
                  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 (1) year prior
                  to the expiration of the Lease Term.  Tenant may exercise this
                  option  only if:  (i) no  condition  of  default  exists  with
                  respect to Tenant's  performance of its obligations  under the
                  Lease; and (ii) Tenant simultaneously exercises its options to
                  extend  under  the New Lease  and  under  the  Existing  Lease
                  covering the premises  located at 4295 Lexington  Avenue North
                  in Arden Hills,  Minnesota (as defined in Section 14.12 of the
                  New Lease). Base Rent for the Option Term shall be at the fair
                  market  rate  for  comparable  space  in  the  north  suburban
                  geographic  area. The fair market rent shall be agreed upon by
                  Tenant and Landlord  within sixty (60) days of Tenant's notice
                  to Landlord of its  irrevocable  intent to exercise its option
                  to extend set forth herein.  The fair market rental rate shall
                  be determined in accordance  with the  definition set forth in
                  Section 7 of the Existing  Lease dated May 1, 1995 and amended
                  December 30, 1996 for the premises  located at 4295  Lexington
                  Avenue  North in Arden  Hills,  Minnesota.  In the event  that
                  Landlord  and Tenant fail to agree to the fair  market  rental
                  rate in the time period set forth herein, then the fair market
                  rent shall be established in accordance  with the  arbitration
                  procedures  set forth in Section 8 of the  Existing  Lease for
                  the premises  located at 4295 Lexington  Avenue North in Arden
                  Hills,  Minnesota.  If Tenant fails to exercise this option as
                  aforesaid,  this  option  shall  be null  and  void  and of no
                  further force and effect.

         D.       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

                                       2




                  (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  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             $64,899.01          $15.45
                                61-120           $66,789.28          $15.90
                                121-156          $68,679.54          $16.35

                  Option Term:
                                157-216          market              market

                  *Base Rent is subject to  adjustment  as  provided in Sections
                  1.5.B., 6.1, and 14.14 of this Lease

         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 50,407  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.  The  Initial  Base Rent shall also be  adjusted
                  based  upon the  actual  construction  costs  as set  forth in
                  Section 6.1.

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 CORPORATION                        DYNAMARK, INC.

                                       3




         2575 UNIVERSITY AVE. W., #150          4255 LEXINGTON AVE. N.
         ST. PAUL, MN  55114-1024               ARDEN HILLS, MN  55112
         (651) 646-1717                         ATTN:  JIM SCHOELLER, SR. V.P.


            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.  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,  1999,  Landlord  determines  that it will not be able to
deliver the  Building and  Premises to Tenant in the  condition  required by the
anticipated  Commencement Date,  Landlord shall notify Tenant, in writing, on or
before July 1, 1999, 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,  the Building and Premises
are not  substantially  complete and ready for  Tenant's  occupancy by August 1,
1999, 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,  the Building and Premises are not substantially  complete
and ready for Tenant's  occupancy  by  September 1, 1999,  Tenant shall have the
option to terminate this Lease by written notice to Landlord after  September 1,
1999 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  operating
expenses  for  each  calendar   year,   which  amount  shall  be  adjusted  from
time-to-time by Landlord based 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

                                       4




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 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:

                                       5




         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 fire 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 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  all  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

                                       6




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  for 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, insurers 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

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  caused  by  criminal  acts or entry by
unauthorized persons into the Premises or the Building.

4.3 UNDERGROUND  CHILLED WATER LINE. In the event that the general contractor or
one of its subcontractors damages the underground chilled water line serving the
4295 building,  and the damage necessitates the Tenant shutting down its chilled
water computers, the Landlord shall pay a penalty of $5,000.00 per day for every
day that the  computers  are  inoperable  due to the  unavailability  of chilled
water.  Any penalty owed by the  Landlord may be paid by crediting  the Tenant's
next rent obligation.

                       ARTICLE 5. REPAIRS AND MAINTENANCE

                                       7




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 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.

                                       8




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.  The parties agree that the Initial
Base  Rent  is  based  on  the  development  cost  estimates  set  forth  in the
preliminary  project budget  attached hereto as EXHIBIT F, and that upon Project
completion  the Base Rent will be  increased  or  decreased  to  reflect  actual
project  costs.  Specifically,  upon  completion  of  the  construction  of  the
Premises,  the  Initial  Base Rent shall be adjusted  so that  Landlord's  gross
annual yield is thirteen and thirty-five/100  percent (13.35%) of the total cost
of the Project (i.e.  annual Base Rent equals Total Project Costs  multiplied by
13.35%), provided, however that the "Soft Costs" as set forth in EXHIBIT F shall
be  fixed at  $616,809.00.  Tenant  shall  be  entitled  to  participate  in the
construction  management process and will have the right to initiate and approve
plan  modifications  and all construction  subcontracts.  Landlord shall provide
Tenant with construction cost information on an "open book" basis and will allow
Tenant to audit Landlord's  accounting  records with respect to the construction
of the Premises.  Upon completion of construction  and  reconciliation  of Total
Project Costs,  the Landlord and Tenant shall execute an Addendum in the form of
attached EXHIBIT E, which Addendum shall,  among other things,  confirm the Base
Rent for the Premises. In the event the Total Project Costs incurred by Landlord
(exclusive of Soft Costs)  exceed Five Million Five Hundred  Thousand and 00/100
Dollars  ($5,500,000),  then any such excess  costs shall be paid to Landlord by
Tenant, in cash, within fifteen (15) days following  completion of construction,
reconciliation  of Project  Costs,  and  Landlord's  submission of an invoice to
Tenant for such excess costs.

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  additions or  improvements  to the Premises made by
Tenant shall at once become the property of Landlord and shall be surrendered to
Landlord upon the 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.

                                       9




                        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 two hundred  (200)  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 two
hundred  (200) 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 two hundred  (200)  working days from the 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,  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 or 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

                                       10




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

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

                                       11




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.

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 novation or a release of Tenant
or any guarantor  from the further  performance  of its  obligations  under this
Lease.

                                       12




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.

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 except 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

                                       13




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 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  canceling 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

                                       14




repairs to the Premises to the extent deemed by Landlord  necessary or 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;

         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

                                       15




reimburse Landlord upon demand for any amount expended by Landlord in connection
with the cure, including, without limitation, attorneys' fees and interest.

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  shall be  effective  unless it is in
                  writing and signed by Landlord.


                 ARTICLE 12. RELOCATION (Intentionally Omitted)


               ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES

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,

                                       16




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  shall 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.

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 shall 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.

                                       17




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  shall  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 shall
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 shall  recover a money  judgment
against 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 shall be no brokerage fee
or commission due on expansions, options or renewals by Tenant.

                                       18




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
service 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 EXISTING  LEASES.  The Landlord and Tenant are parties to leases  covering
premises  located at 4255,  4265 and 4295 Lexington  Avenue North,  Arden Hills,
Minnesota  (the "Existing  Leases").  The parties  acknowledge  and agree that a
material  condition for  Landlord's  agreement to enter into this Lease,  and to
enable  Landlord to perform its obligations  hereunder,  is the Amendment of the
Existing Leases.  Attached hereto and  incorporated  herein by this reference as
EXHIBITS G-1, G-2 and G-3, are the proposed  amendments  of the Existing  Leases
(the  "Amendments").  This Lease shall only be effective upon full execution and
delivery of this Lease and each of the Amendments, by 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 described in Section 6.1 hereof, shall be completed 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,  and is not caused by any act or  negligence  of
Tenant,  its  employees or  contractors.  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.

                                       19




Occupancy of the Premises by Tenant for conducting its business shall constitute
an  acknowledgement  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.

14.14 ADDITIONAL  PARKING. As of the Commencement Date, the Parking Plan for the
Premises  will be as depicted in EXHIBIT A. Upon  written  request  from Tenant,
Landlord will install  additional  parking on the Premises,  and on the premises
covered by the Existing Leases,  generally in accordance with the parking layout
shown on attached EXHIBIT A-1, subject to the following conditions:

      (i)         Landlord's application for and acquisition of all governmental
                  permits and appraisals necessary to permit Landlord to proceed
                  with construction and installation of such additional parking;
      
      (ii)        Landlord shall, following acquisition of necessary permits and
                  approvals,  immediately  proceed  with  construction  of  such
                  additional  parking and shall  complete the same within ninety
                  (90) days, subject to force majeure delays,  including adverse
                  weather conditions (Note: the normal paving season is May 15th
                  through October 15th of each year);
      
      (iii)       From and after the date of completion of the  construction and
                  installation of such parking,  the Base Rent payable by Tenant
                  under this Lease shall be  increased,  annually,  by an amount
                  equal  to  13.35%  of  the  costs   incurred  by  Landlord  in
                  connection with the  construction of such additional  parking,
                  which  increased rent shall be payable  monthly,  as a part of
                  Tenant's Monthly Base Rent.

At any time following the  expiration of the fifth lease year,  Landlord may, at
its option,  proceed with the additional parking, or a portion thereof, and from
and after  the date of

                                       20




completion thereof, the Base Rent payable by Tenant hereunder shall be increased
in accordance with Subsection (iii) above.

14.15  GUARANTY.  The Landlord has required,  as a condition to its execution of
this Lease, that Fair, Isaac and Company, Incorporated unconditionally guarantee
the full performance of the Tenants obligations hereunder.  The Tenant agrees to
deliver such guaranty, in the form of EXHIBIT H attached hereto and incorporated
herein by reference,  within ten (10) days  following the full execution of this
Lease by  Landlord  and  Tenant.  In the  event  Tenant  fails to  deliver  such
guaranty,  Landlord may, at its option  terminate  this Lease upon five (5) days
written notice to Tenant.

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

LANDLORD:                                   TENANT:

CSM CORPORATION                             DYNAMARK, INC.


BY: _______________________________         BY: _______________________________

ITS: _______________________________        ITS: _______________________________

                                       21



                            SECOND AMENDMENT TO LEASE


THIS SECOND  AMENDMENT TO LEASE is made and entered into effective as of the 2nd
day of  December,  1998,  between  CSM  CORPORATION,  a  Minnesota  corporation,
("Landlord") and DYNAMARK, INC., a Minnesota corporation, ("Tenant").


                                    RECITALS

First:        Tenant  entered into a lease  agreement with Control Data Systems,
              Inc.  ("CDSI") dated May 1, 1995, (the "Lease")  covering  certain
              premises  located at 4295  Lexington  Avenue  North,  Arden Hills,
              Minnesota (the "Premises").

Second:       Landlord  purchased  the real  property upon which the Premises is
              located under the terms of the Purchase  Agreement  dated November
              8, 1996.

Third:        As a part  of  Landlord's  purchase  of the  real  property,  CDSI
              assigned its interest in the Lease to Landlord.

Fourth:       The parties have  executed a First  Amendment  to Lease  Agreement
              ("First Amendment") dated December 30, 1996.

Fifth:        The  parties  wish to execute  this Second  Amendment  to Lease to
              further extend the term of the Lease,  establish the rents payable
              thereunder,  adjust the site plan to reflect the  reduction in the
              area of other improvements to the Premises, and nullify the future
              development agreement contained in the First Amendment:


                                    AGREEMENT

In  consideration  of  the  above  stated  premises  and  the  mutual  covenants
hereinafter  contained,  the parties  hereby  agree that the Lease is  modified,
amended and/or supplemented as follows:

1.       Premises.  The Premises and certain improvements thereupon shall be and
         are  hereby  modified  as shown on the site  plan  attached  hereto  as
         REVISED  EXHIBIT  A-1.  REVISED  EXHIBIT  A-1  replaces  and is  hereby
         substituted  for Exhibit A-1 attached to the First  Amendment to Lease.
         Tenant acknowledges that the Premises are a part of a development which
         will include four  buildings and associated  appurtenant  improvements,
         all as shown on REVISED  EXHIBIT A-1.  Tenant  acknowledges  and agrees
         that  the  Premises  will  be  subject  to and  benefitted  by  various
         non-exclusive easements for ingress, egress and access over the private
         drives  serving  the  project,  and  certain  exclusive  easements  for
         utilities  and  other  purposes,  provided  that  the  same  shall  not
         interfere with the use and enjoyment of the Premises,  as  contemplated
         herein.

2.       Lease Term.  Landlord and Tenant are parties to a lease agreement dated
         December 2, 1998 (the "New Lease"), covering certain premises and a new
         building to be constructed  thereon  located  adjacent to the Premises,
         all as shown on REVISED EXHIBIT A-1. The parties agree that the term of
         the Lease  shall be  adjusted  such that the term of the Lease shall be
         coterminous with the term of the New Lease. More particularly, upon the
         commencement  date of the New  Lease,  the term of the  Lease  shall be
         extended  and  shall run for a period of one  hundred  fifty-six  (156)
         months  commencing on the  commencement  date of the New Lease.  If the
         commencement  date of the New  Lease is other  than the  first day of a
         calendar month, then the term of the Lease shall continue in full force
         and effect for a period of one hundred  fifty-six (156) months from and
         after the first day of the month next succeeding the commencement  date
         of the New Lease.  When the commencement date of the New Lease has been
         established,  the  parties  shall  execute an  addendum  to this Second
         Amendment  to Lease,  confirming  the term and  expiration  date of the
         Lease.

                                       1                             Exhibit 2.4




3.       Subsection  4(b) of the Lease and Section 3 of the First  Amendment  to
         Lease are  hereby  deleted  in their  entirety  and  replaced  with the
         following:

         "Base Rent. The Base Rental for the Premises  during the remaining term
         of this Lease shall be as follows:

                                                  Monthly               Per
         Period                                  Base Rent          Square Foot
         ------                                  ---------          -----------
         11/1/98 - 07/31/00                      $28,021.63             $6.89
         08/1/00 - 07/31/03                      $29,445.08             $7.24
         08/1/03 - 12/31/06                      $30,665.18             $7.54
         01/1/07 - New Lease expiration date     $32,698.68             $8.04

         Option Term:
         ------------
           60 months following the
               New Lease expiration date         market                 market

         Landlord  and Tenant  agree that the as built area of the  Premises  is
         48,804 square feet."

4.       Future  Development.  Upon the  execution  of this Second  Amendment to
         Lease  by both  parties,  Tenant's  and  Landlord's  obligations  under
         Section  5 of the First  Amendment  to Lease  are  satisfied,  and said
         section is null and void and shall be of no further force and effect.

5.       Remodeling Allowance. Landlord agrees to provide Tenant with a one time
         allowance for remodeling the Premises.  Landlord's maximum contribution
         towards the costs of  remodeling  will be based upon the time that such
         remodeling occurs, in accordance with the following schedule:

                  Period of                          Maximum Allowance
                  Remodeling Expenditure             Amount Per Square Foot
                  ----------------------             ----------------------
                  1/1/01 - 12/31/02                           $3.00
                  1/1/03 - 12/31/04                           $3.75
                  1/1/05 - 12/31/06                           $4.50
                  1/1/07 - 12/31/08                           $5.25

         The allowance shall apply towards Tenant's actual  remodeling costs and
         shall be payable to Tenant upon completion of remodeling and receipt by
         Landlord of evidence of payment under normal and customary construction
         lending  procedures.  Landlord  shall not be  required  to provide  any
         allowance on costs submitted for reimbursement after December 31, 2010.

6.       Guaranty.  Landlord has  required,  as a condition to its  execution of
         this  Second  Amendment  to  Lease,   that  Fair,  Isaac  and  Company,
         Incorporated unconditionally guarantee the full performance of Tenant's
         obligations under the Lease, as amended.  Tenant agrees to deliver such
         guaranty,  in the form of  EXHIBIT E attached  hereto and  incorporated
         herein by reference,  within ten (10) days following the full execution
         of this Second Amendment to Lease by Landlord and Tenant.  In the event
         Tenant fails to deliver  such  guaranty,  Landlord  may, at its option,
         terminate  this Second  Amendment  to Lease upon five (5) days  written
         notice to Tenant.

7.       Sections 6, 7 and 8 of the Lease are deleted in their  entirety and are
         replaced with the following:

         "Option to Extend.  Subject to the terms and conditions hereinafter set
         forth,  Tenant  shall  have the option to extend the term of this Lease
         for one (1) additional  sixty (60) month term ("Option  Term") 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 (1) year prior to the  expiration  of the Lease Term.
         Tenant may  exercise  this option only if: (i) no  condition of default
         exists with respect to Tenant's  performance of its  obligations  under
         the Lease;  and (ii)  Tenant

                                       2




         simultaneously  exercises its options to extend under the New Lease and
         under  the  Existing  Lease  covering  the  premises  located  at  4295
         Lexington Avenue North in Arden Hills, Minnesota (as defined in Section
         14.12 of the New Lease).  Base Rent for the Option Term shall be at the
         fair market rate for comparable space in the north suburban  geographic
         area.  The fair market rent shall be agreed upon by Tenant and Landlord
         within  sixty  (60)  days  of  Tenant's   notice  to  Landlord  of  its
         irrevocable  intent to exercise its option to extend set forth  herein.
         The fair market rental rate shall be determined in accordance  with the
         definition  set forth in Section 7 of the  Existing  Lease dated May 1,
         1995 and amended  December  30, 1996 for the  premises  located at 4295
         Lexington  Avenue  North in Arden Hills,  Minnesota.  In the event that
         Landlord and Tenant fail to agree to the fair market rental rate in the
         time  period  set forth  herein,  then the fair  market  rent  shall be
         established in accordance with the arbitration  procedures set forth in
         Section  8 of the  Existing  Lease  for the  premises  located  at 4295
         Lexington  Avenue North in Arden Hills,  Minnesota.  If Tenant fails to
         exercise this option as  aforesaid,  this option shall be null and void
         and of no further force and effect."

8.       Miscellaneous.  Except as  expressly  stated  herein,  the Lease  shall
         remain unchanged and in full force and effect.

IN WITNESS  WHEREOF,  the parties  hereto have caused this Second  Amendment  to
Lease to be executed the day and year first above written.

LANDLORD:                                   TENANT:

CSM CORPORATION                             DYNAMARK, INC.


BY: _______________________________         BY: _______________________________

ITS: _______________________________        ITS: _______________________________

                                       3



                                   CERTIFICATE

         I, Peter L. McCorkell,  the duly elected and acting  Secretary of Fair,
Isaac and Company,  Incorporated,  a Delaware  corporation  ("the Company"),  do
hereby  certify that the following  resolutions  are true and correct  copies of
resolutions  which were duly adopted by the Board of Directors of the Company at
a meeting held on September 29, 1998:

         RESOLVED,  for fiscal  1999,  the  revenue  and profit  factors for the
         Company's  Officers'  Incentive Plan, the Exempt  Employees' Bonus Plan
         and other plans using said factors shall be as follows:

         []       Incentive Plan Profit Margin results:

         o        9% margin                minimum tolerable (P = -0.5)
         o        14% margin               acceptable ("on target"; P = 0.0)
         o        19% margin               excellent (P = 0.5)
         o        24% margin               outstanding (P = 1.0)

         []       Incentive Plan Revenue Growth results:

         o        9% growth               minimum tolerable (P = -0.5)
         o        17% growth              acceptable ("on target"; P = 0.0)
         o        25% growth              excellent (P = 0.5)
         o        33% growth              outstanding (P = 1.0)

         The multiplier formula shall remain:

             Multiplier = 1 + 1.5 x P + 0.5 x R

I  further  certify  that the  foregoing  resolutions  have not been  rescinded,
modified or amended  since their  adoption  and are  currently in full force and
effect.

IN WITNESS  WHEREOF,  I have  hereunto  set my hand and  affixed the seal of the
Company this 16th day of December, 1998.


                                        ________________________________________
                                                 Peter L. McCorkell
                                                 Secretary

                                       1

                                                                    Exhibit 10.1



                                                                       Exhibit E

                      FAIR, ISAAC AND COMPANY, INCORPORATED

                             1987 STOCK OPTION PLAN


         1. PURPOSE.

         The Plan is  intended  to provide  incentive  to the  employees  of the
Corporation and its  Subsidiaries,  to encourage such  individuals'  proprietary
interest in the  Corporation,  to encourage  such  individuals  to remain in the
service of the Corporation or its Subsidiaries and to attract new employees with
outstanding qualifications.

         2. DEFINITIONS.

         (a) "Board"  shall mean the Board of Directors of The  Corporation,  as
constituted from time to time.

         (b) "Code" shall mean the Internal Revenue Code of 1986, as amended.

         (c)  "Committee"  shall mean the  committee  appointed  by the Board in
accordance with Section 4.

         (d) "Corporation" shall mean Fair, Isaac and Company,  Incorporated,  a
California corporation.

         (e) "Employee"  shall mean an individual who is an employee (within the
meaning of section  3401(c) of the Code and the  regulations  thereunder) of the
Corporation or of a Subsidiary.

         (f)  "Exercise  Price" shall mean the amount for which one Share may be
purchased  upon  exercise of an Option,  as  specified  by the  Committee in the
applicable stock option agreement.

         (g)  "Fair  Market  Value"  shall  mean  the  market  price  of  Stock,
determined by the Committee as follows:

         (i) If Stock was traded  over-the-counter  on the date in question  but
     was not classified as a national  market issue,  then the Fair Market Value
     shall be equal to the mean between the last reported representative bid and
     asked prices quoted by the NASDAQ system for such date;

                                       1

                                                                    Exhibit 10.2




         (ii) If Stock was traded  over-the-counter  on the date in question and
     was classified as a national market issue, then the Fair Market Value shall
     be equal to the last-transaction price quoted by the NASDAQ system for such
     date;

         (iii) If Stock was traded on a stock  exchange on the date in question,
     then the Fair Market Value shall be equal to the closing price  reported by
     the applicable composite-transactions report for such date; and

         (iv) If none of the foregoing  provisions is applicable,  then the Fair
     Market  Value shall be  determined  by the  Committee in good faith on such
     basis as it deems appropriate.

In all cases,  the  determination of Fair Market Value by the Committee shall be
conclusive and binding on all persons.

         (h) "Incentive  Stock Option" shall mean an option described in section
422A(b) of the Code.

         (i)  "Nonstatutory  Stock Option" shall mean an option not described in
sections 422 (b), 422A(b), 423(b) or 424(b) of the Code.

         (j) "Option" shall mean an Incentive Stock Option or Nonstatutory Stock
Option granted pursuant to the Plan and entitling the holder to purchase Shares.

         (k) "Optionee" shall mean an individual who holds an Option.

         (l) "Plan" shall mean this Fair, Isaac and Company,  Incorporated  1987
Stock Option Plan, as it may be amended from time to time.

         (m) "Purchase  Price" shall mean the Exercise  Price  multiplied by the
number of Shares with respect to which an option is exercised.

         (n) "Share"  shall mean one share of Stock,  as adjusted in  accordance
with Section 10 (if applicable).

         (o) "Stock" shall mean the Common Stock of the Corporation.

         (p) "Subsidiary" shall mean any corporation,  if the Corporation and/or
one or more other  Subsidiaries  own at least 50% of the total  combined  voting
power of all classes of  outstanding  stock in such  corporation.  A corporation
that attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.

                                       2




         (q) "Test  Rate" shall mean the lowest  annual  rate of interest  which
will not result in the  imputation of additional  interest  under the applicable
provision of the Code.

         (r) "Total and  Permanent  Disability"  shall mean that the Optionee is
unable to engage in any substantial  gainful activity by reason of any medically
determinable  physical or mental  impairment  which can be expected to result in
death or which has lasted,  or can be expected to last, for a continuous  period
of not less than 12 months.

         3. EFFECTIVE DATE.

         The Plan was  adopted by the Board on May 13,  1987.  The Plan  remains
subject to the approval of the  Corporation's  stockholders  pursuant to Section
14.

         4. ADMINISTRATION.

         (a) Committee Membership.

         The Plan shall be administered by the Committee. The Committee shall be
appointed by the Board and shall consist only of  disinterested  directors.  The
Board  may from  time to time  remove  members  from,  or add  members  to,  the
Committee.  Vacancies on the Committee,  however caused,  shall be filled by the
Board.  The Board shall appoint one of the members of the Committee as chairman.
The Committee  shall hold meetings at such times and places as it may determine.
Acts of a  majority  of the  Committee  at which a quorum  is  present,  or acts
reduced to or approved in writing by a majority of the members of the Committee,
shall be the valid acts of the Committee.

         (b) Committee Responsibilities.

         The  Committee  shall  from time to time at its  discretion  select the
Employees to whom Options are to be granted,  determine  the number of Shares to
be optioned to each Optionee,  determine the Exercise  Price thereof,  designate
such Options as Incentive  Stock  Options or  Nonstatutory  Stock  Options,  and
determine the other terms and conditions of such Options. The interpretation and
construction  by the  Committee  of any  provision  of the Plan or of any Option
granted  thereunder  shall be final.  No member of the Committee shall be liable
for any action or  determination  made in good faith with respect to the Plan or
any Option granted thereunder.

                                       3




         (c) Disinterested Directors.

         A member of the Board shall be deemed to be "disinterested"  only if he
or she, at the time of his or her appointment to the Committee and within the 12
preceding months,  was not eligible,  under this Plan or under any other plan of
the-Corporation  or an affiliate of the Corporation,  for the purchase of stock,
for the grant of rights or options to purchase  stock, or for the grant of stock
appreciation rights.

         5. ELIGIBILITY.

         (a) Eligible Classes.

         The Optionees  shall be such Employees (who may be officers or employee
directors) as the Committee may select,  subject to the terms and conditions set
forth below.

         (b) Ten-Percent Shareholders.

         An Employee who owns more than 10% of the total  combined  voting power
of  all  classes  of  outstanding  stock  of  the  Corporation  or  any  of  its
Subsidiaries shall not be eligible to receive an Incentive Stock Option,  unless
(i) the Exercise  Price of the Shares subject to such Option is at least 110% of
the Fair  Market  Value of such Shares on the date of grant and (ii) the term of
such Option does not exceed five years from the date of grant.

         (c) Attribution Rules.

         For purposes of (b) above, in determining  stockownership,  an Employee
shall be deemed to own the stock owned, directly or indirectly, by or for his or
her brothers,  sisters, spouse,  ancestors and lineal descendants.  Stock owned,
directly or indirectly,  by or for a corporation,  partnership,  estate or trust
shall be deemed to be owned proportionately by or for its shareholders, partners
or  beneficiaries.  Stock with  respect to which such  Employee  holds an option
shall not be counted.

         (d) Outstanding Stock.

         For purposes of (b) above,  "outstanding stock" shall include all stock
actually  issued and  outstanding  immediately  after the grant of the Incentive
Stock  Option to the  Optionee.  "Outstanding  stock"  shall not include  shares
authorized for issuance under outstanding options held by the Optionee or by any
other person.

                                       4




         6. STOCK.

         The  aggregate  number of Shares  which may be issued upon  exercise of
Options under the Plan shall not exceed 350,000. The number of Shares subject to
Options  outstanding  at any time shall not  exceed  the  number of Shares  then
remaining  available  for  issuance  under  the  Plan.  In the  event  that  any
outstanding Option for any reason expires or is terminated, the Shares allocable
to the unexercised  portion of such Option may again be made subject to Options.
The  limitation  established by this Section 6 shall be subject to adjustment in
the manner  provided  in Section 10 upon the  occurrence  of an event  specified
therein.

         7. TERMS AND CONDITIONS OF OPTIONS.

         (a) Stock Option Agreements.

         Options shall be evidenced by written  stock option  agreements in such
form as the Committee shall from time to time determine.  Such agreements  shall
comply with and be subject to the terms and conditions set forth below. However,
the provisions of all stock option  agreements  executed under the Plan need not
be identical.

         (b) Number of Shares.

         Each Option shall specify the number of Shares to which it pertains and
shall provide for the  adjustment of such number in accordance  with Section 10.
The Option  shall also  specify  whether it is an  Incentive  Stock  Option or a
Nonstatutory Stock Option.

         (c) Exercise Price.

         Each Option shall specify the Exercise Price.  The Exercise Price under
a Nonstatutory  Stock Option shall not be less than 85% of the Fair Market Value
on the date of grant.  The Exercise Price under any Incentive Stock Option shall
not be less than 100% of the Fair Market  Value on the date of grant and, in the
case of an Incentive  Stock Option  granted to an Optionee  described in Section
5(b), shall not be less than 110% of the Fair Market Value on the date of grant.

                                       5




         (d) Medium and Time of Payment.

         The Purchase  Price shall be payable in full in United  States  dollars
upon the exercise of the Option,  except that the Committee  may determine  that
all or part of the Purchase  Price can be paid (i) by the surrender of Shares in
good form for transfer, owned for 12 months or more by the person exercising the
Option  and having a Fair  Market  Value on the date of  exercise  equal to that
portion of the Purchase  Price which is being paid with  Shares,  or (ii) with a
full-recourse  promissory  note executed by the Optionee.  The interest rate and
other terms and  conditions of such note shall be as specified by the Committee;
provided, however, that such note shall have a term of not more than five years,
shall be  payable  in full  within 90 days  after the  Optionee  ceases to be an
Employee  and shall bear  interest  at a rate not less than the Test  Rate.  The
Committee  may  require  that  the  Optionee  pledge  his or her  Shares  to the
Corporation  for the purpose of securing the repayment of such note.  Payment in
the form of a promissory note shall be permissible  only if the person executing
such note then is an Employee.

         (e) Withholding Taxes.

         As a  condition  to the  exercise  of an Option or the  disposition  of
Shares acquired under the Plan, the Optionee shall make such arrangements as the
Committee  may  require  for the  satisfaction  of any  Federal,  state or local
withholding tax  obligations  that may arise in connection with such exercise or
disposition.

         (f) Term and Nontransferability of Options.

         Each option shall specify the date when all or any installment  thereof
is to become  exercisable.  The Option shall also specify its term,  which shall
not exceed 10 years from the dateof grant and, in the case of an Incentive Stock
Option granted to an Optionee  described in Section 5(b),  shall not exceed five
years from the date of grant.

         During the lifetime of the  Optionee,  the Option shall be  exercisable
only by the Optionee and shall not be assignable or  transferable.  In the event
of the Optionee's death, the Option shall not be transferable other than by will
or by the laws of descent and distribution.

         (g) Termination of Service (Except by Death).

         If an Optionee  ceases to be an Employee  for any reason other than his
or her death,  then the Optionee  shall have the right to exercise an Option (to
the extent not previously  exercised and not expired) at any time within 90 days
after the date when he or she ceases to be an  Employee,  but only to the extent
that,  on such date,  the  Optionee's  right to  exercise  then such  Option has
accrued  pursuant to the terms of the  applicable  stock option  agreement.  The
Committee, in the applicable stock option agreement,

                                       6




may replace such period of 90 days with any other period.

         For purposes of this Subsection (g), the Employee relationship shall be
deemed to continue while the Optionee is on military leave,  sick leave or other
bona fide leave of  absence  (to be  determined  in the sole  discretion  of the
Committee).  The foregoing  notwithstanding,  in the case of an Incentive  Stock
Option,  the Employee  relationship  shall not be deemed to continue  beyond the
90th day after the Optionee ceased active  employment as a common-law  employee,
unless  the  Optionee's  reemployment  rights  are  guaranteed  by statute or by
contract.

         (h) Death of Optionee.

         If an Optionee  dies while an Employee  and has not fully  exercised an
Option,  then such  Option  (to the  extent  not  previously  exercised  and not
expired)  may be  exercised  at any time within 12 months  after the  Optionee's
death by the executors or  administrators  of his or her estate or by any person
or persons who have acquired  such Option  directly from the Optionee by bequest
or  inheritance,  but only to the  extent  that,  at the date of the  Optionee's
death,  the Optionee's right to exercise such Option had accrued pursuant to the
terms of the applicable stock option agreement.

         If an Optionee  dies after the Employee  relationship  terminated,  but
within the period  during  which an Option could have been  exercised  under (g)
above, and has not fully exercised such Option,  then such Option (to the extent
not previously exercised and not expired) may be exercised at any time within 12
months after the Optionee's death by the executors or  administrators  of his or
her estate or by any person or persons who have  acquired  such Option  directly
from the Optionee by bequest or inheritance, but only to the extent that, at the
date of  termination  of the  Employee  relationship,  the  Optionee's  right to
exercise such Option had accrued  pursuant to the terms of the applicable  stock
option agreement.

         (i) Rights as a Shareholder.

         An Optionee, or a transferee of an Optionee,  shall have no rights as a
shareholder  with  respect to any Shares  covered by his or her Option until the
date of the issuance of a stock certificate for such Shares. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other  property),  distributions  or other  rights for which the record  date is
prior to the date when such stock  certificate is issued,  except as provided in
Section 10.

                                       7




         (j) Modification, Extension and Renewal of Options.

         Within the limitations of the Plan, the Committee may modify, extend or
renew outstanding  Options or accept the cancellation of outstanding Options (to
the  extent  not  previously  exercised)  for the  granting  of new  Options  in
substitution  therefor.  The foregoing  notwithstanding,  no  modification of an
Option shall, without the consent of the Optionee, alter or impair any rights or
obligations under such Option.

         (k) Other Provisions.

         The stock option agreements  authorized under the Plan may contain such
other provisions not inconsistent with the terms of the Plan (including, without
limitation,  restrictions upon the exercise of the Option or the transferability
of Shares) as the Committee may deem advisable.

         8. LIMITATION ON ISO AWARDS.

         No Incentive  Stock Options  shall be granted to an Optionee  under the
Plan if the  aggregate  Fair  Market  Value of the Stock  subject  to his or her
Incentive  Stock Options which become  exercisable for the first time during any
one calendar year (under all plans of the Corporation, any parent corporation or
a Subsidiary)  would exceed  $100,000.  For purposes of this Section 8, the Fair
Market Value of a Share shall be  determined  as of the date when the  Incentive
Stock Option covering such Share is granted.

         9. TERM OF PLAN.

         Options  may be granted  pursuant  to the Plan until May 12,  1997,  or
until such earlier date as the Board may determine at its sole discretion.

         10. RECAPITALIZATIONS.

         Subject to any required  action by  stockholders,  the number of Shares
covered by the Plan as  provided  in Section 6, the number of Shares  covered by
each  outstanding  Option  and the  Exercise  Price  thereof  shall be  adjusted
proportionately  for any  increase or  decrease  in the number of issued  Shares
resulting  from a  subdivision  or  consolidation  of Shares or the payment of a
stock  dividend or any other increase or decrease in the number of issued Shares
effected without receipt of consideration by the Corporation.

         Subject to any required action by  stockholders,  if the Corporation is
the  surviving  corporation  in any merger or  consolidation,  each  outstanding
Option shall pertain to the securities to which a holder of the number of Shares
subject to the Option would have been entitled.  A dissolution or liquidation of
the Corporation or a merger or

                                       8




consolidation  in which the Corporation is not the surviving  corporation  shall
cause each  outstanding  Option to terminate,  unless the agreement of merger or
consolidation  provides for the assumption thereof by the surviving corporation;
provided,  however,  that each Optionee  shall have the right to exercise his or
her  Options  in  full  immediately  prior  to the  date  of  such  dissolution,
liquidation,  merger or consolidation,  but only to the extent that such Options
have not previously been exercised,  have not expired and are not assumed by the
surviving corporation.

         To the extent that the  foregoing  adjustments  relate to securities of
the  Corporation,  such  adjustments  shall  be  made  by the  Committee,  whose
determination shall be conclusive and binding on all persons.

         Except as expressly  provided in this  Section 10, the  Optionee  shall
have no rights by reason of any subdivision or  consolidation of shares of stock
of any  class,  the  payment  of any stock  dividend  or any other  increase  or
decrease  in the  number  of  shares  of stock of any  class or by reason of any
dissolution, liquidation, merger or consolidation or spin-off of assets or stock
of another  corporation,  and any issue by the Corporation of shares of stock of
any class, or securities  convertible  into shares of stock of any class,  shall
not affect,  and no adjustment by reason  thereof shall be made with respect to,
the number or Exercise Price of Shares subject to an Option.

         The grant of an Option pursuant to the Plan shall not affect in any way
the right or power of the  Corporation to make  adjustments,  reclassifications,
reorganizations  or changes of its  capital or business  structure,  to merge or
consolidate or to dissolve,  liquidate,  sell or transfer all or any part of its
business or assets.

         11. SECURITIES LAW REQUIREMENTS.

         (a) Legality of Issuance.

         No Shares  shall be issued upon the  exercise of any Option  unless and
until the Corporation has determined that (i) it and the Optionee have taken all
actions  required to register the Shares under the  Securities  Act of 1933,  as
amended  (the  "Act"),   or  to  perfect  an  exemption  from  the  registration
requirements  thereof;  (ii) any  applicable  listing  requirement  of any stock
exchange  on which  Stock is  listed  has been  satisfied;  and  (iii) any other
applicable provision of state or Federal law has been satisfied.

         (b) Restrictions on Transfer; Representations of Optionee.

         Regardless  of whether the  offering  and sale of Shares under the Plan
have been  registered  under the Act or have been  registered or qualified under
the securities laws of any state, the Corporation may impose  restrictions  upon
the sale,  pledge or other  transfer of such Shares  (including the placement of
appropriate   legends  on  stock  certificates)  if,  in  the  judgment  of  the
Corporation  and its counsel,  such  restrictions  are necessary or desirable in
order to achieve  compliance with the provisions of the Act, the

                                       9




securities  laws of any state or any other  law.  In the event  that the sale of
Shares  under  the Plan is not  registered  under  the Act but an  exemption  is
available which requires an investment  representation or other  representation,
each Optionee shall be required to represent that such Shares are being acquired
for investment,  and not with a view to the sale or distribution thereof, and to
make such other  representations  as are deemed  necessary or appropriate by the
Corporation and its counsel. Stock certificates evidencing Shares acquired under
the Plan  pursuant  to an  unregistered  transaction  shall bear an  appropriate
restrictive legend.

         Any determination by the Corporation and its counsel in connection with
any of the matters set forth in this Section 11 shall be conclusive  and binding
on all persons.

         (c) Registration or Qualification of Securities.

         The Corporation may, but shall not be obligated to, register or qualify
the sale of Shares under the Act or any other  applicable  law. The  Corporation
shall not be obligated to take any affirmative action in order to cause the sale
of Shares under the Plan to comply with any law.

         (d) Removal of Legends.

         If, in the  opinion  of the  Corporation  and its  counsel,  any legend
placed on a stock  certificate  representing  Shares issued under the Plan is no
longer required,  the holder of such  certificate  shall be entitled to exchange
such  certificate for a certificate  representing  the same number of Shares but
lacking such legend.

         12. AMENDMENT OF THE PLAN.

         The Board may from time to time, with respect to any Shares at the time
not subject to Options, suspend or discontinue the Plan or revise or amend it in
any respect  whatsoever  except that,  without the approval of the Corporation's
shareholders, no such revision or amendment shall:

         (a)      Increase the number of Shares  subject to the Plan,  except as
                  provided in Section 10;

         (b)      Materially change the designation in Section 5 with respect to
                  the class of  Employees  eligible to receive  Incentive  Stock
                  Options; or

         (c)      Amend this Section 12 to defeat its purpose.

                                       10




         13.APPLICATION OF FUNDS.

         The  proceeds  received  by the  Corporation  from  the  sale of  Stock
pursuant  to the  exercise  of an  Option  will be used  for  general  corporate
purposes.

         14. APPROVAL OF SHAREHOLDERS.

         The  adoption  of the Plan and any  amendment  described  in Section 12
shall be  subject  to  approval  by the  affirmative  vote of the  holders  of a
majority of the outstanding shares of the Corporation entitled to vote or by the
unanimous  written  consent  of all  holders  of the  outstanding  shares of the
Corporation  entitled  to vote.  In the event that the Plan is not  approved  by
stockholders   within  12  months  after  adoption  by  the  Board,  any  Option
theretofore granted shall be null and void.

         15. EXECUTION.

         To record the  adoption of the Plan by the Board,  effective  as of May
13,  1987,  the  Corporation  has caused its  authorized  officers  to affix the
corporate name hereto.


                                                FAIR, ISAAC AND COMPANY,
                                                INCORPORATED

                                                By _____________________________

                                                By _____________________________

                                       11



                                SMITH RANCH PLAZA

                              OFFICE BUILDING LEASE

1. PARTIES. This Lease, dated, for reference purposes only, October 20, 1983, is
made by and between S.R.P. Limited Partnership, a California Limited Partnership
(herein called  "Landlord")  and Fair,  Isaac & Company,  Incorporated,  (herein
called "Tenant").

2. PREMISES.  Landlord does hereby lease to Tenant and Tenant hereby leases from
Landlord those certain premises (herein called "Premises")  consisting of 25,994
rentable square feet including corridation and restrooms,  as outlined in red on
Exhibit A-1  attached  hereto,  being  situated  on the first,  second and third
floors of that certain building known as 120 North Redwood Drive, Suite 300, San
Rafael, California 94903.

Said Lease is subject to the terms,  covenants and  conditions  herein set forth
and the Tenant covenants as a material part of the  consideration for this Lease
to keep and perform each and all of said terms,  covenants and  conditions by it
to be kept and  performed  and that this  Lease is made upon  condition  of said
performance.

3. TERM.  The term of this Lease shall be for five (5) years,  commencing on the
lst day of May, 1984, and terminating on the 30th day of April, 1989.

4.  POSSESSION.  If the  Landlord,  for any reason  whatsoever,  cannot  deliver
possession  of the said Premises to the Tenant at the  commencement  of the term
hereof,  this Lease shall not be void or voidable,  nor shall Landlord be liable
to Tenant for any loss or damage resulting  therefrom,  nor shall the expiration
date of the above term be in any way extended, but in that event, all rent shall
be abated during the period between the  commencement  of said term and the time
when Landlord delivers possession;  except that, should Landlord fail to deliver
possession two or more months beyond any date agreed herein or  subsequently  as
the date of  possession,  Tenant may declare this Lease to be terminated and all
sums paid to Landlord by Tenant shall be promptly refunded and Tenant shall have
no  further  obligations  to  Landlord  under this  Lease.  Failure of Tenant to
exercise  this  option at the end of the first two months  delay or at any later
time,  shall not be deemed a waiver of the right to  exercise  the option at any
other date should possession not be delivered.

In the event that Landlord  shall permit Tenant to occupy the Premises  prior to
the  commencement  date of the term,  such occupancy shall be subject to all the
provisions  of  this  Lease.   Said  early  possession  shall  not  advance  the
termination date hereinabove provided.

5. BASIC RENT. Tenant agrees to pay to Landlord, as rental, without prior notice
or demand,  for the Premises  the sum of:  Thirty-Seven  Thousand,  Four Hundred
Thirty-One and no/100 ($37,431.00) Dollars (hereinafter called "Basic Rent"), on
or before the first day of the first full calendar  month of the term hereof and
a like sum as adjusted in the manner specified in Article 6 (hereinafter  called
"Adjusted Basic Rent"),  on or before the first day of each and every successive
calendar month thereafter during the term hereof,  except that the first month's
rent shall be paid upon the execution hereof. The Basic Rent shall be paid until
adjusted in the

                                       1

                                                                    EXHIBIT 10.5




manner specified in Paragraph 6. Thereafter,  the prevailing Adjusted Basic Rent
shall be the amount  paid.  Rent for any period  during the term hereof which is
for  less  than  one (1)  month  shall  be a  prorated  portion  of the  monthly
installment  herein,  based upon a thirty (30) day month.  Said rental  shall be
paid to  Landlord,  without  deduction  or offset in lawful  money of the United
States of  America,  which  shall be legal  tender at the time of payment at the
Office  of the  Building,  or to such  other  person or at such  other  place as
Landlord may from time to time designate in writing.

6.  ADJUSTED  BASIC  RENT.  On  each  annual   anniversary  date  following  the
commencement  of the lease  term,  the rent  specified  in  Paragraph  5 for the
ensuing  twelve (12) months shall be increased by the use of the Consumer  Price
Index (All  Urban  Consumers  Component)  for San  Francisco-Oakland  (1967=100)
published by the Bureau of Labor Statistics of the U.S. Department of Labor. The
indices used will be the latest published index prior to the commencement of the
lease term and,  in  subsequent  years the latest  published  index prior to the
commencement  of each such subsequent year of the lease term. The Adjusted Basic
Rent will be increased by the  percentage  increase,  if any,  between the index
used at the  commencement  of the lease  term and that used for each  subsequent
year.  In no event shall the  combination  of  increases  under this Section and
Section 7 exceed a 10% increase over the combined rental under said Sections for
the immediately preceding lease year.

In case the U.S.  Department  of Labor shall  discontinue  the  computation  and
publication of said Consumers Price Index or the  publication  thereof should be
delayed so as to prevent its use hereunder at the times required, there shall be
substituted  therefor  by Landlord  such other  index or method of  ascertaining
changes  in the  price  level as,  in the  opinion  of  Landlord,  most  closely
resembles the Consumer Price Index and method of arriving at the index figure by
said Bureau.

7.  ADDITIONAL  RENT.  Tenant  agrees to pay to  Landlord as  additional  rental
(hereinafter  "Additional  Rent") a sum  equal to  Tenant's  Proportional  share
(hereinafter defined) of Direct Costs (hereinafter defined).

For the purposes of this  Article,  Tenant's  Proportional  Share shall be a sum
equal to 61.14% of the total rentable area of the Building.

For the purposes of this Article,  the term "Direct  Costs" shall  include:  (i)
property  taxes paid or incurred by Landlord  consisting of all real or personal
property  taxes (and any tax levied  wholly or partly in lieu  thereof)  imposed
against the Building and all related improvements, including the adjacent walks,
parking lots,  and the land upon which they are situated,  but shall not include
any net income or  franchise  taxes;  (ii)  operating  costs paid or incurred by
Landlord in maintaining,  managing, and operating Building,  its equipment,  and
the adjacent walks, parking lots, landscaped areas, and the land upon which they
are located,  including  without  limiting the generality of the foregoing,  the
costs of services of both  independent  contractors and employees  (inclusive of
employment taxes, and fringe benefits) who perform duties connected with the day
to day management,  operation,  maintenance, and repair of the Building, and the
costs incurred by reason of any changes in any regulations, rules, requirements,
laws,  codes,  directives,  or similar  pronouncements  of any  Federal,  state,
county,  city, or other  governmental or regulatory agency which require changes
in or to the  physical  construction  of or related  equipment of or used in the
Building or the adjacent walks,  parking lots,  landscaped  areas,  and/or items
used in the operation and maintenance thereof.

                                       2




For the  purposes of this Lease the term "Base Year" shall refer to and mean the
calendar year in which this Lease term commences.

For the purposes of this Article,  the term "Comparison Year" shall refer to and
mean each  successive  calendar  year of the term of this  Lease  after the Base
Year.

For the purposes of this  Article,  the term  "Current  Year" shall refer to and
mean each  successive  calendar  year as it becomes the current  calendar  year,
beginning with the first calendar year next following the Base Year.

Each year during the term of this Lease other than the Base Year, Landlord shall
furnish to Tenant a written  statement  showing in reasonable  detail Landlord's
Direct  Costs for the  applicable  Comparison  Year and for the Base  Year,  and
showing the amount, if any, of Additional Rent due from Tenant.

During the Base Year,  Tenant shall pay Landlord,  on or before the first day of
each month during which a payment of Additional  Rent is due, a sum equal to the
total of the following two  components:  (a) the product of Fifteen Cents ($.15)
times the number of square feet of the  Premises for which  separate  electrical
metering is provided,  and (b) the product of Twenty-five Cents ($.25) times the
number of square feet of the Premises for which separate  electrical metering is
not provided.

To compute the  Additional  Rent for all years other than the Base year,  if the
Direct  Costs paid or incurred by the Landlord  for the  Comparison  Year are in
excess of the Annualized  Additional Rent paid by Tenant for the Base Year, then
the Tenant shall pay, as Additional Rent,  Tenant's  Proportional Share thereof.
Upon Tenant's  receipt of Landlord's  statement for the first  Comparison  Year,
Tenant  shall pay in full the  total  amount  of  Additional  Rent for the first
Comparison  Year,  and, in  addition,  for the  Current  Year the amount of such
Additional Rent shall be used as an estimate for the Current Year. The amount of
the Additional  Rent shall be divided in twelve (12) equal monthly  installments
and  Tenant  shall pay to  Landlord,  concurrently  with the  Basic  Rent or the
prevailing  Adjusted Basic Rent, as the case may be, which is next due following
the receipt of said  statement  from  Landlord,  an amount equal to one (1) such
monthly  installment  multiplied  by the  number of months  from  January in the
Current  Year in which  Landlord's  said  statement is submitted to the month of
such statement,  both months  inclusive.  Subsequent  installments of Additional
Rent  shall be  payable  concurrently  with  the  Basic  Rent or the  prevailing
Adjusted  Basic Rent,  as the case may be, for the balance for that Current Year
and shall continue until the statement for the next Comparison Year is rendered.
If the next or any succeeding  Comparison  Year results in an increase in Direct
Costs over the immediately preceding Comparison Year, then, upon receipt of said
statement  from  Landlord,  Tenant  shall  pay a  lump  sum  equal  to  Tenant's
Proportional   Share  of  the  Direct  Costs  less  the  total  of  the  monthly
installments  paid during the  immediately  preceding  Comparison  Year, and the
estimated  monthly  installments  of  Additional  Rent to  then be paid  for the
Current Year shall be adjusted to reflect such  increased  Direct Costs.  If the
next or any  succeeding  Comparison  Year  results in a decrease in Direct Costs
over the  immediately  preceding  Comparison  Year,  then,  upon receipt of said
statement from Landlord,  the estimated monthly  installments of Additional Rent
to then be paid for Current  Year shall be adjusted  to reflect  such  decreased
Direct Costs,  and the difference  between  Tenant's  Proportional  Share of the
decreased Direct Costs and the total of the monthly installments paid during the
immediately  preceding

                                       3




Comparison Year shall be credited to the first (and  succeeding,  if applicable)
installments of Additional Rent to be paid for the Current Year.

If the term of this Lease has expired  and/or  Tenant has vacated the  Premises,
when the final  determination  is made of Tenant's share of Direct Costs for the
year in which this Lease  terminated,  Tenant shall immediately pay any increase
due over the estimated amounts paid and, conversely, any overpayment made in the
event said costs decrease shall be immediately rebated by Landlord to Tenant.

8.  SECURITY  DEPOSIT.   Tenant  ,  has  deposited  with  Landlord  the  sum  of
Thirty-Seven  Thousand,  Four Hundred Thirty-One Dollars ($37,431.00).  Said sum
shall be held by Landlord as security for the faithful  performance by Tenant of
all the terms, covenants,  and conditions of this Lease to be kept and performed
by Tenant during the term hereof.  Said sum shall accrue interest at the rate of
eight  percent (8%) per annum,  to be  compounded  annually,  or, at  Landlord's
election,  to be  paid to  Tenant.  All  references  in  this  lease,  including
references in this Paragraph 8, to the security deposit shall be deemed to refer
to said  above-mentioned  sum  together  with any accrued  interest  not paid by
Landlord to Tenant.  If Tenant  defaults  with respect to any  provision of this
Lease,  including,  but not limited to the provisions relating to the payment of
rent,  Landlord may (but shall not be required  to) use,  apply or retain all or
any part of the security deposit for the payment of any rent or any other sum in
default,  or for the payment of any amount  which  Landlord  may spend or become
obligated to spend by reason of Tenant's default,  or to compensate Landlord for
any other  loss or  damage  which  Landlord  may  suffer  by reason of  Tenant's
default.  If any  portion of said  deposit is so used or applied,  Tenant  shall
within five (5) days after written demand  therefor,  deposit cash with Landlord
in an amount  sufficient to restore the security  deposit to its original amount
and  Tenant's  failure to do so shall be a  material  breach of this  Lease.  If
Landlord does so apply all or a portion of the security deposit,  interest shall
be abated  until such time as the applied  portion is  restored to its  original
amount.  Landlord  shall not be required to keep this security  deposit,  or the
interest accrued thereon, separate from its general funds. If Tenant shall fully
and faithfully  perform every provision of this Lease to be performed by it, the
security  deposit  together with said interest  thereon,  or any balance thereof
shall be  returned  and paid to Tenant (or, at  Landlord's  option,  to the last
assignee of Tenant's interest  hereunder) at the expiration of the Lease term or
at any earlier ' date at which Tenant or Landlord shall  terminate this Lease at
their  election  as may be  provided  herein.  In the  event of  termination  of
Landlord's interest in this Lease,  Landlord shall transfer said deposit and the
accrued interest thereon to Landlord's successor in interest,  to hold under the
same conditions as did Landlord.

9. USE.  Tenant shall use the premises for general office  purposes of the Fair,
Isaac  Companies,  which purposes are known and approved by Landlord,  and shall
not use or permit the  Premises  to be used for any other  purpose  without  the
prior written consent of Landlord.

Tenant  shall not do or permit  anything to be done in or about the Premises nor
bring or keep anything  therein which will in any way increase the existing rate
of or  affect  any  fire or other  insurance  upon  the  Building  or any of its
contents,  or cause  cancellation of any insurance policy covering said Building
or any part  thereof  or any of its  contents.  Tenant  shall  not do or  permit
anything to be done in or about the  Premises  which will in any way obstruct or
interfere  with the rights of other  tenants or  occupants  of the  Building  or
injure or annoy them or use or allow the  Premises to be used for any  improper,
immoral,  unlawful or objectionable purpose, nor shall

                                       4




Tenant  cause,  maintain or permit any  nuisance  in, on or about the  Premises.
Tenant  shall not  commit or  suffer  to be  committed  any waste in or upon the
Premises.

10.  COMPLIANCE  WITH THE LAW.  Tenant  shall  not use the  Premises  or  permit
anything to be done in or about the Premises which will in any way conflict with
any law,  statute,  ordinance or governmental rule or regulation now in force or
which may hereafter be enacted or  promulgated.  Tenant shall,  at its sole cost
and  expense,   promptly  comply  with  all  laws,   statutes,   ordinances  and
governmental  rules,  regulations  or  requirements  now in force  or which  may
hereafter be in force,  and with the requirements of any board of fire insurance
underwriters or other similar bodies now or hereafter constituted,  relating to,
or  affecting  the  condition,  use  or  occupancy  of the  Premises,  excluding
structural changes not related to or affected by Tenant's  improvements or acts.
The judgment of any court of competent  jurisdiction  or the admission of Tenant
in any action against Tenant,  whether  Landlord is a party thereto or not, that
Tenant has violated any law, statute, ordinance or governmental rule, regulation
or  requirement,  shall be  conclusive  of that fact as between the Landlord and
Tenant.

11. CONSTRUCTION.  Prior to the commencement of the term hereof,  Landlord shall
furnish and install within the premises the tenant improvements shown on Exhibit
"A" and as shown on Exhibit  "B" to be dated  October 31,  1983,  to be attached
hereto and made a part hereof.

All work not within the normal scope of the construction  trades employed in the
building  construction,  such as the  furnishing  and  installing  of  telephone
equipment and wiring, furniture,  furnishings, office equipment, trade fixtures,
carpeting (unless installed by Landlord under the first part of this paragraph),
special draperies (in addition to Building  Standard  horizontal slat blinds for
which no substitution is permitted), and other items of personal property, shall
be furnished and installed by the Tenant at Tenant's expense, Tenant shall adopt
a schedule in  conformance  with the  schedule  of  Landlord's  contractors  and
conduct its work in such a manner as to maintain  harmonious labor relations and
so as not to  unreasonably  interfere  with or delay the work of the  Landlord's
contractors. Tenant's contractors, subcontractors, and labor shall be acceptable
to and  approved  by  Landlord  and  shall  be  subject  to  the  administrative
supervision of the Landlord's general contractor.  Contractors or subcontractors
engaged  by Tenant  shall  insure,  as far as may be  reasonably  possible,  the
progress of the work without  interruption on account of strikes,  work stoppage
or other causes for delay.  Landlord shall give  reasonable  access and entry to
the Premises to Tenant and its contractors and  subcontractors  to enable Tenant
to adapt the Premises for Tenant's use.

12.  ALTERATIONS  AND ADDITIONS.  Tenant shall not make or suffer to be made any
alterations, additions or improvements to or of the Premises or any part thereof
without  the  written  consent  of  Landlord  first  had  and  obtained  and any
alterations, additions or improvements to or of said Premises including, but not
limited to, wall  covering,  paneling and built-in  cabinet work,  but excepting
movable or modular furniture and trade fixtures,  shall on the expiration of the
term  become a part of the  realty  and  belong  to the  Landlord  and  shall be
surrendered with the Premises.  In the event Landlord  consents to the making of
any alterations,  additions or improvements to the Premises by Tenant,  the same
shall be made by Tenant at Tenant's sole cost and expense, and any contractor or
person  selected by Tenant to make the same must first be approved of in writing
by the Landlord  which  approval  will not be  unreasonably  withheld.  Upon the
expiration or sooner termination of the term hereof,  Tenant shall, upon written
demand by  Landlord,  given at least  thirty  (30) days  prior to the end of the
term,  at Tenant's  sole cost and expense,  promptly and with all due  diligence
remove any

                                       5




alterations,  additions,  or improvements made by Tenant which are designated by
Landlord to be removed, and Tenant shall,  forthwith and with all due diligence,
at its sole cost and expense,  repair any damage to the Premises  caused by such
removal.

13. REPAIRS. (a) By taking possession of the Premises, Tenant shall be deemed to
have  accepted  the Premises as being in good,  sanitary  order,  condition  and
repair except as may be noted in writing and delivered to Landlord  within seven
(7) days of possession.  Tenant shall,  at Tenant's sole cost and expense,  keep
the Premises and every part thereof in good condition and repair, damage thereto
from causes beyond the  reasonable  control of Tenant and from ordinary wear and
tear  excepted.  Tenant shall upon the  expiration or sooner  termination of the
Lease hereof surrender the Premises to the Landlord in good condition,  ordinary
wear and tear and damage from  causes  beyond the  reasonable  control of Tenant
excepted. Except as specifically provided in an addendum, if any, to this Lease,
Landlord shall have no obligation whatsoever to alter, remodel, improve, repair,
decorate or paint the Premises or any part thereof and the parties hereto affirm
that Landlord has made no  representations to Tenant respecting the condition of
the Premises or the Building except as specifically herein set forth.

     (b) Notwithstanding  the provisions of Article 13(a) hereinabove,  Landlord
shall repair and maintain the  structural  portions of the Building,  including,
without  limitation,   the  basic  plumbing,  air  conditioning,   heating,  and
electrical  systems and all other  improvements  to the real property upon which
the  Building  is situated  installed  or  furnished  by  Landlord,  unless such
maintenance  and  repairs  are  caused in part or in whole by the act,  neglect,
fault or omission of any duty by the Tenant, its agents, servants,  employees or
invitees, in which case Tenant shall pay to Landlord the reasonable cost of such
maintenance  and repairs.  Landlord  shall not be liable for any failure to make
any such repairs or to perform any maintenance unless Landlord shall fail within
five (5) days (or such shorter period as the importance or the crucial nature of
the repair may  reasonably  require) after notice of the need of such repairs or
maintenance is given to Landlord by Tenant, to commence and diligently prosecute
such maintenance and repair.  Further  notwithstanding the provisions of Article
13(a)  hereinabove,  Landlord  shall  maintain  the overall  appearances  of the
Premises and the public areas of the building and its appurtenant  property at a
high standard,  specifically including,  but in no way limited to, repainting or
replacing  carpeting  in cases  where  fair  wear and tear have  impaired  their
appearance  to a level  inconsistent  with the quality of the  property.  Should
Landlord fail to thus commence or diligently prosecute any maintenance or repair
hereby  required  by  Landlord  to be  performed,  then  Tenant  may cause  such
maintenance  or repair to be performed and deduct the cost thereof from the next
rent  payable by Tenant to  Landlord.  Except as  provided in Article 24 hereof,
there shall be no  abatement  of rent and no  liability of Landlord by reason of
any injury to or interference  with Tenant's business arising from the making of
any repairs, alterations or improvements in or to any portion of the Building or
the Premises or in or to fixtures, appurtenances and equipment therein.

14. HOLD HARMLESS. Tenant shall indemnify and hold harmless Landlord against and
from any and all  claims  arising  from  Tenant's  use of the  Premises  for the
conduct  of its  business  or from any  activity,  work,  or other  thing  done,
permitted or suffered by the Tenant in or about the Building,  and shall further
indemnify and hold harmless Landlord against and from any and all claims arising
from any breach or default in the performance of any obligation on Tenant's part
to be  performed  under  the terms of this  Lease,  or  arising  from any act or
negligence of the Tenant, or any officer, agent, employee,  guest, or invitee of
Tenant,  and from all and  against  all costs,  attorneys'  fees,  expenses  and
liabilities incurred in or about any such claim or any action or

                                       6




proceeding brought thereon, and, in any case, action or proceeding to be brought
against Landlord by reason of any such claim, Tenant, upon notice from Landlord,
shall defend the same at Tenant's expense by counsel reasonably  satisfactory to
Landlord.  Tenant, as a material part of the  consideration to Landlord,  hereby
assumes all risk of damage to  property or injury to persons,  in, upon or about
the Premises, from any cause other than Landlord's negligence, and Tenant hereby
waives all claims in respect thereof against Landlord.

Landlord or its agents shall not be liable for any damage to property  entrusted
to employees of the Building, nor for loss or damage to any property by theft or
otherwise, nor for any injury to or damage to persons or property resulting from
fire, explosion,  falling plaster, steam, gas, electricity,  water or rain which
may leak from any part of the Building or from the pipes, appliances or plumbing
works  therein or from the roof,  street or  subsurface  or from any other place
resulting from dampness or any other cause  whatsoever,  unless caused by or due
to the negligence of landlord,  its agents,  servants or employees.  Landlord or
its  agents  shall  not be  liable  for  interference  with  the  light or other
incorporeal  hereditaments,  loss of business by tenant,  nor shall  landlord be
liable for any latent  defect in the premises or in the  building.  Tenant shall
give prompt  notice to landlord in case of fire or  accidents in the premises or
in the building or of defects therein or in the fixtures or equipment.

15.  ASSIGNMENT  AND  SUBLETTING.  Neither Tenant nor its heirs or assigns shall
either voluntarily or by operation of law, assign, transfer,  mortgage,  pledge,
hypothecate or encumber this Lease or any interest therein, and shall not sublet
the Premises or any part thereof, or any right or privilege appurtenant thereto,
or suffer any person (Tenant, its employees,  servants, invitees,  subsidiaries,
affiliates,  successors,  or their  employees,  agents,  servants  and  invitees
excepted) to occupy or use the said Premises,  or any portion  thereof,  without
the prior written consent of Landlord had and obtained,  which consent shall not
be unreasonably withheld.  Neither any change in the ownership of Tenant's stock
nor any merger,  corporate  reorganization  or corporate  acquisition  involving
Tenant shall be construed to constitute an assignment within the meaning of this
Article. A consent to one assignment,  subletting,  occupation or use by another
person shall not be deemed to be a consent to any subsequent  assignment and any
purported  assignment  in violation of the  provisions  of this Article  without
Landlord's  consent  shall be void,  and shall,  at the option of the  Landlord,
constitute a default under this Lease.

16. LIENS. Tenant shall keep the Premises and the property in which the Premises
are situated  free from any liens arising out of any work  performed,  materials
furnished or obligations incurred by Tenant. Landlord may require, at Landlord's
sole option,  that Tenant shall  provide to Landlord,  at Tenant's sole cost and
expense,  a lien and  completion  bond in an amount equal to one and one-half (1
1/2)  times  any and all  estimated  costs of any  improvements,  additions,  or
alterations  in the  Premises,  to insure  Landlord  against any  liability  for
mechanics' and materialmen's liens and to insure completion of the work.

17. SUBROGATION.  As long as their respective  insurers so permit,  Landlord and
Tenant hereby mutually waive their  respective  rights of recovery  against each
other  for any loss  insured  by fire,  extended  coverage  and  other  property
insurance  policies  existing for the benefit of the  respective  parties.  Each
party shall  obtain any special  endorsements,  if required by their  insurer to
evidence compliance with the aforementioned waiver.

18. LIABILITY INSURANCE.  Tenant shall, at Tenant's expense,  obtain and keep in
force during the term of this Lease a policy of  comprehensive  public liability
insurance  insuring

                                       7




Landlord and Tenant  against any liability  arising out of the  ownership,  use,
occupancy or maintenance of the Premises and all areas appurtenant thereto. Such
insurance at all times shall be a combined single  aggregate policy in an amount
of not less than One Million Dollars  ($1,000,000).  The limit of said insurance
shall not,  however,  limit the  liability of the Tenant  hereunder.  Tenant may
carry said insurance under a blanket policy, providing,  however, said insurance
by Tenant  shall have a Landlord's  protective  liability  endorsement  attached
thereto.  If Tenant shall fail to procure and maintain said insurance,  Landlord
may, but shall not be required to, procure and maintain same, but at the expense
of Tenant.  Insurance required hereunder,  shall be in companies rated A+ AAA or
better in "Best's  Insurance  Guide." Tenant shall deliver the Landlord prior to
occupancy of the Premises  copies of policies of  liability  insurance  required
herein or  certificates  evidencing  the existence and amounts of such insurance
with  loss  payable  clauses  satisfactory  to  Landlord.  No  policy  shall  be
cancellable or subject to reduction of coverage except after ten (10) days prior
written notice to Landlord. Landlord will keep the Premises insured for fire and
extended  coverage  equivalent  to 90% or more of full  replacement  cost at all
times during the term of this Lease.  Landlord will also maintain  comprehensive
general  public  liability  insurance.  Tenant's  liability  insurance  shall be
primary coverage and Landlord's liability insurance shall be secondary.

19.  SERVICES AND UTILITIES.  Provided that Tenant is not in default  hereunder,
Landlord agrees to furnish to the Premises during  reasonable hours of generally
recognized  business days, to be determined by Landlord at his sole  discretion,
and subject to the rules and  regulations  of the Building of which the premises
are a part,  electricity  for normal lighting and fractional  horsepower  office
machines,  heat and air  conditioning  required in  Landlord's  judgment for the
comfortable use and occupation of the Premises, and janitorial service. Landlord
shall also  maintain  and keep  lighted the common  stairs,  common  entries and
toilet rooms in the Building. Landlord shall not be liable for, and Tenant shall
not be entitled to, any reduction of rental by reason of  Landlord's  failure to
furnish any of the foregoing when such failure is caused by accident,  breakage,
repairs,  strikes, lockouts or other labor disturbances or labor disputes of any
character,  or by any other cause, similar or dissimilar,  beyond the reasonable
control of Landlord.  Landlord shall not be liable under any circumstances for a
loss of or injury to property, however occurring,  through or in connection with
or incidental  to, failure to furnish any of the  foregoing.  Supplementary  air
conditioning  units  will  be  installed  in  the  premises  with  the  cost  of
installation  and the cost of operation  and  maintenance  thereof to be paid by
Tenant to Landlord or public utility upon demand by Landlord or utility.

The  nature of the  business  of Tenant is such that the use of  electronic  and
electrical  equipment is central to the organization.  As a result,  Tenant will
use an amount of  electrical  power  greater  than  would be used by some  other
tenant not engaged in a similar business. Tenant shall not connect with electric
current except through existing  electrical  outlets in the Premises.  If Tenant
shall require water or electric  current in excess of that usually  furnished or
supplied for the use of the  Premises in Tenant's  normal  business  operations,
Tenant shall first procure the written consent of Landlord, which Landlord shall
not unreasonably refuse, to the use thereof and Landlord may cause a water meter
or electrical  current  meter to be installed in the Premises,  so as to measure
the amount of water and electric  current consumed for any such use. The cost of
any such meters and of  installation,  maintenance  and repair  thereof shall be
paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand
therefore by Landlord for all such water and electric  current consumed as shown
by said  meters,  at the rates  charged for such  services  by the local  public
utility  furnishing the same,  plus any additional  expense  incurred in keeping
account of the water and electric  current so consumed.  If a separate  meter is
not

                                       8




installed,  such  excess  cost for  such  water  and  electric  current  will be
established by an estimate made by a utility company or electrical engineer.

Notwithstanding  anything to the contrary contained in this Section 19, Landlord
shall  install,  as a  portion  of  Exhibit  A,  "Work  Agreement,"  excess  air
conditioning and electrical distribution equipment for Tenant's  heat-generating
equipment. In addition,  Landlord shall provide separate metering, to the extent
feasible, of electrical  consumption in Tenant's Premises,  with the intent that
Tenant shall  determine  its own hours and methods of operation and pay for such
consumption direct to the utility.

20. PROPERTY TAXES.  Tenant shall pay, or cause to be paid, before  delinquency,
any and all taxes levied or assessed and which  become  payable  during the term
hereof upon all Tenant's leasehold improvements,  equipment, furniture, fixtures
and personal  property located in the Premises;  except that which has been paid
for by Landlord,  or is the standard of the Building. In the event any or all of
the  Tenant's  leasehold  improvements,  except  that which has been paid for by
Landlord, or is the standard of the Building, equipment, furniture, fixtures and
personal  property  shall be assessed and taxed with the Building,  Tenant shall
pay to Landlord its share of such taxes  within ten (10) days after  delivery to
Tenant by Landlord of a statement  in writing  setting  forth the amount of such
taxes applicable to Tenant's property.

21. RULES AND REGULATIONS.  Tenant shall faithfully  observe and comply with the
rules and regulations that Landlord shall from time to time promulgate. Landlord
reserves  the right from time to time to make all  reasonable  modifications  to
said rules. The additions and modifications to those rules shall be binding upon
Tenant  upon  delivery  of a copy of  them  to  Tenant.  Landlord  shall  not be
responsible to Tenant for the  nonperformance  of any said rules and regulations
by any other tenants or  occupants.  Landlord  agrees  diligently to enforce the
Rules and Regulations with regard to all Tenants in the Building.

22.  HOLDING OVER.  If Tenant  remains in possession of the Premises or any part
thereof  after the  expiration  of the term  hereof,  with the  express  written
consent of Landlord,  such occupancy shall be a tenancy from month to month at a
rental  in the  amount  of the last  monthly  installment  of Basic  Rent or the
prevailing  Adjusted  Basic  Rent,  as the  case may be,  plus the last  monthly
installment of Additional  Rent, and all other charges  payable  hereunder,  and
upon all the terms hereof applicable to a month to month tenancy.

23. ENTRY BY LANDLORD. Landlord reserves and shall at any and all times have the
right to enter the Premises for the purposes of inspection, and for that purpose
shall at all times have and retain the  necessary  keys with which to unlock all
doors in, upon, and about the Premises, excluding Tenant's vaults, safes, files,
and such areas as Tenant shall  designate as "secure  areas."  Tenant shall have
the right to place  Tenant's own locks on any such  designated  "secure  areas."
Landlord  shall  have the  right to  inspect  the  physical  status of any areas
designated  as  "secure  areas"  upon  notice to Tenant  and in  company  with a
representative  of Tenant.  Landlord  shall have right of access to the Premises
necessary to provide  janitorial and other services to be provided hereunder but
the times of such  access  shall be those  that  shall be agreed on from time to
time between Landlord and Tenant, and neither party shall withhold its agreement
unreasonably.  Landlord shall have the right, upon reasonable  notice, to submit
Premises to inspection by prospective purchasers or tenants. Landlord shall have
the right to enter the Premises  during normal  business  hours of 9:00 a.m. and
5:00 p.m.  during  working days in order to post notices of  non-responsibility.
Landlord  shall  have the right to enter the  Premises,  other

                                       9




than the secure areas, at any time Landlord deems it necessary or desirable,  in
order to alter,  improve,  or repair the premises and may for that purpose erect
scaffolding  and other necessary  structures  where  reasonably  required by the
character of the work to be performed, always providing that access by Tenant to
the Premises or freedom of movement  within the  Premises  are not  unreasonably
restricted.  Landlord shall have the right to use the keys in his possession for
the  purpose  of  entering  the   Premises  for  the  purposes  of   alteration,
improvement,  or repair. Landlord undertakes,,  in those cases where alteration,
improvement,  or repair can be planned in  advance,  to notify  Tenant as far in
advance as is possible, and in those cases where an alteration,  improvement, or
repair is of an  emergency  or other  nature such that  advance  planning is not
possible,  to notify  Tenant  promptly  that the  Premises  have  been  entered.
Landlord shall have no liability to Tenant for any such proper  entrance  except
for any failure to exercise  due care for  Tenant's  property.  Tenant  shall be
responsible to report to landlord any circumstance  requiring action by Landlord
in any secure area.

As regards any proper entry governed by this Paragraph, Tenant hereby waives any
claim  for  damages  or for  injury or  inconvenience  to or  interference  with
Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and
any other loss occasioned  thereby,  other than a loss resulting from negligence
by Landlord. Any such proper entry shall not be cause for any abatement of rent.

Any proper  entry to the  Premises  as governed  by this  Paragraph  obtained by
Landlord  by any of these  said  means  shall  not under  any  circumstances  be
construed or deemed to be a forcible or unlawful  entry into,  or a detainer of,
the Premises, or an eviction of Tenant from the Premises or any portion thereof.

24.  RECONSTRUCTION.  In the event the  Premises or the  Building are damaged by
fire or other perils covered by extended coverage insurance,  Landlord agrees to
forthwith repair the same; and this Lease shall remain in full force and effect,
except that Tenant  shall be entitled to a  proportionate  reduction of all rent
payable  hereunder  while  such  repairs  are  being  made,  such  proportionate
reduction  to be based upon the extent to which the damage  and/or the making of
such repairs  shall  materially  interfere  with the business  carried on by the
Tenant in the Premises.  If the damage is due to the fault and neglect of Tenant
or his employees, there shall be no abatement of rent.

In the event the  Premises or the  Building are damaged as a result of any cause
other than the perils  covered by fire and  extended  coverage  insurance,  then
Landlord shall forthwith repair the same, provided the extent of the destruction
be less than ten percent (10%) of the then full replacement cost of the building
in which the Premises are located.  In the event the destruction of the Premises
or the Building by a peril not covered by fire and extended  coverage  insurance
is to an extent  greater than ten percent  (10%) of the full  replacement  cost,
then Landlord shall have the option; (1) to repair or restore such damage,  this
Lease  continuing in full force and effect;  or (2) give notice to Tenant at any
time within sixty (60) days after such damage,  terminating this Lease as of the
date specified in such notice,  which date shall be no less than thirty (30) and
no more than sixty (60) days  after the giving of such  notice.  In the event of
giving such  notice,  this Lease shall  expire and all interest of the Tenant in
the Premises  shall  terminate  on the date so specified in such notice.  If the
Premises  of the  Building  are  damaged as a result of any cause other than the
perils  covered by fire and  extended  coverage  insurance,  and  whether or not
Landlord  elects to repair or restore such damage or to terminate  this Lease as
herein  provided,  Tenant shall be entitled to a proportionate  reduction of all
rent  payable  hereunder to be based

                                       10




upon the  extent to which the damage  and the  making of such  repairs,  if any,
shall  materially  interfere  with the business  carried on by the Tenant in the
Premises.

Notwithstanding  anything to the contrary  contained in this  Article,  Landlord
shall not have any obligation  whatsoever to repair,  reconstruct or restore the
Premises  (1) when the damage  resulting  from any casualty  covered  under this
Article  occurs  during the last twelve (12) months of the extended term of this
Lease, if any extended term there is; or (2) when the damage  resulting from any
casualty covered under this Article occurs during the last twelve (12) months of
the original term of this Lease unless  Tenant,  within ten (10) days  following
Landlord's  notice to Tenant of  Landlord's  election not to repair such damage,
exercises Tenant's option to renew.

Landlord  shall not be  required to repair any injury or damage by fire or other
cause, or to make any repairs or replacements of any panels, decoration,, office
fixtures,  railings, floor covering,  partitions, or any other property which is
installed in the Premises by Tenant.

Except as otherwise  provided in this  Article,  Tenant shall not be entitled to
any  compensation  or damages from  Landlord for loss of the use of the whole or
any part of the Premises,  Tenant's  personal  property or any  inconvenience or
annoyance  occasioned by such damage,  repair,  reconstruction  or  restoration,
except as caused by Landlord, Landlord's agents or employees.

25.  DEFAULT.  In  addition to any other act or event  elsewhere  stated in this
Lease which will cause a default hereunder, the occurrence of any one or more of
the following acts or events shall constitute a default and breach of this Lease
by Tenant.

         (a) The vacating or abandonment of the Premises by Tenant.

         (b) The  failure  by  Tenant to make any  payment  of rent or any other
payment  required to be made by Tenant  hereunder,  as and when due,  where such
failure  shall  continue  for a period of three (3) days  after  written  notice
thereof by Landlord to Tenant.

         (c) The failure by Tenant to observe or perform  any of the  covenants,
conditions  or  provisions  of this Lease to be  observed  or  performed  by the
Tenant,  other than described in  subparagraph  (b) of this Article,  where such
failure  shall  continue for a period of thirty (30) days after  written  notice
thereof by Landlord to Tenant, provided, however, that if the nature of Tenant's
default is such that more than thirty (30) days are reasonably  required for its
cure, then Tenant shall not be deemed to be in default if Tenant  commences such
cure within said thirty  (30) day period and  thereafter  diligently  prosecutes
such cure to completion.

         (d)  The  making  by  Tenant  of  any  general  assignment  or  general
arrangement for the benefit of creditors;  or the filing by or against Tenant of
a petition to have Tenant adjudged a bankrupt,  or a petition or  reorganization
or arrangement  under any law relating to bankruptcy  (unless,  in the case of a
petition filed against Tenant,  the same is dismissed  within one hundred twenty
(120) days); or the appointment of a trustee or a receiver to take possession of
substantially  all of  Tenant's  assets  located at the  Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within thirty
(30)  days;  or  the  attachment,   execution  or  other  judicial   seizure  of
substantially  all of  Tenant's  assets  located at the  Premises or of Tenant's
interest in this Lease,  where such seizure is not discharged within thirty (30)
days.

                                       11




26. REMEDIES IN DEFAULT.  In the event of any such material default or breach by
Tenant,  Landlord may at any time  thereafter,  with or without notice or demand
and  without  limiting  Landlord  in the  exercise  of a right or  remedy  which
Landlord may have by reason of such default or breach:

         (a)  Terminate  Tenant's  right to  possession  of the  Premises by any
lawful  means,  in which  case this  Lease  shall  terminate  and  Tenant  shall
immediately  surrender  possession  of the Premises to  Landlord.  In such event
Landlord  shall be  entitled  to recover  from  Tenant all  damages  incurred by
Landlord by reason of Tenant's default  including,  but not limited to, the cost
of  recovering  possession of the  Premises;  expenses of  reletting,  including
necessary renovation and alteration of the Premises;  reasonable attorney's fees
and costs; any real estate commissions and costs actually paid; the worth at the
time of award by the court  having  jurisdiction  thereof of the amount by which
the unpaid rent for the balance of the term after the time of such award exceeds
the amount of such rental loss for the same period that Tenant  proves  could be
reasonably avoided;  that portion of the leasing commission paid by Landlord and
applicable to the unexpired term of this Lease.  Unpaid  installments of rent or
other  sums  shall  bear  interest  from the  date due at the rate of ten  (10%)
percent  per annum.  In the event  Tenant  shall have  abandoned  the  Premises,
Landlord  shall have the option of (a) taking  possession  of the  Premises  and
recovering from Tenant the amount specified in this paragraph, or (b) proceeding
under the provisions of the following Article 26(b).

         (b) Maintain  Tenant's  right to  possession,  in which case this Lease
shall  continue  in effect  whether  or not  Tenant  shall  have  abandoned  the
Premises.  In such event Landlord shall be entitled to enforce all of Landlord's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.

         (c) Pursue any other  remedy now or  hereafter  available  to  Landlord
under the laws or  judicial  decision  of the State in which  the  Premises  are
located.

27. EMINENT DOMAIN. If more than twenty-five  percent (25%) of the floor area of
the building of which the Premises are a part shall be taken or  appropriated by
any public or quasi-public authority under the power of eminent domain, Landlord
shall have the right,  at its election,  to terminate  this Lease.  If more than
twenty-five  percent (25%) of the parking area appurtenant to the building is so
taken or  appropriated,  then  either  party  hereto  shall  have  the  right to
terminate  this  lease.   If  any  portion  of  the  Premises  is  so  taken  or
appropriated,  then Tenant shall have the right,  at its election,  to terminate
this  Lease.  In the event  that  there is any  taking or  appropriation  of any
portion of the Building,  or of the real  property on which it is situated,  and
this  Lease  is not  terminated  pursuant  to the  provisions  hereof,  any sums
thereafter due as rental under this Lease shall be equitably reduced.

Any award paid in connection with any such taking shall belong to and be paid to
Landlord, except that Tenant shall receive from the award the following:

         a. A sum  attributable to Tenant's  improvements or alterations made to
the  Premises  by  Tenant  in  accordance   with  this  Lease,   which  Tenant's
improvements  or  alterations  Tenant has the right to remove from the  Premises
pursuant to the provisions of this Lease but elects not to remove; or, if Tenant
elects  to remove  any such  Tenant's  improvements  or  alterations,  a sum for
reasonable  removal or  relocation  costs not to exceed the market value of such
improvements or alterations.

                                       12




         b. A sum paid to Tenant from the condemnor for loss of goodwill.

         c.  A sum  attributable  to  that  portion  of the  award  constituting
severance  damages for the  restoration  of the Premises,  unless this Lease has
been terminated pursuant to the provisions hereof.

28.  OFFSET  STATEMENT.  Tenant shall at any time and from time to time upon not
less than ten (10) days prior written notice from Landlord execute,  acknowledge
and deliver to Landlord a statement in writing,  (a) certifying  that this Lease
is unmodified and in full force and effect (or, if modified,  stating the nature
of such  modification and certifying that this Lease as so modified,  is in full
force and effect), and the date to which the rentals and other charges are paid,
and (b)  acknowledging  that there are not, to Tenant's  knowledge,  any uncured
defaults on the part of the Landlord  hereunder,  or specifying such defaults if
any are  claimed.  Any such  statement  may be  relied  upon by any  prospective
purchaser or  encumbrancer  of all or any portion of the real  property of which
the Premises are a part.

29. PARKING.  Tenant shall have the right to use in common with other tenants or
occupants of the Building the parking facilities of the Building.  Tenant agrees
that  Tenant's  employees  and agents  will not park in any area  designated  by
Landlord  for visitor  parking or no parking.  In the event of violation of this
provision,  Tenant  agrees that the  offending  vehicle may be towed away at the
expense of Tenant. Ninety-four (94) parking spaces will be assigned to Tenant at
Tenant's  or  Landlord's  request at such time as general  parking is  regularly
inadequate, which assignment shall not be unreasonably withheld.

30.  AUTHORITY OF TENANT.  Tenant and each  individual  executing  this Lease on
behalf of Tenant  represents and warrants that he is duly  authorized to execute
and deliver this Lease.

31.  GENERAL PROVISIONS.

         (a) Plats and Riders.  Clauses, plats and riders, if any, signed by the
Landlord  and the  Tenant  and  endorsed  on or fixed to this  Lease  are a part
hereof.

         (b) Waiver.  The waiver by Landlord of any term,  covenant or condition
herein  contained  shall not be deemed to be a waiver of such term,  covenant or
condition on any  subsequent  breach of the same or any other term,  covenant or
condition herein  contained.  The subsequent  acceptance of rentals hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of
any  term,  covenant  or  condition  of this  Lease,  regardless  of  Landlord's
knowledge of such preceding breach at the time of the acceptance of such rent.

         (c) Notices. All notices and demands which may or are to be required or
permitted  to be  given  by  either  party to the  other  hereunder  shall be in
writing.  All notices and demands by the Landlord to the Tenant shall be sent by
United States Mail, postage prepaid, addressed to the Tenant at the Premises, or
to such other place as Tenant may from time to time designate in a notice to the
Landlord. All notices and demands by the Tenant to the Landlord shall be sent by
United States Mail, postage prepaid,  addressed to the Landlord at the Office of
the Building,  or to such other person or place as the Landlord may from time to
time designate in a notice to the Tenant.

                                       13




         (d) Joint Obligation.  If there be more than one Tenant the obligations
hereunder imposed upon Tenants shall be joint and several.

         (e) Marginal Headings. The marginal headings and titles to the Articles
of this  Lease are not a part of this  Lease and shall  have no effect  upon the
construction or interpretation of any part hereof.

         (f) Time.  Time is of the essence of this Lease and each and all of its
provisions in which performance is a factor.

         (g)  Successors  and  Assigns.  The  covenants  and  conditions  herein
contained,  subject to the  provisions as to  assignment,  apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.

         (h) Recordation. Neither Landlord nor Tenant shall record this Lease or
a short form  memorandum  hereof without the prior written  consent of the other
party.

         (i) Quiet  Possession.  Upon Tenant paying the rent reserved  hereunder
and observing and performing all of the covenants,  conditions and provisions on
Tenant's  part to be observed and performed  hereunder,  Tenant shall have quiet
possession  of the  Premises  for the  entire  term  hereof,  subject to all the
provisions of this Lease.

         (j) Late Charge. Tenant hereby acknowledges that late payment by Tenant
to Landlord  or rent or other sums due  hereunder  will cause  Landlord to incur
costs  not  contemplated  by this  Lease,  the  exact  amount  of which  will be
extremely  difficult to ascertain.  Such costs include,  but are not limited to,
processing  and accounting  charges,  and late charges which may be imposed upon
Landlord by terms of any  mortgage or trust deed  covering  the  Premises or the
Building accordingly.  Accordingly,  if any amounts due from Tenant shall not be
received by Landlord or Landlord's  designee  within ten (10) days after written
notice  that said amount is past due,  then Tenant  shall pay to Landlord a late
charge equal to five percent (5%) of such  overdue  amount.  The parties  hereby
agree that such late  charges  represent a fair and  reasonable  estimate of the
cost  that  Landlord  will  incur by  reason  of the  late  payment  by  Tenant.
Acceptance of such late charges by the Landlord  shall in no event  constitute a
waiver of Tenant's  default  with respect to such  overdue  amount,  nor prevent
Landlord from exercising any of the other rights and remedies granted hereunder.

         (k) Prior Agreements.  This Lease contains all of the agreements of the
parties  hereto with  respect to any matter  covered or mentioned in this Lease,
and no prior agreements or understanding pertaining to any such matters shall be
effective for any purpose. No provision of this Lease may be amended or added to
except  by an  agreement  in  writing  signed  by the  parties  hereto  or their
respective successors in interest.  This Lease shall not be effective or binding
on any party until fully executed by both parties hereto.

         (l) Inability to Perform.  Except as provided in Paragraph 4 or Exhibit
A to this Lease,  this Lease and the  obligations of the Tenant  hereunder shall
not be affected or impaired because the Landlord is unable to fulfill any of its
obligations  hereunder or is delayed in doing so, if such  inability or delay is
caused by reason of strike, labor disputes, civil disobedience,  acts of God, or
any other cause beyond the reasonable control of the Landlord.

                                       14




         (m) Attorneys'  Fees. In the event of any action or proceeding  brought
by either party against the other under this Lease,  the prevailing  party shall
be  entitled  to  recover  all  costs  and  expenses  including  the fees of its
attorneys in such action or  proceeding  in such amount as the court may adjudge
reasonable.

         (n)  Sale of  Building  by  Landlord.  In the  event of any sale of the
Building,  Landlord  shall be and is hereby  entirely  freed and relieved of all
liability  under any and all of its  covenants and  obligations  contained in or
derived from this Lease arising out of any act, occurrence or omission occurring
after the  consummation  of such sale;  and the  purchaser,  at such sale or any
subsequent sale of the Building shall be deemed,  without any further  agreement
between the parties or their  successors  in interest or between the parties and
any such  purchaser,  to have assumed and agreed to carry out any and all of the
covenants and  obligations of the Landlord under this Lease.  In connection with
any such sale,  Landlord agrees to obtain Purchaser's express written assumption
of this Lease.

         (o) This lease  shall be prior to any  encumbrance  recorded  after the
date of this Lease affecting the Building, other improvements, and land of which
the Premises  are a part.  If,  however,  a lender  requires  that this Lease be
subordinate  to any such  encumbrance,  this Lease shall be  subordinate to that
encumbrance,  if Landlord first obtains from the lender,  in favor of tenant,  a
written agreement that provides substantially the following:

         "As long as Tenant  performs  its  obligations  under  this  Lease,  no
foreclosure  of,  deed  given  in lieu of  foreclosure  of,  or sale  under  the
encumbrance,  and no steps or  procedures  taken  under the  encumbrance,  shall
affect Tenant's rights under this Lease."

Tenant shall attorn to any purchaser at any foreclosure  sale, or to any grantee
or transferee designated in any deed given in lieu of foreclosure.  Tenant shall
execute the written agreement and any other documents  required by the lender to
accomplish the purposes of this paragraph.

         (p) Name. Tenant shall not use the name of the Building for any purpose
other than as an address of the  business to be  conducted  by the Tenant in the
Premises.

         (q)  Separability.  Any provision of this Lease which shall prove to be
invalid,  void or illegal shall in no way affect, impair or invalidate any other
provision hereof and such other provision shall remain in full force and effect.

         (r)  Cumulative  Remedies.  No remedy or  election  hereunder  shall be
deemed  exclusive but shall,  wherever  possible,  be cumulative  with all other
remedies at law or in equity.

         (s) Choice of Law.  This  Lease  shall be  governed  by the laws of the
State of California.

         (t)  Signs  and  Auctions.  Tenant  shall  not  place any sign upon the
Premises or Building or conduct any auction  thereon  without  Landlord's  prior
written consent.

32.  OPTION TO RENEW.  If Tenant is not in  default  under  this lease as of one
hundred  twenty (120) days prior to the  expiration  of the initial term hereof,
then  Tenant  shall  have an  option to  extend  the term of this  lease for one
additional  period of five (5) years. Such option must be exercised by Tenant by
written notice to Landlord, which notice must be given not less than one hundred
twenty (120) days prior to the expiration of the initial lease term.

                                       15




If Tenant is then in default under the terms of this Lease, or fails to exercise
said  option in the manner and within the time above set forth,  then this Lease
shall expire at the end of the initial five-year (5) term.

If Tenant is entitled  to, and in fact does  exercise  this option in the manner
and within  the time  limits  herein set forth,  and if Tenant is not in default
under the terms of this lease as of the expiration of the initial  five-year (5)
term, then this Lease shall automatically be extended for an additional five (5)
years,  commencing at the expiration of the initial five-year (5) term, and each
and every term, provision and covenant of this Lease, except as to rental, shall
be applicable during such five-year extended term.

During such  extended  term,  rental shall be that which would have obtained had
the original term contained the renewal period.

33. OPTION TO LEASE  ADDITIONAL  SPACE.  Landlord shall provide Tenant notice of
any  available  space on the  second  level of the  East  Wing of the  Building,
whereupon  Tenant shall have ten days to exercise its option to lease said space
at rates and on terms  equivalent  to that  contained  in this Lease,  but in no
event  shall  the term be less  than one (1) year.  Landlord  further  agrees to
restrict  Lease terms to other Tenants on the second level of the East Wing to a
maximum of three years.

34.  OPTION TO  PURCHASE.  If Tenant is not in  default  under the terms of this
Lease as of one hundred eighty (180) days prior to the expiration of the initial
five-year  (5) term  hereof,  then Tenant  shall have an option to purchase  the
Building of which the leased  premises are a part,  on the  following  terms and
conditions:

         (a) The option  must be  exercised  by written  notice  from  Tenant to
Landlord,  which  notice must be given not later than one hundred  eighty  (180)
days prior to the  expiration  of the  initial  five-year  lease  term.  If such
written notice is not given, this option shall terminate.

         (b) If Tenant  exercises this option,  then the purchase  price,  which
shall be payable in cash at the time of escrow close (unless Landlord is willing
to negotiate and accept payment terms other than cash), shall be the fair market
value of the Building.  Fair market value shall be  established by the agreement
of Landlord and Tenant.  Provided  that if they are unable to agree on or before
one hundred  twenty (120) days before the  expiration  of the initial  five-year
lease term,  then Landlord and Tenant shall each appoint an  appraiser,  the two
appraisers shall appoint a third appraiser,  and a mutual decision of any two of
said three  appraisers  shall establish fair market value, and thus the purchase
price for the Building.

         Each party shall pay the costs and fees of their respective  appraiser,
and they  shall  share  equally  in the costs  and fees of the third or  neutral
appraiser.

         (c) Escrow shall close, and the sale shall be consummated,  at any time
during the last five (5) calendar days of the initial five-year (5) lease term.

         (d) Landlord  reserves the right to enter into a tax deferred  exchange
under IRC Section 1031. In such event,  Tenant agrees to cooperate with Landlord
in consummating such tax

                                       16




deferred exchange, provided that Tenant shall not incur any costs or expenses in
connection with such tax deferred exchange.

         (e) If Tenant  exercises  this purchase  option,  Tenant agrees that it
will not  receive  any  equitable  interest  in the  Building  by reason of such
exercise of option,  and that Tenant shall not thereby be entitled to any rights
as  a  purchaser   in   possession.   Rather,   all  rights,   liabilities   and
responsibilities  of Landlord and Tenant between the date of option exercise and
the date of escrow  close  shall be those of Landlord  and Tenant,  and shall be
determined exclusively under the provisions of this Lease, and Tenant shall have
no rights as a purchaser in possession.

         (f)  Time,  as set forth in the  various  provisions  of this  purchase
option,  is expressly  declared to be of the essence of this option,  and of the
purchase contract that will result from any exercise thereof.

35.  BROKERS.  Tenant  warrants that it has had no dealings with any real estate
broker or agents in connection with the negotiation of this Lease excepting only
James C.  Westenbroek and James J. Williams and it knows of no other real estate
broker or agent who is entitled to a commission in connection with this Lease.

The  parties  hereto  have  executed  this  Lease at the  place and on the dates
specified immediately adjacent to their respective signatures.

If this Lease has been filled in, it has been  prepared for  submission  to your
attorney for his approval.  No  representation  or recommendation is made by the
real estate broker or its agents or employees as to the legal sufficiency, legal
effect, or tax consequences of this Lease or the transactions relating thereto.


                                                  SRP Limited Partnership
                                             -----------------------------------

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

Address    120 N. Redwood Drive              By:
        -------------------------------         --------------------------------
       San Rafael, California                             "Landlord"
- --------------------------------------


                                                Fair, Isaac & Company, Inc.
                                             -----------------------------------

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

Address    55 Mitchell Boulevard             By:
        -------------------------------         --------------------------------
       San Rafael, California                             "Tenant"
- --------------------------------------

                                       17






                                SMITH RANCH PLAZA

                                 WORK AGREEMENT

                              EXHIBIT "A" TO LEASE


FAIR,  ISAAC COMPANY,  INC.  (hereinafter  called  "Tenant") and S.R.P.  LIMITED
PARTNERSHIP  (hereinafter  called "Landlord") are executing  simultaneously with
this Work Agreement,  the written Lease to which this Work Agreement is attached
covering  the  premises  described  in  said  Lease  (hereinafter   called  "the
premises").

To induce  Tenant to enter  into said  Lease  (which is hereby  incorporated  by
reference to the extent that the provisions of this agreement may apply thereto)
and in consideration of the mutual covenants hereinafter contained, Landlord and
Tenant mutually agree as follows:

         1. TENANT'S PLANS AND SPECIFICATIONS

         (a) Except to the extent otherwise  provided in  subparagraphs  (b) and
(c) of this paragraph,  Landlord agrees to furnish at its sole cost and expense,
all architectural, mechanical, and electrical engineering plans required for the
performance of the work  (hereinafter  referred to as "Building  Standard Work")
hereinbelow described,  including complete detailed plans and specifications for
Tenant's  partition  layout,  reflected  ceiling,  heating and air conditioning,
electrical  outlets and  switches and  telephone  outlets.  Design  services are
limited to one schematic  design plus one set of revisions  based on a review of
the schematic  design.  Further  revisions will be at the expense of the Tenant.
The layout shall be approved by each of the parties  hereto and attached to this
Lease and shall become a part thereof and shall be described as Exhibit "B".

         (b)  It  is  understood  and  agreed  that  Tenant  will  require  work
(hereinafter  referred to as "Building  Non-Standard Work") different from or in
addition to said  Building  Standard  Work.  In such event,  any  architectural,
mechanical, and electrical plans and specifications required shall be furnished,
at Tenant's sole cost and expense to Landlord's office for approval.

         (c) It is understood and agreed that any interior decorating  services,
such as selection of special wall  coverings,  fixtures,  non-building  standard
carpet,  and  any or  all  other  decorator  items  required  by  Tenant  in the
performance of said work referred to hereinabove  in  subparagraphs  (a) and (b)
shall be at the Tenant's sole cost and expense.

         (d) It is  understood  and  agreed  that all plans  and  specifications
referred  to  hereinabove  in  subparagraphs  (a)  and (b)  are  subject  to the
Landlord's approval,  which approval shall not be unreasonably withheld.  Tenant
also agrees that,  when  requested  by  Landlord's  office,  Tenant will furnish
complete information respecting Tenant's  requirements.  Schematic plans will be
approved  by Tenant on or before  October  27,  1983,  with  complete  plans and
specifications approved by Tenant on or before October 31, 1983.

                                       18




         2. BUILDING STANDARD WORK AT LANDLORD'S COST AND EXPENSE

         Landlord  will, at its sole cost and expense,  furnish and install Four
Hundred, Four Thousand, One Hundred,  Forty-three  ($404,143.00) in value of the
work as indicated on Tenant's final approved plans,  which portion is defined as
"Building Standard Work".

         The following categories are an indication of normal building standard.
Because of agreement on an improvement  budget,  these  descriptions are only to
indicate type and quality of  materials,  and are not to be utilized as quantity
allowances.

         (a) Building  standard  interior  partitions,  ceiling high, 5/8" vinyl
clad gypsum  board,  with rubber base on both sides of 2 1/2 " metal stud, in an
amount equal to one lineal foot per fifteen square feet of office area. Demising
partitions  between  tenants to be full height (floor to suspended  ceiling) and
sound-insulated.

         (b) Building  standard full height  interior  doors,  3" X 9" X 1 3/4",
solid core,  stain grade oak veneer face with K.D.  metal frame,  Baldwin  Lever
latchset  design,  in an amount equal to one per 350 square feet of office area,
and a maximum of one  building  standard  full height suite  entrance  door with
hardware  including  Baldwin Lever  lockset  design,  closer and deadbolt.  (All
hardware to have oil rubbed bronze finish.)

         (c) Building  standard two foot by four foot  fluorescent  fixture at a
maximum rate of one per eighty square feet of area,  including switches for said
fixtures, but not to exceed one switch for each private office or room.

         (d) Building standard electrical duplex wall outlets,  with cover plate
in an amount equal to one duplex per one-hundred square feet of office area.

         (e) Building standard  telephone wall outlets,  with cover plate, in an
amount equal to one per two-hundred square feet of office area.

         (f) Building standard blinds on all exterior office windows.

         (g) Building standard  ceiling,  exposed grid,  mechanically  suspended
white 2 X 2 tegular acoustic panels.

         (h) Building standard heating, ventilating, and air conditioning,  with
duct work,  supply grilles,  return.  and thermostats,  served by a water source
heat pump system to provide air  conditioning  suited to normal  general  office
occupancy, with a minimum area for each zone of seven hundred fifty square feet.
Tenant will be  required to pay  additional  charges if its  application  of the
space necessitates excess zoning or capacity.

         (i) Building standard carpet in colors uniform for each floor.

         (j) Automatic  sprinkler  system with building  standard  recessed-type
head, chrome plated.

                                       19




         3. BUILDING NON-STANDARD WORK AT TENANTIS COST AND EXPENSE

         Provided  Tenant's plans and  specifications  are furnished by the date
provided  hereinabove in Paragraph  l(d) and approved by Landlord,  the Landlord
shall cause Tenant's "Building  Non-Standard Work" to be installed by Landlord's
contractor,  but at  Tenant's  sole cost and expense for any amount in excess of
Ninety-Five  Thousand,  Eight Hundred  Fifty-Seven  Dollars ($95,857).  Prior to
commencing  any such work,  Landlord,  its  contractor,  or its  architects  and
engineers,  shall submit to Tenant a written  estimate of the cost  thereof.  If
Tenant  shall  fail to  approve  any such  estimate  within  ten (10) days after
submission  thereof,  such failure  shall be deemed a disapproval  thereof,  and
Landlord's  contractor  shall not proceed with such work.  Tenant  agrees to pay
Landlord promptly upon being billed therefore,  the cost to Landlord of all such
excess  Building  Non-Standard  Work.  Such  bills may be  rendered  during  the
progress of the performance of the work and the furnishings and  installation of
the materials to which such bills relate. Landlord may require Tenant to deposit
the estimated cost of such work with Landlord prior to the  commencement of such
work.

         Within the demised  premises Tenant may select  different new materials
(except  exterior  window  coverings)  in  place  of  "Building  Standard  Work"
materials which would otherwise be initially furnished and installed by Landlord
for or in the  interior  of the  Premises  under  the  provisions  of this  Work
Agreement, provided such selection is indicated on said Tenant's final plans. No
such different new materials shall be furnished and installed in replacement for
any of Landlord's  "Building  Standard Work" materials  until  Landlord,  or its
contractor  and/or its  architects  shall have advised Tenant in writing of, and
Landlord or its contractor and/or its office planning  architects have agreed in
writing on, the work of such different new material and the  Landlord's  cost of
such replaced Landlord's "Building Standard Work" materials.

         All  amounts  payable  by  Tenant to  Landlord  pursuant  to  preceding
paragraphs  shall  be paid by  Tenant  promptly  after  the  rendering  of bills
therefore by Landlord or its  contractors to Tenant,  it being  understood  that
such bills may be rendered  during the progress of the  performance  of the work
and/or the  furnishings  and  installation  of the materials to which such bills
relate.  Any such different new materials  shall be surrendered by the Tenant to
the  Landlord at the end of the initial or other  expiration  of the term of the
Lease.

         4. COMPLETION AND RENTAL COMMENCEMENT DATE

         If the occupancy date of the Premises is delayed by:

         (a)      Tenant's  failure  to furnish  the  information  specified  in
                  Paragraph 1 hereof in a timely fashion; or

         (b)      Tenant's request for  substitution or additional  improvements
                  or changes in materials, finisher, or installations other than
                  those which are not Building Standard; or

         (c)      Tenant's changes in the final drawings and specifications; or

                                       20




         (d)      A delay in performance  of building  standard work as a result
                  of Tenant's  failure to approve written  estimates of the cost
                  of  non-building  standard work in accordance with Paragraph 3
                  hereof,

then the  commencement  of the term of the Office  Lease and the payment of rent
shall be unchanged.



LANDLORD:                                      TENANT:

S.R.P. LIMITED PARTNERSHIP                     FAIR, ISAAC AND COMPANY, INC.
- ---------------------------------              ---------------------------------

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

Dated ---------------------------              ---------------------------------


                                       21



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

         1. PURPOSE.

         The Plan is intended to provide incentive to the Non-Employee Directors
of the  Corporation,  to align  such  individuals'  interests  with those of the
Corporation's  stockholders,  to  encourage  such  individuals  to remain in the
service  of the  Corporation  and to attract  new  Non-Employee  Directors  with
outstanding qualifications.

         2. DEFINITIONS.

         (a) "Board"  shall mean the Board of Directors of the  Corporation,  as
constituted from time to time.

         (b) "Code" shall mean the Internal Revenue Code of 1986, as amended.

         (c)  "Committee"  shall mean the  committee  appointed  by the Board in
accordance with Section 4.

         (d) "Corporation" shall mean Fair, Isaac and Company,  Incorporated,  a
Delaware corporation.

         (e)  "Exercise  Price" shall mean the amount for which one Share may be
purchased  upon  exercise  of an  Option,  as  determined  by the  Committee  in
accordance with the Plan.

         (f)  "Fair  Market  Value"  shall  mean  the  market  price  of  Stock,
determined by the Committee as follows:

                  (i) If  Stock  was  traded  over-the-counter  on the  date  in
         question but was not  classified as a national  market issue,  then the
         Fair Market Value shall be equal to the mean between the last  reported
         representative  bid and asked  prices  quoted by the NASDAQ  system for
         such date;

                  (ii) If  Stock  was  traded  over-the-counter  on the  date in
         question and was classified as a national  market issue,  then the Fair
         Market Value shall be equal to the last-transaction price quoted by the
         NASDAQ system for such date;

                  (iii) If Stock was traded on a stock  exchange  on the date in
         question,  then the Fair  Market  Value  shall be equal to the  closing
         price reported by the applicable composite-transactions report for such
         date; and

                                       1

                                                                    Exhibit 10.6




                  (iv) If none of the foregoing  provisions is applicable,  then
         the Fair Market  Value shall be  determined  by the  Committee  in good
         faith on such basis as it deems appropriate.

         In all cases,  the  determination of Fair Market Value by the Committee
shall be conclusive and binding on all persons.

         (g) "Non-Employee Director" shall mean a member of the Board who is not
a common-law employee of the Corporation or of a Subsidiary.

         (h)  "Nonstatutory  Stock Option" shall mean an option not described in
sections 422(b), 422A(b), 423(b) or 424(b) of the Code.

         (i) "Option" shall mean a Nonstatutory Stock Option granted pursuant to
the Plan and entitling the holder to purchase Shares.

         (j) "Optionee" shall mean an individual who holds an Option.

         (k) "Plan" shall mean this Fair, Isaac and Company,  Incorporated Stock
Option Plan for Non-Employee Directors, as it may be amended from time to time.

         (l) "Purchase  Price" shall mean the Exercise  Price  multiplied by the
number of Shares with respect to which an Option is exercised.

         (m) "Share"  shall mean one share of Stock,  as adjusted in  accordance
with Section 9 (if applicable).

         (n) "Stock" shall mean the Common Stock of the Corporation.

         (o) "Subsidiary" shall mean any corporation,  if the Corporation and/or
one or more other  Subsidiaries  own at least 50% of the total  combined  voting
power of all classes of  outstanding  stock in such  corporation.  A corporation
that attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.

         3. EFFECTIVE DATE.

         The Plan was adopted by the Board on February 1, 1988. The Plan remains
subject to the approval of the  Corporation's  stockholders  pursuant to Section
13.

         4. ADMINISTRATION.

         (a) Committee Membership.

                                       2




         The Plan shall be administered by the Committee. The Committee shall be
appointed  by the Board and shall  consist  only of three or more  disinterested
directors.  The Board may from time to time remove  members from, or add members
to, the Committee.  Vacancies on the Committee,  however caused, shall be filled
by the Board.  The Committee  shall hold meetings at such times and places as it
may determine. Acts of a majority of the Committee at which a quorum is present,
or acts  reduced to or  approved  in writing by a majority of the members of the
Committee, shall be the valid acts of the Committee.

         (b) Committee Responsibilities.

         The  Committee  shall  construe the Plan and carry out its  provisions.
However, the Committee shall have no discretion in selecting the Optionees or in
awarding Options.  The  interpretation  and construction by the Committee of any
provision of the Plan or of any Option  granted  thereunder  shall be final.  No
member of the Committee shall be liable for any action or determination  made in
good faith with respect to the Plan or any Option granted thereunder.

         (c) Disinterested Directors.

         A member of the Board  shall be  deemed to be  "disinterested"  for the
purposes of this Plan only if he or she, at all times  required  for purposes of
Rule 16b-3 of the Securities and Exchange  Commission or any successor rule, was
not  eligible  for the grant of rights or options to  purchase  stock under this
Plan. A Non-Employee  Director shall not fail to qualify as "disinterested"  for
the purpose of  administering  any other stock option plan of the Company solely
because he or she is eligible for the grant of Options under this Plan.

         5. STOCK.

         The  aggregate  number of Shares  which may be issued upon  exercise of
Options under the Plan shall not exceed 40,000.  The number of Shares subject to
Options  outstanding  at any time shall not  exceed  the  number of Shares  then
remaining  available  for  issuance  under  the  Plan.  In the  event  that  any
outstanding Option for any reason expires or is terminated, the Shares allocable
to the unexercised  portion of such Option may again be made subject to Options.
The  limitation  established by this Section 5 shall be subject to adjustment in
the manner  provided  in  Section 9 upon the  occurrence  of an event  specified
therein.

         6. ELIGIBILITY AND GRANT OF OPTIONS.

         Each Non-Employee Director shall receive a single Option covering 8,000
Shares (subject to adjustment  under Section 9). Such Option shall be considered
a Nonstatutory Stock Option for tax purposes. Such Option shall automatically be
granted as of the later of (a)  February  1, 1988,  or (b) the date on which the
Non-Employee  Director completes

                                       3




his or her sixth month of  continuous  service as a  Non-Employee  Director.  No
individuals other than  Non-Employee  Directors shall be eligible to participate
in the Plan.

         7. TERMS AND CONDITIONS OF OPTIONS.

         (a) Stock Option Agreements.

         Options shall be evidenced by written  stock option  agreements in such
form as the Committee shall from time to time determine.  Such agreements  shall
comply with, and be subject to, the terms and conditions set forth in the Plan.

         (b) Exercise Price.

         Each Option shall specify the Exercise  Price,  which shall be equal to
100% of the Fair Market Value on the date of grant.

         (c) Medium and Time of Payment.

         The Purchase  Price shall be payable in full in United  States  dollars
upon the exercise of the Option,  except that all or part of the Purchase  Price
may be paid by the surrender of Shares in good form for  transfer,  owned for 12
months or more by the person  exercising  the  Option  and having a Fair  Market
Value on the date of exercise  equal to that portion of the Purchase Price which
is being paid with Shares.

         (d) Withholding Taxes.

         As a  condition  to the  exercise  of an Option or the  disposition  of
Shares  acquired under the Plan, the Optionee  shall make such  arrangements  as
applicable law may require for the  satisfaction of any federal,  state or local
withholding tax  obligations  that may arise in connection with such exercise or
disposition.

         (e) Exercisability, Term and Nontransferability.

         Each  Option  shall  become  exercisable  six months  after the date of
grant,  subject to Section 13. The Option shall  terminate on the day before the
10th  anniversary of the date of grant,  except as otherwise  provided in (f) or
(g) below.

         During the lifetime of the  Optionee,  the Option shall be  exercisable
only by the Optionee and shall not be assignable or  transferable.  In the event
of the Optionee's death, the Option shall not be transferable other than by will
or by the laws of descent and distribution.

         (f) Termination of Board Membership

                                       4




         If an Optionee  ceases to be a member of the Board for any reason other
than his or her death,  then the  Optionee  shall have the right to  exercise an
Option (to the extent exercisable but not previously  exercised and not expired)
at any time  within 90 days  after the date when he or she ceases to be a member
of the Board.

         For purposes of this  Subsection  (f),  status as a member of the Board
shall be deemed to continue while the Optionee is on military leave,  sick leave
or other bona fide leave of absence.

         Options  already  granted  pursuant  to  this  Plan  to a  Non-Employee
Director shall not be affected by reason of the Optionee  thereafter becoming an
employee  of the  Corporation  or a  Subsidiary  so long as he or she  remains a
member of the Board.

         (g) Death of Optionee.

         If an  Optionee  dies  while he or she is a member of the Board and has
not fully  exercised an Option,  then such Option (to the extent not  previously
exercised and not expired) may be exercised in full at any time within 12 months
after the  Optionee's  death by the  executors or  administrators  of his or her
estate or by any person or persons who have acquired  such Option  directly from
the Optionee by bequest or inheritance.

         (h) Rights as a Stockholder.

         An Optionee, or a transferee of an Optionee,  shall have no rights as a
stockholder  with  respect to any Shares  covered by his or her Option until the
date of the issuance of a stock certificate for such Shares. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other  property),  distributions  or other  rights for which the record  date is
prior to the date when such stock  certificate is issued,  except as provided in
Section 9.

         8. TERM OF PLAN.

         Options may be granted  pursuant to the Plan until January 31, 1998, or
until such earlier date as the Board may determine at its sole discretion.

         9. RECAPITALIZATIONS.

         Subject to any required  action by  stockholders,  the number of Shares
covered by the Plan as  provided  in Section 5, the number of Shares  covered by
each  outstanding  Option  and the  Exercise  Price  thereof  shall be  adjusted
proportionately  for any  increase or  decrease  in the number of issued  Shares
resulting  from a  subdivision  or  consolidation  of Shares or the payment of a
stock  dividend or any other increase or decrease in the number of issued Shares
effected without receipt of consideration by the Corporation.

                                       5




         Subject to any required action by  stockholders,  if the Corporation is
the  surviving  corporation  in any merger or  consolidation,  each  outstanding
Option shall pertain to the securities to which a holder of the number of Shares
subject to the Option would have been entitled.  A dissolution or liquidation of
the Corporation or a merger or consolidation in which the Corporation is not the
surviving  corporation shall cause each outstanding Option to terminate,  unless
the agreement or merger or consolidation  provides for the assumption thereof by
the surviving corporation.

         To the extent that the  foregoing  adjustments  relate to securities of
the  Corporation,  such  adjustments  shall  be  made  by the  Committee,  whose
determination shall be conclusive and binding on all persons.

         Except as expressly provided in this Section 9, the Optionee shall have
no rights by reason of any  subdivision or  consolidation  of shares of stock of
any class,  the payment of any stock  dividend or any other increase or decrease
in the  number of shares of stock of any class or by reason of any  dissolution,
liquidation,  merger or  consolidation or spin-off of assets or stock of another
corporation,  and any issue by the  Corporation of shares of stock of any class,
or securities  convertible into shares of stock of any class,  shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option.

         The grant of an Option pursuant to the Plan shall not affect in any way
the right or power of the  Corporation to make  adjustments,  reclassifications,
reorganizations  or changes of its  capital or business  structure,  to merge or
consolidate or to dissolve,  liquidate,  sell or transfer all or any part of its
business or assets.

         10. SECURITIES LAW REQUIREMENTS.

         (a) Legality of Issuance.

         No Shares  shall be issued upon the  exercise of any Option  unless and
until the Corporation has determined that (i) it and the Optionee have taken all
actions  required to register the Shares under the  Securities  Act of 1933,  as
amended  (the  "Act"),   or  to  perfect  an  exemption  from  the  registration
requirements  thereof;  (ii) any  applicable  listing  requirement  of any stock
exchange  on which  Stock is  listed  has been  satisfied;  and  (iii) any other
applicable provision of state or federal law has been satisfied.

         (b) Restrictions on Transfer; Representations of Optionee.

         Regardless  of whether the  offering  and sale of Shares under the Plan
have been  registered  under the Act or have been  registered or qualified under
the securities laws of any state, the Corporation may impose  restrictions  upon
the sale,  pledge or other  transfer of such Shares  (including the placement of
appropriate   legends  on  stock  certificates)  if,  in  the  judgment  of  the
Corporation  and its counsel,  such  restrictions  are necessary or desirable in
order to achieve  compliance with the provisions of the Act, the securities

                                       6




laws of any state or any other law.  In the event that the sale of Shares  under
the Plan is not  registered  under the Act but an exemption  is available  which
requires an investment  representation  or other  representation,  each Optionee
shall be  required  to  represent  that  such  Shares  are  being  acquired  for
investment, and not with a view to the sale or distribution thereof, and to make
such  other  representations  as are  deemed  necessary  or  appropriate  by the
Corporation and its counsel. Stock certificates evidencing Shares acquired under
the Plan  pursuant  to an  unregistered  transaction  shall bear an  appropriate
restrictive legend.

         Any determination by the Corporation and its counsel in connection with
any of the matters set forth in this Section 10 shall be conclusive  and binding
on all persons.

         (c) Registration or Qualification of Securities.

         The Corporation may, but shall not be obligated to, register or qualify
the sale of Shares under the Act or any other  applicable  law. The  Corporation
shall not be obligated to take any affirmative action in order to cause the sale
of Shares under the Plan to comply with any law.

         (d) Removal of Legends.

         If, in the  opinion  of the  Corporation  and its  counsel,  any legend
placed on a stock  certificate  representing  Shares issued under the Plan is no
longer required,  the holder of such  certificate  shall be entitled to exchange
such  certificate for a certificate  representing  the same number of Shares but
lacking such legend.

         11. AMENDMENT OF THE PLAN.

         The Board may from time to time, with respect to any Shares at the time
not subject to Options, suspend or discontinue the Plan or revise or amend it in
any respect  whatsoever  except that,  without the approval of the Corporation's
stockholders, no such revision or amendment shall:

         (a) Materially  increase the benefits  accruing to Optionees  under the
     Plan;

         (b)  Materially  increase  the  number of Shares  subject  to the Plan,
     except as provided in Section 9;

         (c) Materially  change the designation in Section 6 with respect to the
     class of individuals eligible to receive Options; or

         (d) Amend this Section 11 to defeat its purpose.

         12. APPLICATION OF FUNDS.

                                       7




         The  proceeds  received  by the  Corporation  from  the  sale of  Stock
pursuant  to the  exercise  of an  Option  will be used  for  general  corporate
purposes.

         13. APPROVAL OF STOCKHOLDERS.

         The  adoption  of the Plan and any  amendment  described  in Section 11
shall be  subject  to  approval  by the  affirmative  vote of the  holders  of a
majority of the outstanding shares of the Corporation entitled to vote or by the
unanimous  written  consent  of  all  holders  of  the  outstanding   shares  of
the-Corporation  entitled to vote. In the event that the Plan is not approved by
stockholders  at or before the first annual meeting of  stockholders  held after
its  adoption by the Board,  any Option  theretofore  granted  shall be null and
void.  Any other  provision  of the Plan  notwithstanding,  no  Option  shall be
exercisable until the Corporation's stockholders have approved the Plan.

         14. EXECUTION.

         To  record  the  adoption  of the Plan by the  Board,  effective  as of
February 1, 1988, the  Corporation  has caused its authorized  officers to affix
the corporate name hereto.


                                       FAIR, ISAAC AND COMPANY, INCORPORATED

                                       By ______________________________________
                                          President and CEO


                                       By ______________________________________
                                          Vice President and Secretary

                                       8



                                 AMENDMENT NO. 1

                  TO THE FAIR, ISAAC AND COMPANY, INCORPORATED
                             1987 STOCK OPTION PLAN

         Effective  as  of  March  1,  1988,   the  Fair,   Isaac  and  Company,
Incorporated 1987 Stock Option Plan is hereby amended as follows:

         Section 2(g) is amended to read as follows:

                  "Fair  Market  Value"  shall mean the  market  price of Stock,
         determined by the Committee as follows:

                  (i) If  Stock  was  traded  over-the-counter  on the  date  in
         question,  whether or not classified as a national  market issue,  then
         the Fair  Market  Value  shall be  equal to the mean  between  the last
         reported  representative  bid and asked  prices  quoted  by the  NASDAQ
         system for such date;

                  (ii) If Stock was  traded on a stock  exchange  on the date in
         question,  then the Fair  Market  Value  shall be equal to the  closing
         price reported by the applicable composite-transactions report for such
         date; and

                  (iii) If none of the foregoing provisions is applicable,  then
         the Fair Market  Value shall be  determined  by the  Committee  in good
         faith on such basis as it deems appropriate.

         To  record  the  adoption  of this  amendment  to the  Fair,  Isaac and
Company,  Incorporated  1987 Stock  Option Plan by the Board on August 18, 1988,
the Corporation  has caused its authorized  officers to affix the corporate name
hereto.


                                     Fair, Isaac and Company, Incorporated




                                       By ______________________________________
                                               Peter L. McCorkell
                                               Vice President & Secretary

                                                                    EXHIBIT 10.8





                                 AMENDMENT NO. 1

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

         Effective  as  of  March  1,  1988,   the  Fair,   Isaac  and  Company,
Incorporated  Stock Option Plan for Non-Employee  Directors is hereby amended as
follows:

         Section 2(f) is amended to read as follows:

                  "Fair  Market  Value"  shall mean the  market  price of Stock,
         determined by the Committee as follows:

                  (i) If  Stock  was  traded  over-the-counter  on the  date  in
         question,  whether or not classified as a national  market issue,  then
         the Fair  Market  Value  shall be  equal to the mean  between  the last
         reported  representative  bid and asked  prices  quoted  by the  NASDAQ
         system for such date;

                  (ii) If Stock was  traded on a stock  exchange  on the date in
         question,  then the Fair  Market  Value  shall be equal to the  closing
         price reported by the applicable composite-transactions report for such
         date; and

                  (iii) If none of the foregoing provisions is applicable,  then
         the Fair Market  Value shall be  determined  by the  Committee  in good
         faith on such basis as it deems appropriate.

         In all cases,  the  determination of Fair Market Value by the Committee
shall be conclusive and binding on all persons.

         To  record  the  adoption  of this  amendment  to the  Fair,  Isaac and
Company,  Incorporated Stock Option Plan for Non-Employee Directors by the Board
on August 18, 1988, the Corporation has caused its authorized  officers to affix
the corporate name hereto.


                                     Fair, Isaac and Company, Incorporated




                                       By ______________________________________
                                               Peter L. McCorkell
                                               Vice President & Secretary

                                                                    EXHIBIT 10.9





                         ADDENDUM NUMBER SEVEN TO LEASE

THIS  ADDENDUM  NUMBER  SEVEN TO LEASE is made and entered  into this 1st day of
March 1990, by and between  S.R.P.  Limited  Partnership,  (Landlord)  and Fair,
Isaac and Company, Incorporated (Tenant), and shall constitute a modification of
that Lease  between the  parties  dated  October  20,  1983 (Base  Lease) and as
amended on May 1, 1984, September 21, 1984, February 8, 1985, September 3, 1985,
November 21,  1985,  and October 1, 1986,  relating to the premises  occupied by
Tenant in the building  commonly known as 120 North Redwood  Drive,  San Rafael,
California 94903. This action  constitutes both the extension of the term of the
Lease, and the expansion of Tenant into future available space.

The parties hereto agree that:

1. The leased  premises  shall be increased by 3,488  rentable  square feet,  to
include the space commonly known as Suite 350, effective upon ninety days notice
to  Tenant,  for  possession  no earlier  than July 1,  1990,  and no later than
October 1, 1990.

2. Tenant agrees to lease Suite 375, comprised of 2,472 rentable square feet, at
such time as that space is first  available  for lease,  upon the same terms and
conditions as is then existing under the Lease.

3. The  expiration  date of the Lease for both  existing  and  future  expansion
Tenant space shall be changed to December 31, 2001.

4. The Option to Renew,  contained  in  Paragraph  32 of the Base Lease shall be
changed such that the first option period,  if exercised,  shall now commence on
January  1,  2002.  The  Option to Renew is only  available  on all of the space
contained in the Lease, at the time of option exercise.  This Option is personal
to Tenant and is not available to sublessee or sublessees of Tenant's leasehold.

5. The  combination of Basic Rent and Additional Rent for the period of March 1,
1990,  to December 31, 1990,  shall be computed at the monthly rate of $1.90 per
rentable square foot, prior to a monthly credit in the amount of $2,150 for west
wing utility  expense and first floor west wing janitorial  expense.  Therefore,
until  expansion space is included in the leased  premises,  the monthly rent on
the existing 36,554 rentable square feet shall be $67,303.

6. Additional Rent as defined and administered by Paragraph 7 of the Lease shall
be unchanged except that Base Year shall now refer to and mean the calendar year
1990.  During the revised Base Year 1990, the portion of total rent attributable
to  Additional  Rent shall be equal to the actual Tenant  Proportional  Share as
retroactively determined at the end of the Base Year.

     Example: Considering only Tenant's present space, if at the end of 1990, it
     is determined that Tenant's  proportional  share of 1990 operating expenses
     on a monthly  basis equaled  $16,500,  then that amount shall be subtracted
     from the $67,303  total monthly  rent,

                                       1

                                                                   Exhibit 10.11




     therefore  providing a remainder of $50,803 as the Base Year Basic  Monthly
     Rent.

     Then,  during 1991, the $16,500 Monthly  Additional Rent will be used as an
     estimate of monthly  operating  expenses,  with an adjustment at the end of
     the year to reflect actual operating expenses,  creating a resultant rebate
     or  recapture as is then  determined  to be  appropriate,  per the terms of
     Paragraph 7 of the Lease.

7.  Paragraph 6 "Adjusted  Basic Rent," of the Base Lease shall be modified such
that the  combination of increases in rent under  Paragraphs 6 and 7 shall in no
event exceed a 7.5% increase over the combined  rental under said Paragraphs for
the immediately preceding lease year.

8.  Paragraph 9 "Use," of the Base Lease  shall be  modified  such that "use" is
defined as "general office purposes," instead of "general office purposes of the
Fair, Isaac Companies."

9. Paragraph 24  "Reconstruction," of the Base Lease shall be modified such that
if the time period required to complete  restoration of the Premises or Building
is greater than twelve  months from the date of the damage,  either  Landlord or
Tenant shall have the right to terminate the Lease within thirty (30) days after
the date of the determination  that such  reconstruction  will require more than
twelve months.  Landlord will make such  determination and notify Tenant of such
determination within sixty (60) days of the event of damage.

10. Paragraph 13.b. of the Base Lease is modified so that Landlord's obligations
with  respect  to repair  and  maintenance  of the  structural  portions  of the
building shall explicitly  include any modifications  required of the structural
portions of the building under then current building and fire codes.

11. All other terms and conditions of the Base Lease shall remain unchanged.

Landlord: S.R.P. Limited                   Tenant: Fair, Isaac and Company, Inc.
          Partnership



By: _________________________________      By: _________________________________

                                       2


                                      LEASE

                              111 SMITH RANCH ROAD
                             San Rafael, California


         THIS  LEASE,  dated  for  reference  purposes  only,  the  fifth day of
September, 1991, between

                  111 PARTNERS, (hereafter "Landlord")
                  and whose address is:
                  50 Bon Air Center, Suite 140
                  Greenbrae, California 94904

         and FAIR, ISAAC AND COMPANY, INCORPORATED,
                   (hereafter "Tenant")
                  and whose address is:
                  120 North Redwood Drive
                  San Rafael, California 94903-1996

         (a) Demise.  Landlord hereby leases to Tenant, and Tenant hereby leases
from Landlord those certain premises (the "Premises") described as follows:

                  The real  property  described  in  Exhibit  "A' and the office
                  building  to be known as 111 Smith  Ranch Road in San  Rafael,
                  California (the "Building"), and shown on the site plan marked
                  Exhibit  "B,"  comprising  approximately  26,678  square  feet
                  ("Tenant's  Leasable  Area") to be  constructed by Landlord in
                  accordance with paragraph 8 below.

         (b) Terms, Covenants and Conditions.  The parties agree that this lease
is made upon the following terms, covenants and conditions:

1.       TERM:

         (a) The term of this Lease shall  commence on the later of (i) delivery
by Landlord  of the Final  Completion  Notice  described  in  paragraph 9 of the
Leasehold  Improvements  Agreement  (Exhibit  "D")  or  (ii)  ninety  (90)  days
following  the  Delivery  Date  described  in  paragraph  4(e) of the  Leasehold
Improvements  Agreement  (subject to  extensions to which tenant may be entitled
under paragraph 4(b) of the Leasehold Improvements Agreement) (the "Construction
Period").  The commencement date is hereinafter referred to as the "Commencement
Date," The term of this Lease  shall  expire at  midnight  June 30,  2001 unless
Tenant shall exercise the option to renew provided for herein.

         (b) Landlord shall use  reasonable  efforts to  substantially  complete
those  improvements  referred  to in the  Leasehold  Improvements  Agreement  as
"Landlord's  Work" and to deliver  possession of the Premises to Tenant by April
1, 1992 ("Delivery Date").

         The Delivery  Date may be extended on account of delays as set forth in
Article 11 of the Leasehold Improvements Agreement

                                       1                           Exhibit 10.13



2.       MINIMUM RENT:

         a) Tenant and Landlord have entered into a loan agreement  concurrently
with the  execution  of this Lease  whereby  Tenant has agreed to loan  Landlord
funds  to be used  for the  construction  of the  Building.  Said  loan  will be
represented  by a note  ('Note")  secured  by a deed of  trust  encumbering  the
Premises.  Tenant  agrees to pay  Landlord  monthly  rent  equal to the  monthly
payments   payable  under  the  Note  including  both  principal  and  interest,
commencing upon the Commencement Date and continuing throughout the term of this
Lease. In the event the loan is not fully funded upon  commencement of the lease
term and  monthly  installments  are  increased  to  provide  for  repayment  of
additional advances, concurrently with the increase in monthly note installments
the monthly rent shall be increased. Monthly rent payments shall continue in the
manner  provided for in the Note  notwithstanding  any prepayment by Landlord of
the Note. Such monthly rent is herein referred to as the "Note Rent."

         (b) In addition to the Note Rent Tenant promises to pay monthly rent as
set forth below for the use of the land ("Land Rent") as follows:

                  First twelve months of the term:           $3,750.00 per month
                  Second twelve months of the term:          $5,417.00 per month
                  Third twelve months of the term:           $7,500.00 per month
                  Fourth twelve months of the term:          $7,917.00 per month
                  Fifth twelve months of the term:           $8,333.00 per month
                  Sixth twelve months of the term:           $9,167.00 per month

         During the Seventh  twelve  months of the term,  the land rent shall be
the greater of $9,167,00 per month or $9,167 per month  multiplied by a fraction
the numerator of which is the Index (as hereinafter  defined)  published nearest
but  prior to the 73rd  month  of the term and the  denominator  of which is the
Index published for the month of June 1991.

         Commencing  with  the  85th  month  of the  term and at the end of each
twelfth (12th) month thereafter during the term of this Lease, the Land Rent for
the ensuing  twelve (12) month  period (the  "Adjustment  Period".)  shall be an
amount equal to the greater of (i) the Land Rent in effect  immediately prior to
the  commencement  of such  Adjustment  Period  (without regard to any temporary
abatement of rental then in effect pursuant to the provisions of this Lease), or
(ii) the product  obtained by  multiplying  the Land Rent in effect  immediately
prior to the  commencement  of such  Adjustment  Period  (without  regard to any
temporary  abatement of rental then in effect pursuant to the provisions of this
Lease) by a fraction,  the numerator of which is the Index published nearest but
prior to the commencement  date of such Adjustment Period and the denominator of
which is the Index published for the month which is twelve (12) months earlier.

         The term "Index" as used herein shall mean the Consumer Price Index For
All Urban Consumers, San Francisco-Oakland-San Jose, 1982-84 = 100, published by
the Bureau of Labor Statistics of the U.S. Department of Labor. If the Bureau of
Labor Statistics  revises the above Consumer Price Index, the parties agree that
the Bureau of Labor  Statistics will be the sole judge of the  comparability  of
successive indexes.

         (c) The total of the Note Rent and the Land Rent is  referred to herein
as the Minimum Rent.  Tenant agrees to pay the Minimum Rent to Landlord  without
offset or deduction (except as

                                       2



provided herein), prior notice or demand in advance at Landlord's address on the
first day of each month  commencing upon the  commencement of the lease term and
continuing upon the first day of each calendar month  thereafter  throughout the
lease term. If Tenant's obligation to pay rent commences other than on the first
day of a calendar  month,  the first  month's  Minimum  Rent  shall be  prorated
accordingly  and  paid  at the  commencement  of  the  obligation  to pay  rent.
Landlord's  address  shall  be as set  forth  above,  or as  from  time  to time
designated by Landlord to Tenant in writing.  Upon  Landlord's  request,  Tenant
will co-sign Landlord's written  confirmation of the lease commencement date and
the Note Rent.

         (d) Tenant  shall make  payment of Minimum  Rent and other  payments to
Landlord in lawful  money of the United  States;  provided,  if any such payment
made  by a  check,  draft  or  money  order  is  returned  to  Landlord  due  to
insufficient  funds,  or otherwise,  Landlord shall have the right,  at any time
thereafter,  upon  written  notice  to  Tenant,  to  require  Tenant to make all
subsequent  payments in cash, by cashier's  certified check, wire transfer or by
money order.

         (e) It is expressly  understood and agreed that Tenant's timely payment
of Minimum Rent and all other rents, charges and amounts of any kind provided in
this Lease is an unconditional  obligation of Tenant,  and one on which Landlord
is relying in order to meet the financial obligations of the Building.  Tenant's
obligation to pay shall be  continuous  throughout  the term of the Lease,  even
during the pendency of any dispute resolution process which may arise during the
term hereof.


3.       ADDITIONAL RENT, LATE CHARGE AND DEFAULT INTEREST:


         (a) All taxes, insurance premiums, maintenance charges, and other costs
and  expenses  payable  hereunder  by Tenant  (together  with any late charge or
interest  that may accrue  thereon in the event of  Tenant's  failure to pay the
same) and all damages,  costs and expenses which Landlord may incur by reason of
Tenant's default hereunder shall be deemed to be "Additional Rent'. In the event
of non-payment by Tenant of any Additional Rent,  Landlord shall have all of the
rights and remedies with respect  thereto as Landlord has for the non-payment of
Minimum  Rent.  The term  "rentals" or "rental" as used in this Lease shall mean
Minimum Rent, and Additional Rent.

         (b) Tenant  acknowledges that the late payment by Tenant of any rentals
due  hereunder  will cause  Landlord to incur  certain  costs and  expenses  not
contemplated  under this  Lease,  the exact  amount of which  will be  extremely
difficult or impractical to ascertain.  Such costs and expenses include, without
limitation,  administrative  and collection  costs and processing and accounting
expenses.  Accordingly,  if any rental  payable  hereunder  is not  received  by
Landlord from Tenant within ten (10) days after notice that the same is overdue,
Tenant shall immediately pay to Landlord, without prior notice or demand. a late
charge equal to four percent  (4%) of the amount then  delinquent.  Landlord and
Tenant  agree that this late charge  represents  a  reasonable  estimate of such
costs and expenses and is fair compensation to landlord for its losses sustained
by reason of  Tenant's  failure to make timely  payment.  In no event shall this
provision  for the payment of a late charge be deemed to grant to Tenant a grace
period or  extension  of time within  which to pay any rental due  hereunder  or
prevent  Landlord from exercising any right or remedy available to Landlord upon
Tenant's  failure to pay such rental when due,  including the right to terminate
this Lease.

         (c) If any rental  remains  delinquent for a period in excess of thirty
(30) days, in addition to

                                       3


the late charge provided  hereinabove,  Tenant shall pay to Landlord interest on
any rental that is not paid when due at the lesser of twelve  percent  (12%) per
annum or the maximum interest rate permitted by law, from the 30th day following
the date such amount became due, until paid.

         (d) If Tenant  shall  fail to pay  Minimum  Rent  within  ten (10) days
following  the due date  thereof on any three (3) or more  occasions  during any
twelve (12) month period during the lease term,  Landlord  shall have the right,
in addition to any other  rights or remedies it may have  hereunder,  to require
Tenant thereafter to pay Minimum Rent in quarterly installments in advance.

4.       RESERVE FOR RE-LEASING AND SECURITY DEPOSIT:

         (a)  Tenant  shall  pay to  Landlord  a monthly  amount  upon the first
anniversary of the  Commencement  Date and continuing upon the first day of each
calendar  month  thereafter,  an amount  which with  accrued  interest  shall be
sufficient to create the  Re-leasing  Reserve at the end of the lease term.  The
monthly payments shall be deposited into a separate  federally  insured interest
bearing trust account or accounts.  Such accounts  shall remain  Tenant's  funds
subject to Landlord's rights under this paragraph 4.

         (b) The Re-leasing Reserve shall be equal to the sum of the following:

                  1.  Twelve  monthly  payments  due under the Note  payable  to
Tenant (whether or not the Note shall have been prepaid.)

                  2. Real  property  taxes,  personal  property  taxes,  and any
assessments  payable for the 12-month period commencing at the expiration of the
lease term ('Reserve Term").

                  3.  Insurance  premiums  for fire and  extended  coverage  and
public liability insurance payable for the Reserve Term.

                  4. Estimated  costs of maintenance  and repair of the Premises
during the Reserve Term.

         (c) Landlord may pay from the Re-leasing  Reserve after  termination of
this lease all of the costs and expenses included in the Releasing Reserve until
the  Re-leasing  Reserve is fully  expended or  eighty-five  (85) percent of the
Tenant's  Leasable Area has been  re-leased.  Landlord shall deliver to Tenant a
monthly accounting of all amounts paid from the Re-leasing Reserve.  Any balance
remaining  shall be  returned to Tenant.  Said  payments of costs may extend for
more than one (1) year  following the  expiration  of this lease,  but shall not
include any costs or expenses payable by new tenants in the Premises.

         (d) This  paragraph  sets forth the  calculation  of the monthly amount
paid by Tenant to Landlord to create the Re-leasing Reserve and Security Deposit
defined above.  The monthly  payment shall be determined by Landlord as provided
herein during the first full calendar month of the term,  and then  recalculated
every  twelve (12) months  thereafter  throughout  the term of this Lease.  Upon
Landlord's  determination of the monthly amount,  Landlord shall promptly notify
Tenant,  who shall commence  payment of said monthly  amount  beginning with the
first day of the immediately following calendar month.

                                       4




                  The  Re-leasing  Reserve  ("RLR")  amount  at  the  end of the
initial lease term shall be:

                  LP + (OM x (1 + C/100) n) = RLR

Where LP is the total of the monthly  loan  payments  under the note  payable to
Tenant during the previous twelve (12) months, OM is the total of average annual
operation and  maintenance  costs as defined in  paragraphs  4(b)2 through 4(b)4
based on known and  estimated  costs for the previous  twelve  months,  C is the
percentage  change in the  Consumer  Price  Index For All Urban  Consumers,  San
Francisco-Oakland  Area-San  Jose  (1982-1984 = 100)  ("Index")  during the last
twelve months,  and N is the number of months  remaining until expiration of the
initial term of this Lease divided by twelve.

                  The payment (MPRLR) into the reserve shall be:

                  (RLR - (CB x (1 + 1/100) n)             100            = MPRLR
                                               ------------------------
                                               ((1 + 1/100 ) n -1) x 12

where I is the average annual percentage  interest rate earned on the Re-leasing
Reserve in all accounts  during the previous  twelve  months,  CB is the current
balance  including accrued interest in the Re-leasing  Reserve account,  and the
other figures are as defined in paragraph (2) above. For the first  calculation,
the parties  agree that I shall be equal to the  three-month  Treasury Bill rate
(10) days prior to the Commencement Date.

                  Notwithstanding paragraphs (b) through (d), MPRLR shall not be
less than zero and shall be rounded up to the nearest whole dollar.

                  For  example  purposes  only,  assume  CB  is  $50,000,  LP is
$228,000,  OM is $80,000,  C is 5%, N is 8 and I is 7%. RLR is  $346,196.  MPRLR
rounded up to the nearest whole dollar is $2,115.00.

         (e) The Re-leasing Reserve shall also constitute a Security Deposit for
the payment of all amounts  payable by Tenant to Landlord  hereunder.  If Tenant
shall  fail to pay any sum due to  Landlord,  Landlord  may,  but  shall  not be
required to, pay such amount from the Re-leasing Reserve.  Tenant shall promptly
repay to Landlord for deposit into the  Re-leasing  Reserve any such amount paid
to Landlord.

5.       COMMON AREAS AND LANDLORD'S COST OF MAINTENANCE:

         (a) Areas  within the outer  property  lines of the  demised  Premises,
exclusive of the interior building areas which are exclusively leased to Tenant,
and  including  such other  areas that are the  responsibility  of  Landlord  to
maintain  as  required  by the City of San  Rafael,  shall  be known as  "Common
Areas".  The Common  Areas shall be available  for the use of by  Landlord,  its
employees,  and  invitees.  Notwithstanding  any other  provision in this Lease,
Landlord shall have the right from time to time to make changes in additions to,
and deletions  from the Common Areas,  and to alter the purposes to which any of
them may be devoted, all without consent from Tenant,  provided any such change,
addition,  deletion or alteration of purpose would not  materially and adversely
affect Tenant's  continued  ability to operate its business from the Premises in
accordance with its rights

                                       5


under this Lease (except for temporary disruption to Tenant's business caused by
construction  activity).  The use of the  Common  Areas  shall  at all  times be
subject to such  reasonable  rules and  regulations as Landlord may establish in
accordance with paragraph 15 below.

         (b) Beginning  concurrently  with the date of  commencement of Tenant's
obligation to pay Minimum Rent,  Tenant shall pay the total cost of  maintaining
the Common Areas and all portions of the Building  which Landlord is required to
maintain in  accordance  with  paragraph  9. For  purposes of this  paragraph 5,
maintenance  costs  (collectively  "Common  Area  Charges")  shall  include  all
reasonable  general  maintenance,  upkeep,  lighting,  cleaning,  repairs to and
replacements of improvements in the Common Areas, including, but not limited to,
operation,  maintenance and repair of the  underground  utility  systems,  roof,
canopies, awnings, and building exterior painting and maintenance, building roof
repairs,  fire sprinkler  maintenance and inspection,  repairs to the electrical
system,  pavement  repairs and striping,  central  heating,  ventilation and air
conditioning (HVAC) maintenance, planting and landscaping, parking lot striping,
pavement repairs, sealing and replacement, lighting repairs and rubbish removal,
security  services  and  police  protection,   including  traffic  control,   if
necessary,  public  liability  and property  damage  insurance  premiums for the
Building,  improvements  required  by law for  the  operation  of the  Building,
insurance premiums as set forth in paragraph 26 below,  personal property taxes,
depreciation  (if  owned) or rental  payments  (if  rented) on  maintenance  and
operating  machinery and equipment,  and a Management Fee to be paid to Landlord
to compensate it for the supervision of such maintenance, billing and collection
of Tenant's  charges.  Landlord's  Management Fee shall be $958 per month.  Such
Management  Fee  shall be  increased  in the  same  manner  as the Land  Rent as
provided in paragraph  3(b) except that the  adjustment  shall be made  annually
commencing with the thirteenth month of the lease term.  Expenditures for any of
the foregoing  which are of a capital  nature,  as determined in accordance with
generally  accepted  accounting  principles,  such as but not  limited  to major
parking lot  rehabilitation  or  replacement,  shall be prorated over the useful
life of the improvement or facility so replaced,  and there shall be included in
Common  Area  Charges  only  that pro rata  portion  of such  expenditure  as is
properly  allocable to the lease term. Tenant shall pay Landlord the sum of $222
per month,  increased annually in the same manner as Landlord's  management fee,
to establish a maintenance reserve. Expenditures of a capital nature shall first
be paid from the  maintenance  reserve and only  Tenant's  pro rata share of the
excess  shall be  included  in Tenant's  Common  Area  charges.  Any Common Area
Charges  paid by  Tenant  which  are  subsequently  reimbursed  to  Landlord  by
insurance or  condemnation  proceeds shall be reimbursed to Tenant within thirty
(30) days following Landlord's receipt of such proceeds. Any Common Area charges
which relate to offsite  maintenance,  such as expenses relating to the adjacent
pond in the open space area, shall be prorated between  Landlord's Retail Center
and the Premises on the basis of the rentable  square footage  contained in each
parcel.  Landlord  agrees that the manner and method of operation,  maintenance,
upkeep and repair of the  Building  and Common  Areas  shall be in a first class
manner  consistent  with other first  class  office  buildings  located in Marin
County. All expenses shall be characterized and accounted for in accordance with
generally  accepted  accounting  principles.  All  reasonable  costs incurred by
Landlord in good faith shall be conclusive and finally binding upon Tenant.

         (c) Notwithstanding any contrary provisions of the preceding paragraph,
the following costs and expenses are to be excluded from Operating Expenses:

                  1) Repairs of capital nature  occasioned by fire,  earthquake.
windstorm, or other casualty;

                                       6


                  2) Leasing  commissions,  accountants'  or attorneys' fees and
other costs and expenses  incurred in connection with proposals and negotiations
to lease  space in the  Building or legal fees or costs in  connection  with any
particular dispute or litigation with a tenant in the Building;

                  3) Fees paid to Landlord or to  subsidiaries  or affiliates of
Landlord  for  services for the Building to the extent the same exceeds the cost
of such  services if rendered by  unaffiliated  third  parties on a  competitive
basis;

                  4)   Landlord's   general   corporate   overhead  and  general
administrative expenses;

                  5) Rentals and other related expenses  incurred in the capital
leasing of air  conditioning  systems,  elevators  or other  Building  equipment
ordinarily  considered to be of a capital nature,  where such capital leasing is
in lieu of other forms of financing the acquisitions of such systems,  elevators
or equipment;

                  6)       Advertising and promotional expenditures;

                  7)  Penalties  or  fines  assessed  against  Landlord  or  the
Building for  violations  of any  governmental  order,  law,  rule or regulation
applicable thereto, not caused by Tenant;

                  8) Costs of correcting  material  construction  defects in the
Building.

                  Tenant's   obligation   for  Common  Area  Charges   shall  be
determined  and billed monthly by Landlord and shall be payable by Tenant within
ten (10) days from the receipt of the bill.

6.       TAXES:

         Tenant  shall pay at the times and in the manner set forth  below,  all
real estate  taxes,  general  and special  assessments,  license  fees,  levies,
charges,  expenses,  impositions  and  Environmental  Surcharges,  as more fully
described below,  including any real estate tax consultant  expense incurred for
the purpose of maintaining  equitable tax assessments on the Building so long as
the engagement of such consultant,  and the consultant's fee, have been approved
by Tenant, payable with respect to the Premises and the Common Areas as follows:

         (a) "Real estate taxes, general and special assessments,  license fees,
charges, expenses,  impositions" shall mean such taxes, assessments,  levies and
charges levied, assessed or imposed:

                  (i) upon or with  respect  to, or which shall be or may become
liens upon the Premises, the Building, or any portion of them or any interest of
Landlord in them or under this Lease  specifically  excluding  only payments due
for the Smith Ranch subdivision improvement bonds now a lien upon the Premises:

                  (ii) upon or against,  or which shall be measured by, or shall
be or may because liens upon, any rents or rent income,  as such,  payable to or
on behalf of Landlord, in connection with the Premises or any portion of them or
any interest of Landlord in them; or

                  (iii)  upon  or with  respect  to the  ownership,  possession,
leasing, operation. management, maintenance, alteration, repair, rebuilding, use
or occupancy by Tenant of the

                                       7


Premises or any portion of them or any building or improvement of which they are
a part; or

                  (iv) upon this  transaction or any document to which Tenant is
a party creating or transferring an interest or any estate in the Premises; or

                  (v) upon or against  Landlord  or any  interest of Landlord in
the Premises in any manner and for any reason  whether  similar or dissimilar to
the  foregoing;  under or by virtue of any  present  or future  law,  ordinance,
regulation  or  other  requirement  of any  governmental  or  quasi-governmental
authority,  regardless of whether now customary or within the  contemplation  of
the parties  hereto and  regardless of whether  resulting  from  increased  rate
and/or  valuation,  or whether  extraordinary  or ordinary,  general or special,
unforeseen or foreseen, or similar or dissimilar to any of the foregoing.

         (b)  "Environmental  Surcharge"  shall  mean  and  include  any and all
expenses,  taxes,  charges or  penalties  imposed by the Federal  Department  of
Energy,  Federal Environmental  Protection Agency, The Federal Clean Air Act, or
any regulations  promulgated  thereunder,  or any other local,  state or federal
governmental  agency or entity now or hereafter  vested with the power to impose
taxes.  assessments,  or other types of surcharges as a means of  controlling or
abating environmental  pollution or the use of refuse services,  energy or water
in regard to the use,  operation  or occupancy of the  Building,  excluding  any
amounts  attributable  to  conditions  caused by Landlord or its agents or which
predate the Delivery Date.

         (c) All of the items set forth in  subparagraphs  (a) and (b) above are
sometimes collectively referred to in this Lease as "taxes."

         (d) It is the  intention of the parties that insofar as it may lawfully
be done, the  provisions of this  paragraph  should be construed to provide that
the amount of rent  reserved  to  Landlord  under this Lease shall be net of all
taxes  charges to Landlord,  except such  non-real  estate taxes as Landlord may
from time to time be required to pay on such rent in common with other  ordinary
income received by Landlord in the regular course of its business.  In the event
it shall be unlawful for Tenant to reimburse  Landlord for such taxes,  then the
Minimum Rent payable  hereunder  shall be increased pro rata to net Landlord the
same amount that would have been payable to Landlord  prior to the imposition of
any such taxes.

         (f)  Beginning at the  commencement  of the term of this Lease,  Tenant
shall pay to Landlord taxes not less than twenty-one (21) days prior to the date
when such taxes become  delinquent.  Landlord  shall submit to Tenant a bill for
such taxes,  together with true copies of the tax bill at least thirty (30) days
prior to such payment being due to Landlord.  If the law  expressly  permits the
payment  of any  or all of the  above  items  in  installments  (whether  or not
interest  accrues on the unpaid  balance)  Tenant  may,  at  Tenant's  election,
utilize the permitted  installment  method,  but shall pay each installment with
interest before delinquency.

         (g) Landlord shall advise Tenant promptly of all notices  pertaining to
taxes. Notwithstanding anything to the contrary in this Lease, Tenant shall have
the right to contest in good faith the imposition of any tax, a portion of which
is to be paid by Tenant, provided that:

                  (i) Tenant shall bear the  responsibility for timely protests,
legal actions, etc., as may be required for an effective protest:

                                       8



                  (ii) If Landlord has paid such tax,  Tenant shall not withhold
its payment to Landlord of such tax; and

                  (iii) Tenant shall indemnify  Landlord against any loss, cost,
damage or expense  which may arise from such  contest by  indemnity  in form and
content satisfactory to Landlord

                  (iv)  Tenant  shall  pay,  or  cause  to  be  paid,  prior  to
delinquency,  directly  to the  taxing  authority,  any  and all  taxes  levied,
assessed or which become payable  during the lease term upon Tenant's  leasehold
improvements, equipment, furniture, fixtures and other personal property located
in the Premises.

7.       UTILITIES:

         (a) From the commencement of the term of this Lease, and throughout the
term of this  Lease,  Tenant  shall pay for all public and other  utilities  and
related  services  rendered or furnished  to the  Premises,  including,  but not
limited to, water, hot water, gas, electricity,  telephone,  heat, light, sewer,
refuse or garbage collection or disposal, and related deposits.

         (b) Tenant understands that the Marin Municipal Water District ("MMWD")
which  supplies  water to the Building may limit the amount of water  available.
The allocation  based on estimates by MMWD, shall be 2.08 acre feet per year for
potable  water  and 1.1  acre  feet  per  year  for  reclaimed  water  used  for
landscaping  subject to such changes in allocation  during the term of the Lease
as the MMWD may make. If tenant's usage exceeds such allocation, tenant shall be
responsible to reimburse  Landlord for all penalties or surcharges  which may be
imposed by the MMWD on account of such excess use. If  necessary  to protect the
water  allocation  available to the Building,  Landlord  shall have the right to
terminate  water service  after Tenant has used the full amount  available to it
for the  billing  or other  measurement  period  established  by the MMWD.  Such
termination of service shall not relieve tenant of any of its obligations  under
this  lease.  Landlord  Agrees  that such right will not be  exercisable  unless
Tenant has actual notice from Landlord of the amount of the current  allocation,
of the  magnitude  of  Tenant's  usage,  and the fact that  failure by Tenant to
adhere to the allocation level would threaten the building's water allocation.

         (c) Landlord shall maintain the necessary  mains,  conduits,  wires and
cables to bring utilities to the Premises and the cost of such maintenance shall
be included as part of Common Area Charges under paragraph 6 above.

         (d)  Landlord  shall  not  be  liable  in  damages,   consequential  or
otherwise,  nor  shall  there  be  any  rent  abatement,   arising  out  of  any
interruption  whatsoever  in  utility  services  which is due to  causes  beyond
Landlord's  reasonable control,  including,  but not limited to fire,  accident,
strike,  governmental  authority,  acts of  God,  or  other  causes  beyond  the
reasonable  control of Landlord or any  temporary  interruption  in such service
which is necessary to the making of alterations, repairs, or improvements to the
Building or any part of it.

                                       9


8.       CONSTRUCTION:

         (a) The work  for  construction  of the  Premises  is set  forth in the
Leasehold  Improvements  Agreement  (Exhibit "D").  Landlord shall have the sole
responsibility for planning and executing  Landlord's Work included in the Shell
Plans and  Specifications  described in the  Leasehold  Improvements  Agreement.
Tenant shall prepare plans and specifications for Tenant  Improvements and shall
construct  said  improvements  as set forth in the  provisions  of the Leasehold
Improvements  Agreement.  Tenant is granted a Tenant  Improvement  Allance in an
amount  and  subject  to  provisions  set  forth in the  Leasehold  Improvements
Agreement.

         (b) All construction work required or permitted by this Lease,  whether
by Landlord or by Tenant, shall be done in a good and workmanlike manner, and in
compliance  with all applicable laws and all lawful  ordinance,  regulations and
orders of governmental authority and insurers of the Premises.  Either party may
inspect the work of the other at reasonable times and shall promptly give notice
to the other of observed defects.

         (c) Tenant's original installation of equipment and furnishings and all
alterations  and  additions  at any time  thereafter  undertaken  by  Tenant  in
accordance  with  Paragraph 11 below shalI be performed by licensed  contractors
approved  by  Landlord,  in such a manner as to avoid any  labor  dispute  which
causes or is likely to cause  stoppage or impairment of work,  deliveries or any
other services to the Building or any occupant thereof. In the event there shall
be any such stoppage or impairment  which is caused by any such labor dispute or
potential labor dispute,  Tenant shall immediately  undertake such action as may
be necessary to eliminate such dispute or potential dispute, including,  without
limitation, (i) removing all disputants from the job site until such time as the
labor  dispute no longer  exists,  (ii) seeking an  injunction in the event of a
breach of contract  between  Tenant and  Tenant's  contractor,  and (iii) filing
appropriate unfair labor practice charges in the event of a union jurisdictional
dispute.  Any work to be performed  before  Landlord's Work is finished shall be
coordinated with Landlord's Work.

                  Before starting any work, Tenant shall (i) obtain all required
licenses and  permits;  (ii) deliver to Landlord a statement of the names of all
contractors and  subcontractors and the estimated cost of all labor and material
to be furnished by them;  (iii) cause Tenant's  contractors  to carry  workmen's
compensation   insurance  covering  all  the  contractors'  and  subcontractors'
employees,  and public  liability  insurance with liability  limits of the least
$500,000-$1,000,000, and property damage insurance with limits of $100,000, both
general and vehicular (all such insurance to be written by companies licensed to
do business in the State of California, and insuring Landlord and Tenant as well
as the  contractors);  and (iv)  deliver to  Landlord  certificates  of all such
insurance, providing that such insurance may not be canceled without thirty (30)
days prior written  notice to Landlord.  Landlord shall have the right from time
to time during the lease term to increase the minimum liability limits specified
above, to meet changed  circumstances as described in paragraph 27 below. At all
times Tenant shall keep the Premises free from and clear of mechanics' liens.

9.       REPAIRS:

         Landlord  shall  maintain all of the demised  Premises,  excluding  the
Building, and shall maintain the roof, exterior structural walls,  foundation as
to load bearing integrity, fire sprinklers,  electrical panels, and HVAC system.
All of  Landlord's  costs of  maintenance  shall  be  subject  to  reimbursement
pursuant to paragraph 5 hereof.

                                       10


         Tenant  shall,  at  its  sole  cost,   keep  and  maintain   (including
replacements if necessary) the Building, and every part thereof (except as noted
in the preceding  paragraph) and all  appurtenances in clean,  good and sanitary
order,  condition and repair,  and Tenant expressly waives any and all rights it
might  otherwise  have  under the law to make  repairs  or  replacements  at the
expense of the  Landlord.  Tenant  shall keep its sewers and drains (and use the
same only for  designated  purposes) open and clear and shall keep the sidewalks
and Common Areas adjacent to the Premises  clean and free of all debris.  Tenant
agrees  that it will paint,  varnish,  wallpaper,  or  otherwise  redecorate  or
renovate the interior of the Premises and Tenant's trade fixtures when necessary
to maintain the Premises in a first-class condition. Landlord for the benefit of
Tenant will enforce all rights to repair or  replacement of defective work under
contracts for the construction of the Building or Tenant's Improvements.  On the
last day of the term, or at any sooner  termination of this Lease,  Tenant shall
also  surrender  to Landlord the  Premises in good and  sanitary  condition  and
repair, but with reasonable use, wear and tear, or damage by fire, act of God or
by the elements excepted;  and Tenant also agrees to remove all of its signs and
trade fixtures which Tenant has the right to remove from the Premises, restoring
any damage caused by such removal.  Repairs to the premises  required to be made
by Tenant under the  provisions  of this lease must be completed  whether or not
they are due to either  conditions  existing upon the commencement of the lease,
or use during the term of the lease.

                  During  the term of this  Lease  Landlord  shall keep in force
preventative  maintenance  contracts  with  qualified  contractors  covering all
heating and air conditioning  equipment and elevator  equipment which serves the
Premises.

10.      ALTERATIONS:

         Tenant may,  from time to time,  make  non-structural  alterations  and
additions  to  the  interior  of the  Premises  in  accordance  with  plans  and
specifications first approved in writing by Landlord which approval shall not be
unreasonably  withheld or delayed.  Landlord may  disapprove  such plans if they
will result in unusual  expense to re-adapt the Premises to normal office use on
lease termination,  unless Tenant agrees to restore the Premises to its original
configuration prior to lease termination.  All such changes shall become at once
part of the Premises and belong to Landlord.  except for trade  fixtures,  which
may be removed by Tenant,  upon  termination  or  expiration of this Lease term.
Landlord can elect within  thirty (30) days before  expiration  of the term,  or
within five (5) days after  expiration of the term, to require  Tenant to remove
any alterations made by Tenant where Landlord's written approval was conditioned
upon and  reserved  such right.  If Landlord so elects,  Tenant at its sole cost
shall  restore  the  premises  to  the  condition  of  the  premises  prior  the
installation of such alterations designated by Landlord at its election,  before
the last day of the  term,  or  within  thirty  (30)  days  after  notice of the
election is given,  whichever is later. Tenant shall have no right to remove any
fighting fixtures or any portion of the HVAC system or electrical system whether
or not such equipment would otherwise be a trade fixture of Tenant.

         If Tenant  makes any  alterations  to the  premises as provided in this
paragraph,  the alteration  shall not be commenced  until three (3) working days
after Landlord has received notice from Tenant stating the date the installation
of the  alterations  is to  commence  so that  Landlord  can post and  record an
appropriate Notice of Non-Responsibility.

                                       11


11.      SIGNS AND DECORATIONS:

         Tenant  shall  not place or permit  to be  placed,  any sign,  marquee,
awning,  decoration,  window  covering  or other  attachment  on or to the roof,
windows  (inside or outside),  doors  (inside or outside),  visible  portions of
inside walls or exterior  walls of the  Premises or at any other  location in or
adjacent to the Building  without the prior written  consent of Landlord,  which
consent shall not be  unreasonably  withheld or delayed.  Landlord may,  without
liability to Tenant,  enter upon the Premises and remove any such sign, marquee,
awning,  decoration,  window covering or attachment affixed in violation of this
paragraph,  and Tenant agrees to pay the cost of any such removal.  Tenant shall
not  exhibit or affix  flags,  pennants,  banners or similar  items on or to the
exterior of the Premises or the building of which the Premises are a part. Also,
no  advertising  medium  shall  be  utilized  by  Tenant  which  can be heard or
experienced outside the Premises, including without limitation, flashing lights,
searchlights, loudspeakers, phonographs, radios or television.

12.      USE:

         Tenant  agrees to use and occupy the Premises  continuously  during the
term of this Lease for  General  office  use  (including  the use of  computers,
printers,  copiers,  modems and similar equipment and for shipping and receiving
of supplies, materials and mail which is not inconsistent with such office use),
food service for Tenant's  employees and business guests,  and not for any other
purpose.

13.      PARKING:

         There is a cross easement between the Premises and the adjoining Retail
Center for ingress and egress and for parking in the areas shown in Exhibit "B."
Tenant shall not permit its employees to park in the areas designated as visitor
or short-term parking in Exhibit "B." Landlord shall have the right to establish
reasonable  rules  governing the use of the visitor or short-term  parking areas
including limitations on the duration of parking privileges.

14.      RULES AND REGULATIONS:

         Tenant and Tenant's employees and invitees shall faithfully observe and
comply with any reasonable  rules and regulations  governing the Building as may
from time to time be established by Landlord.

15.      COMPLIANCE WITH LAW:

         Except as otherwise provided in this Lease, Tenant,  shall, at Tenant's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable  Law," which term is used in this Lease to include all laws,  rules,
regulations,  ordinances,  directives,  covenants, easements and restrictions or
record,  permits, the requirements of any applicable fire insurance underwriting
or rating bureau,  and the reasonable  recommendations  of Landlord's  engineers
and/or  consultants,  relating in any manner to the Premises  (including but not
limited to matters  pertaining to (i)  industrial  hygiene,  (ii)  environmental
conditions on, in, under or about the Premises,  including soil and  groundwater
conditions, (iii) the use, generation,  manufacture,  production,  installation,
maintenance, removal, transportation, storage, spill or release of any Hazardous
Substance or storage  tank),  and (iv) traffic,  circulation or parking of motor
vehicles of Tenant, its employees and invitees now in effect

                                       12


or which may hereafter come into effect,  and whether or not reflecting a change
in policy from any previously  existing  policy.  Tenant shall,  within five (5)
days after receipt of Landlord's  written request,  provide Landlord with copies
of all  documents  and  information,  including,  but not limited  to,  permits,
registrations,  manifests,  applications,  reports and certificates,  evidencing
lessee's  compliance  with any Applicable  Law specified by Landlord,  and shall
immediately  upon  receipt,  notify  Landlord  in  writing  (with  copies of any
documents  involved)  of any  threatened  or  actual  claim,  notice,  citation,
warning, complaint or report pertaining to or involving failure by Tenant or the
Premises to comply with any Applicable Law.

16.      PROHIBITED USES:

         (a) No use shall be made or  permitted to be made of the  Premises,  or
acts done,  or materials  stored or used in,  which would  increase the existing
rate of  insurance  upon the building in which the Premises are located over the
standard rate of insurance  prevailing  in the area of the Building,  or cause a
cancellation of any insurance policy covering all or part of such building,  nor
shall Tenant sell, or permit to be kept, used, or sold in or about the Premises,
any  article  which  may be  prohibited  by the  form of fire  insurance  policy
provided in paragraph 29(g) below,  as it may provide from time to time.  Tenant
shall,  at its  sole  cost and  expense,  comply  with any and all  requirements
pertaining to the Premises by any insurance  organization  or company  necessary
for the maintenance of reasonable fire and public liability insurance,

         (b) From and after the date of commencement  of the lease term,  Tenant
shall  keep the  Premises,  and every  part  thereof,  in a clean and  wholesome
condition,  free from any  objectionable  noise,  odors or nuisances,  and shall
comply with all health, safety and police regulations in all respects.

17.      HAZARDOUS SUBSTANCES:

A. Reportable Uses Require  Consent.  The term "Hazardous  Substance' as used in
this lease shall mean any product, substance,  chemical, material or waste whose
presence,  nature,  quantity and/or  intensity of existence,  use,  manufacture,
disposal,  transportation,  spill,  release  or  effect,  either by itself or in
combination  with  other  materials  expected  to be on the  Premises,  which is
either: (i) potentially  injurious to the public health,  safety or welfare, the
environment  or the Premises,  (ii)  regulated or monitored by any  governmental
authority, or (iii) a basis for liability of Landlord to any governmental agency
or third party  under any  applicable  statute or common law  theory.  Hazardous
Substance  shall  include,  but  not be  limited  to,  hydrocarbons,  petroleum,
gasoline,  crude oil or any products,  by-products or fractions thereof.  Tenant
shall not engage in any activity in, on or about the Premises which  constitutes
a Reportable Use (as hereinafter  defined) of Hazardous  Substances  without the
express prior written  consent of Landlord and compliance in a timely manner (at
Tenant's sole cost and expense with all  Applicable Law (as defined in paragraph
13.  "Reportable  Use"  shall mean (i) the  installation  or use of any above or
below ground  storage  tank,  (ii) the  generation,  possession,  storage,  use,
transportation, or deposal of a Hazardous Substance that requires a permit from,
or with  respect to which a report,  notice,  registration  or business  plan is
required to be filed with, any governmental authority. Reportable Use shall also
include Tenant's being responsible for the presence in, on or about the Premises
of a Hazardous  Substance with respect to which any Applicable Law requires that
a notice be given to persons  entering or occupying the Premises or  neighboring
properties.  Notwithstanding the foregoing, Tenant may, without Landlord's prior
consent, but in compliance with all Applicable Law, use any ordinary and

                                       13


customary  materials  reasonably  required  to be used by Tenant  in the  normal
course of Tenant's  business  permitted on the Premises,  so long as such use is
not a Reportable Use and does not expose the Premises or neighboring  properties
to any  meaningful  risk of  contamination  or damage or expose  Landlord to any
liability therefor. In addition,  Landlord may (but without any obligation to do
so)  condition  its consent to the use or presence of any  Hazardous  Substance,
activity or storage tank by Tenant upon Tenant's giving Landlord such additional
assurances as Landlord, in its reasonable discretion, deems necessary to protect
itself,   the  public,   the  Premises  and  the  environment   against  damage,
contamination or injury and/or liability therefrom or therefore,  including, but
not limited to, the  installation  (and removal on or before Lease expiration or
earlier  termination) of reasonably  necessary  protective  modifications to the
Premises  (such as  concrete  encasement)  and/or the  deposit of an  additional
Security Deposit under paragraph 4 hereof.

         (b) Duty to Inform  Landlord.  If Tenant knows, or has reasonable cause
to believe,  that a Hazardous  Substance,  or a condition involving or resulting
from same,  which is a  Reportable  Use has come to be located in, on,  under or
about the Premises,  other than as previously  consented to by Landlord,  Tenant
shall  immediately  give written  notice of such fact to Landlord.  Tenant shall
also  immediately  give  Landlord  a copy  of  any  statement,  report,  notice,
registration,  application,  permit,  business plan,  license,  claim, action or
proceeding  given to, or received  from, any  governmental  authority or private
party, or persons  entering or occupying the Premises,  concerning the presence,
spill,  release,  discharge  of, or  exposure  to, any  Hazardous  Substance  or
contamination  in, on, or about the  Premises,  including but not limited to all
such documents as may be involved in any Reportable Uses involving the Premises.

         (c) Indemnification.  Tenant shall indemnify,  protect, defend and hold
Landlord, its agents, employees, and the Premises, harmless from and against any
and all loss of rents and/or damages,  liabilities,  judgements,  costs, claims,
liens, expenses,  penalties,  permits and reasonable attorney's and consultant's
fees arising out of or involving any Hazardous Substance or storage tank brought
onto  the  Premises  by or  for  Tenant  or  under  Tenant's  control.  Tenant's
obligations  under this  Paragraph  shall  include,  but not be limited  to, the
effects of any  contamination  or injury to person,  property of the environment
created  or  suffered  by  Tenant,  and  the  cost of  investigation  (including
consultant's and attorney's fees and testing), removal, remediation, restoration
and/or abatement thereof,  or of any contamination  therein involved,  and shall
survive the  expiration or earlier  termination of this Lease.  No  termination,
cancellation  or release  agreement  entered  into by Landlord  and Tenant shall
release Tenant from its  obligations  under this Lease with respect to Hazardous
Substances  or storage  tanks,  unless  specifically  so agreed by  Landlord  in
writing at the time of such agreement.

         Landlord shall indemnify, protect, defend and hold Tenant harmless with
respect to any Hazardous  Substance brought upon the Premises by Landlord or its
Agents or  existing  upon the  Delivery  Date to the same extent and in the same
manner.

18.      VOLUNTARY SURRENDER:

         The voluntary or other  surrender of this Lease by Tenant,  or a mutual
cancellation  thereof,  shall not work a merger,  but  shall,  at the  option of
Landlord, either (i) terminate all or any existing subleases or subtenancies, or
(ii)  operate as an  assignment  to  Landlord  of any or all such  subleases  or
subtenancies.

                                       14


19.      NOTICES:

         All notices to be given to Tenant may be given in writing personally or
by depositing the same in the United States mail, postage prepaid, and addressed
to Tenant at Tenant's  address  given on page 1 of this Lease,  or at such other
address as Tenant may indicate from time to time during the term of this Lease.

         Notice by Tenant to Landlord  shall be in writing and  deposited in the
United  States  mail,  postage  prepaid,  addressed  to  Landlord at the address
specified  on Page 1 of this  lease,  or such  other  address  as  Landlord  may
indicate from time to time during the term of this lease.

20.      DELIVERY OF POSSESSION: HOLDING OVER:

         (a)  Immediately  upon  expiration or sooner  termination  of the lease
term,  Tenant shall vacate and deliver to Landlord  possession  of the Premises,
and  except as  provided  in the next  sentence,  all  Tenant  improvements  and
alterations,  broom  clean,  in good  condition  and in  substantially  the same
condition as they were in the commencement of this Lease, or when installed,  if
later,  normal wear and tear  excepted.  Prior to such  delivery,  Tenant  shall
remove all personal property and alterations that Tenant has the right to remove
or is obligated to remove under the  provisions of Paragraph 11 and shall repair
all damage  caused and  perform  all  restoration  necessary  as a result of the
removal of any alterations or personal property.

         (b) If Tenant has vacated the premises  Landlord may elect to retain or
dispose of in any manner any  alterations or personal  property that Tenant does
not remove from the Premises on  expiration or sooner  termination  of the lease
term as allowed or  required  by this Lease.  Title to any such  alterations  or
personal  property that Landlord elects to retain or dispose of after Tenant has
vacated the Premises  shall vest in Landlord.  Tenant waives all claims  against
Landlord for damage or injury to Tenant  resulting from Landlord's  retention of
any such  alteration or personal  property and shall indemnify and hold Landlord
harmless  from  liability  for  damages and all costs and  expenses  incurred by
Landlord  in  defending  claims to any such  alterations  or  personal  property
asserted by any other person.  Tenant shall  reimburse  Landlord upon demand for
Landlord's reasonable costs of storing,  removing,  and/or disposing of any such
alterations or personal property.

         (c) If Tenant fails to vacate and deliver possession of the Premises on
the  expiration  or earlier  termination  of the lease term,  as required  under
subparagraph  (a) above,  Tenant shall hold  Landlord  harmless from all damages
resulting  from  Tenant's  failure to so vacate and  deliver  possession  of the
Premises,  including,  without  limitation,  claims made by a succeeding  tenant
resulting from Tenant's failure to vacate and deliver possession of the Premises
and  any  rental  loss  suffered  by  Landlord.   Tenant  understands  that  the
termination date of this lease was selected to occur prior to expected vacancies
in other buildings in the vicinity and that  consequently  any delay in vacating
the Premises may substantially  adversely affect Landlord's  ability to re-lease
the Premises.

         (d) If Tenant,  with Landlord's  consent,  remains in possession of the
Premises after  expiration of the lease term, such possession by Tenant shall be
deemed to be a  month-to-month  tenancy  terminable  on thirty  (30) days notice
given at any time by either party.  All  provisions of this Lease,  except those
pertaining  to  term,  and  option  to  extend,  if  any,  shall  apply  to  the
month-to-month  tenancy,  provided  that the Minimum  Rent shall be  one-hundred
twenty-five percent (125%) of

                                       15


the minimum rent payable during the last month of the lease term.

         (e) Tenant shall vacate and deliver  possession of the Premises free of
all liens,  charges,  or  encumbrances  resulting  from any act or  omission  on
Tenant's  part and  free  and  clear of all  violations  thereon  placed  by any
federal,  state,  municipal or other agency or  authority,  and shall  indemnify
Landlord against any and all loss,  expense,  damage,  costs, or attorneys' fees
arising out of Tenant's failure to do so.

21.      ENTRY BY LANDLORD:

         Tenant  shall  permit  Landlord and its agents to enter the Premises at
reasonable times upon reasonable  notice for any of the following  purposes:  to
inspect the same;  to maintain  the  Building to make  repairs,  alterations  or
additions to any portion of the Building;  to post notices of non-responsibility
for alterations, additions or repairs undertaken by Tenant; to install a leasing
signs upon the  Premises  during the final one hundred  twenty (120) days of the
lease term;  to show the  Premises to  prospective  purchasers  or lenders  and,
during the final one hundred eighty (180) days of the lease term, to prospective
Tenants:  and to install,  use and maintain pipes,  ducts,  conduits,  wires and
appurtenant  meters and  equipment in the  Premises.  Landlord may exercise such
right of entry without any abatement of rent to Tenant for any loss of occupancy
or quiet  enjoyment  of the Premises  unless  Landlord is negligent or acts with
willful disregard of Tenant's  business  interests when making such entry, or if
the need for such repairs  arise from the  negligent or willful act of Landlord,
its employees or agents.

22.      LANDLORD'S CONVEYANCE:

         If during the term of this Lease  Landlord,  its successors or assigns,
conveys  all or part of its  interest in the  Premises,  then from and after the
effective date of the conveyance, Landlord shall be released and discharged from
any and all  obligations  under  this  Lease with  respect  to the  interest  so
conveyed,  except those already accrued. If Landlord conveys,  assigns and sells
all its interest in the  Premises to a third party,  Tenant shall attorn to such
party as if it had been named as Landlord under this Lease,

23.      ASSIGNMENT AND SUBLETTING:

         Tenant  shall not  assign  this  lease or  sublet  any  portion  of the
Premises  without the prior written  consent of Landlord.  No such assignment or
subletting shall relieve Tenant of its obligations hereunder. Landlord shall not
unreasonably  withhold such consent.  In determining  whether or not to consent,
Landlord may consider all relevant  factors,  including  but not limited to, the
financial  responsibility  of the  proposed  tenant,  the nature of the tenant's
business,  any  modifications  to the  building  which  might be  required,  any
increased  burden upon the parking  facilities,  traffic,  water usage, or other
factors  which  affect  Landlord  as the  owner  of the  Premises  and  adjacent
property.  Tenant shall  reimburse  Landlord for all reasonable  legal and other
expenses incurred by Landlord in reviewing such requests for consent.

24.      SUCCESSORS:

         All the terms,  covenants and conditions of this Lease shall be binding
upon and inure to the

                                       16


benefit of the heirs, executors,  administrators,  successors and assigns of the
parties hereto, and in the case of Tenant, all amounts due and payable hereunder
shall be the obligation of such heirs,  executors,  administrators  and assigns,
regardless  of the time  period to which such  amounts  relate.  Nothing in this
paragraph shall be deemed to permit any assignment, subletting, occupancy or use
contrary to the provisions of paragraph 23 above.

25.      INDEMNIFICATION AND LIABILITY INSURANCE:

         Landlord,  its managing  agent,  and architects  shall not be liable to
Tenant, its officers, agents, employees, customers, invitee or third parties for
loss or damage to property,  including goods,  wares and  merchandise,  for lost
profits,  or for injury or death to persons in, on, or about the  Premises,  and
Tenant agrees to indemnify and hold Landlord, its managing agent, and architects
harmless  from and on account  thereof no matter how arising or by whom  caused,
except for such loss or damage as may be caused by the negligence or willful act
or omission of Landlord, its agents,  architects or employees for which Landlord
shall  be  liable  and  for  which  Landlord  shall  indemnify  Tenant.   Tenant
acknowledges that the provisions of Paragraph 37 below require Tenant to pay all
Landlord's,  its  managing  agent's and  architect's  costs,  expenses  and fees
resulting from any action  associated with such loss,  damage,  injury or death,
unless caused by Landlord's negligence or willful act.

         During the term of this Lease,  Tenant shall maintain in full force and
effect with insurance  companies with general policy holder's rating of not less
than A and a  financial  rating of not less than X as rated in the most  current
available "Best's"  Insurance  Reports,  licensed to do business in the state in
which the  Building  is  located,  comprehensive  liability  insurance  policies
applicable to the Premises and Tenant's activities,  including contractual, with
limits of liability per person,  per occurrence and for property damage at least
equal to a combined  single  limit  policy of  $1,000,000.  The  minimum  limits
specified above are the minimum amounts required by Landlord, and may be revised
by Landlord from time to time, but not more frequently than once each year, when
reasonably  necessary  to  meet  changed   circumstances,   including,   without
limitation  (i)  changes in the  purchasing  power of the dollar,  (ii)  changes
indicated by the amount of  plaintiffs;  verdicts in personal  injury actions in
the State of California, or (iii) changes consistent with the standards required
by  Landlords  of other  similar  buildings  located  in the County in which the
Building  is  located.  Such  liability  insurance  shall  be  primary  and  not
contributing to any insurance carried by Landlord,  and Landlord's insurance (if
any) shall be in excess thereof.

         Tenant  shall  cause  Landlord  and its  managing  agent to be named as
additional insured, and certificates evidencing such coverage and providing that
the  insurance  may not be  cancelled  without  thirty (30) days' prior  written
notice to  Landlord  shall be  delivered  to  Landlord  prior to  Tenant  taking
possession of the Premises or entering to commence fixturization.

26.      INSURANCE PREMIUMS:

         Tenant  shall pay to Landlord as part of Common Area  Charges  provided
for in Paragraph 6 above,  all premiums paid by Landlord for the property damage
insurance  policy described in Paragraph 28(g) below, or an appropriate pro rata
share of the premiums if the policy  insures more than the  Premises.  Provided,
however,  that  Tenant's  liability  for the payment of premiums for  earthquake
insurance shall not exceed $10,000 per annum increased in the same manner as the
Management Fee as provided in paragraph 5(b), and the earthquake  insurance must
provide for a deductable of five percent (5%) or less of the damage.

                                       17


27.      SUBROGATION WAIVER:

         With  respect to all  policies of  insurance  which are required by the
provisions  of this Lease  Landlord  and Tenant each agree to obtain a clause or
endorsement denying to the insurer rights of subrogation against the other party
to the extent such rights have been waived by the insured  under the  provisions
of this Lease.

         Each  party,  notwithstanding  any  provisions  of  this  Lease  to the
contrary,  waives any right of recovery against the other for injury or loss due
to hazards covered by insurance to the extent of the insurance coverage required
by this Lease.

28.      DAMAGE AND DESTRUCTION:

         (a) If the Building is destroyed or materially  damaged  (i.e.,  to the
extent of five  percent (5%) or more of the then full  replacement  cost) from a
cause not insured  against under  Landlord's  casualty  insurance  policy,  with
extended  coverage,  Landlord  shall have the right to  terminate  this Lease by
giving written notice of termination to Tenant within thirty (30) days after the
date of such  damage or  destruction.  If the Lease is not so  terminated,  then
Landlord shall diligently proceed to repair and restore the Building.

         (b) If the Building is  materially  damaged or  destroyed  from a cause
covered by  Landlord's  casualty  insurance  referred to above,  and they may be
repaired or restored  within one hundred fifty (150) days after  commencement of
repair or  restoration,  then Landlord  shall  diligently  proceed to repair and
restore  the  Premises.  If  Landlord  determines  that the  Premises  cannot be
repaired or restored within such a period. then Landlord shall have the right to
terminate  this Lease by written  notice to Tenant  given within sixty (60) days
after the date of such damage or  destructions,  and Tenant's  obligation to pay
rent and other  charges  under this Lease shall  terminate as of the date of the
damage or destruction, or the date Tenant ceases to do business at the Premises,
whichever date is later.

         (c) If the Building is damaged to the extent of fifty  percent (50%) or
more of its  replacement  cost,  Landlord may elect to  terminate  this Lease by
written  notice to Tenant  given  within  sixty (60) days after the date of such
destruction.

         (d) If in any case  which is the  subject  of this  paragraph  29,  the
Premises or any portion thereof is rendered unfit for use and occupancy and this
Lease is not terminated as provided above, a just proportion of the Minimum Rent
in light of the  nature  and  extent of the  damage  shall be  abated  until the
Premises,  excluding any fixtures or items installed or paid for by Tenant which
Tenant is entitled or required to remove under this Lease, have been restored by
Landlord as provided above.

         (e) Except as expressly provided otherwise in this Lease,  damage to or
destruction  of the  Premises  shall not  terminate  this Lease or result in any
abatement  or  rentals  payable  hereunder.  Tenant  waives  any right of offset
against  its  rental  obligations  provided  by any  statute  or  rule of law in
connection with Landlord's duties of repair and restoration under the provisions
of this Lease.

         (f) Landlord's duties of repair and restoration under the provisions of
this Lease shall  extend only to those  portions of the Premises  insured  under
Landlord's casualty insurance with

                                       18


extended  coverage  endorsements  and Landlord shall not be responsible  for any
loss,  damage,  or  destruction  to Tenant's  to  fixtures,  inventory  or other
Tenant-owned property.

         (g) Landlord  shall  obtain and  maintain in force a standard  fire and
extended risk insurance  policy with Landlord as insured,  insuring the Premises
and  building  of  which it is a part in  amounts  and in form  satisfactory  to
Landlord,  which may also include, at Landlord's option, rental continuation for
a period of  twelve  (12)  months,  earthquake  (subject  to the  provisions  of
paragraph 26), flood, demolition,  increased cost of construction due to changes
in building  codes,  and such other coverage as Landlord deems prudent or as may
be  required  under  the  terms  of any  mortgage  or deed of  trust at any time
encumbering the Building of which the Premises form a part. Any proceeds of such
insurance shall be payable to Landlord and used for repair and reconstruction of
the  improvements,  if  Landlord  is  obligated  under  this  Lease to repair or
reconstruct,  subject to any  requirements as to the disposition of the proceeds
that may be imposed by the  beneficiary  under any  mortgage or deed of trust at
any time encumbering the Building.

         (h) Tenant  shall  obtain  and  maintain  in force a standard  fire and
extended coverage insurance policy on all of Tenant's personal  property,  in an
amount equal to their full replacement value.

29.      DEFAULT:

         (a) The following events shall constitute events of default by Tenant:

                  (i) Abandonment of the Premises;  or dispossession of Premises
by power of law or otherwise;

                  (ii)  failure  to pay any  installment  of  Minimum  Rent,  or
Additional  Rent on the date when any such  payment is due,  with such a failure
continuing  for a  period  of  ten  (10)  days  after  written  notice  of  such
delinquency,  except  that in the case of Minimum  Rent,  no  written  notice of
delinquency shall be required:

                  (iii)  assignment or subletting in violation of the provisions
of paragraph 23;

                  (iv)  failure  by  Tenant  to  perform  any  other  covenants,
agreements  or  obligations  required  of Tenant  under  this  Lease with such a
failure  continuing  for thirty (30) days after written  notice of such failure:
provided,  however, if the nature of the failure is such that it cannot with the
exercise of  reasonable  diligence  be cured within said thirty (30) day period,
then Tenant shall not be in default hereunder if it shall promptly commence such
cure (in any event within said thirty-day period) and thereafter pursue the same
to completion with diligence and continuity; provided, further, however, if such
failure is of a nature which adversely affects the health and safety of users of
the Building,  obstructs or impedes the flow of pedestrian and vehicular traffic
through the Common Areas,  or adversely  affects the appearance of the Building,
and can with the  exercise of  reasonable  diligence  be cured  within a shorter
period of time, then the applicable cure period  following  notice shall be such
shorter period of time. If on three (3) or more  occasions  during any period of
twelve  (12)  consecutive  months  during  the lease term  Tenant  shall fail to
perform any obligation  hereunder which adversely  affects the health and safety
of the Common Areas,  and  regardless of whether such prior  failures shall have
been cured within the required time period, then,  commencing on the fourth such
failure, no prior notice shall be required;

                  (vi) a  general  assignment  by  Tenant  for  the  benefit  of
creditors;

                                       19


                  (vii) the filing of a  voluntary  petition  in  bankruptcy  by
Tenant or the filing of an involuntary petition by Tenant's creditors, with such
a petition remaining undischarged for a period of ninety (90) days;

                  (viii) the  appointment  of a receiver to take  possession  of
substantially  all  of  Tenant's  assets  or  of  the  Premises,   with  such  a
receivership remaining undissolved for a period of ninety (90) days;

                  (ix) the  attachment,  execution or other judicial  seizure of
substantially  all of Tenant's assets or the Premises,  with such an attachment,
execution or other seizure remaining  unreleased or undischarged for a period of
ninety (90) days after the levy thereof;

                  (x) the  chronic  delinquency  by  Tenant  in the  payment  of
rentals due hereunder,  with "chronic delinquency" meaning the failure by Tenant
to pay any rental by the required due date on seven (7) or more occasions during
any 12-month period.

         (b) Upon any of the above events of default or any other breach of this
Lease by, then Landlord, besides other rights or remedies it may have under this
Lease or by law, shall have the right to: (i)  immediately  terminate this Lease
and Tenant's right to possession of the Premises by giving Tenant written notice
that this Lease is terminated,  in which event, upon such termination,  Landlord
shall  have the right to  recover  from  Tenant the sum of; (A) the worth at the
time  of  award  of the  unpaid  rent  which  has  been  earned  at the  time of
termination;  (B) the  worth at the time of award  of the  amount  by which  the
unpaid  rent which would have been earned  after  termination  until the time of
award  exceeds the amount of such rental loss that Tenant  affirmatively  proves
could have been  reasonably  avoided;  (C) the worth at the time of award of the
amount by which the  unpaid  rent for the  balance of the term after the time of
award  exceeds the amount of such rental loss that Tenant  affirmatively  proves
could be  reasonably  avoided;  (D) any other  amount  necessary  to  compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
Tenant's  obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom;  and (E) all such other amounts in addition
to or in lieu of the  foregoing  as may be  permitted  from  time to time  under
applicable  law;  or (ii)  have this  Lease  continue  in effect  for so long as
Landlord does not terminate  this Lease and Tenant's  right to possession of the
Premises,  in which  event  Landlord  shall  have the  right to  enforce  all of
Landlord's rights and remedies under this Lease,  including the right to recover
all  rentals  payable by Tenant  under this Lease as they  become  due, or (iii)
without  terminating  this Lease,  make such  alterations  and repairs as may be
necessary  in order to relet the  Premises,  and relet the  Premises or any part
thereof  for such term or terms  (which may be for a term  extending  beyond the
term of this  Lease) and at such rental or rentals and upon such other terms and
conditions as Landlord in its sole discretion may deem advisable. Upon each such
reletting all rent and other sums received by Landlord from such reletting shall
be applied,  first,  to the payment of any  indebtedness  other than rentals due
hereunder  from  Tenant to  Landlord:  second,  to the  payment of any costs and
expenses of such reletting,  including  reasonable brokerage fees and attorney's
fees and of costs of such  alterations  and  repairs;  third,  to the payment of
rentals due and unpaid  hereunder;  and the  residue,  if any,  shall be held by
Landlord and applied in payment of future rentals payable by Tenant hereunder as
the as the same may become due and payable hereunder. If the rent and other sums
received  from such  reletting  during  any month are less than the rental to be
paid during that month by Tenant hereunder, Tenant shall pay such

                                       20


deficiency to Landlord;  if such rent and other sums shall be more, Tenant shall
have no right to the  excess.  Such  deficiency  shall  be  calculated  and paid
monthly.  No re-entry or taking  possession of the Premises by Landlord shall be
construed  as an election on its part to  terminate  this Lease unless a written
notice of such intention is given to Tenant or unless the termination thereof is
decreed by a court of competent jurisdiction. Notwithstanding any such reletting
without termination, Landlord may at any time thereafter elect to terminate this
Lease for such previous breach. Should Landlord at any time terminate this Lease
for any breach,  in addition to any other  remedies it may have,  it may recover
from Tenant all  damages it may incur by reason of such  breach,  including  the
cost of recovering  the Premises and  reasonable  attorneys'  fees, all of which
amounts  shall be  immediately  due and  payable  from Tenant to  Landlord.  The
failure or refusal of Landlord to relet the Premises  shall not affect  Tenant's
liability. At its option, Landlord may request the appointment of a receiver for
Tenant to take possession of the Premises and to exercise all rights of Landlord
herein  relating to the taking of possession of and reletting the Premises,  and
to apply any rent and other sums  collected from the Premises  accordingly.  The
terms "entry" and "re-entry" are not limited to their  technical  meanings.  For
the  purpose  of this  paragraph:  "worth at the time of award"  as  defined  in
Subparagraphs  (b) (i) (A) and (B) shall be computed by allowing interest at the
rate of ten  percent  (10%) per  annum,  and for  Subparagraph  (i)(c)  shall be
computed by discounting  such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).

         (c) Upon any such event of default or breach, all of Tenant's fixtures,
furniture, equipment,  improvements,  additions, alterations, and other personal
property shall remain on the Premises and,  during the length of such default or
breach,  Landlord shall have the right to take the exclusive  possession of them
and to use them,  rent or  charge  free,  or to  remove  and store the same in a
public  warehouse  or  elsewhere  at the cost of and for the  account of Tenant,
until all  defaults  are cured or, at  Landlord's  option at any time during the
remaining term of this Lease, to require Tenant to immediately remove the same.

         (d) The  waiver by  Landlord  of any  breach of any term,  covenant  or
condition  of this Lease  shall not be deemed to be a waiver of any other  term,
covenant or  condition or any  subsequent  breach of the same or any other term,
covenant, or condition.  The subsequent acceptance of rent by Landlord shall not
be deemed to be a waiver of any preceding breach by Tenant of any term, covenant
or  condition  of this  Lease,  other  than the  failure  of  Tenant  to pay the
particular  rent  so  accepted,  regardless  of  Landlord's  knowledge  of  such
preceding breach at the time of acceptance of such rent.

30.      RIGHT OF LANDLORD TO PERFORM:

         All covenants and agreements to be performed by Tenant under any of the
terms of this  Lease  shall be  performed  by Tenant at  Tenant's  sole cost and
expense and without any  abatement  of rent.  If Tenant  fails to pay any sum of
money  required to be paid by it hereunder to third  parties or fails to perform
any other act on its part to be performed  hereunder and such failure  continues
for ten (10) days  after  notice  thereof by  Landlord,  Landlord  may,  without
waiving or releasing  Tenant from any  obligations  of, make any such payment or
perform any such other act on Tenant's behalf.  All sums so paid by Landlord and
all necessary  incidental costs,  together with interest on all of the foregoing
at the default  rate  specified  in  Paragraph  4(c) above from the date of such
payment by Landlord, shall be payable to Landlord on demand.

                                       21


31.      CONDEMNATION:

         (a) If during the lease term, the Premises,  or any substantial portion
thereof  (i.e.,  ten percent  (10%)) or more of the gross  leasable  area),  are
damaged by action of public or other  authority or are taken by eminent  domain,
or if Landlord receives  compensable  damage by reason of anything lawfully done
in pursuance of public or other authority in connection with the Premises,  this
Lease shall terminate at Landlord's election, which election may be made whether
or not  Landlord's  entire  interest  has been  divested.  If only a part of the
Premises is taken and the remainder is insufficient for Tenant's purposes or, in
case of such damage or taking,  if the time needed to do the  construction  work
necessary to put the Premises or such remainder in proper  condition for use and
occupation is reasonably estimated to exceed six (6) months, or if Landlord does
not  commence  within  sixty (60) days after the damage or the  surrender of the
part taken and proceed with  reasonable  diligence  to do such work,  Tenant may
terminate  this Lease,  without  penalty,  by written  notice  given to Landlord
within thirty (30) days after the right to terminate arises. If in any such case
the Premises are rendered  unfit for use and  occupation and the Lease is not so
terminated,  a just  proportion of the Minimum Rent  according to the nature and
extent of the injury  shall be abated until the Premises (or in case of a taking
what may remain  thereof,  excluding any fixtures or items installed or paid for
by Tenant which Tenant is entitled or required to remove by agreement, have been
put by Landlord in proper  condition for use and  occupation;  and, in case of a
taking which permanently reduces the area of the Premises,  a just proportion of
the Minimum Rent shall be abated for the remainder of the lease term.

         (b) The entire award or compensation in such proceedings, whether for a
total or partial  taking or for  diminution in the value of the leasehold or for
the fee,  shall belong to and be the property of  Landlord;  provided,  however,
that Tenant shall be entitled to recover from the condemnor such compensation as
may be separately  awarded by the condemnor to Tenant,  or recoverable  from the
condemnor  by Tenant in its own  right,  for the  taking of trade  fixtures  and
equipment  owned by  Tenant  (meaning  personal  property,  excluding  fixtures,
whether or not  attached  to the real  property,  which may be  removed  without
injury to the  Premises)  for  business  goodwill  and for  Tenant's  relocation
expenses.  Each party waives any statutory right in conflict with the provisions
of this Paragraph 33,  including,  without  limitations  rights under California
Code of Civil Procedure Section 1265.130.

         (c) If the Premises or any part of them are taken for temporary use:

                  (i)  this  Lease,  including  Tenants'  obligation  to pay all
rentals hereunder, shall be and remain in full force and effect, and

                  (ii)  Tenant  shall be  entitled  to receive  such  portion or
portions of any award made for such use with respect to the period of the taking
which is within the lease term, provided that is such taking remains in force at
the expiration or earlier  termination  of this Lease,  Tenant shall then pay to
Landlord a sum equal to the reasonable cost of performing  Tenant's  obligations
under Paragraph 10 above with respect to surrender of the Premises and upon such
payment shall be excused from such obligations.

32.  OPTION TO RENEW:  So long as Tenant  shall not be in default at the time of
the  exercise of the option,  Landlord  grants to Tenant the option to renew the
Lease for an additional term of five (5) years commencing upon the day following
the expiration date of the initial term upon the following terms and conditions:

                                       22


         (a) The option shall be exercised  by written  notice to Landlord  from
Tenant delivered not more than one year prior to the commencement of the renewal
term,  and not less than nine months  prior to the  commencement  of the renewal
term. The notice shall be accompanied by Tenant's  financial  statements for its
most recent fiscal year and any subsequent  interim periods for which Tenant has
issued financial statements. If such financial statements indicate that Tenant's
financial  condition is not  satisfactory  to reasonably  ensure payment of rent
under the Lease for the option  term,  Landlord may refuse to honor the exercise
of such option.  In the event that the option is not  exercised  within the time
provided, it shall expire.

         (b) If the option is exercised,  during the renewal  term,  the minimum
rent (in lieu of the Note Rent and the Land Rent) shall be equal to  ninety-five
percent  (95%)  of the fair  rental  value  of the  premises  at the date of the
commencement of the renewal term. In determining the fair rental value, the term
of the  Lease,  and all the other  terms and  conditions  of the Lease  shall be
considered.  The fair rental value shall be  determined on the basis of the fair
rental  value of a rentable  square  foot of  comparable  office  space in Marin
County. No consideration shall be given to the fact that Tenant shall occupy the
entire building.

                  Upon the  exercise  of the option,  the parties  shall make an
attempt to determine  the fair rental value of the  premises.  In the event that
they are unable to do so within a period of two (2) months from the  exercise of
the  option,  each  party  shall  appoint an  appraiser  who shall be a licensed
appraiser or a licensed  commercial  real estate broker doing  business in Marin
County,  with at least five years experience in commercial leasing of comparable
property in Marin County. The two appraisers shall meet and attempt to determine
the fair  rental  value of the  premises.  If they are unable to agree  within a
period of thirty (30) days  thereafter,  the two shall choose a third  appraiser
who shall be similarly  qualified.  The third appraiser shall determine the fair
rental  value of the premises  and his  determination  shall be binding upon the
parties. Provided, however, that the fair rental value of the premises shall not
be less than the rental paid during the last lease year of the initial term, nor
less than the fair rental value  proposed by the appraiser  appointed by Tenant,
and shall not be more  than the fair  rental  value  proposed  by the  appraiser
appointed by Landlord.

                  If either  party  shall fail to appoint its  appraiser  at the
time  provided,  or if the two  appraisers  shall  fail  to  appoint  the  third
appraiser  within the time  provided,  upon  application  by either  party,  the
appraisers  shall be  appointed  by the  president  of the Marin County Board of
Realtors.

                  Each  party  shall  pay  the  compensation  of  its  appointed
appraiser and one-half the compensation of the third appraiser.

         (c) The rent shall be adjusted  annually in accordance  with changes in
the Index as described in paragraph 2 commencing one year from the  commencement
date of the  renewal  term  using a base  Index  which  shall be the Index  last
published prior to the  commencement of the renewal term and an adjustment index
which shall be the Index last published prior to the adjustment date.

         (d) All the  remaining  terms and  conditions of the Lease shall apply,
including,  but not limited to, the provisions for payment of additional rent in
the form of common  area  charges,  taxes,  insurance,  and  maintenance  of the
building.

                  No additions shall be made to the Re-leasing  Reserve provided
for herein,  but the  reserve  shall be  maintained  and shall be  available  to
Landlord at the expiration of the renewal term.

         (e) In the event the option is exercised,  Landlord  shall use its best
efforts to obtain a new

                                       23






loan to be secured by the premises  sufficient  to repay the balance of Note and
the costs of  refinancing.  If Landlord is unable to secure a loan providing for
monthly payments of interest and principal  sufficient to amortize the principal
over a term of not less  than  twenty-five  (25)  years  which  does not  exceed
eighty-five percent (85%) of the net operating income from the building, and due
in not less than seven (7) years from the Commencement  Date of the Renewal Term
then as a condition  for the renewal of the Lease,  Tenant  shall be required to
extend  the  maturity  date of the Note for a period of five (5) years  from the
date the Note is  otherwise  due, or in the  alternative,  cancel the option and
vacate the premises at the end of the then current term.  If Tenant  proposes to
assign  the Note to a third  party  during  the  extension  period  of the Note,
Landlord agrees to terminate its right to offset payments under the Note against
rent due, if financial  statements  submitted by Tenant indicate that Tenant has
sufficient  income to pay the rent under the Lease.  Such  termination  shall be
effective upon assignment of the Note by Tenant.  Net operating income means the
Minimum Rent less the expenses of operating  the Demised  Premises to the extent
not  reimbursed by Tenant and  specifically  excluding any interest or principal
loan payments or depreciation.

                  In the event that the foregoing  option to renew is exercised,
Tenant shall have two additional  five-year options to renew upon the same terms
and  conditions  with the fair rental value of the premises to be  determined in
the same manner at the time each option is exercised.

                  In the event that  Tenant  fails to  exercise  an option,  all
subsequent options shall terminate.

33. FIRST RIGHT OF  NEGOTIATION:  In the event that Landlord shall elect to sell
the building during the term of the Lease,  Tenant shall have the first right to
negotiate for the purchase upon the following terms and conditions:

                  Prior  to  listing  the  building  for  sale,   and  prior  to
negotiation with respect to sale to any third party, Landlord shall give written
notice to Tenant that  Landlord  wishes to sell the  building,  and shall advise
Tenant of the proposed  sale price and other terms and  conditions  of the sale.
For a period of thirty (30) days thereafter, Landlord and Tenant shall negotiate
in good faith for the  purchase and sale of the  building.  In the event that no
agreement  is reached  during said time,  Landlord may list the building and may
offer the building for sale to third parties  without any further  obligation to
Tenant except that if Landlord  proposes to make sale of the building for a sale
price which is more than ten percent  (10%) less than the last price  offered to
Tenant, Landlord shall give written notice of such proposed price to Tenant, and
within a  period  of five (5)  working  days  thereafter,  Tenant  may  elect to
purchase  the  building at the reduced  price and upon the terms and  conditions
proposed.

                  In the event that Landlord  receives an unsolicited  offer for
purchase of the building  which Landlord  wishes to accept,  Landlord shall give
Tenant written notice of such offer and shall include a copy of the offer in the
notice.  Within ten (10) working days following  submission of the offer, Tenant
shall have the option to purchase the building from Landlord upon the same terms
and conditions as are offered by such third party.

                  This  provision  shall not  apply to the sale of an  undivided
interest  in  the  property,  nor  to a  dissolution  or  reorganization  of the
partnership  so long as the existing  partners  retain more than a fifty percent
(50%) beneficial interest in the building.

                                       24


                  In  the  event  that  the  proposed  sale  provides  for a tax
deferred  exchange to be made, as a condition for the purchase,  Tenant shall be
required to cooperate with Landlord in connection with such exchange.

34.      SUBORDINATION:

         This lease is and shall be prior to any encumbrance  recorded after the
date of this Lease affecting the premises.  If, however,  a lender requires that
this  Lease  be  subordinate  to any  such  encumbrance,  this  Lease  shall  be
subordinate  to the  encumbrance  if Landlord  first  obtains  from the lender a
written statement that provides substantially as follows:

         "As long as Tenant  performs  its  obligations  under  this  Lease,  no
         foreclosure of, deed given in lieu of foreclosure of, or sale under the
         encumbrance,  and no steps or procedures  taken under the  encumbrance,
         shall affect  Tenant's  rights under this Lease.  Tenant shall attom to
         any purchaser at any foreclosure  sale, or to any grantee or transferee
         designated  in any deed in lieu of  foreclosure  so long as such  party
         executed a document  indicating that it will recognize  Tenant's rights
         under the Lease,  provide quite  enjoyment of the Premises to Tenant so
         long as Tenant is not in default,  and shall perform the obligations of
         Landlord hereunder."

         Tenant shall execute any written agreement or other documents  required
by the lender to accomplish the purpose of this paragraph.

35.      LANDLORD DEFAULT; MORTGAGEE PROTECTION:

         (a) In the event  Landlord  shall neglect or fail to perform or observe
any of the terms covenants,  or conditions contained in this Lease on it part to
be performed or observed within thirty (30) days after written notice of default
(or if more than thirty (30) days shall be required because of the nature of the
default,  if Landlord shall fail to commence  within such thirty (30) day period
and  thereafter  proceed  diligently to cure such default  after written  notice
thereof),  then, in that event,  Landlord  shall be liable to Tenant for any and
all damages sustained by Tenant as a result of Landlord's breach.

         (b) If Landlord  shall fail to perform any covenant,  term or condition
of this Lease on Landlord's  part to be performed,  and as a consequence  of its
default,  Tenant shall recover a money judgment against Landlord,  such judgment
shall  be  satisfied  solely  out of (i)  the  proceeds  of sale  received  upon
execution  of such  judgment  levied  against the right,  title and  interest of
Landlord in the  Building and its interest in the  underlying  realty;  (ii) the
rents or other  income  from the  Building  receivable  by  Landlord;  (iii) the
consideration  received by landlord from the sale or other disposition of all or
any part of Landlord's  right,  title and interest in and to said property;  and
(iv) any condemnation awards or insurance proceeds.  It is expressly  understood
and agreed that neither Landlord nor any partner of Landlord shall be personally
liable  for  any  deficiency  if the  proceeds  of the  sale or  disposition  of
Landlord's  interest in the Building is insufficient for the payment of any such
judgment,  and Tenant shall not institute any further  action,  suit, or similar
demand against  Landlord,  or any partner of Landlord,  for or on the account of
such deficiency.  Nothing contained herein shall limit the personal liability of
Landlord or its partners for acts of gross negligence or for willful acts.

         (c) Tenant  agrees to give the holder of any  mortgage or deed of trust
encumbering  the Premises,  by registered  mail, a copy of any notice of default
served upon Landlord, provided Tenant has previously been notified in writing of
the  identity  and address of the holder of any such  mortgage or deed of trust.
Tenant further agrees that if Landlord has failed to cure any default

                                       25


giving rise to such notice  within the time period  provided  for in this Lease,
then the  holder of such  mortgage  or deed of trust  shall  have an  additional
ninety (90) days in which to cure such default or, if such  default  cannot with
the exercise or reasonable diligence be cured within such time period, then such
additional time as may be necessary  (including time to obtain possession of the
Premises by power of sale or judicial  foreclosure,  if such should be necessary
to effect a cure) if within such ninety (90) days the holder of such mortgage or
deed of trust has commenced and is diligently pursuing the remedies necessary to
cure such default.

36.      FINANCIAL AND OFFSET STATEMENTS:

         Tenant  agrees to furnish to  Landlord,  upon seven (7)  business  days
prior  written  notice,  a financial  statement  including  a balance  sheet and
statement  of income and expense for  Tenant's  last fiscal  year,  and its most
recent quarterly and year to date statement,  and Tenant shall have the right to
deliver copies of such financial statements to any person from whom Landlord has
accepted a bona fide purchase offer for Landlord's Building,  or for the purpose
of obtaining a loan to be secured by Landlord's Building.

         Tenant shall at any time,  and from time to time,  not later than seven
(7) business days  following  Landlord's  written  request  therefore,  execute,
acknowledge, and deliver to Landlord, without charge, a statement in writing, in
a form provided by Landlord,  certifying the date of commencement of this Lease,
that this  Lease is  unmodified  and in full  force and effect (or if there have
been  modifications,  that the same is in full force and effect as modified  and
stating the date of the  modifications)  and further  stating the dates to which
the Minimum Rent and other charges have been paid,  and setting forth such other
matters as may reasonably by requested by Landlord.

37.      ARBITRATION:

Except as provided  in this  paragraph,  if there  shall be any dispute  between
Tenant and Landlord with respect to the  interpretation  of this /ease,  or with
respect to any claim of liability to the other party with respect to this lease,
or with respect to any matter  arising out of the  occupation of the premises by
Tenant,  the matter shall be submitted to arbitration under the Commercial rules
of Arbitration of the American Arbitration Association, and the hearing shall be
held at San Rafael, California. In connection with such arbitration, the parties
shall  have the  right to  discovery  as set  forth in  Section  1283.05  of the
California Code of Civil  Procedure.  This provision for  arbitration  shall not
apply with respect to any action  brought by Landlord  for unlawful  detainer of
the premises.

INITIALS:



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

38.      ATTORNEY'S FEES:

         If Landlord must join in any  litigation or  arbitration  brought by or
against  Tenant in order to protect an interest of  Landlord,  or if Landlord is
joined as a party in any litigation commenced by or against Tenant, Tenant shall
pay all costs,  expenses, and attorney's fees incurred by Landlord, its managing
agent,  its  architects,  or their  insurance  carriers in connection  with such
litigation  unless such  litigation  determines  that  Landlord has  committed a
breach of this Lease and  adjudicates  that Landlord is a liable  party.  If any
action at law or in equity is brought between Landlord and Tenant

                                       26


to enforce any of the  provisions  and/or rights under this Lease,  Landlord and
Tenant hereby  expressly  waive the right,  if any, to trial by jury in order to
avoid the time delays  inherent in such  process,  and Landlord and Tenant agree
that the unsuccessful party to such litigation shall pay to the successful party
all costs and expenses,  including reasonable  attorney's fees, incurred by such
successful  party,  and if such successful  party recovers  judgment in any such
action or preceding,  such costs, expenses and attorney's fees shall be included
in and as part of such judgment.

39.      ENTIRE AGREEMENT:

         This Lease and the  Leasehold  Improvements  Agreement  constitute  the
entire agreement between Landlord and Tenant, and there are no other agreements,
oral or written,  that would modify the terms set forth in this Lease. Except as
otherwise  expressly  provided herein, any later agreement that would purport to
renew,  extend,  modify,  amend or terminate  this Lease shall be of no force or
effect unless in writing and executed by both Landlord and Tenant.

40.      HAZARDOUS MATERIALS DISCLOSURE & BROKER DISCLAIMER:

         Various construction  materials may contain items that have been or may
in the future be determined to be hazardous  (toxic) or undesirable and may need
to be specially  treated/handled or removed. For example,  some transformers and
other  electrical  components  contain  PCBs,  and  asbestos  has  been  used in
components  such  as  fire-proofing,  heating  and  cooling  systems,  air  duct
insulation  spray-on  and tile  acoustical  materials,  linoleum,  floor  tiles,
roofing,  dry wall and plaster.  Due to prior or current uses of the Property or
in the area, the Property may have hazardous or  undesirable  metals,  minerals,
chemicals,  hydrocarbons,  or biological or radioactive  items in soils,  water,
building components, above or below-ground containers or elsewhere in areas that
may or may not be accessible or noticeable.  Such items may leak or otherwise be
released. Real estate agents have no expertise in the detection or correction of
hazardous or undesirable  items.  Expert  inspections are necessary.  Current or
future laws may require  clean up by past,  present  and/or future owners and/or
operators.  It is the  responsibility  of the  Landlord  and  Tenant  to  retain
qualified  experts to detect and correct  such matters and to consult with legal
counsel of their choice to determine what  provisions,  if any, they may wish to
include in transaction documents regarding the Property.

         To the best of  Landlord's  knowledge,  no asbestos or other  hazardous
materials and undesirable substances are contained in the Property.  Landlord is
required  under  California  Health and Safety  Code  Section  25915 et seq.  to
disclose reports and surveys  regarding  asbestos to certain persons,  including
their employees, contractors,  co-owners, purchasers and tenants. Buyers/Tenants
have  similar  disclosure  obligations.  Landlord  and  Tenant  have  additional
hazardous materials  disclosure  responsibilities to each other under California
Health and Safety Code Section 25359.7 and other California  laws.  Consult your
attorney  regarding  this  matter.  The  brokers  in  this  transaction  are not
qualified  to assist you in this  matter or provide  you with other legal or tax
advice.

         LANDLORD REPRESENTS AND WARRANTS THAT TO THE BEST OF ITS KNOWLEDGE,  NO
ASBESTOS OR OTHER HAZARDOUS MATERIALS ARE OR WILL BE CONTAINED IN THE PREMISES.

                                       27


41.      MISCELLANEOUS:

         (a) The table of contents and  marginal  captions in this Lease are for
convenience  of  reference  only and  shall not in any way limit or be deemed to
construe or interpret the terms and provisions hereof.

         (b) Time is of the  essence  of this  Lease and of all its  provisions,
except with  respect to the delivery of  possession  of the  Premises,  which is
governed by paragraph 1 above.

         (c) As used herein, the words "Landlord" and "Tenant" shall include the
plural as well as the  singular.  Words used in the neuter  gender shall include
the masculine and  feminine,  as the context may require.  If there is more than
one Landlord or Tenant, the obligations imposed upon Landlord or Tenant shall be
joint and several.

         (d) This Lease shall be construed and enforced in  accordance  with the
laws of the State of California.

         (e) All acts  concerning  this Lease,  the  Premises,  or the Building,
shall be  performed  on behalf of  Landlord  only by a partner of  Landlord,  if
Landlord  is a  Partnership,  or  an  officer  of  Landlord,  if  Landlord  is a
corporation, unless written notice to the contrary is given to Tenant.

         (f) If any  provision of this Lease,  or the  application  of it to any
person or circumstances,  shall to any extent be invalid or  unenforceable,  the
remainder of this Lease, or the application of such provision to any such person
or  circumstances  other than those as to which it is invalid or  unenforceable,
shall not be  affected,  and each  provision  of this  Lease  shall be valid and
enforceable to the fullest extent permitted by law.

         (g) Landlord and Tenant acknowledge and agree that the only real estate
broker(s)  involved in the  negotiation of this Lease was were the Grubb & Ellis
Company is acting as agent for and  representing  only Landlord and not as agent
for Tenant, and Damner Pike acting as the agent for and representing only Tenant
and not as agent for Landlord.

         (h)  Tenant  acknowledges  that it is  aware  that  the  agent  for the
Landlord,  Roger  A.  Smith,  is also a  principal  in this  transaction  with a
forty-five percent (45%) ownership  interest.  Tenant further  acknowledges that
another principal in the transaction, Michael J. Smith, is a California licensed
real  estate  broker,  and Daniel  Ross is a  California  licensed  real  estate
salesperson.

         (i) This Lease  imposes  numerous  financial and other  obligations  on
Landlord and Tenant,  and each of them was urged, and had ample time, to consult
an attorney before entering this Agreement.  No representation or recommendation
is made by the Landlord, the real estate brokers or their agents or employees as
to the legal sufficiency, legal effect, or tax consequences of this lease or the
transaction  relating thereto;  the parties shall rely solely upon the advice of
their own attorneys as to the legal and tax consequences of this lease.

         (j) The persons  executing  this lease on behalf of the parties  hereby
covenant and warrant that (i) they are duly authorized by appropriate resolution
and/or the  articles and by-laws of said  corporation  to execute this Lease and
thereby bind Landlord and Tenant to all the terms and conditions  thereof,  (ii)
Tenant is a duly qualified corporation and all steps have been taken prior to

                                       28




the execution of this Lease to qualify  Tenant to do business in the state where
the Building is situated, (iii) all franchise and corporate taxes have been paid
as of the date of  execution,  (iv) all future  forms,  reports,  fees and other
documents  necessary to comply with  applicable laws will be filed when due, and
(v) Landlord is a duly existing California general partnership.

         (k) During  the entire  lease  term  Tenant  shall  maintain a business
license as required by the municipality in which the Building is located.

         (l) All agreements by Tenant contained in this Lease, whether expressed
as  covenants  or  conditions,  shall  be  construed  to be both  covenants  and
conditions,  conferring  upon  Landlord  in the event of the breach  thereof the
right to terminate this Lease.

         (m)  All  exhibits  attached  to  this  Lease  shall  be  deemed  to be
incorporated  herein by the individual  reference to each such exhibit,  and all
such exhibits  shall be deemed to be a part of this Lease as though set forth in
full herein.

42.      RIGHT TO MONTH-TO-MONTH TENANCY:

         In the event that (a) Tenant has not  exercised  an option to extend in
accordance  with the  provisions of Paragraph 32; and (b) the Note  described in
Paragraph  2(a)  has not been  repaid  or  assigned  to a third  party;  and (c)
Landlord  has been  unsuccessful  in  executing  any new leases three (3) months
prior to the expiration of the then current term of the lease, Tenant shall have
the right to remain in the premises on a month-to-month basis at 95% of the fair
rental  value of the  premises.  The fair rental  value shall be  determined  as
provided for in Paragraph  32.  Tenant must  exercise  this right in writing not
later than eighty-five (85) days prior to the expiration of the current term.

         IN WITNESS  WHEREOF,  the parties have  executed  this Lease or, as the
case may be, have caused their duly  authorized  officers to execute this Lease,
on the date last written below.

LANDLORD:                               TENANT:
111 PARTNERS                                   FAIR, ISAAC AND COMPANY,
                                               INCORPORATED

By:______________________________              By:______________________________
         Michael J. Smith

Date:____________________________              Date:____________________________


By:______________________________
          Roger A. Smith

Date:____________________________


By:______________________________
           Daniel C. Ross

Date:____________________________

                                       29



                                    EXHIBIT A
                              PROPERTY DESCRIPTION

                              111 Smith Ranch Road
                             San Rafael, California

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

ALL THAT CERTAIN  REAL  PROPERTY  situated in the City of San Rafael,  County of
Marin, State of California described as follows:

PARCEL ONE:

Parcel 3B, as shown upon that certain Parcel map entitled  "Parcel Map, Lot 3 of
Map of Smith  Ranch,  Northerly  Portion 17 R.M. 39, San Rafael,  Marin  County,
California",  filed for record  __________ in Book __________ of parcel Maps, at
Page __________, Marin County Records.

Reserving  therefrom  an  easement  for  access,  parking,  drainage  and public
utilities  over that portion of the herein  described  property lying within the
boundaries of that certain, "Mutual Access and Parking Easement, D.E. & P.U.E.",
as shown upon the filed map referred to above.

Said  easement to be  appurtenant  to and for the benefit of Parcel 3A, as shown
upon the filed map referred to above.

PARCEL TWO:

An easement for access. parking,. drainage and public utility purposes over that
portion of Parcel 3A,  lying  within the  boundaries  of that  certain,  "Mutual
Access and Parking  Easement,  D.E. &,  P.U.E.,  as said parcel and easement are
shown upon that certain Parcel Map entitled,  "Parcel Map, Lot 3 of Map of Smith
Ranch.  Northerly  Portion 17 R.M. 39, San Rafael,  Marin  County,  California",
filed  for  record  __________  in  Book  __________  of  Parcel  Maps  at  Page
__________, Marin County Records.

PARCEL THREE:

An easement for storm drainage purposes more particularly described as follows:

Beginning at the Easterly terminus of the course "South 81(degree) 38' 00" East,
536.00 feet":  said point being on the Northery line of Smith Ranch Road and the
Southerly  line of Lot 3, as shown and  delineated on that certain map entitled.
"Map of Smith Ranch - Northerly Portion",  filed for record in Book 17 of Record
Maps at Page 39, Marin County  Records:  thence  leaving said  Northerly line of
said Smith  Ranch Road (17 R.M.  39) along the  Easterly  line of said Lot 3 (17
R.M. 39) the following courses and distances;  Easterly along a tangent curve to
the left whose center bears North  8(degree) 22' 00" East,  having,  a radius of
20.00  feet,  through a central  angle of  90(degree)  00' 00", an arc length of
31.42 feet and thence North 8(degree) 22' 00" East, 23.00 feet,  thence leaving,
said  Easterly  line of said Lot 3 (17 R.M. 39) South  13(degree)  12' 17" East,
46-24 feet to said Northerly line of said Smith Ranch Road (17 R.M. 39),  thence
along said Northerly line of said Smith Ranch Road (17 R.M. 39) North 81(degree)
37' 00" West, 37.00 feet to the point of beginning.

                                       30                          Exhibit 10.13



PARCEL FOUR:

An easement for storm drainage over a strip of land 10 feet in width and being 5
feet on each side of the following described line:

Beginning at the Easterly terminus of the course "South 81(degree) 38' 00" East,
536.00 feet"; said point being on the Northerly line of Smith Ranch Road and the
Southerly  line of Lot 3, as shown and  delineated on that certain Map entitled,
"Map of Smith Ranch  Northerly  Portion",  filed for record in Book 17 of Record
Maps at Page 39, Marin County  Records;  thence  leaving said  Northerly line of
said Smith  Ranch Road (17 R.M.  39) along the  Easterly  line of said Lot 3 (17
R.M. 39) the following courses and distances;  Easterly along a tangent curve to
the left whose center  bears North  8(degree)  22' 00" East,  having a radius of
20.00  feet,  through a central  angle of  90(degree)  00' 00", an arc length of
31.42 feet,  and thence North  8(degree)  22' 00" East,  128.00 feet to the true
point of beginning; thence leaving said Easterly line of said Lot 3 (17 R.M. 39)
South  81(degree)  38' 00" East 60.00 feet to the Westerly  line of Parcel D, as
shown on said "Map of Smith Ranch  -Northerly  Portion" (17 R.M. 39),  being the
terminus of this easement.

PARCEL FIVE:

An easement for access and public utility purposes more  particularly  described
as follows:

Beginning at the Easterly terminus of the course "South 81(degree) 38' 00" East,
536.00 feet" said point being on the Northerly  line of Smith Ranch Road and the
Southerly  line of Lot 3, as shown and  delineated on that certain Map entitled,
"Map of Smith Ranch - Northerly Portion",  filed for record in Book 17 of Record
Maps at Page 39, Marin County Record; thence leaving said Northerly line of said
Smith Ranch Road (17 R.M. 39) along the Easterly line of said Lot 3 (17 R.M. 39)
the following courses and distances,  Easterly along a tangent curve to the left
whose center bears North 8(degree) 22' 00" East,  having a radius of 20.00 feet,
through a central  angle of  90(degree)  00' 00",  an arc length of 31.42  feet,
thence North 8(degree) 22' 00" East, 271.13 feet and thence  Northeasterly along
a tangent  curve to the left whose center bears North  81(degree)  38' 00" West,
having,  a radius of 670 feet.  through a central angle of 2(degree) 00' 00", an
arc length of 23.39 feet;  thence  leaving  said  Eastery line of said Lot 3 (17
R.M. 39) South 81(degree) 38' 00" East,  27.41 feet,  thence South 8(degree) 22'
00" West.  141.15 feet; thence Southerly along a tangent curve to the left whose
center  bears South  81(degree)  38' 00" East.  having a radius of 292.00  feet,
through a central  angle of  10(degree)  59' 17",  an arc length of 56.00  feet;
thence  Southerly  along a reverse curve to the right whose center bears.  South
87(degree) 22' 43" West, having a radius of 308.00 feet, through a central angle
of 10(degree)  59' 17", an arc length of 59.07 feet;  thence South  8(degree)22'
00" West,  59.00 feet to said  Northerly  line of said Smith Ranch Road;  thence
along said Northerly line of said Smith Ranch Road (17 R.M. 39) North 81(degree)
38' 00" West, 58.00 feet to the point of beginning.

                                       31



Exhibit B
- ---------

Site Plan
- ---------
111 Smith Ranch Road
San Rafael, California

Exhibit C
- ---------

Floor Plan 
- ---------- 
(Page 1 of 2)
Office Building
111 Smith Ranch Road
San Rafael, California

Exhibit C
- ---------

Floor Plan 
- ---------- 
(Page 2 of 2)
Office Building
111 Smith Ranch Road
San Rafael, California

                                       32


                                   SCHEDULE A
                         SHELL PLANS AND SPECIFICATIONS

                              111 Smith Ranch Road
                             San Rafael, California

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

1.       GENERAL PROVISIONS:

         a.       Shell plans and Specifications  shall be subject to applicable
                  governmental codes and ordinances.

         b.       The building shell shall have the approximate dimensions shown
                  on Exhibit C, Floor Plan, attached to this Lease.

         c.       All work not  described  herein  shall  be  considered  tenant
                  improvements  and shall be  constructed  by tenant as provided
                  for in the Leasehold Improvements Agreement.

         d.       The atrium/lobby,  bathrooms,  janitor  closet(s),  mechanical
                  rooms,  both  staircases  and elevator shall be completed with
                  all necessary finishes as part of the shell construction.

2.       LANDSCAPING & SITE WORK:

         To be completed in  accordance  with plans and  specifications  already
         prepared  and  submitted  to the  City of San  Rafael  by  Glanville  &
         Associates,  Oberkamper and Associates,  and Forsher & Guthrie.  Tenant
         acknowledges receipt of a copy of said plans and its approval thereof.

3.       FOUNDATIONS:

         As  required  by the  Geotechnical  Report,  101,  111 Smith Ranch Road
         (Parcel 3), San Rafael, California, dated January 11, 1991, prepared by
         Miller Pacific Engineering Group. Tenant acknowledges receipt of a copy
         of said report.

         a.       Continuous  exterior footings with isolated column footings on
                  compacted fill.

         b.       Additional   footings  may  be  required   for   architectural
                  features.

                                       33



4.       SUBSTRUCTURE:

         a.       Slab  on  grade:   Minimum  of  5"  thick,   reinforced   with
                  reinforcing  bars (not welded wire mesh) over a membrane vapor
                  barrier and above a compacted aggregate base.

5.       SUPERSTRUCTURE:

         a.       Columns,  beams and brace  frames;  tubular  steel.  Roofs and
                  Floors:  Wood  frame  of  purlins,   sub-purlins  and  plywood
                  diaphragms.

         b.       Lateral  steel brace  frames will be exposed as  necessary  on
                  both  levels.  Steel  columns will be located  along  exterior
                  window line, aligned with window mullions where feasible.

         c.       Floor has been designed for the following load conditions:

                  Live loads:               50 pounds per square foot
                           Partitions:      10 pounds per square foot

                  Deadloads:
                           Structure        13 pounds per square foot
                           Gypcrete         13 pounds per square foot
                           Misc.             4 pounds per square foot

                  TOTAL:                   100 pounds per square foot
                  ---------------------------------------------------

6.       EXTERIOR CLOSURE:

         a.       Exterior walls:  Framing:  2'x6' wood studs and/or 2'x4' metal
                  studs  and  plywood  sheathing;  Finish:  Exterior  insulation
                  finish system (Drivit or other similar system), 6" thick, with
                  a fine uniform  texture,  grey (exact color to be determined).
                  This system will provide for all required wall insulation.

         b.       Glazing:  Continuous  butt-joint  glass (at  exterior),  5'-6"
                  high,  sealed at each joint.  All frames to be Medium  Bronze,
                  anodized.  All  glazing to be tinted  light  gray and  windows
                  shall be  double  paned  on the  south  and west  sides of the
                  building.  All  doors  and  windows  at the main and  easterly
                  accesses to the building will be a storefront system, finished
                  similarly to the glazing system. The lobby glazing will not be
                  double paned.

                                       34



         c.       Light weight metal trim elements to be fabricated of aluminum,
                  painted finish.

7.       ROOFING:

         a.       Roof covering; multi-ply built-up with granular ballast.

         c.       Insulation;  roll type batt  insulation  will be  incorporated
                  between roof framing members.

8.       CONVEYING:

         a.       One  completed  hydraulic   passenger   elevator.   Must  meet
                  California Title 24 Accessibility Standards.

9.       MECHANICAL:

         a.       Plumbing;  completed men's and women's toilet rooms will be on
                  each floor. The men's room will be furnished with one handicap
                  toilet, one handicap height urinal, one standard height urinal
                  and two handicap lavatories set in a counter. The womens' room
                  will be  furnished  with one  handicap  toilet,  one  standard
                  toilet and two handicap lavatories set in a counter.

         b.       Fire  Protection:  A fire  sprinkler  system for office hazard
                  shall be installed with  distribution  and coverage  necessary
                  for shell  space and for  completed  bathrooms,  lobbies,  and
                  stairwells,  and  mechanical  room.  Said system to include an
                  alarm system as required by municipal codes.

         C.       HVAC: Multiple zone package system (Variable-air-volume). Base
                  equipment  shall be roof mounted,  and connected to utilities,
                  and  distributed to shell space. If the HVAC system is changed
                  from  these  specifications  at the  request  of  Tenant,  any
                  increased  cost  shall be  deleted  from the budget for tenant
                  improvements.

10.      ELECTRICAL:

         a.       Service and distribution;  1,600 amp service,  panel board and
                  feeders  shall be  installed.  Tenant may increase the size of
                  said  service with any  increased  cost to be deleted from the
                  budget for tenant improvements.

         b.       Special  Electrical:  Alarm systems and emergency  lighting as
                  required

                                       35


                  by codes and conditions of approval for completed shell, Cable
                  TV and telephone  conduits will be provided from  right-of-way
                  to the mechanical room.


11.      INTERIOR CONSTRUCTION:

         a.       Interior doors:  Janitor closet,  mechanical room,  bathrooms,
                  fire doors as required for shell.

         b.       Wall  finishes.  Lobby:  combination  of paint and vinyl  wall
                  covering.  Toilet  rooms:  ceramic  tile and paint.  Secondary
                  staircase:  Painted  sheet rock.  Mechanical  Room:  unpainted
                  sheetrock.

         c.       Floor  finishes:  Lobby and  secondary  exit:  combination  of
                  carpet and tile. Toilet rooms:  ceramic tile. Easterly stairs:
                  glue down commercial carpet.

         d.       Ceiling finishes.  Lobby areas and toilet rooms,  "5/8" gypsum
                  board, painted.

12.      OTHER:

         a.       Complete shell shall be left free of debris and broom clean at
                  completion by shell contractor.

                                       36




                                   SCHEDULE B
                        INTERIOR PLANS AND SPECIFICATIONS

                              111 Smith Ranch Road
                             San Rafael, California

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

Tenant shall use the standards and materials listed below in the construction of
its Tenant  Improvements:  All items not listed here shall be selected by Tenant
subject to the provisions of this Leasehold Improvements Agreement.


DOORS:                     Full height (3'0" wide), solid core, laminate finish.

HARDWARE:                  Mortise  lock  and  latches  to be  used,  with  auto
                           closures installed as required by code.

CEILING:                   Suspended T-Bar with 2'x2' or 2'x4' tiles. Grid to be
                           1" white metal.  Ceiling height to be per Shell Plans
                           and Specifications.

LIGHTS:                    Fluorescent   2'x4'  or  2'x2'   parabolic,   3  lamp
                           multi-cell fixtures with aluminum finished grid to be
                           used in general purpose office areas.

WINDOW COVERINGS:          1" metal miniblinds on exterior windows.
      

FIRE SPRINKLERS:           Semi-recessed heads with white trim.

EXCEPTIONS:                Tenant may  deviate  from the above  standards  where
                           required for special  purpose  areas of the Building,
                           for example computer rooms or lunch rooms.

FINISHES:                  Tenant may select colors finishes, material and other
                           details  ("Finishes")  regarding the final appearance
                           of  its  Tenant  Improvements,  except  Landlord  may
                           withhold its approval of said  Finishes,  as provided
                           for in Paragraph 6(b) of this Leasehold  Improvements
                           Agreement  if they are not  similar  to those used in
                           other, first class office building in Marin County.

                                       37


                                    EXHIBIT D

                        LEASEHOLD IMPROVEMENTS AGREEMENT
                        --------------------------------

                              111 Smith Ranch Road
                             San Rafael, California


                  This Leasehold  Improvements  Agreement (this  "Agreement") is
made  as of the  day  __________  of  August,  1991,  between  111  PARTNERS,  a
California  general  partnership  having an address at 50 Bon Air Center,  Suite
140,  Greenbrae,  California  94904  ("Landlord"),  and FAIR, ISAAC AND COMPANY,
INCORPORATED,  a corporation,  having an address at 120 North Redwood Drive, San
Rafael, CA 94903-1996 ("Tenant").

         1. The Lease and the  Demised  Premises.  Upon and subject to the terms
and conditions herein contained, Landlord and Tenant are entering into a "Lease"
of even date herewith (herein called the "Lease"),  whereby Landlord shall lease
to Tenant, and Tenant shall lease from Landlord,  upon and subject to the terms,
covenants,  provisions and conditions of the Lease,  certain  premises which are
commonly known as 111 Smith Ranch Road, San Rafael,  California (the "Project").
The Project consists of the Building, the landscaping and the parking area.

         2.  Construction of the Proiect.  Landlord at its sole cost and expense
agrees to commence  construction  as soon as possible and diligently to continue
construction  of the Project.  The Project shall be  constructed  by Landlord in
substantial  compliance  with the plans and  specifications  to be  prepared  by
Forsher and Guthrie, (the Shell Plans and Specifications").  The Shell Plans and
Specifications  shall  provide  for the  construction  of a first  class  office
building and shall be in accordance with the approvals heretofore granted by the
City of San Rafael. The final Shell Plans and Specifications shall be subject to
the  reasonable  approval of tenant.  Such  approval  shall not be  unreasonably
withheld or delayed.  If written  work or any  defects  therein,  nor shall such
exercise be deemed  notice of  disapproval  has not been  delivered  to Landlord
within  ten  (10)  working  days  following  delivery  of the  Shell  Plans  and
Specifications  or  within  five (5)  working  days  following  delivery  of any
proposed changes to the Shell Plans or Specifications, Tenant shall be deemed to
have approved the Shell Plans and Specifications or such change.

                  Landlord's  Work shall  consist of the  completion of the work
included in the Shell Plans and Specifications which shall include all items set
forth in Schedule "A" hereto.

         3.  Inspection  by  Tenant.   During  the  course  of  construction  of
Landlord's work, Tenant or Tenant's  representative  shall at all times have the
right to inspect the construction. 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

                                       38



work or any defects therein,  nor shall such exercise be deemed an assumption by
Tenant of any responsibility for the quality of the work.

         4.       Completion  of  Landlord's  Work and  Delivery  of the Demised
Premises.

                  (a) Substantial Completion. For purposes of the Lease and this
Leasehold Improvements  Agreement,  "substantially  complete the Building" means
completing the Building in a manner  sufficient to permit Tenant to commence and
prosecute the construction of its Tenant Improvements in a reasonably  efficient
manner.  Landlord shall be deemed to have  substantially  completed the Building
notwithstanding the fact that certain items of Landlord's work are not complete,
even if such items of  Landlord's  work may delay  certain  aspects of  Tenant's
work,  so long as  Tenant  will  have  the  ability  to  perform  its  work in a
reasonably efficient manner.

                  (b) Target  Date for  Completion.  Landlord  agrees to use its
best efforts to substantially complete the Building by April 1, 1992.

                  In the event that the  construction  activities  in connection
with  Landlord's  Work in or about the Building,  or the state of completion (or
lack thereof) of Landlord's Work in or about the Building,  results in any delay
in or interference with Tenant's work, then:

                           (i)  the  90-day  Tenant's  Construction  Period  (as
referred to in  paragraph 1 (a) of the Lease) shall be extended one day for each
day of such delay; and

                           (ii)  Landlord   shall   reimburse   Tenant  for  all
additional costs incurred as a result of such delay or interference.

                  (c)  Inquiries by Tenant as to  Progress.  Between the date of
execution  of the  Lease  and the  date  Landlord  substantially  completes  the
Building,  Landlord  agrees to respond to  inquires  from Tenant  regarding  the
progress on the Project and the estimated date of substantial completion.

                  (d)   Notice  of   Substantial   Completion.   When   Landlord
substantially  completes the Building,  Landlord  shall (i) give Tenant  written
notice  (the  "Substantial  Completion  Notice")  and (ii)  deliver  the Demised
Premises to Tenant for purposes of  constructing  its tenant  improvements.  The
fact that the balance of the Project  has not been  completed  shall not prevent
Landlord  from  delivering  the  Substantial  Completion  Notice to  Tenant  and
delivering the Demised  Premises to Tenant for the purpose of  constructing  its
tenant improvements, if Tenant and its contractors are provided reasonable means
of access to the Demised Premises.

                  (e) Delivery  Date.  The Delivery Date shall be the date which
is the  earlier  of: (i) ten (10) days after the date on which  Tenant  actually
received the Substantial

                                       39


Completion  Notice;  or,  (ii) the date upon which  Tenant  enters  the  Demised
Premises to commence the construction of its tenant improvements.

         5.       Compensation for Delay in Completion of the Building.

                  If Landlord  does not give Tenant the  Substantial  Completion
Notice  by June 1,  1992  (which  date  shall  be  subject  to  postponement  in
accordance  with the  provisions  of  paragraph 11 below)  Landlord  agrees that
Tenant shall be entitled to an additional  one (1) day of free rent for each day
beyond  June 1,  1992,  until  Landlord  has  given to  Tenant  the  Substantial
Completion  Notice.  Subject to the  provisions  of paragraph 10, such free rent
shall constitute  liquidated damages and the sole remedy of Tenant for the delay
in  possession,  and Tenant  hereby  waives any claim  against  Landlord for any
consequential  or other damages or losses  incurred by reason of any such delay.
Such free rent  shall be  applied  as soon as  possible  after the date on which
rental  otherwise  becomes  payable under the Lease.  As used in this  Leasehold
Improvements  Agreement,  the term "free rent" shall mean a  forgiveness  of the
Land Rent, as prorated on a daily basis for the period described.

         6.       Construction by Tenant of Interior Improvements.

                  (a) Construction by Tenant.  Following the Commencement  Date,
Tenant  shall  construct  its tenant  improvements  in the  Demised  Premises in
accordance with plans and  specifications to be approved by Landlord pursuant to
the  provisions  of paragraph  6(b) below and in a good and  workmanlike  manner
using new first-class materials.

                  (b) Approval of Interior  Plans and  Specifications.  Prior to
commencing  such  construction,  Tenant shall submit to Landlord for  Landlord's
approval a complete set of plans and specifications for the tenant improvements.
Landlord agrees that it will not unreasonably  withhold its approval of Tenant's
plans and  specifications  and will provide Tenant with detailed reasons for the
basis of any  objection  to  Tenant's  plans and  specifications.  Landlord  may
withhold its approval of proposed tenant improvements which could not be altered
without  substantial  expense to re-lease the Building after the  termination of
this Lease.  Notwithstanding  the  foregoing,  Landlord's  approval shall not be
withheld because such plans do not provide for corridor  separations or demising
interior walls.  The Interior Plans and  Specifications  shall include the items
set forth in  Schedule  "S"  hereto.  If  Landlord  does not respond to Tenant's
request for approval within ten (10) business days of Landlord's  receipt of the
Tenant's  plans  and  specifications  (or  any  resubmittal  of  the  plans  and
specifications), then Tenant's plans and specifications will be deemed approved.

                  (c) Approval of Contractors.  Any contractor  chosen by Tenant
to perform the Tenant improvement work shall be subject to the prior approval of
Landlord. Landlord agrees that it will not unreasonably withhold its approval of
Tenant's  contractor and will provide Tenant with specific reasons for the basis
of any objection to Tenant's

                                       40


contractor. If Landlord does not respond to Tenant's request for approval within
seven (7) business days of Landlord's  receipt of Tenant's proposed  contractor,
then  Tenant  may give to  Landlord  a written  notice  stating  the  failure of
Landlord to respond to the prior  request and further  stating  that if Landlord
does not respond to such request within three (3) business days from the receipt
by Landlord of such second notice,  then Tenant's  proposed  contractor  will be
deemed  approved.  If Landlord does not respond to such request within three (3)
business days from the receipt by Landlord of such second notice,  then Tenant's
proposed  contractor  shall be deemed  approved.  Tenant shall have the right to
submit a list of not more than six (6)  proposed  contractors  to  Landlord  for
Landlord's approval in accordance with the procedures outlined in this paragraph
6.(c).

         (d) Certain  Bidders.  Tenant agrees that, it shall give a set of plans
and specifications for the tenant improvements to Ross/Donovan  Company, and the
company  shall be given not less than ten (10)  business days in which to bid or
deliver to Tenant a proposal for constructing the tenant improvements.  However,
nothing herein shall obligate Tenant to consider such bid or negotiate with such
contractor,  it being  understood that Tenant shall have the right to select its
own  contractor  (subject only to the  limitation  set forth in paragraph  6.(c)
above)  on such  terms and in such  manner  as  Tenant in its sole and  absolute
discretion shall determine.

         (e) Control of Contractors  and Avoidance of Labor  Disputes.  Landlord
may refuse to approve a contractor or supplier if Landlord  reasonably  believes
that the  presence of such  contractor  or supplier at the Demised  Premises may
cause labor or other difficulties for Landlord or its contractors.  In the event
that Landlord  permits Tenant to enter or commence work in the Demised  Premises
prior to substantial  completion of the Building,  Tenant shall immediately take
such actions as may be necessary to resolve any labor  disputes  which may arise
by  reason  of  Tenant's  work  or the  presence  or use of its  contractors  or
suppliers  on  the  job,  including,  without  limitation,  the  removal  of any
non-union contractors or suppliers from the job.

         (f)  Inspection  by  Landlord.  During the course of  constructing  the
tenant  improvements,  Landlord or Landlord's  representative shall at all times
have the right to inspect  the  construction.  Any  inspection  by  Landlord  of
Tenant's  construction  or  improvements  shall not be deemed an  acceptance  by
Landlord of such  construction  nor shall it impose upon  Landlord any liability
whatsoever for any defects in such construction or improvements.  Landlord shall
not  be  entitled  to  charge  Tenant  any  fee  for   Landlord's   approval  or
participation  on the design and  construction  process for the  construction of
Tenant's  improvements in the Demised  Premises or any out of pocket expenses in
connection therewith.

         (g) Changes in the Interior Plans and Specifications. Tenant shall have
the right to make changes in the approved  plans and  specifications  subject to
the  limitations on alterations as set forth in paragraph 10 of the Lease and to
the right of Landlord to approve  such  modifications  in the same manner as the
original plans and specifications.

                                       41


         7.       Tenant Improvement Allowance.

                  (a) Initial  Build-out.  In connection  with Tenant's  initial
build out of the Tenant's Improvements, Landlord agrees to pay to Tenant the sum
of  $618,500  or the  cost of  Tenant's  Improvements  whichever  is the  lesser
("Tenant Improvements Allowance") to pay Tenant's architectural,  space planning
and engineering fees and for the cost of constructing  the tenant  improvements.
Landlord  shall pay to Tenant  the  Tenant  Improvement  Allowance  in  periodic
progress  payments  within  thirty  (30) days  after  delivery  to  Landlord  of
invoices, and lien releases or waivers conditional only upon payment;  provided,
however,  Tenant's  requests for progress payments shall not at any time average
more than one for each  month of  Tenant's  Construction  Period  which has then
elapsed.

                  (b)  Indemnity by Tenant.  Tenant  hereby agrees to indemnify,
defend and hold Landlord harmless from all demands,  claims, causes of action or
judgments and all reasonable expenses incurred in investigating or resisting the
same for injury to persons,  for loss of life or damage to property occurring on
the Demised  Premises  resulting  from  Tenant's  work in the  Demised  Premises
(except to the extent  such  injury,  loss of life or damage to  property is the
direct  result of the  negligence  or willfully  wrongful act of Landlord or its
agents, employees or contractors),  and Tenant agrees to provide Landlord with a
certificate  of  insurance   confirming  that  Tenant  is  maintaining  adequate
comprehensive  general public liability  insurance covering Tenant's  obligation
under this paragraph and naming Landlord as an additional insured.

         8. Storage of  Materials by Tenant.  Tenant may request in writing that
Landlord permit Tenant to store  construction  materials in the Demised Premises
prior to the  delivery  by  Landlord  to  Tenant of the  Notice  of  Substantial
Completion. The request by Tenant shall set forth the nature and quantity of the
materials  which Tenant  wishes to store and may state the  location  within the
Demised  Premises where Tenant suggests that such materials be stored.  Landlord
shall permit Tenant to store such  materials in the Demised  Premises if, in the
reasonable  opinion of Landlord and Landlord's  contractor,  the storage of such
materials  will not present a material  inconvenience  to Landlord or Landlord's
contractor  or any  subcontractor  in the  completion  of the work  required  of
Landlord by this Leasehold Improvements Agreement. In the event that the storage
of such materials would present such a material inconvenience, then Landlord may
refuse to permit  Tenant to store such  materials.  In the event  that  Landlord
permits the materials to be stored in the Demised Premises, Landlord may specify
the location within the Demised Premises where the materials may be stored,  and
may  later and from time to time  require  that  Tenant  move the  materials  to
another  location within the Demised  Premises at the expense of Tenant,  should
such a move be required for the  convenience  of  Landlord's  contractor  or any
subcontractor, and Tenant shall promptly cause such materials to be moved within
the Demised  Premises to the new location  specified  by Landlord.  In the event
that Tenant does store materials in the Demised  Premises prior to the giving by
Landlord of the Notice of Substantial Completion, Tenant shall indemnify, defend
and hold Landlord  harmless from: (i) all demands,  claims,  causes of action or
judgments and

                                       42


all  reasonable  expenses  incurred in  investigating  or resisting the same for
injury to persons, for loss of life or damage to property occurring arising from
or in  connection  with Tenant's  storage of materials in the Demised  Premises;
and, (ii) the effects of any mechanics or other liens or claims which may attach
to the Project or be claimed  against  Landlord by reason of the storage of such
materials in the Demised Premises.

         9. Project  Completion.  Notices of Completion  and Defects.  Following
delivery of the Demised  Premises to Tenant for the purposes of constructing its
tenant improvements,  Landlord agrees to diligently continue with the completion
of Landlord's  Work in accordance  with this Leasehold  Improvements  Agreement.
Tenant  shall  not be  required  to  commence  its  business  activities  in the
Premises,  nor shall  any  rental  obligations  commence  under the lease  until
Landlord's Work has been completed.

                  In the event Landlord has not completed Landlord's Work thirty
(30) days  after  Tenant  has  completed  its  Tenant  Improvements,  subject to
postponement in accordance with the provisions of paragraph 11 of this Leasehold
Improvements  Agreement,  Landlord  agrees that  Tenant  shall be entitled to an
additional  one (1) day of free rent for each day beyond  said  thirty  (30) day
period, until Landlord has given to Tenant the Final Completion Notice.  Subject
to the provisions of paragraph 10 of this Leasehold Improvements Agreement, such
free rent shall constitute  liquidated damages and the sole remedy of Tenant for
the delay in possession, and Tenant hereby waives any claim against Landlord for
any  consequential  or other  damages or losses  incurred  by reason of any such
delay.  Such free rent shall be applied  as soon as  possible  after the date on
which  rental  otherwise  becomes  payable  under  the  Lease.  As  used in this
Leasehold Improvements Agreement,  the term "free rent" shall mean a forgiveness
of the Land Rent, as prorated on a daily basis for the period described.

                  Upon the  completion of Landlord's  Work,  Landlord shall give
Tenant written notice of such completion (the "Final  Completion  Notice"),  and
Tenant shall be deemed to have fully accepted  Landlord's 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 Landlord's
Work, except to the extent that:

                  (i) Tenant  shall  furnish  Landlord  with a list (the  "Punch
List")  within  thirty  (30)  days  after  the  receipt  by  Tenant of the Final
Completion  Notice,  which Punch List shall  specify  the items of  construction
which have not been completed, and

                  (ii) Tenant shall  furnish  Landlord  with a list (the "Defect
List")  within one (1) year the date of receipt of the Final  Completion  Notice
specifying  any  defects  in the  construction  of  Landlord's  Work  which were
discovered prior to the end of such one (1) year period.

                  Landlord shall  promptly  undertake and complete the repair of
each of the items on the Punch List and the Defect List,  except those,  if any,
which do not have a material  adverse affect upon the use,  appearance or safety
of the Demised

                                       43


Premises  by Tenant.  Nothing in this  paragraph  9 shall be deemed to affect or
limit  the  obligations  of  Landlord  to  repair  or  maintain  the  structural
components or any other portions of the Buildings  which Landlord is required to
repair or maintain under the provisions of the Lease.

         10.      Termination.

                  In the event that a grading  permit for grading of the site is
not issued by September 15, 1991, or in the event  substantial Site Work has not
commenced  by October 15, 1991,  or in the event that a building  permit for the
construction  of the  Building is not issued by December  31,  1991,  Tenant may
terminate all of the  obligations  under this Agreement and the Lease by written
notice to Landlord  delivered within five (5) days thereafter.  If the permit is
not issued or if  construction  is not  commenced  by such dates,  and if Tenant
elects to  terminate  this Lease,  the  obligations  of the  parties  under this
Agreement and the Lease shall terminate.

         11.      Delays.

                  (a)  Tenant  Caused  Delays.  If a delay  shall  occur  in the
substantial completion of construction as the result of:

                           (i)  any   delay   of   Tenant   in   approving   any
modifications to the Shell Plans or  Specifications  submitted to Tenant for its
approval;

                           (ii) any  request by Tenant that  Landlord  delay any
element, or the completion, of construction;

                           (iii) any request for a change by Tenant in the Shell
Plans  and  Specifications  or the  plans  and  specifications  for  the  tenant
improvements;

                           (iv)  any   breach  or   default  by  Tenant  in  the
performance  of  Tenant's   obligations   under  the  Lease  or  this  Leasehold
Improvements Agreement;

                           (v) any  interference  by  Tenant  or its  agents  or
contractors with the prosecution by Landlord of its 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 paragraph
11. (a); then:

                                       44


                                    a.  any  such   delay  in  the   substantial
completion of construction shall extend all dates for the completion by Landlord
of ail or any part of its work by one (1) day for each day of such delay;

                                    b. Tenant shall  reimburse  Landlord  within
thirty (30) days from demand for all  reasonable  additional  costs  incurred by
Landlord as a result of such delays (including,  without  limitation,  increased
design costs, increased construction costs and increased financing costs arising
by reason of the resulting delays, if any, in the construction schedule); and,

                                    c. the  Delivery  Date and the  Commencement
Date 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.  Landlord  shall  notify  Tenant in  writing of the
existence of any of the above delays of which Landlord has knowledge  within ten
(10)  business  days  after the event  causing  the  commencement  of such delay
occurs.  In the event that Landlord fails to give such a notice to Tenant within
ten (10) business days of the  commencement of such delay,  then the delay shall
be deemed to have  commenced  on the date upon  which  such  notice is  actually
given.  Landlord shall use Landlord's  reasonable efforts to minimize the length
of any such delay.

                  (b) Other Delays.  In the event that Landlord shall be delayed
in or prevented from the performance of any act by reason of strikes,  lockouts,
unusual delays in transportation, unavailability of materials, acts or omissions
of  contractors  and   subcontractors,   failure  or  unavailability  of  power,
unavailability of fuel,  restrictive  governmental laws or regulations,  fire or
other casualty, inclement weather, riots, insurrections, the act, failure to act
or default of the other  party,  war or other reason  beyond its  control,  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 Landlord.

         12.  Disputes.  Any dispute  arising  under this  Agreement  (including
without  limitation  any dispute as to the cost or  duration of a Tenant  Caused
Delay) shall be determined by  arbitration in accordance  with the  construction
arbitration rules of the American Arbitration Association.

         13.  Notices.  Any notice or other  communication  which  either  party
hereto shall desire or be required to give  pursuant to the  provisions  of this
Leasehold  Improvements  Agreement  shall be given and  deemed  received  in the
manner provided in Article 19 of the Lease.

                                       45


         14.      Assignment.

                  (a) By Tenant.  This Agreement and Tenant's  rights  hereunder
shall  not be  assigned  by  Tenant  except to a  permitted  assignee  of ail of
Tenant's rights under the Lease,  and any other  purported  assignment by Tenant
shall be null and void and of no force and effect.

                  (b)  By  Landlord.   This  Agreement  and  Landlord's   rights
hereunder  shall not be assigned by Landlord except to a successor to Landlord's
title to the Project and any other  purported  assignment  by Landlord  shall be
null and void  and of no force  and  effect;  provided,  however,  that  nothing
contained in this Section shall apply to nor restrict  Landlord  from  executing
and delivering any collateral  assignment,  pledge or security interest which is
granted in connection with any financing secured by a lien against the Project.

                  (c) Written Agreement. If a party shall duly assign its rights
hereunder,  the assignee  shall  execute,  acknowledge  and deliver to the other
party an agreement in form and substance  reasonably  satisfactory  to the other
party whereby the assignee shall assume the obligations of this Agreement on the
part of the assignor to be performed or observed.

         15.      Waiver of Certain Remedies.

                  (a) No Offset.  No sum  payable to Tenant as the result of any
breach or default by Landlord  under this  Agreement  shall be deducted  from or
offset  against any minimum rent or additional  rent or other sums payable under
the Lease,  and no such breach or default by Landlord under this Agreement shall
excuse Tenant from the performance of any of its obligations  under the Lease or
relieve  Tenant  of  any  of  its  liabilities   thereunder.   Nothing  in  this
subparagraph  (a)  shall be  deemed to  affect  any  express  right of Tenant to
terminate  the  Lease  in  accordance  with  the  provisions  of this  Leasehold
Improvements Agreement.

                  (b) No  Consequential  Damages.  Any  failure by  Landlord  to
complete  the  Project  shall  not give  rise to any claim or cause of action or
remedy other than as set forth in this Leasehold Improvement  Agreement.  Tenant
waives all claims  for  consequential  or other  damages  arising  from any such
failure.

         16.      Limitation on Landlord Liability.

                  (a) Basic Limitation. Except as otherwise provided in below in
this  paragraph  16, if  Landlord  shall fail to perform any  covenant,  term or
condition of this  Leasehold  Improvements  Agreement on  Landlord's  part to be
performed,  and as a  consequence  of its default,  Tenant shall recover a money
judgment against Landlord, such judgment shall be satisfied solely out of:

                                       46


                           (i) the proceeds of sale received  upon  execution of
such judgment  levied  against the right,  title and interest of Landlord in the
Project;

                           (ii)  the  rents  or other  income  from the  Project
receivable (but not received) by Landlord;

                           (iii) the consideration received by Landlord from the
sale or other  disposition  of all or any part of  Landlord's  right,  title and
interest in and to the Project; and,

                           (iv) any  condemnation  awards or insurance  proceeds
receivable in respect of the Project.

                  (b) No Personal  Liability.  It is  expressly  understood  and
agreed that neither Landlord nor any employee or partner in or of Landlord shall
be  personally  liable  for  any  deficiency  if the  proceeds  of the  sale  or
disposition  of  Landlord's  interest  in the  Project is  insufficient  for the
payment of any such judgment, and Tenant shall not institute any further action,
suit,  or  similar  demand  against  Landlord,  or any  employee  or  partner of
Landlord,   for  or  on  the   account  of  such   deficiency.   The   foregoing
notwithstanding,  Tenant  may seek to  recover  any  consideration  received  by
Landlord  from the sale or other  disposition  of all or any part of  Landlord's
right, title and interest in and to said property and any condemnation awards or
insurance proceeds  thereafter  received by Landlord or any partner of Landlord,
provided  that any action to recover such proceeds is commenced by the filing of
a complaint and the service of summons within ninety (90) days of the receipt by
Tenant of actual notice of a sale or disposition of the Project by Landlord.

                  (c) Effect of Limitation.  The  limitations  set forth in this
paragraph 16 shall not apply to Tenant's right to recover  liquidated damages as
provided in paragraph 5 above.

         17.  Conflicts  and  Conformity  with Lease.  To the extent  which this
Agreement  fails to provide the rights and  obligations  of Landlord  and Tenant
relative  to any  matter,  the rights and  obligations  of  Landlord  and Tenant
relative to such matters  shall be governed by the Lease.  If there shall be any
conflict  between this Agreement and the Lease, the provisions of this Agreement
shall prevail.

         18.  Attorney  Fees.  Each party shall pay to the other all amounts for
costs,  including,  but not limited  to, the other  party's  attorneys  fees and
amounts paid to any collection agency, or reasonably incurred by the other party
in  connection  with any breach or default  beyond  applicable  grace and notice
periods  by the first  party  under this  Leasehold  Improvements  Agreement  or
incurred  in  order  to  enforce  the  terms  or  provisions  of this  Leasehold
Improvements Agreement. Such amounts shall be payable within thirty (30) days of
demand.  In addition,  if any action shall be instituted  by either  Landlord or
Tenant for the enforcement or interpretation of any of its rights or remedies in

                                       47


or under this Lease,  the prevailing party shall be entitled to recover from the
losing party all costs incurred by the  prevailing  party in said action and any
appeal therefrom,  including  reasonable attorneys fees and costs to be fixed by
the court or  arbitrators  therein.  In the event  Landlord  or Tenant is made a
party to any  litigation  between the other party and any third party,  then the
other party shall pay all costs and  attorneys  fees incurred by or imposed upon
the first party in connection with such litigation;  provided,  however,  if the
first  party is  ultimately  held to be  liable,  then  the  first  party  shall
reimburse the other party for the cost of any  attorneys  fees paid by the other
party on behalf of the first party.

         19.  Waiver.  Waiver by a party of any breach of any term,  covenant or
condition contained in this Leasehold Improvements Agreement shall not be deemed
to be a waiver of such term,  covenant or condition or of any subsequent  breach
of the same or of any other  term,  covenant,  or  condition  contained  in this
Agreement.  A party's consent to, or approval of, any act shall not be deemed to
render  unnecessary  the obtaining of a party's  consent to, or approval of, any
subsequent  act by the other party.  The  acceptance by a party of rent or other
sums  payable  under the Lease by the other party in amounts less than that owed
by the other  party  shall not be deemed a waiver of the  amounts  not paid or a
waiver of any other breach or default under this  Agreement or the Lease,  other
than  failure  of the  other  party to pay the  particular  rent or other sum so
accepted,  regardless of the first party's knowledge of such preceding breach at
the time of acceptance of such rent, or sum equivalent to rent.

         20.  Captions.  The  captions  of  the  paragraphs  of  this  Leasehold
Improvements  Agreement are for convenience of reference only, are not a part of
this  Leasehold  Improvements  Agreement,  and shall not be deemed in any way to
define or limit the terms and provisions of the paragraph to which they refer.

         21.  Governing  Law. This  Leasehold  Improvements  Agreement  shall be
construed and enforced in accordance with the laws of the State of California.

         22. Miscellaneous Matters.

                  (a)  Covenants  and  Conditions.  The  covenants of Tenant set
forth  in this  Leasehold  Improvements  Agreement  shall be  deemed  also to be
conditions.

                  (b)  Relationship  of  Landlord  and  Tenant.  Nothing in this
Leasehold  Improvements  Agreement  shall be deemed or  construed  as creating a
partnership,  joint  venture  or  agency  between  Tenant  and  Landlord  or any
relationship between them other than that of landlord and tenant.

                                       48


         IN WITNESS  WHEREOF,  the parties have entered into this agreement upon
the date above written.

LANDLORD:                                   TENANT:

111 PARTNERS                                FAIR, ISAAC AND COMPANY, INC.


By:________________________________         By:_________________________________
        Michael J. Smith

Date:______________________________         Date:_______________________________

By:________________________________
          Roger A. Smith

Date:______________________________

By:________________________________

Date:______________________________

                                       49



                                   SCHEDULE A
                         SHELL PLANS AND SPECIFICATIONS

                              111 Smith Ranch Road
                             San Rafael, California

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

1.       GENERAL PROVISIONS:

         a.       Shell plans and Specifications  shall be subject to applicable
                  governmental codes and ordinances.

         b.       The building shell shall have the approximate dimensions shown
                  on Exhibit C, Floor Plan, attached to this Lease.

         c.       All work not  described  herein  shall  be  considered  tenant
                  improvements  and shall be  constructed  by tenant as provided
                  for in the Leasehold Improvements Agreement.

         d.       The atrium/lobby,  bathrooms,  janitor  closet(s),  mechanical
                  rooms,  both  staircases  and elevator shall be completed with
                  all necessary finishes as part of the shell construction.

2.       LANDSCAPING & SITE WORK:

         To be completed in  accordance  with plans and  specifications  already
         prepared  and  submitted  to the  City of San  Rafael  by  Glanville  &
         Associates,  Oberkamper and Associates,  and Forsher & Guthrie.  Tenant
         acknowledges receipt of a copy of said clans and its approval thereof.

3.       FOUNDATIONS:

         As  required  by the  Geotechnical  Report,  101,  111 Smith Ranch Road
         (Parcel 3), San Rafael, California, dated January 11, 1991, prepared by
         Miller Pacific Engineering Group. Tenant acknowledges receipt of a copy
         of said report.

         a.       Continuous  exterior footings with isolated column footings on
                  compacted fill.

         b.       Additional   footings  may  be  required   for   architectural
                  features.

                                       50


4.       SUBSTRUCTURE:

         a.       Slab  on  grade:   Minimum  of  5"  thick,   reinforced   with
                  reinforcing  bars (not welded wire mesh) over a membrane vapor
                  barrier and above a compacted aggregate base.

5.       SUPERSTRUCTURE:

         a.       Columns,  beams and brace  frames;  tubular  steel.  Roofs and
                  Floors:  Wood  frame  of  purlins,   sub-purlins  and  plywood
                  diaphragms.

         b.       Lateral  steel brace  frames will be exposed as  necessary  on
                  both  levels.  Steel  columns will be located  along  exterior
                  window line, aligned with window mullions where feasible.

         c.       Floor has been designed for the following load conditions:

                  Live loads:                        50 pounds per square foot
                           Partitions:               10 pounds per square foot

                  Deadloads:
                           Structure                 13 pounds per square foot
                           Gypcrete                  13 pounds per square foot
                           Misc.                      4 pounds per square foot
                  TOTAL:                            100 pounds per square foot
                  ------------------------------------------------------------

6.       EXTERIOR CLOSURE:

         a.       Exterior walls:  Framing:  2'x6' wood studs and/or 2'x4' metal
                  studs  and  plywood  sheathing;  Finish:  Exterior  insulation
                  finish system (Drivit or other similar system), 6" thick, with
                  a fine uniform  texture,  grey (exact color to be determined).
                  This system will provide for all required wall insulation.

         b.       Glazing:  Continuous  butt-joint  glass (at  exterior),  5'-6"
                  high,  sealed at each joint.  All frames to be Medium  Bronze,
                  anodized.  All  glazing to be tinted  light  gray and  windows
                  shall be  double  paned  on the  south  and west  sides of the
                  building.  All  doors  and  windows  at the main and  easterly
                  accesses to the building will be a storefront system, finished
                  similarly to the glazing system. The lobby glazing will not be
                  double paned.

                                       51


         c.       Light weight metal trim elements to be fabricated of aluminum,
                  painted finish.

7.       ROOFING:

         a.       Roof covering; multi-ply built-up with granular ballast.

         b.       Insulation;  roll type batt  insulation  will be  incorporated
                  between roof framing members.

8.       CONVEYING:

         a.       One  completed  hydraulic   passenger   elevator.   Must  meet
                  California Title 24 Accessibility Standards.

9.       MECHANICAL:

         a.       Plumbing;  completed men's and women's toilet rooms will be on
                  each floor. The men's room will-be furnished with one handicap
                  toilet, one handicap height urinal, one standard height urinal
                  and two handicap lavatories set in a counter. The womens' room
                  will be  furnished  with one  handicap  toilet,  one  standard
                  toilet and two handicap lavatories set in a counter.

         b.       Fire  Protection:  A fire  sprinkler  system for office hazard
                  shall be installed with  distribution  and coverage  necessary
                  for shell  space and for  completed  bathrooms,  lobbies,  and
                  stairwells,  and  mechanical  room.  Said system to include an
                  alarm system as required by municipal codes.

         c.       HVAC: Multiple zone package system (Variable-air-volume). Base
                  equipment  shall be roof mounted,  and connected to utilities,
                  and  distributed to shell space. If the HVAC system is changed
                  from  these  specifications  at the  request  of  Tenant,  any
                  increased  cost  shall be  deleted  from the budget for tenant
                  improvements.

10.      ELECTRICAL:

         a.       Service and distribution;  1,600 amp service,  panel board and
                  feeders  shall be  installed.  Tenant may increase the size of
                  said  service with any  increased  cost to be deleted from the
                  budget for tenant improvements.

         b.       Special  Electrical:  Alarm systems and emergency  lighting as
                  required

                                       52


                  by codes and conditions of approval for completed shell. Cable
                  TV and telephone  conduits will be provided from  right-of-way
                  to the mechanical room.


11.      INTERIOR CONSTRUCTION:

         a.       Interior doors:  Janitor closet,  mechanical room,  bathrooms,
                  fire doors as required for shell.

         b.       Wall  finishes.  Lobby:  combination  of paint and vinyl  wall
                  covering.  Toilet  rooms:  ceramic  tile and paint.  Secondary
                  staircase:  Painted  sheet rock.  Mechanical  Room:  unpainted
                  sheetrock.

         c.       Floor  finishes:  Lobby and  secondary  exit:  combination  of
                  carpet and tile. Toilet rooms:  ceramic tile. Easterly stairs:
                  glue down commercial carpet.

         d.       Ceiling finishes.  Lobby areas and toilet rooms,  "5/8" gypsum
                  board, painted.

12.      OTHER:

         a.       Complete shell shall be left free of debris and broom clean at
                  completion by shell contractor.

                                       53


                           CONSTRUCTION LOAN AGREEMENT

         THIS  AGREEMENT,  made as of  September  5, 1991,  by and  between  111
PARTNERS,  a California general  partnership  ("Borrower"),  and FAIR, ISAAC AND
COMPANY, INCORPORATED, a Delaware corporation ("Lender"),


                              W I T N E S S E T H:

         Recital of Facts:

         A.  Borrower  owns the real  property  described  in Exhibit A attached
hereto and made a part hereof ("Property").

         B.  Borrower  proposes to construct  on the  Property the  improvements
described in Exhibit B attached  hereto and made a part hereof  ("Improvements")
in accordance with the plans and specifications  described in Exhibit B, as such
plans and  specifications  may be  amended  in  accordance  with this  Agreement
("Plans  and  Specifications"),  and has  requested  a loan from  Lender for the
purpose of constructing  the Improvements on the Property in accordance with the
Plans and Specifications.


              NOW, THEREFORE, Borrower and Lender agree as follows:

                                    ARTICLE 1

                                      Loan

         1.1  Loan.  Upon and  subject  to the terms of this  Agreement,  Lender
agrees  to lend to  Borrower  and  Borrower  agrees to borrow  from  Lender  the
principal  sum of three  million  dollars  ($3,000,000)  ("Loan") to finance the
construction of the Improvements and for the other purposes provided in the Loan
Documents (as hereinafter defined).

         1.2 Loan Documents.  Borrower shall deliver to Lender concurrently with
execution and delivery of this Agreement the documents, properly executed and in
recordable  form if requested by Lender,  described in Exhibit C attached hereto
and made a part hereof  (collectively  "Loan  Documents").  The terms "Note" and
"Deed of Trust" shall have the meanings defined in Exhibit C.

         1.3  Effective  Date.  The date of the Loan  Documents is for reference
purposes only. The effective date ("Effective Date") of delivery and transfer to
Lender of the security  under the Loan  Documents and of Borrower's and Lender's
obligations  under the Loan  Documents is the date the Deed of Trust is recorded
in the  office of the  County  Recorder  of the  County  where the  Property  is
located.

         1.4 Formation and  Organizational  Documents.  Borrower has  previously
delivered  to Lender  the  following  formation  and  organizational  documents:
Partnership Agreement dated June 1, 1990, among Michael J. Smith, Roger A. Smith
and Daniel C. Ross and  Statement of  Partnership  dated  August 26,  1991,  and
recorded on August 27, 1991, as Instrument No.  91-054475 of Official Records of
Marin  County.  Borrower  hereby  certifies  to  Lender  that (a) the  foregoing
documents  are all of the relevant  formation  and  organizational  documents of

                                       1

                                                                   Exhibit 10.14




Borrower;  (b) such  documents  remain in full  force and  effect;  and (c) such
documents have not been amended or modified.

         1.5 Opinion of Legal  Counsel.  Borrower shall cause to be furnished to
Lender on the Effective Date, at Borrower's expense, an opinion of legal counsel
approved by Lender  covering  such  matters  relating  to Borrower  and the Loan
Documents as Lender may request.

         1.6  Acceleration  Upon  Loss of  Security.  If at any time the Deed of
Trust ceases to be a valid first lien upon the  Property  and the  Improvements,
all sums remaining  unpaid and owing to Lender under the Note and the other Loan
Documents shall  automatically  become  immediately due and payable and Lender's
obligation  to  disburse  the  remaining  portion  of the  Loan  which  is  then
undisbursed, if any, shall terminate.

         1.7 Tax Service. Lender is authorized to secure, at Borrower's expense,
a tax service  contract  which shall provide tax  information on the Property to
Lender for the term of the Loan.

         1.8 Management of Property. Borrower shall not enter into any agreement
providing  for the  management,  leasing or  operation  of the  Property  or the
Improvements without the prior written consent of Lender.

         1.9 Further  Encumbrance.  Without the prior written consent of Lender,
Borrower  shall not  receive  any other  financing  for the  development  of the
Property or the  construction of the Improvements and shall not further encumber
the Property or the Improvements,  except as permitted by and in compliance with
the Note.


                                    ARTICLE 2

                                  Disbursement

         2.1  Conditions  Precedent.  Lender  shall not be obligated to make any
disbursements  or take any other action under the Loan  Documents  unless all of
the following conditions precedent are satisfied at the time of such action:

                  (a) There  exists no Default,  as defined this  Agreement,  or
         default  or  event of  default  as  defined  in any of the  other  Loan
         Documents,  or event,  omission  or failure of  condition  which  would
         constitute  such a default or event of default after notice or lapse of
         time, or both; and

                  (b) The undisbursed Loan proceeds,  together with all sums (if
         any) to be provided  by Borrower as shown in Exhibit D attached  hereto
         and made a part hereof,  shall at all times be not less than the amount
         which Lender from time to time determines  reasonably necessary to: (i)
         pay, through final completion,  all costs of development,  construction
         and leasing of the Property and the Improvements in accordance with the
         Loan  Documents;  (ii) pay all sums  which  may  accrue  under the Loan
         Documents  through  final  completion  of the  Improvements;  and (iii)
         enable Borrower to perform and satisfy all of the covenants of Borrower
         contained  in  the  Loan  Documents  through  final  completion  of the
         Improvements.  If Lender determines at any time that such funds are not
         sufficient  for such  purposes,  Borrower may satisfy this

                                       2




         condition by  depositing  with Lender the amount of such  deficiency in
         the  Account  (as  hereinafter  defined)  within  five (5)  days  after
         Lender's written demand; and

                  (c) Borrower has delivered to Lender all of the Loan Documents
         and all other documents,  instruments,  policies, and forms of evidence
         or other  materials  requested by Lender  pursuant to this Agreement or
         any of the other Loan Documents.

         2.2  Account.  If required by Lender,  a  non-interest  bearing  demand
deposit account in Borrower's and Lender's names  ("Account")  will be opened by
Lender with a bank selected by Lender and  administered  in accordance with this
Agreement.  The  proceeds  of the  Loan and  Borrower's  Funds  (as  hereinafter
defined), when qualified for disbursement,  shall be deposited into the Account,
if opened, or otherwise  disbursed to or for the benefit or account of Borrower,
as determined by Lender, under the terms of this Agreement.

         2.3 Borrower's Funds.  Except as otherwise  provided in this Agreement,
all funds which are  deposited  with Lender  pursuant to section  2.1(b)  hereof
("Borrower's  Funds")  or any other  provision  of the Loan  Documents  shall be
deposited in the Account,  and controlled by Lender, for disbursement under this
Agreement.

         2.4 Pledge and  Assignment.  As security for  performance of Borrower's
obligations under the Loan Documents,  Borrower  irrevocably pledges and assigns
to Lender,  and grants to Lender a security  interest in, all monies at any time
deposited in the Account.

         2.5  Disbursement.  Subject to the  conditions set forth in section 2.1
hereof,  the  proceeds of the Loan and  Borrower's  Funds shall be  disbursed in
accordance with Exhibit E attached hereto and made a part hereof.  Disbursements
made after the deposit of Borrower's  Funds shall be made from Borrower's  Funds
until depleted.

         2.6 Disbursed Funds. All disbursements of the Loan and Borrower's Funds
shall be held by  Borrower  in trust and  applied  by  Borrower  solely  for the
purposes  for which the funds have been  disbursed.  Lender is not  obligated to
monitor or determine Borrower's use or application of such disbursements.

         2.7 Disbursement Authorization.  Disbursements hereunder may be made by
Lender to the Account or disbursed to or for the benefit or account of Borrower,
as  determined  by  Lender,  upon  the  written  request  of any  one (1) of the
following persons,  Michael J. Smith, Roger A. Smith, or Daniel C. Ross, who are
authorized  to  request   disbursements   until  written  notice  of  Borrower's
revocation of such authority is received by Lender.


                                    ARTICLE 3

                                  Construction

         3.1 Commencement and Completion.  Borrower shall commence  construction
of the  Improvements  without  delay  immediately  after,  but not  before,  the
Effective Date, shall diligently continue construction to completion,  and shall
complete

                                       3




construction of the Improvements (other than the interior improvements for which
Lender is  responsible  pursuant to the Lease (the "Lease")  dated  September 5,
1991, between Borrower,  as landlord,  and Lender, as tenant) on or before April
1, 1992.

         3.2  Construction.  Borrower shall construct the Improvements in a good
and workmanlike  manner in accordance with the Plans and  Specifications and the
recommendations  of any soils or  engineering  report  approved  by  Lender.  In
constructing the  Improvements,  Borrower shall comply with all applicable laws,
ordinances,  rules, regulations,  building restrictions,  recorded covenants and
restrictions, and requirements of all regulatory authorities having jurisdiction
over  the  Improvements  or  the  Property  (collectively  "Requirements").   If
necessary,  the Plans and  Specifications  shall be  modified to comply with the
Requirements, subject to the provisions of section 3.3 hereof.

         3.3 Plans and  Specifications.  Except as  otherwise  provided  in this
Article  3,  there  shall be no change in the Plans and  Specifications  without
Lender's prior written  approval.  Requests for approval shall be submitted on a
change order form  acceptable  to Lender  signed by Borrower and, if required by
Lender, the project architect and the general contractor, accompanied by working
drawings and a written  narrative of the proposed  change.  As conditions to its
approval,  (a)  Lender  may  require  satisfactory  evidence  of the cost of the
proposed  change and the time necessary to complete the proposed  change and (b)
to the  extent  Lender  determines  that the  proposed  change  will  result  in
increased cost,  Lender may require Borrower to deposit  Borrower's Funds in the
amount of the increased cost into the Account in accordance  with section 2.1(b)
hereof.  Borrower  acknowledges that this approval process may result in delays.
Upon  Lender's  request,   Borrower,  the  project  architect  and  the  general
contractor shall initial the copy of the Plans and Specifications  delivered to,
and approved by, Lender as a true copy of the Plans and  Specifications  for the
Improvements.  Borrower  shall  maintain  at all  times  a full  set of  working
drawings for the  Improvements  available for  inspection by Lender.  Within ten
(10)days  after  Lender's  request,  Borrower  shall deliver to Lender  complete
as-built Plans and Specifications for the completed Improvements.

         3.4 Changes in Plans and  Specifications.  The prior written consent of
Lender  shall not be required  for any  changes in the Plans and  Specifications
unless such change (a) constitutes a material change in the building material or
equipment  specifications or the architectural or structural  design,  value, or
quality of any of the  Improvements,  or  (b)would  result in an increase in any
item of  construction  cost in excess of one thousand  dollars  ($1,000) for any
single  change or in  excess  of ten  thousand  dollars  ($10,000)  for all such
changes in such items of  construction  cost, or (c) would affect the structural
integrity,  quality of building material or equipment,  or overall efficiency of
operating  systems or utility systems of the Improvements.  Notwithstanding  the
foregoing,  Borrower  shall  submit  all  proposed  changes  in  the  Plans  and
Specifications  to Lender at least ten (10) days  prior to the  commencement  of
construction relating to such proposed change, whether or not any such change is
subject to Lender's approval.

         3.5  Construction   Information;   Inspections.   Lender  is  expressly
authorized to contact any contractor, subcontractor or material supplier and, at
all reasonable times, to enter the Property and inspect the Improvements and the
work of construction in order to verify  information  disclosed pursuant to this
section or for any other  purpose.  From time to time,  and within ten (10) days
after Lender's request, Borrower shall deliver to Lender:

                                       4




                  (a)  A  complete  list  stating  (i)  the  name,  address  and
         telephone  number  of  each  contractor,   subcontractor  and  material
         supplier to be employed or used for  construction  of the  Improvements
         and (ii) the dollar amount, including changes, if any, of each contract
         and subcontract, and the portion thereof, if any, paid through the date
         of such list; and

                  (b) Copies of each contract and subcontract identified in such
         list, including any changes thereto; and

                  (c) A cost breakdown,  in a form acceptable to Lender, stating
         the estimated total cost of  constructing  the  Improvements,  and that
         portion, if any, of each cost item (i) which has been incurred and (ii)
         which has been paid, all as of the date of such cost breakdown; and

                  (d) A construction  progress schedule, in a form acceptable to
         Lender,   showing  the  progress  of  construction  and  the  estimated
         sequencing and completion time for uncompleted work, all as of the date
         of such schedule; and

                  (e) With respect to any item  designated  above which has been
         previously delivered, such update thereof as Lender may request.

         3.6  Prohibited  Contracts.  Without  Lender's  prior written  consent,
Borrower shall not contract for any materials, furnishings,  equipment, fixtures
or other parts or components of the Improvements,  or other property for the use
or occupancy of the Property or the Improvements,  if any third party retains or
purports to retain any  interest  (other than lien  rights,  if any,  created by
operation of law) in such items after their  delivery to the Property.  Borrower
shall have five (5) days to effect the removal of any such retained interest.

         3.7 Liens and Stop  Notices.  If a claim of lien is recorded  affecting
the Property or the  Improvements  or a bonded stop notice is served upon Lender
which affects the Loan or Borrower's Funds,  Borrower shall,  within twenty (20)
days after such  recording  or  service or within  five (5) days after  Lender's
demand  (whichever  last occurs):  (a) pay and discharge the same; or (b) effect
the  release  thereof by  recording  or  delivering  to Lender a surety  bond in
sufficient  form and amount;  or (c) provide Lender with other  assurance  which
Lender deems, in its sole discretion, to be satisfactory for the payment of such
lien or bonded stop notice and for the full and continuous  protection of Lender
from the effect of such lien or bonded stop notice.

         3.8 Construction responsibilities. Borrower shall be solely responsible
for all  aspects of  Borrower's  business  and  conduct in  connection  with the
Property  and the  Improvements,including,  but not  limited to, the quality and
suitability  of the  Plans and  Specifications  and  their  compliance  with the
Requirements,  the supervision of the work of construction,  the qualifications,
financial condition and performance of all architects,  engineers,  contractors,
material suppliers,  consultants and property managers,  and the accuracy of all
applications for payment and the proper application of all disbursements. Lender
is not obligated to supervise,  inspect or inform Borrower or any third party of
any aspect of the  construction of the Improvements or any other matter referred
to in this section.  Any inspection or review by Lender is to determine  whether
Borrower is properly discharging its obligations to Lender and may not be relied
upon by Borrower or any third party.  Lender owes no duty of care to Borrower or
any third party to

                                       5




protect  against,  or to inform  Borrower or any third party of, any  negligent,
faulty, inadequate or defective design or construction of the Improvements.

         3.9  Improvement  District.  Without  Lender's  prior written  consent,
Borrower  shall  not,  directly  or  indirectly,   advocate  or  assist  in  the
incorporation of any of the Property or the Improvements into any improvement or
other assessment district.

         3.10 Delay.  Borrower  shall  promptly  notify Lender in writing of any
event causing delay or interruption of construction or the timely  completion of
construction. The notice shall specify the particular work delayed and the cause
and period of each delay.

         3.11 Surveys.  At Lender's  request,  Borrower shall deliver to Lender:
(a) a perimeter  survey of the Property;  (b) upon completion of the foundations
of the  Improvements,  a survey showing the location of the  Improvements on the
Property  and showing  that the  Improvements  are located  entirely  within the
Property and do not  encroach  upon any easement or breach or violate any of the
Requirements;  and (c) upon completion of the  Improvements,  an as-built survey
acceptable  to a title  insurer  for  purposes of issuing an ALTA Loan Policy of
title  insurance.  All such surveys  shall be made and certified by a registered
engineer or licensed surveyor.

         3.12  Force  Majeure.   The  time  within  which  construction  of  the
Improvements  must be completed  shall be extended for a period of time equal to
the period of any delay directly affecting the construction work which is caused
by fire, earthquake,  inclement weather,  strike, lockout, acts of public enemy,
riot, insurrection,  or governmental regulation of the sale or transportation of
materials,  supplies or labor,  provided Borrower  furnishes Lender with written
notice of any such delay within seven (7) days after the  occurrence of any such
delay. In no event,  however,  shall the time for completion of the Improvements
(other than the interior  improvements for which Lender is responsible  pursuant
to the Lease) be extended beyond July 1, 1992.

         3.13 Construction Agreement. Borrower and a general contractor approved
by Lender ("Contractor") will enter into a construction agreement ("Construction
Agreement"),  pursuant to which  Contractor  will construct the  Improvements in
accordance with the Plans and Specifications.  Borrower shall require Contractor
to perform in accordance  with the  Construction  Agreement and shall not amend,
modify or terminate the duties of Contractor  under the  Construction  Agreement
without Lender's prior written consent.  Upon Lender's  request,  Borrower shall
execute an  assignment of the  Construction  Agreement to Lender as security for
Borrower's  obligations  under the Loan Documents and shall cause the Contractor
to consent to any such assignment.

         3.14   Architect's   Agreement.   Borrower   and   Forsher   &  Guthrie
("Architect") have entered into the Standard Form of Agreement Between Owner and
Architect  for  Designated   Services   dated  August  21,  1991   ("Architect's
Agreement"), pursuant to which Architect is to design and supervise construction
of the  Improvements.  Borrower shall require Architect to perform in accordance
with the  Architect's  Agreement  and shall not amend,  modify or terminate  the
duties of Architect  under the  Architect's  Agreement  without  Lender's  prior
written consent. Upon Lender's request,  Borrower shall execute an assignment of
the Architect's Agreement and the Plans and Specifications to Lender as security
for  Borrower's  obligations  under

                                       6




the Loan  Documents  and  shall  cause  the  Architect  to  consent  to any such
assignment.

         3.15 Bonds. Within five (5) days after Lender's request, Borrower shall
procure from a surety acceptable to Lender, and deliver to Lender,  dual obligee
performance and labor and material payment bonds in a form, substance and amount
acceptable  to Lender and,  if  requested  by Lender,  cause any such bond to be
recorded and the Construction  Agreement to be filed in the office of the County
Recorder of the County where the Property is located.

         3.16 Contractors. Lender may, but shall not be obligated to, disapprove
any contractor, subcontractor or material supplier whom Lender deems financially
or  otherwise  unqualified.  The  absence  of any  such  disapproval  shall  not
constitute a representation of qualifications.

         3.17  Completion  of  Plans  and  Specifications.  Notwithstanding  the
foregoing  provisions of Articles 1, 2 and 3, Borrower and Lender recognize that
the  Plans  and   Specifications   (Exhibit   B),  the   Financial   Requirement
Analysis.(Exhibit  D) and  the  Disbursement  Plan  (Exhibit  E) have  not  been
completed as of the date of this  Agreement  and will not be completed as of the
Effective Date. Accordingly,  Exhibits B, D and E attached to this Agreement are
incomplete.  Borrower  shall,  on or before November 1, 1991, (a) cause complete
Plans and  Specifications  for the  Improvements  to be prepared,  (b) prepare a
final  construction cost budget based on the complete Plans and  Specifications,
(c) enter into the  Construction  Agreement with the Contractor  consistent with
the complete Plans and  Specifications  and the final  construction cost budget,
and  (d)  obtain  all  required   building   permits  for  construction  of  the
Improvements. The complete Plans and Specifications, the final construction cost
budget,  the Contractor and the  Construction  Agreement shall be subject to the
prior written  approval of Lender.  Upon such  approval by Lender,  Borrower and
Lender each shall execute and deliver an amendment to this Agreement  containing
Exhibits B, D and E, which shall become part of this Agreement,  on the basis of
the complete Plans and  Specifications  and the final  construction  cost budget
approved by Lender.  The total amount of the Loan shall not exceed three million
dollars  ($3,000,000),  and  Borrower  shall pay all costs  over  three  million
dollars  ($3,000,000)  necessary to complete the Improvements in accordance with
this Agreement.

         3.18 Grading and Drainage work.  Borrower has submitted to Lender,  and
Lender has approved,  plans for the grading and drainage work,  which consist of
Sheet 1  (improvement  plan),  Sheets 2 and 3 (grading and  drainage  plans) and
Sheet 4 (signing and striping  plan for the parking  area) dated August 1, 1991,
prepared by Oberkamper & Associates.  The portion of the Loan  allocated to such
grading and drainage  work is three  hundred six  thousand  two hundred  dollars
($306,200).  Borrower  shall  commence  such grading and drainage  work promptly
after the Effective Date,  Borrower shall perform such grading and drainage work
in accordance with such approved  plans,  and Lender shall disburse such portion
of the Loan  allocated  to such  grading  and  drainage  work  pursuant  to this
Agreement as the work progresses.

                                       7




                                   ARTICLE 4

                                   Insurance

         4.1 Title  Insurance.  Borrower shall, at Borrower's  expense,  procure
from a title  insurer  satisfactory  to Lender a 1970 LP-10 ALTA Loan  Policy of
title insurance  ("Title  Policy"),  with any  endorsements  Lender may require,
insuring  Lender,  in the principal  amount of the Loan, of the validity and the
priority  of  the  lien  of  the  Deed  of  Trust  upon  the  Property  and  the
Improvements,  subject only to matters approved by Lender in writing. During the
term of the Loan, Borrower shall, at Borrower's expense,  procure and deliver to
Lender,  within five (5) days after Lender's request, such other endorsements to
the Title Policy as Lender may require.

         4.2 Hazard  Insurance.  Borrower shall procure and maintain a policy of
builder's risk completed value hazard insurance,  with a vandalism and malicious
mischief  endorsement and such other  endorsements as Lender may require,  in an
amount acceptable to Lender. Lender shall be named under a Lender's Loss Payable
Endorsement  (form  438BFU)  attached to the policy.  At Lender's  request,  the
policy shall contain an agreed value clause sufficient (as determined by Lender)
to eliminate any risk of co-insurance.

         4.3 Liability  Insurance.  Borrower shall procure and maintain a policy
of comprehensive  public liability  insurance and property damage insurance with
limits as required by Lender,  insuring against liability for injury or death to
any person and property damage  occurring on the Property or in the Improvements
from any cause  whatsoever.  The  policy  shall  name  Lender  as an  additional
insured.

         4.4  Blanket  Coverage.  Lender  may  accept,  at its  option,  blanket
insurance  policies  in  satisfaction  of  Borrower's   obligations  to  provide
insurance.

         4.5 General.  Borrower  shall procure and maintain all other  insurance
required by the Requirements,  the Deed of Trust or applicable law. Lender shall
receive the originals of all required insurance  policies,  or other evidence of
insurance  acceptable to Lender.  Borrower shall maintain all required insurance
until  the  Loan is  repaid.  All  insurance  policies  shall  provide  that the
insurance  shall not be  cancellable or materially  changed  without thirty (30)
days' prior written notice to Lender.  All insurance policies shall be issued by
licensed insurance companies acceptable to Lender.


                                    ARTICLE 5

                         Representations and warranties

         Borrower  hereby  represents and warrants to Lender as of the Effective
Date and continuing thereafter as follows:

         5.1  Authority.  Borrower  has complied  with all laws and  regulations
concerning its organization, existence and transaction of business. Borrower has
the  right  and  power  to own  and  develop  the  Property  and  construct  the
Improvements  as  contemplated  in the Loan  Documents.  Borrower has, or at all
appropriate  times shall have,  properly  obtained  all  permits,  licenses  and
approvals  necessary to construct,  occupy,  operate and lease the Improvements,
and complied with the  Requirements  and all other  applicable  statutes,  laws,
regulations and ordinances.

         5.2  Enforceability.  Borrower is  authorized  to execute,  deliver and
perform under the Loan Documents, which are legal, valid and binding obligations
of Borrower, enforceable in accordance with their respective terms.

                                       8




         5.3 No Violation.  Borrower's undertakings in the Loan Documents do not
violate any of the Requirements or any other applicable statute, law, regulation
or  ordinance  or any order or ruling of any court or  governmental  entity,  or
conflict with, or constitute a breach or default  under,  any agreement by which
Borrower is, or the  Property  and the  Improvements  are,  bound or  regulated.
Borrower is not in violation of any statute, law, regulation or ordinance, or of
any order of any court or governmental entity.  There are no claims,  actions or
proceedings pending or, to Borrower's knowledge,  threatened against Borrower or
affecting the Property or the Improvements.

         5.4  Financial  Information.  All  financial  information  delivered to
Lender,  including,  without limitation,  information  relating to the financial
condition of Borrower, the Property, the Improvements,  or partners of Borrower,
fairly and accurately  represents such financial condition and has been prepared
in  accordance  with  generally  accepted  accounting  principles   consistently
applied, unless otherwise noted in such information.  No material adverse change
in such financial condition has occurred.

         5.5 Accuracy.  All reports,  documents,  instruments,  information  and
forms of evidence  delivered  to Lender  concerning  the Loan or required by the
Loan Documents are accurate,  correct and  sufficiently  complete to give Lender
true and accurate  knowledge  of their  subject  matter,  and do not contain any
misrepresentation or omission.

         5.6 Adequacy of Loan.  The  undisbursed  Loan  proceeds,  together with
Borrower's Funds and all other sums (if any) to be provided by Borrower as shown
in Exhibit D, are sufficient to do all of the things specified in section 2.1(b)
hereof.

         5.7 Taxes.  Borrower has filed all required federal,  state, county and
municipal  tax returns  and has paid all taxes owed and  payable,  and  Borrower
knows of no basis for additional assessment with respect to any taxes.

         5.8 Utilities.  All utility services,  including,  without  limitation,
gas,  water,  sewer,  drainage,  electrical  and  telephone,  necessary  for the
development, construction and occupancy of the Property and the Improvements are
available at or within the boundaries of the Property, or Borrower has taken all
steps  necessary  to assure that all utility  services  will be  available  upon
completion of the Improvements.

         5.9  Compliance.  Borrower  is  familiar  with  all  Requirements.  The
development  of the  Property  and the  construction  of the  Improvements  will
conform to and comply with the Requirements and the Plans and Specifications.


                                    ARTICLE 6

                                     Default

         6.1 Default.  The following shall constitute a "Default" under the Loan
Documents:

                  (a) Monetary.  (i) Borrower's failure to pay when due any sums
         payable  under the Note or any of the  other  Loan  Documents;  or (ii)
         Borrower's failure

                                       9




         to deposit any  Borrower's  Funds as and when  required  under  section
         2.1(b) hereof; or

                  (b) Construction;  Use. (i) Any material deviation in the work
         of construction  from the Plans and  Specifications or the Requirements
         or the  appearance  or use of  defective  workmanship  or  materials in
         constructing  the  Improvements,  and Borrower's  failure to remedy the
         same to  Lender's  satisfaction  within  ten (10) days  after  Lender's
         written demand to do so; or (ii) the cessation of  construction  of the
         Improvements  prior to completion for a continuous  period of more than
         fifteen  (15) days  (except as caused by events for which  delay may be
         permitted under Article 3 hereof); or (iii) the prohibition,  enjoining
         or  delaying  (in  any  manner)  of  the  construction  of  any  of the
         Improvements  in  accordance  with the Loan  Documents for a continuous
         period  of more than  thirty  (30)  days;  or (iv) the  curtailment  in
         availability to the Property or the  Improvements of utilities or other
         public services necessary for the full occupancy and utilization of the
         Improvements for a continuous period of more than thirty (30) days; or

                  (c)  Liens,  Attachment;  Condemnation.  (i) The filing of any
         claim of lien against the Property or the  Improvements  or the service
         on  Lender  of any  bonded  stop  notice  relating  to the Loan and the
         continuance  of the claim of lien or bonded stop notice for twenty (20)
         days without  discharge,  satisfaction  or provision  for payment being
         made in  accordance  with Article 3 hereof;  or (ii) the  condemnation,
         seizure or  appropriation  of, or occurrence  of an uninsured  casualty
         with respect to, any material (as  determined by Lender in its sole and
         absolute  discretion)  portion of the Property or the Improvements;  or
         (iii) the  sequestration  or  attachment  of, or any levy or  execution
         upon,  any of the Property or the  Improvements,  any other  collateral
         provided by Borrower under any of the Loan Documents, any monies in the
         Account,  or any  substantial  portion of the other assets of Borrower,
         which is not  released,  expunged or dismissed  prior to the earlier of
         thirty  (30)days  after  sequestration,  attachment or execution or the
         sale of such other assets affected thereby; or

                  (d) Performance of obligations.  Borrower's failure to perform
         its  obligations  under any of the Loan Documents;  provided,  however,
         that if a  specific  time is  provided  in the Loan  Documents  for the
         curing  of  such  failure,  Borrower's  failure  to  perform  will  not
         constitute a Default until the specified time period expires; or

                  (e) Representations and Warranties.  (i) The failure of any of
         Borrower's  representations or warranties in any of the Loan Documents,
         except as to adverse change in financial  condition,  to be true within
         fifteen (15) days, or other period as may be provided,  after notice by
         Lender; or (ii) any material adverse change in the financial  condition
         of Borrower or any other  person or entity in any manner  obligated  to
         Lender  under  the  Loan   Documents   from  the  financial   condition
         represented to Lender as of the Effective Date; or

                  (f)  Voluntary  Bankruptcy;   Insolvency;   Dissolution.   (i)
         Borrower's  filing of a petition for relief under the Bankruptcy Reform
         Act of 1978, as amended or recodified ("Bankruptcy Code"), or under any
         other  present or future  state or federal  law  regarding  bankruptcy,
         reorganization or other relief to debtors (collectively, "Debtor

                                       10




         Relief Law"); or (ii) Borrower's filing any pleading in any involuntary
         proceeding  under the Bankruptcy Code or other Debtor Relief Law, which
         admits  the  jurisdiction  of  the  court  or the  petition's  material
         allegations regarding Borrower's insolvency; or (iii) Borrower's making
         a general  assignment for the benefit of creditors;  or (iv) Borrower's
         applying for, or the appointment of, a receiver,  trustee, custodian or
         liquidator of Borrower or any of its property;  or (v) the filing by or
         against  Borrower of a petition  seeking the liquidation or dissolution
         of Borrower or the  commencement of any other procedure to liquidate or
         dissolve Borrower; or

                  (g)  Involuntary  Bankruptcy.  Borrower's  failure to effect a
         full dismissal of any involuntary petition under the Bankruptcy Code or
         any other Debtor  Relief Law that is filed  against  Borrower or in any
         way  restrains or limits  Borrower or Lender  regarding  the Loan,  the
         Property or the  Improvements  prior to the earlier of the entry of any
         order granting relief sought in the involuntary petition or thirty (30)
         days after the date of filing of the petition; or

                  (h) Partners; Guarantors. The occurrence of an event specified
         in section  6.1(f) or section  6-1(g) hereof as to any person or entity
         in any manner obligated to Lender under the Loan Documents

         6.2  Acceleration.  Upon  the  occurrence  of a  Default  specified  in
sections  6.1(a) through 6.1(e)  hereof,  inclusive,  Lender may, at its option,
declare  all sums owing to Lender  under the Note and the other  Loan  documents
immediately  due and  payable.  Upon the  occurrence  of a Default  specified in
section 6.1(f),  6.1(g) or 6.1(h) hereof,  or upon the occurrence of any default
or event of default  specified in any of the Loan Documents  which provides that
acceleration  shall be  automatic,  all  sums  owing to  Lender  under  the Loan
Documents  shall  automatically   become  immediately  due  and  payable.   Upon
acceleration,  Lender may, in  addition to other uses  permitted  under the Loan
Documents,  apply  undisbursed  Loan proceeds and any sums in the Account to the
sums owing to Lender under the Loan Documents.

         6.3  Disbursement by Lender.  Upon the occurrence of a Default which is
occasioned  by  Borrower's  failure to pay money,  Lender may,  but shall not be
obligated,  to make such payment from Loan proceeds,  Borrower's Funds, or other
funds of  Lender.  If such  payment  is made from  proceeds  of the Loan or from
Borrower's Funds, Borrower shall deposit with Lender, upon written demand issued
pursuant to section  2.1(b)  hereof,  an amount equal to such  payment.  If such
payment  is made from  funds of  Lender,  Borrower  shall  repay such funds upon
demand issued  pursuant to section 6.6 hereof.  In either case, the Default with
respect to which any such  payment  has been made by Lender  shall not be deemed
cured  until  such  deposit or  repayment  (as the case may be) has been made by
Borrower.

         6.4 Lender's Completion of Construction. If Default occurs, Lender may,
upon five (5)  days'  written  notice to  Borrower,  and with or  without  legal
process,  take possession of the Property and the Improvements,  remove Borrower
and all agents,  employees and contractors of Borrower from the Property and the
Improvements,  complete the work of  construction,  and market and sell or lease
the Property and the Improvements.  Borrower  irrevocably appoints Lender as its
attorney-in-fact, which agency is coupled with an interest. As attorney-in-fact,
Lender may, in Borrower's  name, take or omit to take any action Lender may deem
appropriate,  including, without limitation,  exercising Borrower's rights under
the  Loan   Documents  and  all  contracts   concerning   the  Property  or  the
Improvements.

                                       11




         6.5  Cessation  of   Construction.   If  Lender   determines  that  the
Improvements  are not  being  constructed  in  accordance  with  the  Plans  and
Specifications,  the  Requirements or the Loan  Documents,  Lender may order all
construction  on  any  of  the   Improvements   affected  by  the  condition  of
nonconformance  immediately stopped.  After such order, Borrower shall not allow
any construction work, other than corrective work, to be performed on any of the
Improvements  affected by the condition of nonconformance  until Lender notifies
Borrower in writing that the nonconforming condition has been corrected.

         6.6  Repayment  of  Funds  Advanced.  If  Lender  spends  its  funds in
exercising any of its rights or remedies under the Loan Documents, the amount of
funds spent shall be payable to Lender upon demand,  together  with  interest at
the rate  applicable  to the  principal  balance  of the Note  after  default or
maturity as specified therein, from the date the funds were spent. Until repaid,
such amounts shall have the security afforded disbursements under the Note.

         6.7 Right of  Contest.  Borrower  may  contest in good faith any claim,
demand,  levy or assessment  (other than liens and stop  notices,  provision for
which is made in Article 3 hereof) by any person  other than Lender  which would
constitute a Default if (a)  Borrower  pursues the contest  diligently  and in a
manner which Lender  determines is not prejudicial to Lender and does not impair
the rights of Lender  under any of the Loan  Documents  and (b) if  requested by
Lender,  Borrower  deposits  with Lender any funds or other  forms of  assurance
Lender in good faith from time to time determines  appropriate to protect Lender
from the consequences of the contest being unsuccessful.  Borrower's  compliance
with  this  section  shall  operate  to  prevent  such  claim,  demand,  levy or
assessment from becoming a Default.


                                    ARTICLE 7

                            Miscellaneous Provisions

         7.1 Expenses.  Borrower shall pay within five (5) days Lender's  demand
all reasonable and necessary expenses incidental to making the Loan,  including,
without   limitation,   preclosing  and  closing   expenses,   commitment  fees,
architectural  and engineering  review  expenses,  appraisal fees,  construction
inspection fees and attorneys' fees, incurred by Lender; provided, however, that
Borrower  shall not be required to pay more than the total  amount of  sixty-two
thousand five hundred dollars ($62,500) on account of such expenses.

         7.2 Financial  Information.  Within one hundred twenty (120) days after
the end of  Borrower's  tax year,  Borrower  shall  deliver  to Lender a current
signed financial  statement,  income and expense  statement and balance sheet of
Borrower.  Borrower  shall also  deliver to Lender such  quarterly,  periodic or
other  financial  information  as Lender may  request.  If Borrower  has audited
financial information prepared,  Borrower shall deliver to Lender copies of that
information  within five (5) days after its preparation.  All financial  reports
shall be prepared in accordance with generally  accepted  accounting  principles
consistently applied, or other form acceptable to Lender.

         7.3 Indemnity.  Borrower  indemnifies Lender against,  and holds Lender
harmless from,  any losses,  damages,  liabilities,  claims,  demands,  actions,

                                       12




judgments,  court costs and legal or other expenses  (including  attorneys' fees
and  disbursements)  which Lender may incur as a direct or indirect  consequence
of: (i) the making of the Loan,  except for violations of laws or regulations by
Lender;  or (ii)  Borrower's  failure to  perform  any  obligations  as and when
required  by this  Agreement  or any of the other Loan  Documents;  or (iii) any
failure at any time of any of  Borrower's  representations  or  warranties to be
true and  correct;  or (iv) any act or omission  by  Borrower,  any  contractor,
subcontractor or material supplier,  or any engineer,  architect or other person
or entity  with  respect to any of the  Property or the  Improvements.  Borrower
shall pay  immediately  upon  Lender's  demand  any  amounts  owing  under  this
indemnity  together with interest  from the date the  indebtedness  arises until
paid at the rate of interest  applicable  to the  principal  balance of the Note
after  default or maturity as specified  therein.  Borrower's  duty to indemnify
Lender  shall  survive  the  release  and  cancellation  of  the  Note  and  the
reconveyance or partial reconveyance of the Deed of Trust.

         7.4  Books and  Records.  Borrower  shall  maintain  complete  books of
account  and  other  records  for  the  Property  and the  Improvements  and for
disbursement  and use of the Loan proceeds and  Borrower's  Funds,  and the same
shall be available for inspection and copying by Lender.

         7.5 Further Assurances.  At Lender's request and at Borrower's expense,
Borrower  shall  execute,  acknowledge  and  deliver any other  instruments  and
perform any other acts necessary,  desirable or proper (as determined by Lender)
to carry out the  purposes of the Loan  Documents or to perfect and preserve any
liens created by the Loan Documents.

         7.6  Form of  Documents.  The  form  and  substance  of all  documents,
instruments,  and forms of evidence to be delivered to Lender under the terms of
any of the Loan Documents shall be subject to Lender's approval and shall not be
modified, superseded or terminated in any respect without Lender's prior written
approval.

         7.7 No Third  Parties  Benefited.  No  person  other  than  Lender  and
Borrower  and their  permitted  successors  and assigns  shall have any right of
action under any of the Loan Documents.

         7.8 Notices.  All written  notices and demands under the Loan Documents
shall be deemed served upon  delivery or, if mailed,  upon receipt after deposit
in United  States  Postal  Service  by  certified  mail,  postage  prepaid,  and
addressed to the address of Borrower or Lender appearing below. Notice of change
of address may be given in the same manner, provided Borrower's address shall be
in the State of California.

         7.9  Authority  to File  Notices.  Borrower  irrevocably  appoints  and
authorizes Lender, as Borrower's attorney-in-fact,  which agency is coupled with
an  interest,  to execute  and/or  record in  Lender's  or  Borrower's  name any
notices,  instruments  or  documents  that Lender deems  appropriate  to protect
Lender's interest under any of the Loan Documents.

         7.10 Actions.  Lender may  commence,  appear in or defend any action or
proceeding  purporting  to  affect  the  Property,  the  Improvements,  the Loan
Documents or the rights,  duties or  liabilities of Borrower or Lender under the
Loan  Documents.  In exercising  this right,  Lender may incur and pay costs and
expenses,

                                       13




including,  without  limitation,  attorneys' fees and court costs,  and Borrower
agrees to pay all such expenses so incurred or paid.

         7.11  Relationship of Parties.  The relationship of Borrower and Lender
under the Loan  Documents  is,  and shall at all times  remain,  solely  that of
borrower and lender. No partnership,  joint venture or fiduciary relationship of
any kind or nature  whatsoever  exists between  Borrower and Lender and Borrower
and Lender are not  members of any joint or common  enterprise.  Lender  neither
undertakes  nor assumes any  responsibility  or duty to Borrower or to any third
party with respect to the  Property,  the  Improvements  or the Loan,  except as
expressly provided in the Loan Documents.

         7.12 Lender's Delay. Lender shall not be liable in any way for Lender's
failure to perform or delay in performing  under the Loan Documents,  and Lender
may suspend or terminate  all or any portion of Lender's  obligations  under the
Loan Documents if Lender's delay or failure results directly or indirectly from,
or is based upon, the action, inaction, or purported action, of any governmental
or  local  authority,   or  any  war  (whether  declared  or  not),   rebellion,
insurrection,  strike,  lock-out,  boycott or  blockade  (whether  presently  in
effect,  announced or in the sole  judgment of Lender deemed  probable),  or any
other cause or event beyond Lender's control.

         7.13 Attorneys' Fees; Enforcement. If any attorney is engaged by Lender
to enforce, construe or defend any provision of any of the Loan Documents, or as
a consequence of any Default or event of default under the Loan Documents,  with
or without the filing of any legal action or  proceeding,  Borrower shall pay to
Lender,  immediately  upon  demand,  the  amount  of  all  attorneys'  fees  and
disbursements incurred by Lender in connection therewith, together with interest
thereon from the date of such demand at the rate of interest  applicable  to the
principal balance of the Note after default or maturity as specified therein.

         7.14 Assignment.  Borrower shall not assign  Borrower's  interest under
any of the Loan  Documents,  or in any monies  due or to become due  thereunder,
without  Lender's prior written  consent.  Any assignment made without  Lender's
consent shall be void. Borrower recognizes that this is not an ordinary loan and
that Lender would not make this Loan except in reliance on Borrower's  expertise
and reputation,  Lender's knowledge of Borrower, and Lender's understanding that
this Agreement is more in the nature of an agreement involving personal services
than a standard loan where Lender would rely on security  which already  exists.
In this instance,  the Improvements are not constructed and Lender is relying on
Borrower's  expertise and prior experience to develop the Property and construct
the Improvements in accordance with the terms of the Loan Documents.

         7.15 Disclosure of Information. If Lender elects to sell participations
in the Loan, Lender may forward to each participant and prospective  participant
all  documents  and  information  relating to the Loan and all parties  thereto,
whether furnished by Borrower or otherwise.

         7.16 Signs.  Lender may place on the Property signs stating that Lender
is providing construction financing.

         7.17 Lender's Agents. Lender may designate an agent,  representative or
independent  contractor  to  exercise  any of  Lender's  rights  under  the Loan

                                       14




Documents.  Any reference to Lender in any of the Loan  Documents  shall include
Lender's agents, employees, representatives or independent contractors.

         7.18  Severability.  If any  provision of the Loan  Documents  shall be
determined  by a court of  competent  jurisdiction  to be  invalid,  illegal  or
unenforceable,  that portion shall be deemed severed from the Loan Documents and
the remaining parts shall remain in full force as though the invalid, illegal or
unenforceable portion were not part of the Loan Documents.

         7.19 Heirs,  Successors  and Assigns.  The terms of the Loan  Documents
shall  be  binding  upon  and  inure  to  the  benefit  of the  heirs,  personal
representatives,  successors and assigns of the parties;  provided however, that
this section does not waive the provisions of section 7.14 hereof.

         7.20 Rights  Cumulative,  No Waiver.  All Lender's  rights and remedies
provided in the Loan Documents,  granted by law or otherwise, are cumulative and
may be exercised by Lender at any time. Lender's exercise of any right or remedy
shall not  constitute a cure of any Default unless all sums then due and payable
to Lender under the Loan  Documents  are repaid and Borrower has cured all other
Defaults.  No waiver shall be implied from any failure of Lender to take, or any
delay by Lender in taking, action concerning any Default or failure of condition
under  the Loan  Documents,  or from  any  previous  waiver  of any  similar  or
unrelated  Default or failure of condition.  Any waiver or approval under any of
the Loan  Documents  must be in writing  and shall be  limited  to its  specific
terms.

         7.21 Time. Time is of the essence of each term of the Loan Documents.

         7.22 Headings.  All headings appearing in any of the Loan Documents are
for convenience only and shall be disregarded in construing the Loan Documents.

         7.23  Governing  Law.  The Loan  Documents  shall be  governed  by, and
construed in accordance with, the laws of the State of California.

         7.24  Integration;   Interpretation.  The  Loan  Documents  contain  or
expressly  incorporate  by  reference  the entire  agreement of the parties with
respect to the matters contemplated herein and supersede all prior negotiations.
The Loan Documents shall not be modified except by written  instrument  executed
by all parties.  Any  reference in any of the Loan  Documents to the Property or
the  Improvements  shall  include  all  or any  parts  of  the  Property  or the
Improvements.  Any reference to the Loan  Documents in any of the Loan Documents
includes any amendments,  renewals or extensions  approved in writing by Lender.
Any reference in this Agreement to the Loan  Documents  shall include all or any
of the  provisions  of  this  Agreement  and the  other  Loan  Documents  unless
otherwise specified.

         7.25 Joint and  Several  Liability.  The  liability  of all persons and
entities who are in any manner  obligated  under any of the Loan Documents shall
be joint and several.

                                       15




         7.26 Incorporation. Exhibits A, B, C, D and E, all attached hereto, are
incorporated into this Agreement.

         IN WITNESS WHEREOF, Borrower and Lender have executed this Construction
Loan Agreement as of the date first hereinabove written.


                                     111 PARTNERS, a California general
                                     partnership



                                     By________________________________
                                             Michael J.  Smith
                                             General Partner


                                     By________________________________
                                             Roger A. Smith
                                             General Partner


                                     By________________________________
                                             Daniel C. Ross
                                             General Partner



                                     Borrower's Address:

                                     50 Bon Air Center, Suite 140
                                     Greenbrae, CA 94904
                                     Attn: Roger A. Smith


                                     FAIR, ISAAC AND COMPANY,
                                     INCORPORATED, a Delaware corporation


                                     By________________________________
                                             Gerald de Kerchove
                                             Executive Vice President


                                     Lender's Address:

                                     120 North Redwood Drive
                                     San Rafael, CA 94903-1996
                                     Attn: Michael C. Gordon

                                       16




                                    EXHIBIT A

                           CONSTRUCTION LOAN AGREEMENT

                            (Description of Property)


All of the real  property in the City of San Rafael,  County of Marin,  State of
California, described as follows:

PARCEL ONE:

Parcel 3B, as shown upon that certain Parcel Map entitled  "Parcel Map, Lot 3 of
Map of Smith  Ranch,  Northerly  Portion 17 R.M. 39, San Rafael,  Marin  County,
California", filed for record August 13, 1991 in Book 25 of Parcel Maps, at Page
18, Marin County Records.

Reserving  thereform  an  easement  for  access,  parking,  drainage  and public
utilities  over that portion of the herein  described  property lying within the
boundaries of that certain, "Mutual Access and Parking Easement, D.E. & P.U.E.",
as shown upon the filed map referred to above.

Said  easement to be  appurtenant  to and for the benefit of Parcel 3A, as shown
upon the filed map referred to above.

PARCEL TWO:

An easement for access, parking,  drainage and public utility purposes over that
portion of Parcel 3A,  lying  within the  boundaries  of that  certain,  "Mutual
Access and Parking  Easement,  D.E. & P.U.E.",  as said parcel and  easement are
shown upon that certain Parcel Map entitled,  "Parcel Map, Lot 3 of Map of Smith
Ranch,  Northerly  Portion 17 R.M. 39, San Rafael,  Marin  County,  California",
filed for record  August 13, 1991 in Book 25 of Parcel  Maps,  at Page 18, Marin
County Records.

PARCEL THREE:

An easement for storm drainage purposes more particularly described as follows:

Beginning  at the  Easterly  terminus of the course  "South  81(0) 38' 00" East,
536.00 feet"; said point being on the Northerly line of Smith Ranch Road and the
Southerly  line of Lot 3, as shown and  delineated on that certain map entitled,
"Map of Smith Ranch - Northerly Portion",  filed for record in Book 17 of Record
Maps at Page 39, Marin County  Records;  thence  leaving said  Northerly line of
said Smith  Ranch Road (17 RM 39) along the  Easterly  line of said Lot 3 (17 RM
39)the  following  courses and distances;  Easterly along a tangent curve to the
left whose center bears North 8(0) 22' 00" East,  having a radius of 20.00 feet,
through a central angle of 90(0) 00' 00", an arc length of 31.42 feet and thence
North 8(0) 22' 00' East,  23.00 feet;  thence leaving said Easterly line of said
Lot 3 (17 RM 39) South 13(0) 12' 17" East 46.24 feet to said  Northerly  line of
said Smith Ranch Road (17 RM 39); thence along said Northerly line of said Smith
Ranch  Road (17 RM 39)  North  81(0) 38' 00'  West,  37.00  feet to the point of
beginning.

                                       17




PARCEL FOUR:

An easement for storm drainage over a strip of land 10 feet in width and being 5
feet on each side of the following described line:

Beginning  at the  Easterly  terminus of the course  "South  81(0) 38' 00" East,
536.00 feet"; said point being on the Northerly line of Smith Ranch Road and the
Southerly  line of Lot 3, as shown and  delineated on that certain Map entitled,
"Map of Smith Ranch  Northerly  Portion",  filed for record in Book 17 of Record
Maps at Page 39, Marin County  Records;  thence  leaving said  Northerly line of
said Smith  Ranch Road (17 RM 39) along the  Easterly  line of said Lot 3 (17 RM
39) the following  courses and distances;  Easterly along a tangent curve to the
left whose center bears North 8(0) 22' 00" East,  having a radius of 20.00 feet,
through  a central  angle of 90(0) 00' 00",  an arc  length of 31.42  feet,  and
thence North 8(0) 22' 00" East, 128 feet to the true point of beginning;  thence
leaving  said  Easterly  line of said Lot 3 (17 RM 39) South  81(0) 38' 00' East
60.00  feet to the  Westerly  line of  Parcel  D, as shown on said "Map of Smith
Ranch - Northerly Portion" (17 RM 39), being the terminus of this easement.

PARCEL FIVE:

An easement for access and public utility purposes more  particularly  described
as follows:

Beginning  at the  Easterly  terminus of the course  "South  81(0) 38' 00' East,
536.00 feet"; said point being on the Northerly line of Smith Ranch Road and the
Southerly  line of Lot 3, as shown and  delineated on that certain Map entitled,
"Map of Smith Ranch - Northerly Portion",  filed for record in Book 17 of Record
Maps at Page 39, Marin County  Records;  thence  leaving said  Northerly line of
said Smith  Ranch Road (17 RM 39) along the  Easterly  line of said Lot 3 (17 RM
39) the following  courses and distances;  Easterly along a tangent curve to the
left whose center bears North 8(0) 22' 00" East,  having a radius of 20.00 feet,
through a central  angle of 90(0) 00' 00", an arc length of 31.42  feet;  thence
North 8(0) 22' 00" East,  271.13 feet and thence  Northeasterly  along a tangent
curve to the left whose center  bears North 81(0) 38' 00" West,  having a radius
of 670 feet,  through a central  angle of 2(0) 00' 00",  an arc  length of 23.39
feet; thence leaving said Easterly line of said Lot 3 (17 RM 39) South 81(0) 38'
00" East,  27.41  feet;  thence  South 8(0) 22' 00' West,  141.15  feet;  thence
Southerly  along a tangent  curve to the left whose center bears South 81(0) 38'
00' East, having a radius of 292 feet, through a central angle of 10(0) 59' 17",
an arc length of 56.00 feet; thence Southerly along a reverse curve to the right
whose center  bears,  South 87(0) 22' 43" West,  having a radius of 308.00 feet,
through a central  angle of 10(0) 59' 17", an arc length of 59.07  feet;  thence
South 8(0) 22' 00" West,  59.00 feet to said  Northerly line of said Smith Ranch
Road; thence along said Northerly line of said Smith Ranch Road (17 RM 39) North
81(0) 38' 00" West, 58.00 feet to the point of beginning.

                                       18




                                    EXHIBIT B

                           CONSTRUCTION LOAN AGREEMENT

                        (Description of Improvements and
                            Plans and Specifications)

         1. Description of Improvements.  The Improvements  consist of a general
purpose two-story office building,  fully air conditioned and sprinklered,  with
one  elevator,  of steel  and wood  frame  construction,  tar and  gravel  roof,
containing approximately 24,944 square feet of usable area (approximately 26,362
square feet of gross building  area),  with on-site  parking for 89 vehicles and
fully landscaped grounds, together with all appurtenances,  fixtures,  equipment
and interior tenant improvements.

         2.   Description   of  Plans   and   Specifications.   The   Plans  and
Specifications  described below were prepared for use by Borrower and Contractor
in constructing the Improvements, and Borrower hereby represents and warrants to
Lender that the description of the Plans and  Specifications  set forth below is
accurate and complete.

                                                                    Latest
                                                                    Revision
     Description                                                    Date
(Sheet(s) or Page(s))       Prepared By         Date                if any
- ---------------------       -----------         ----                ------




                                       19




                                    EXHIBIT C

                           CONSTRUCTION LOAN AGREEMENT

                                (Loan Documents)

         The  loan  documents  numbered  1  through  8,  inclusive,  below,  and
amendments,  modifications and supplements thereto which have received the prior
written  consent of Lender,  and any  documents  executed in the future that are
approved by Lender and that recite that they are "Loan  Documents"  for purposes
of this Agreement, are collectively referred to as the "Loan Documents":

         1. This Agreement;

         2.  Promissory  Note of even date herewith,  in the original  principal
amount  of the  Loan,  made by  Borrower  and  payable  to the  order of  Lender
("Note");

         3.  Construction  Deed of  Trust,  Assignment  of  Rents  and  Security
Agreement of even date herewith executed by Borrower,  as trustor, to California
Land Title  Company of Marin,  a  California  corporation,  as trustee,  for the
benefit of Lender, as beneficiary ("Deed of Trust");

         4.  Assignment  of Lessor's  Interest  in Leases of even date  herewith
executed by Borrower in favor of Lender;

         5.  Environmental  Indemnity of even date herewith executed by Borrower
in favor of Lender;

         6. State of California Uniform Commercial Code - Financing  Statement -
Form UCC-1  executed  by  Borrower,  as debtor,  in favor of Lender,  as secured
party; and

         7.  Assignment  of  Architect's/Engineer's  Agreements  and  Plans  and
Specifications and Architect's/Engineer's Consent of even date herewith executed
by Borrower and Architect in favor of Lender.

                                       20




                                    EXHIBIT D

                           CONSTRUCTION LOAN AGREEMENT

                        (Financial Requirement Analysis)

         The financial  analysis set forth herein  represents an analysis of the
total  costs  necessary,   in  Borrower's  estimation,   to  perform  Borrower's
obligations   under  the  Loan  Documents   through  final   completion  of  the
Improvements.  Column A, "Total Costs," sets forth Borrower's  representation of
the maximum costs for each Item  specified in Column A. Column B, "Costs Paid By
Borrower," sets forth Borrower's  representation of costs that Borrower has paid
or has caused to be paid from other sources of funds for each Item  specified in
Column  B.  Column C,  "Costs To Be Paid By  Borrower,"  sets  forth  Borrower's
representation  of costs  that  Borrower  will pay or will cause to be paid from
other  sources  of funds  for  each  Item  specified  in  Column  C.  Column  D,
"Disbursement  Budget," sets forth the portion of the Loan and Borrower's  Funds
which  has  been  allocated  for each  Item  specified  in  Column D and will be
disbursed pursuant to the terms, covenants, conditions and provisions of Exhibit
E and the Loan Documents.  Unless specified otherwise, all references to Columns
or Items in this Agreement refer to Columns or Items in this Exhibit D.

                                       21








                                                   FINANCIAL REQUIREMENT ANALYSIS

- -------------------------------------------- -------------------- -------------------- ----------------------- --------------------- (A) TOTAL COSTS (B) COSTS PAID (C) COSTS TO BE (D) DISBURSEMENT BY BORROWER PAID BY BORROWER BUDGET (a) (b) - -------------------------------------------- -------------------- -------------------- ----------------------- --------------------- 1. LAND COST - -------------------------------------------- -------------------- -------------------- ----------------------- --------------------- *2. Construction Costs of Improvements ($____ sq. ft) *3. Tenant Improvement Costs ($____ sq. ft) *4. Site Work Costs ($____ sq. ft) *5. Offsite Costs ($____ sq. ft) 6. Architect and Engineering Fees 7. Government Fees (permits, bonds, etc.) 8. Operating Costs during construction (job supervision, utilities, etc.) *9. Contingency Reserve (____% of #'s 2-5) 10. Other Hard Costs a. _____________ b. _____________ c. _____________ 11. TOTAL HARD COSTS (Lines 2-10) $ $ $ $ - -------------------------------------------- -------------------- -------------------- ----------------------- --------------------- 12. Interest Reserve 13. Taxes during construction 14. Insurance during construction 15. Lender Loan Fee 16. Permanent Loan Fee 17. Title, Recording and Escrow expenses 18. Legal Fees 19. Promotion and Advertising 20. Commission Expense 21. Organization Expenses (developer overhead) 22. Soft Costs Contingency 23. Other Soft Costs: a. _____________ b. _____________ c. _____________ 24 TOTAL SOFT COSTS (Lines 12-23) $ $ $ $ - -------------------------------------------- -------------------- -------------------- ----------------------- --------------------- 25. CUMULATIVE TOTALS (Lines 1, 11 & 24) $ $ $ $ - -------------------------------------------- -------------------- -------------------- ----------------------- --------------------- Footnotes: (a) Borrower's Funds in the amount of $__________ are included in the total shown on line #25 of the Disbursement Budget. Unless specified otherwise, all such funds shall be disbursed prior to any disbursement of Loan proceeds. (b) These funds will be available on or after the Effective Date as defined in the Construction Loan Agreement. * Items requiring retention. - ------------------------------------------------------------------------------------------------------------------------------------
22 EXHIBIT E CONSTRUCTION LOAN AGREEMENT (Disbursement Plan) A. Timing of Disbursements. On or about the ____( ) day of each month, or at such other times as Lender may deem appropriate, Borrower shall submit to Lender a written itemized statement ("Application for Payment"), signed by Borrower, setting forth: 1. A description of the work performed, materials supplied and costs incurred or due for which disbursement is requested with respect to any line item ("Item") shown in Column D ("Disbursement Budget") of the Financial Requirement Analysis attached as Exhibit D to this Agreement; and 2. The total amount incurred, expended or due for each requested Item less prior disbursements. Each Application for Payment by Borrower shall constitute a representation and warranty by Borrower that Borrower is in compliance with all the conditions precedent specified in section 2.1 of this Agreement. B. Lender's Right to Condition Disbursements. Lender shall have the right to condition any disbursement upon Lender's receipt and approval of the following: 1. The Application for Payment and an itemized requisition for payment of Items 2 through 10 as shown in the Disbursement Budget ("Hard Costs"); 2. Bills, invoices, documents of title, vouchers, statements, payroll records, receipts and any other documents evidencing the total amount expended, incurred or due for any requested Items; 3. Evidence of Borrower's use of a lien release, joint check and voucher system acceptable to Lender for payments or disbursements to any contractor, subcontractor, materialman, supplier or lien claimant; 4. Architect's, inspector's or engineer's periodic certifications of the percentage or stage of construction that has been completed and its conformance to the Plans and Specifications and the Requirements based upon any such architect's, inspector's or engineer's periodic, physical inspections of the Property and the Improvements; 5. Waivers and releases of mechanics' liens, stop notice claims, equitable lien claims or other lien claim rights; 6. Evidence of Borrower's compliance with the provisions of sections 3.2 and 5.1 of this Agreement; 23 7. Valid, recorded Notice(s) of Completion for the Improvements or any portions of the Improvements for which Notice(s) of Completion may be recorded under applicable law; 8. The Architect's and Engineer's, if any, Certificate of Substantial Completion prior to the final retention disbursement of Hard Costs 9. Any other document, requirement, evidence or information that Lender may request under any provision of the Loan Documents; and 10. In the event that any Application for Payment includes the cost of materials stored on the Property ("Onsite Materials"), such Application for Payment shall include each of the following: (a) evidence that the Onsite Materials have been paid for in full by Borrower; (b) evidence that the Onsite Materials are insured as required hereunder; and (c) evidence that the Onsite Materials are stored in an area on the Property for which adequate security is provided against theft and vandalism. Borrower acknowledges that this approval process may result in disbursement delays and Borrower consents to all such delays. C. Periodic Disbursements. The Disbursement Budget (Column D) shall be disbursed by Lender into the Account or to or for the benefit or account of Borrower, as determined by Lender, periodically as follows: 1. Land Cost. The portion allocated to Land Cost, Column D, Item ____, initially totaling ____dollars ($____), shall be disbursed as follows: ____________________________. 2. Construction Costs, Site Work Costs and Offsite Costs. The portion allocated to Construction Costs, Site Work Costs and Offsite Costs, Column D, Items ____, initially totaling ____ dollars ($____), shall be disbursed as construction progresses for the payment of Construction Costs, Site Work Costs and Offsite Costs Items up to ninety percent (90%) of the amount allocated for any requested Item less prior disbursements. The remaining ten percent (10%) of the amounts allocated to Construction Costs, Site Work Costs and Offsite Costs Items shall be disbursed after the Improvements are fully completed in accordance with the Plans and Specifications and the Requirements, the statutory lien period has expired, and Lender has received a lien-freeLP-10 re-write of the Title Policy and evidence satisfactory to Lender of lien-free final completion. 3. Tenant Improvement Costs. The portion allocated to Tenant Improvement Costs, Column D, Item ____,initially totaling ____dollars ($____), shall be disbursed as construction progresses for the payment of Tenant Improvement Costs up to the maximum of the lower of ____ dollars ($____) per square foot or the actual cost per square foot of completed Tenant Improvements less prior disbursements. The remaining ____dollars ($____) of the amount allocated to Tenant Improvement Costs shall be disbursed after the Tenant Improvements are fully completed in accordance with tenant improvement plans and specifications (that have previously been approved in writing by Lender) and the Requirements, the statutory lien period has expired, and Lender has received a lien-free LP-10 re-write of the Title Policy and evidence satisfactory to Lender of lien-free final completion. 24 4. Architect and Engineering Fees. The portion allocated to Architect and Engineering Fees, Column D, Item ____, initially totaling ____ dollars ($____ ), shall be disbursed for the payment of Architect and Engineering Fees. 5. Government Fees. The portion allocated to Government Fees, Column D, Item ____ , initially totaling ____ dollars ($____), shall be disbursed for the payment of Government Fees. 6. Operating Costs. The portion allocated to Operating Costs, Column D, Item ____, initially totaling ____ dollars ($____), shall be disbursed for the payment of Operating Costs incurred during construction as Operating Costs become due and payable. 7. Contingency Reserve. The portion allocated to Contingency Reserve, Column D, Item ____, initially totaling ____ dollars ($____), and any increases in the Contingency Reserve pursuant hereto, shall be reallocated periodically to such other Items as Borrower shall, from time to time, request in writing and Lender shall approve in writing. After any such reallocation, the portion of the Contingency Reserve that has been reallocated will be disbursed in accordance with the provisions governing the disbursement of the Item(s) to which such portion of the Contingency Reserve has been allocated. If the actual cost or a revised guaranteed cost of an Item is less than the maximum amount of the Disbursement Budget allocated to any such Item, then any such excess amounts may be reallocated to the Contingency Reserve from time to time upon Borrower's written request and Lender's written approval. Any amounts reallocated to this Item will be disbursed in accordance with this paragraph. The increase, reallocation or depletion, or refusal of Lender to increase, reallocate or deplete, the Contingency Reserve shall not release Borrower from any of Borrower's obligations under the Loan Documents. 8. Other Hard Costs. The portion allocated to Other Hard Costs, Column D, Item ____, initially totaling ___ dollars ($____), shall be disbursed as construction progresses for the payment of Other Hard Costs. 9. Interest Reserve. The portion allocated to Interest Reserve, Column D, Item ____, initially totaling ____ dollars ($____), shall be disbursed directly to Lender for the payment of interest which accrues and becomes due under the Note during construction. Lender is hereby authorized to charge the Loan directly for such interest payments as they become due. Lender shall provide Borrower with a monthly interest statement. Depletion of the Interest Reserve shall not release Borrower from any of Borrower's obligations under the Loan Documents, including, without limitation, paying interest accruing under the Note and depositing Borrower's Funds with Lender pursuant to section 2.1(b) of this Agreement. 10. Taxes. The portion allocated to Taxes, Column D, Item ____, initially totaling ____ dollars ($____), shall be disbursed for the payment of Taxes incurred during construction as Taxes become due and payable. Funds with Lender pursuant to section 2.1(b) of this Agreement. 11. Insurance. The portion allocated to Insurance, Column D, Item ____, initially totaling ____ dollars ($____), shall be periodically disbursed for the payment of Insurance premiums during construction as Insurance premiums become due and payable. 25 12. Lender Loan Fee. The portion allocated to Lender Loan Fee, Column D, Item____, initially totaling ____ dollars ($____), shall be disbursed directly to Lender for Borrower's credit on the Effective Date for the payment of Lender's Loan Fee. 13. Permanent Loan Fee. The portion allocated to Permanent Loan Fee, Column D, Item ____, initially totaling ____ dollars ($____), shall be disbursed for the payment of a Permanent Loan Fee for permanent financing. 14. Title, Recording and Escrow Expenses. The portion allocated to Title, Recording and Escrow Expenses, Column D, Item ____, initially totaling ____ dollars ($____), shall be disbursed for the payment of Title, Recording and Escrow Expenses. 15. Legal Fees. The portion allocated to Legal Fees, Column D, Item ____, initially totaling ____ dollars ($____), shall be disbursed for the payment of Legal Fees. 16. Promotion and Advertising. The portion allocated to Promotion and Advertising, Column D, Item ____, initially totaling ____ dollars ($____), shall be disbursed for the payment of Promotion and Advertising expenses. 17. Commission Expense. The portion allocated to Commission Expense, Column D, Item ____, initially totaling ____ dollars ($____), shall be disbursed for the payment of Commission Expense. 18. Organization Expense. The portion allocated to Organization Expense, Column D, Item ____, initially totaling ____ dollars ($____), shall be disbursed for the payment of Organization Expense incurred during construction as Organization Expense becomes due and payable. 19. Soft Costs Contingency. The portion allocated to Soft Cost Contingency, Column D, Item ____, initially totaling ____ dollars ($____), shall be periodically reallocated, at the written request of Borrower and with the written approval of Lender, within the Disbursement Budget, Column D, Items , or disbursed for cost overruns that have been approved by Lender for Column D, Items , in accordance with paragraphs hereof, depending upon the intended use of any such funds. 20. Other Soft Costs. The portion allocated to Other Soft Costs, Column D, Item ___, initially totaling ____ dollars ($____), shall be disbursed for the payment of Other Soft Costs. 26


                            SECOND AMENDMENT TO LEASE


THIS SECOND  AMENDMENT TO LEASE is made and entered into effective as of the 2nd
day of  December,  1998,  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  a First  Amendment  to Lease,  dated
              September   24,  1997,   extending  the  term  of  the  Lease  and
              documenting  increased  construction costs payable by Tenant under
              the Lease.

Third:        The  parties  wish to execute  this Second  Amendment  to Lease to
              confirm their agreement to certain matters related thereto:


                                    AGREEMENT

In  consideration  of  the  above  stated  premises  and  the  mutual  covenants
hereinafter  contained,  the parties  hereby  agree that the Lease is  modified,
amended, and/or supplemented as follows:

1.       Premises.  The Premises and certain improvements thereupon shall be and
         are  hereby  modified  as shown on the site  plan  attached  hereto  as
         REVISED   EXHIBIT  A.  REVISED   EXHIBIT  A  replaces  and  his  hereby
         substituted  for  Exhibit A attached to the First  Amendment  to Lease.
         Tenant acknowledges that the Premises are a part of a development which
         will include four  buildings and associated  appurtenant  improvements,
         all as shown on REVISED EXHIBIT A. Tenant  acknowledges and agrees that
         the Premises will be subject to and benefitted by various non-exclusive
         easements  for  ingress,  egress and  access  over the  private  drives
         serving the Project,  and certain exclusive easements for utilities and
         other purposes, provided that the same shall not interfere with the use
         and enjoyment of the Premises, as contemplated herein.

2.       Lease Term.  Landlord and Tenant are parties to a lease agreement dated
         December 2, 1998 (the "New Lease"), covering certain premises and a new
         building to be constructed  thereon  located  adjacent to the Premises,
         all as shown on REVISED  EXHIBIT A. The parties  agree that the term of
         the Lease  shall be  adjusted  such that the term of the Lease shall be
         coterminous with the term of the New Lease. More particularly, upon the
         commencement  date of the New  Lease,  the term of the  Lease  shall be
         extended  and  shall run for a period of one  hundred  fifty-six  (156)
         months  commencing on the  commencement  date of the New Lease.  If the
         commencement  date of the New  Lease is other  than the  first day of a
         calendar month, then the term of the Lease shall continue in full force
         and effect for a period of one hundred  fifty-six (156) months from and
         after the first day of the month next succeeding the commencement  date
         of the New Lease.  When the commencement date of the New Lease has been
         established,  the  parties  shall  execute an  addendum  to this Second
         Amendment  to Lease,  confirming  the term and  expiration  date of the
         Lease.

3.       Subsection  1.5 of the  Lease is hereby  deleted  in its  entirety  and
         replaced with the following:

                                       1                           Exhibit 10.23




         "Base Rent. The Base Rental for the Premises  during the remaining term
         of this Lease shall be as follows:

                                                  Monthly              Per
         Period                                   Base Rent         Square Foot
         ------                                   ---------         -----------
         11/1/98 - 07/31/02                      $24,062.50            $8.75
         08/01/02 - 12/31/06                     $25,437.50            $9.25
         01/01/07 - New Lease expiration date    $26,812.50            $9.75

         Option Term:
         ------------
         60 months following the
            New Lease expiration date             market               market

         Landlord  and Tenant  agree that the as built area of the  Premises  is
         33,000 square feet."

4.       Remodeling Allowance. Landlord agrees to provide Tenant with a one time
         allowance for remodeling the Premises.  Landlord's maximum contribution
         towards the costs of  remodeling  will be based upon the time that such
         remodeling occurs, in accordance with the following schedule:

                  Period of                          Maximum Allowance
                  Remodeling Expenditure             Amount Per Square Foot
                  ----------------------             ----------------------
                  1/1/01 - 12/31/02                           $3.00
                  1/1/03 - 12/31/04                           $3.75
                  1/1/05 - 12/31/06                           $4.50
                  1/1/07 - 12/31/08                           $5.25

         The allowance shall apply towards Tenant's actual  remodeling costs and
         shall be payable to Tenant upon completion of remodeling and receipt by
         Landlord of evidence of payment under normal and customary construction
         lending  procedures.  Landlord  shall not be  required  to provide  any
         allowance on costs submitted for reimbursement after December 31, 2010.

5.       Guaranty.  Landlord has  required,  as a condition to its  execution of
         this  Second  Amendment  to  Lease,   that  Fair,  Isaac  and  Company,
         Incorporated unconditionally guarantee the full performance of Tenant's
         obligations under the Lease, as amended.  Tenant agrees to deliver such
         guaranty,  in the form of  EXHIBIT E attached  hereto and  incorporated
         herein by reference,  within ten (10) days following the full execution
         of this Second Amendment to Lease by Landlord and Tenant.  In the event
         Tenant fails to deliver  such  guaranty,  Landlord  may, at its option,
         terminate  this Second  Amendment  to Lease upon five (5) days  written
         notice to Tenant.

6.       Section  1.4(B) of the Lease is deleted in its entirety and is replaced
         with the following:

         "Option to Extend.  Subject to the terms and conditions hereinafter set
         forth,  Tenant  shall  have the option to extend the term of this Lease
         for one (1) additional  sixty (60) month term ("Option  Term") 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 (1) year prior to the  expiration  of the Lease Term.
         Tenant may  exercise  this option only if: (i) no  condition of default
         exists with respect to Tenant's  performance of its  obligations  under
         the Lease;  and (ii)  Tenant  simultaneously  exercises  its options to
         extend  under the New Lease and under the Existing  Lease  covering the
         premises  located  at 4295  Lexington  Avenue  North  in  Arden  Hills,
         Minnesota (as defined in Section 14.12 of the New Lease). Base Rent for
         the Option Term shall be at the fair market rate for  comparable  space
         in the north  suburban  geographic  area. The fair market rent shall be
         agreed upon by Tenant and  Landlord  within sixty (60) days of Tenant's
         notice to Landlord of its irrevocable  intent to exercise its option to
         extend  set  forth  herein.  The  fair  market  rental  rate  shall  be
         determined in accordance  with the definition set forth in Section 7 of
         the

                                       2




         Existing Lease dated May 1, 1995 and amended  December 30, 1996 for the
         premises  located  at 4295  Lexington  Avenue  North  in  Arden  Hills,
         Minnesota.  In the event that  Landlord and Tenant fail to agree to the
         fair market rental rate in the time period set forth  herein,  then the
         fair  market  rent  shall  be  established   in  accordance   with  the
         arbitration procedures set forth in section 8 of the Existing Lease for
         the  premises  located at 4295  Lexington  Avenue North in Arden Hills,
         Minnesota.  If Tenant fails to exercise this option as aforesaid,  this
         option shall be null and void and of no further force and effect."

7.       Miscellaneous.  Except as  expressly  stated  herein,  the Lease  shall
         remain unchanged and in full force and effect.

IN WITNESS  WHEREOF,  the parties  hereto have caused this Second  Amendment  to
Lease to be executed the day and year first above written.

LANDLORD:                                   TENANT:

CSM CORPORATION                             DYNAMARK, INC.


BY: _______________________________         BY: _______________________________

ITS: _______________________________        ITS: _______________________________

                                       3




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

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


                             PARTICIPATION AGREEMENT

                                      Among

                          FAIR, ISAAC AND COMPANY, INC.

                                       And

                         LEASE PLAN NORTH AMERICA, INC.

                                       And

                          THE PARTICIPANTS NAMED HEREIN

                                       And

                               ABN AMRO BANK N.V.,

                          as Agent for the Participants

                                  May 15, 1998


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

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






                                TABLE OF CONTENTS

                                                                            Page

SECTION 1.        INTERPRETATION.............................................2
1.01.             Definitions................................................2
1.02.             Rules of Construction......................................2

SECTION 2.        LEASE FACILITY.............................................2
2.01.             Acquisition, Lease, Amount Limitations, Etc. ..............2
2.02.             Participation Agreement....................................4
2.03.             Advance Requests...........................................5
2.04.             Fees.......................................................7
2.05.             Funding of Advances........................................7
2.06.             Sharing of Payments........................................8
2.07.             Other Payment Terms.......................................11
2.08.             Commitment Reductions.....................................12
2.09.             Extensions................................................13
2.10.             Nature of the Transactions................................14
2.11.             Security..................................................15
2.12.             Change of Circumstances...................................18
2.13.             Taxes on Payments.........................................20
2.14.             Funding Loss Indemnification..............................21
2.15.             Replacement of Participants...............................22

SECTION 3.        CONDITIONS PRECEDENT......................................22
3.01.             Initial Acquisition Advance...............................22
3.02.             Tract 2 Acquisition Advance...............................22
3.03.             Improvement/Expense Advances..............................23
3.04.             Other Conditions Precedent................................23
3.05.             Covenant to Deliver.......................................23

SECTION 4.        REPRESENTATIONS AND WARRANTIES............................23
4.01.             Lessee's Representations and Warranties...................23
4.02.             Lessor's Representations and Warranties...................29
4.03.             Participants' Representations and Warranties..............30

                                      -i-




                                TABLE OF CONTENTS
                                  (continued)

                                                                           Page

SECTION 5.        COVENANTS.................................................31
5.01.             Lessee's Affirmative Covenants............................31
5.02.             Lessee's Negative Covenants...............................34
5.03.             Lessee's Financial Covenants..............................41
5.04.             Lessor's Covenants........................................42
5.05.             Participants' Covenants...................................43

SECTION 6.        LESSOR, AGENT AND THEIR RELATIONS WITH PARTICIPANTS.......43
6.01.             Appointment of Agent......................................43
6.02.             Powers and Immunities.....................................43
6.03.             Reliance..................................................44
6.04.             Defaults..................................................44
6.05.             Indemnification...........................................44
6.06.             Non-Reliance..............................................44
6.07.             Resignation or Removal of Agent...........................45
6.08.             Authorization.............................................45
6.09.             Lessor and Agent in their Individual Capacities...........45

SECTION 7.        MISCELLANEOUS.............................................46
7.01.             Notices...................................................46
7.02.             Expenses..................................................48
7.03.             Indemnification...........................................48
7.04.             Waivers; Amendments.......................................49
7.05.             Successors and Assigns....................................49
7.06.             Setoff....................................................53
7.07.             No Third Party Rights.....................................53
7.08.             Partial Invalidity........................................53
7.09.             JURY TRIAL................................................53
7.10.             Counterparts..............................................54
7.11.             No Joint Venture, Etc. ...................................54
7.12.             Usury Savings Clause......................................54

                                      -ii-




                                TABLE OF CONTENTS
                                  (continued)

                                                                           Page

7.13.             Confidentiality...........................................54
7.14.             Governing Law.............................................54
7.15.             Consent to Jurisdiction...................................55

                                     -iii-




                                TABLE OF CONTENTS
                                  (continued)

                                                                            Page

SCHEDULES

I              Participants
II             Pricing Grid
1.01           Definitions
1.02           Rules of Construction
3.01           Conditions Precedent to Initial Acquisition Advances
3.02           Conditions Precedent to Tract 2 Acquisition Advances
4.01(f)        Environmental Reports
4.01(q)        Subsidiaries
4.01(u)        Property Representations
4.01(x)        Budget
5.02(a)        Existing Indebtedness
5.02(b)        Existing Liens
5.02(d)        Investment Policy


                  EXHIBITS

A              Land
B              Lease Agreement
C              Purchase Agreement
D              Construction Agency Agreement
E              Acquisition Request
F              Improvement/Expense Advance Request
G(1)           364-Day Commitment Extension Request
G(2)           Lease Extension Request
H              Assignment of Construction Agreements
I              Cash Collateral Agreement
J              Assignment of Lease
K              Lessor Deed of Trust
L              Lessor Security Agreement
M              Assignment Agreement

                                      -iv-




                             PARTICIPATION AGREEMENT



         THIS PARTICIPATION AGREEMENT (this "Agreement" herein), dated as of May
15, 1998, is entered into by and among:

                  (1) FAIR,  ISAAC AND  COMPANY,  INC.,  a Delaware  corporation
("Lessee");

                  (2) LEASE PLAN NORTH  AMERICA,  INC., an Illinois  corporation
("Lessor");

                  (3)  Each  of the  financial  institutions  from  time to time
listed in  Schedule  I hereto,  as  amended  from time to time  (such  financial
institutions to be referred to collectively as the "Participants"); and

                  (4) ABN AMRO  BANK  N.V.,  acting  through  its San  Francisco
International Branch, as agent for the Participants (in such capacity, "Agent").


                                    RECITALS

         A.  Lessee  has  requested  Lessor and the  Participants  to provide to
Lessee a lease facility pursuant to which:

                  (1) Lessor would (a) purchase the land  described in Part 1 of
         Exhibit A (as more fully defined in Schedule 1.01, the "Tract 1 Land"),
         (b) purchase  the land  described in Part 2 of Exhibit A (as more fully
         defined in Schedule 1.01, the "Tract 2 Land" and collectively  with the
         Tract 1 Land,  or  individually,  as the case may be, the "Land"),  (c)
         lease to Lessee the Land,  (c) appoint Lessee as Lessor's agent to make
         certain  improvements on the Land (which  improvements will be owned by
         Lessor),  (d) make  advances to finance  such  improvements  and to pay
         certain related  expenses and (e) grant to Lessee the right to purchase
         the Land and such improvements; and

                  (2) The Participants  would participate in such lease facility
         by (a)  funding  the  purchase  price and other  advances to be made by
         Lessor  and (b)  acquiring  participation  interests  in the rental and
         certain other payments to be made by Lessee.

         B.  Lessor and the  Participants  are  willing  to  provide  such lease
facility upon the terms and subject to the conditions set forth herein.


                                    AGREEMENT

         NOW,  THEREFORE,  in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:

                                                                   EXHIBIT 10.38



SECTION 1. INTERPRETATION.

         1.01. Definitions.  Unless otherwise indicated in this Agreement or any
other  Operative  Document,  each term set forth in Schedule 1.01,  when used in
this  Agreement  or any other  Operative  Document,  shall  have the  respective
meaning  given  to  that  term in  Schedule  1.01  or in the  provision  of this
Agreement or other  document,  instrument  or agreement  referenced  in Schedule
1.01.

         1.02.  Rules  of  Construction.  Unless  otherwise  indicated  in  this
Agreement or any other Operative  Document,  the rules of construction set forth
in  Schedule  1.02  shall  apply  to  this  Agreement  and the  other  Operative
Documents.


SECTION 2. LEASE FACILITY.

         2.01.    Acquisition, Lease, Amount Limitations, Etc.

                  (a)  Acquisition,   Lease,  Etc.  Subject  to  the  terms  and
         conditions of this Agreement  (including the  limitations  set forth in
         Subparagraph 2.01(b)):

                       (i)  On  a  date   specified   by  Lessee   pursuant   to
                  Subparagraph  2.03(a) for the  acquisition of the Tract 1 Land
                  (the "Closing Date"):

                            (A) Lessor shall  purchase  (with funds  provided by
                       the  Participants)  the Tract 1 Land,  together  with any
                       Appurtenant Rights thereto,  all Improvements thereto and
                       other related property;

                            (B) Immediately  upon the purchase by Lessor of such
                       property,  Lessor and Lessee  shall  execute  (i) a Lease
                       Agreement   in  the  form  of   Exhibit  B  (the   "Lease
                       Agreement"),  pursuant  to  which  Lessor  will  lease to
                       Lessee such  property,  (ii) a Purchase  Agreement in the
                       form of Exhibit C (the "Purchase Agreement"), pursuant to
                       which Lessor  grants to Lessee the right to purchase such
                       property and (iii) a Construction Agency Agreement in the
                       form of Exhibit D (the "Construction  Agency Agreement"),
                       pursuant  to which  Lessee  agrees to  construct  certain
                       improvements to such property;

                       (ii)  On  a  date   specified   by  Lessee   pursuant  to
                  Subparagraph  2.03(a) for the  acquisition of the Tract 2 Land
                  (the "Tract 2 Acquisition Date"):

                                    (A)  Lessor  shall   purchase   (with  funds
                           provided  by the  Participants)  the  Tract  2  Land,
                           together with any  Appurtenant  Rights  thereto,  all
                           Improvements thereto and other related property; and

                                    (B)   Immediately   upon  the  purchase  and
                           acquisition  by Lessor of such  property,  Lessor and
                           Lessee  shall   execute   amendments   to  the  Lease
                           Agreement,    the   Purchase    Agreement   and   the
                           Construction Agency 

                                       2

                       Agreement to the extent necessary to add such property to
                       the property covered thereby; and

                           (iii)  During the period  (the  "Commitment  Period")
                  beginning on the date of this Agreement and ending on the date
                  which  is 30  months  after  the  date  hereof  (the  "Outside
                  Completion  Date") or, if earlier,  the first  Business Day of
                  the first  full  calendar  month  immediately  succeeding  the
                  earlier of (A) the  Completion  Date and (B) the date on which
                  the Unused Total  Commitment is $0 (the earlier of the Outside
                  Completion  Date and such first Business Day to be referred to
                  as the "Commitment  Termination  Date"),  Lessor shall, at the
                  request of Lessee,  make  additional  advances to Lessee (with
                  funds   provided  by  the   Participants)   to  pay  Permitted
                  Improvement   Costs   and   Permitted   Transaction   Expenses
                  ("Improvement/Expense Advances").

                  (b)  Amount  Limitations.  The  advances  made  by  Lessor  to
         purchase   the   Land   (the    "Acquisition    Advances")    and   the
         Improvement/Expense  Advances made by Lessor (the Acquisition  Advances
         and the Improvement/Expense  Advances to be referred to collectively as
         the "Advances") shall be subject to the following limitations:

                            (i) Until  Lessee  delivers  to Lessor the Plans and
                  Specifications  for all New  Improvements to be constructed on
                  the Property  pursuant to  Subparagraph  5.01(h) and a revised
                  Expiration  Date  Appraisal  for each  Tract of  Property  (if
                  required by Subparagraph 5.01(h)), the aggregate amount of all
                  portions of all Advances made by Lessor which are allocated to
                  any Line Item in the Budget,  as set forth in the  Schedule to
                  the  Acquisition  Request or the  Improvement/Expense  Advance
                  Request   for  such   Advance   pursuant   to  clause  (v)  of
                  Subparagraph 2.03(a) or clause (i)(D) of Subparagraph 2.03(b),
                  as applicable,  shall not exceed shall not exceed 110% of such
                  Line Item of the Budget:

                           (ii) Until  Lessee  delivers  to Lessor the Plans and
                  Specifications  for all New  Improvements to be constructed on
                  the Property  pursuant to  Subparagraph  5.01(h) and a revised
                  Expiration  Date  Appraisal  for each  Tract of  Property  (if
                  required by Subparagraph 5.01(h)), the aggregate amount of all
                  Advances  made by Lessor  shall not  exceed  the lesser of (A)
                  aggregate  amount  of the  Budget or (B) the  Expiration  Date
                  Appraisal as delivered on the Closing Date;

                           (iii) After  Lessee  delivers to Lessor the Plans and
                  Specifications  for all New  Improvements to be constructed on
                  the Property  pursuant to  Subparagraph  5.01(h) and a revised
                  Expiration  Date  Appraisal  for each  Tract of  Property  (if
                  required by Subparagraph 5.01(h)), the aggregate amount of all
                  Advances made by Lessor for such Tract of Property  (including
                  the Acquisition Advance and all  Improvement/Expense  Advances
                  for such Tract of  Property)  shall not exceed the  Expiration
                  Date Appraisal for such Tract of Property;

                           (iv) The aggregate amount of all Advances made during
                  the period commencing on the date of this Agreement and ending
                  on the date 364 days

                                       3


                  thereafter (the "364-Day  Commitment  Termination Date") shall
                  not exceed Sixteen Million Dollars ($16,000,000) (the "364-Day
                  Commitment"); and;

                           (v) The aggregate  amount of all Advances made during
                  the period commencing on the date of this Agreement and ending
                  on the Commitment Termination Date (such period to be referred
                  to as the  "Commitment  Period")  shall not exceed  Fifty-Five
                  Million Dollars ($55,000,000) (the "Total Commitment").

                  Of  the  Total   Commitment,   Thirty-Nine   Million   Dollars
                  ($39,000,000)  (the "Thirty Month Commitment") is available at
                  any time during the entire Commitment Period. Unless otherwise
                  directed by Lessee, all Advances made by Lessor on or prior to
                  the 364-Day  Commitment  Termination  Date shall be  allocated
                  first  to  the  364-Day  Commitment  and,  after  the  364-Day
                  Commitment is reduced to zero, to the Thirty-Month Commitment.
                  All  Advances  made by  Lessor  after the  364-Day  Commitment
                  Termination  Date  shall  be  allocated  to  the  Thirty-Month
                  Commitment,  whether or not the  364-Day  Commitment  has been
                  reduced to zero.

                  (c)  Tranches.  Each  Advance  shall  consist  of a  Tranche A
         Portion,  a Tranche B Portion and a Tranche C Portion.  For  accounting
         purposes,  the Tranche A Portion and Tranche B Portion of each  Advance
         shall  constitute  debt and the  Tranche  C  Portion  shall  constitute
         equity.

         2.02.    Participation Agreement.

                  (a) Advances. Each Participant severally,  unconditionally and
         irrevocably  agrees with Lessor to  participate in each Advance made by
         Lessor in an amount equal to such Participant's  Proportionate Share of
         such Advance;  provided,  however,  that the  aggregate  amount of each
         Participant's Proportionate Share of all Advances shall not exceed such
         Participant's Commitment. Each Participant shall fund its Proportionate
         Share  of each  Advance  as  provided  in  Subparagraph  2.05(a).  Each
         Participant's Proportionate Share of each Advance shall consist of such
         Participant's  Tranche  A  Portion,  Tranche B  Portion  and  Tranche C
         Portion of such Advance.

                  (b)  Payments.   In   consideration   of  each   Participant's
         participation in each Advance made by Lessor,  such  Participant  shall
         participate in the payments made by Lessee under this Agreement and the
         other Operative Documents as provided in Paragraph 2.06.

                  (c)  Other Rights of Participants and Agent.

                           (i)  Until   all   amounts   payable   to  Agent  and
                  Participants  under  this  Agreement  and the other  Operative
                  Documents  are paid in full,  Lessee shall deliver all notices
                  for  Lessor  under  this  Agreement  and the  other  Operative
                  Documents  to Agent at the  office  or  facsimile  number  and
                  during the hours  specified  in  Paragraph  7.01.  Agent shall
                  promptly furnish to Lessor and each Participant copies of each
                  such notice  and, in the case of each  request for an

                                       4


                  Advance,  shall notify each  Participant of the amount of such
                  Participant's  Proportionate  Share of the  Advance  requested
                  thereby.

                           (ii) Lessor is not an agent for Participants or Agent
                  and may exercise or refrain from  exercising  its rights under
                  this  Agreement  and  the  other  Operative  Documents  in its
                  discretion;  provided, however that, until all amounts payable
                  to Agent and  Participants  under this Agreement and the other
                  Operative  Documents  are  paid in  full,  (A)  Lessor  shall,
                  subject  to the  limitations  set  forth  in  Section  VI,  be
                  required to act or to refrain from acting upon instructions of
                  the Required  Participants  as provided in Paragraph  6.03 and
                  (B) Agent may  exercise  any or all of the rights and remedies
                  of  Lessor,  and  shall  be  entitled  to the  other  benefits
                  afforded Lessor,  under this Agreement and the other Operative
                  Documents.

                           (iii)  Neither Agent nor any  Participant  shall have
                  any right,  title or interest in the  Property  except for the
                  Lien  therein  granted  to  Agent,  for  the  benefit  of  the
                  Participants,  in the Lessor Deed of Trust,  the Assignment of
                  Lease and the Lessor Security Agreement.

         2.03.    Advance Requests.

                  (a)  Acquisition  Request.  Lessee  shall  request  Lessor  to
         purchase the Land by delivering to Agent an irrevocable written request
         in the form of Exhibit E,  appropriately  completed  (the  "Acquisition
         Request"), which specifies, among other things:

                           (i)      The Tract of Land to be purchased;

                           (ii)  The  amount  of  such   requested   Acquisition
                  Advance, including the amount of the Acquisition Price and the
                  Permitted  Transaction  Expenses  (which may include  expenses
                  previously  paid  by  Lessee)  included  in  such  Acquisition
                  Advance;

                           (iii) The date selected by Lessor as the  Acquisition
                  Date for such purchase, which shall be, (A) in the case of the
                  Acquisition Advance to purchase the Tract 1 Land (the "Initial
                  Acquisition  Advance"),  on a Business  Day on or prior to May
                  31,  1998 and (B) in the case of the  Acquisition  Advance  to
                  purchase the Tract 2 Land (the "Tract 2 Acquisition Advance"),
                  on a date that is a Business Day on or prior to July 1, 1999;

                           (iv) The Portions into which such Advance(s) is (are)
                  to be divided and the Rental Period for each Portion; and

                           (v) If  Lessee  has not yet  delivered  the Plans and
                  Specifications  as  required by  Subparagraph  5.01(h) and any
                  revised  Expiration  Date Appraisal  required by  Subparagraph
                  5.01(h), a Schedule to such Acquisition  Request setting forth
                  by reference to Line Items in the Budget the purpose for which
                  each   portion  of  such   Advance  will  be  utilized  and  a
                  reconciliation  by Line  Items in the  Budget of all  Advances
                  made prior to the date of such Advance.

                                       5


                  (b) Improvement/Expense Advance Requests. Lessee shall request
         Lessor  to make  each  Improvement/Expense  Advance  by  delivering  to
         Lessor:

                           (i) An  irrevocable  written  request  in the form of
                  Exhibit F,  appropriately  completed (an  "Improvement/Expense
                  Advance Request"), which specifies, among other things:

                                    (A) The amount of such Advance,  which shall
                           be in the amount of $500,000 or an integral  multiple
                           of $100,000 in excess thereof;

                                    (B) The date of such Advance, which shall be
                           the  Closing  Date  or the  first  Business  Day of a
                           month;

                                    (C)  The  Permitted  Improvement  Costs  and
                           Permitted  Transaction  Expenses  to be  paid by such
                           Advance and the  Tract(s) of Land for which  payable;
                           and

                                    (D) If  Lessee  has  not yet  delivered  the
                           Plans and  Specifications as required by Subparagraph
                           5.01(h) and any  revised  Expiration  Date  Appraisal
                           required by Subparagraph  5.01(h), a Schedule to such
                           Improvement/Expense  Advance Request setting forth by
                           reference to Line Items in the Budget the purpose for
                           which each  portion of such  Advance will be utilized
                           and a  reconciliation  by Line Items in the Budget of
                           all Advances made prior to the date of such Advance.

                           (ii) If the  proceeds of such  Advance are to be used
                  to purchase Related Goods:

                                    (A) A  Supplement  to Exhibit B to the Lease
                           Agreement  in the form of  Exhibit  B(1) to the Lease
                           Agreement (an "Exhibit B Supplement"), which contains
                           a description of such Related Goods; and

                                    (B) Bills of sale for all such Related Goods
                           showing Lessor as the purchaser.

         Lessee shall not request more than one (1) Improvement/Expense  Advance
         in any calendar month.

                  (c) Delivery of Advance Requests. Etc. Lessee shall deliver to
         Lessor the Acquisition  Request for the Initial  Acquisition Advance at
         least  three  (3)  Business  Days  before  the  Closing  Date  and  the
         Acquisition  Request for the Tract 2 Acquisition Advance at least three
         (3)  Business  Day before the Tract 2  Acquisition  Date.  Lessee shall
         deliver  each  Improvement/Expense  Advance  Request to Lessor at least
         three  (3)  Business  Days  before  the  date  of  such  Advance.   The
         Acquisition   Requests   and   Improvement/Expense   Advance   Requests
         (collectively,  "Advance  Requests")  shall be delivered by first-class
         mail or facsimile  as required by  Subparagraph  2.02(c) and  Paragraph
         7.01; provided,  however,  that Lessee shall promptly deliver to Lessor
         the original of any Advance Request initially delivered by facsimile.

                                       6


                  (d)  Capitalization of Base Rent During Commitment  Period. On
         each Scheduled Rent Payment Date  occurring  under the Lease  Agreement
         during the Commitment  Period, the Base Rent due on such Scheduled Rent
         Payment Date shall be capitalized by automatically  treating the amount
         of  such  Base  Rent  as an  Improvement/Expense  Advance  made on such
         Scheduled Rent Payment Date. Agent shall notify Lessee, Lessor and each
         Participant  of the amount of the Base Rent due on each such  Scheduled
         Rent Payment Date and so treated as an Improvement/Expense Advance.

         2.04.    Fees.

                  (a)  Agent's  Fees.  Lessee  shall pay to  Agent,  for its own
         account,  agent's fees in the amounts and at the times set forth in the
         Agent's Fee Letter (the "Agent's Fees").

                  (b)  Commitment  Fees.  Lessee  shall  pay to  Agent,  for the
         ratable  benefit of the  Participants  as  provided  in clause  (ii) of
         Subparagraph  2.06(c),  commitment  fees  (the  "Commitment  Fees")  as
         follows:

                           (i) Lessee  shall pay  Commitment  Fees of twenty one
                  hundredths  of one  percent  (0.20%)  per  annum on the  daily
                  average Unused 364-Day  Commitment for the 364-Day  Commitment
                  Period.

                           (ii)  Lessee  shall  pay  Commitment  Fees of  thirty
                  hundredths  of one  percent  (0.30%)  per  annum on the  daily
                  average   Unused   Thirty-Month   Commitment  for  the  entire
                  Commitment Period.

         Lessee shall pay the  Commitment  Fees in arrears on the first Business
         Day in each January,  April,  July and October  (commencing July, 1998)
         and on the Commitment  Termination  Date (or if the Total Commitment is
         cancelled on a date prior to such day, on such prior date).

                  (c)  364-Day  Commitment  Extension  Fee.  If  Lessor  and the
         Participants  consent  to  any  extension  of  the  364-Day  Commitment
         Termination Date requested by Lessee pursuant to Subparagraph  2.09(a),
         Lessee  shall pay to Agent,  for the ratable  benefit of Lessor and the
         Participants  as provided in clause (iii) of Subparagraph  2.06(c),  an
         extension fee (the  "364-Day  Commitment  Extension  Fee") equal to one
         tenth of one percent  (0.10%) of the Unused  364-Day  Commitment on the
         original  364-Day  Commitment  Termination  Date.  Lessee shall pay the
         364-Day  Commitment  Extension Fee on or prior to the original  364-Day
         Commitment Termination Date.

         2.05.    Funding of Advances.

                  (a) Participant  Funding and  Disbursement.  Each  Participant
         shall, before 11:00 a.m. on the date of each Advance, make available to
         Agent  at its  office  specified  in  Paragraph  7.01,  in same  day or
         immediately available funds, such Participant's  Proportionate Share of
         such Advance.  After Agent's receipt of such funds and upon fulfillment
         of the  applicable  conditions  set  forth in  Section  3,  Agent  will
         promptly  disburse  such  funds on  behalf  of  Lessor,  in same day or
         immediately  available  funds,  as

                                       7


         directed  by Lessee  in the  Advance  Request  for such  Advance.  Each
         Acquisition  Advance  shall be disbursed to an escrow or other  account
         established  for  payment  of the  Acquisition  Price  and any  related
         Permitted Transaction Expenses pursuant to the Acquisition Agreement or
         otherwise  as directed by Lessee in the  Acquisition  Advance  Request.
         Each  Improvement/Expense  Advance  shall be  disbursed  as directed by
         Lessee in the Advance Request for such Improvement/Expense Advance.

                  (b)  Participant  Failure  to Fund.  Unless  Agent  shall have
         received  notice  from a  Participant  prior to the date of any Advance
         that  such   Participant   will  not  make   available  to  Agent  such
         Participant's  Proportionate  Share of such  Advance,  Agent may assume
         that such  Participant has made such portion  available to Agent on the
         date of such Advance in accordance with Subparagraph 2.05(a), and Agent
         may, in reliance upon such assumption, disburse the full amount of such
         Advance on such date; provided,  however, that neither Agent nor Lessor
         shall have any obligation to make an Advance requested  hereunder in an
         amount which exceeds the aggregate amount of funds actually received by
         Agent  from  the   Participants   on   account   of  their   respective
         Proportionate  Shares of such Advance. If any Participant does not make
         the amount of its Proportionate Share of any Advance available to Agent
         on or prior to the date such  Advance  is made,  Agent  promptly  shall
         notify such Participant of such failure and such Participant  shall pay
         to Agent,  on demand,  interest which shall accrue on such amount until
         made  available to Agent at rates equal to (i) the daily  Federal Funds
         Rate during the period from the date of such Advance  through the third
         Business Day  thereafter and (ii) the Base Rate plus two percent (2.0%)
         thereafter.  A certificate of Agent submitted to any  Participant  with
         respect to any amounts owing under this  Subparagraph  2.05(b) shall be
         conclusive  absent manifest error. If any  Participant's  Proportionate
         Share of any  Advance  is not in fact made  available  to Agent by such
         Participant  within  three  (3)  Business  Days  after the date of such
         Advance,  Lessee shall pay to Agent, on demand, an amount equal to such
         Proportionate  Share together with interest thereon,  for each day from
         the date such amount was made  available  to Lessee until the date such
         amount is repaid to Agent, at a per annum rate equal to the Base Rate.

                  (c)  Participants'  Obligations  Several.  The  failure of any
         Participant  to fund its  Proportionate  Share of any Advance shall not
         relieve any other  Participant of its obligation  hereunder to fund its
         Proportionate  Share  of such  Advance,  and no  Participant  shall  be
         responsible  for the  failure  of any  other  Participant  to fund  its
         Proportionate Share of any Advance on the date of such Advance.

         2.06.    Sharing of Payments.

                  (a) Outstanding  Lease Amount or any Portion  thereof.  Lessor
         shall share payments applied to reduce the Outstanding  Lease Amount or
         any Portion thereof as follows:

                           (i) Each payment of the  Outstanding  Lease Amount or
                  any Portion  thereof  derived from the purchase  price paid by
                  Lessee (or an Assignee  Purchaser)  to purchase  the  Property
                  pursuant  to the  Purchase  Agreement  shall be


                                       8


                  shared  by  the  Participants  pro  rata  according  to  their
                  respective  Outstanding  Participation  Amounts at the time of
                  such payment.

                           (ii) Each payment of the Outstanding  Lease Amount or
                  any Portion  thereof  derived from the Residual Value Guaranty
                  Amount paid by Lessee pursuant to the Purchase Agreement shall
                  be  shared  first  by the  Tranche  A  Participants  pro  rata
                  according   to  their   respective   Outstanding   Tranche   A
                  Participation Amounts at the time of such payment;  second, if
                  any   amounts   remain   after  all   Outstanding   Tranche  A
                  Participation  Amounts  are paid in  full,  by the  Tranche  B
                  Participants   pro  rata   according   to   their   respective
                  Outstanding  Tranche B  Participation  Amounts  at the time of
                  such  payment;  and third,  if any  amounts  remain  after all
                  Outstanding   Tranche   A   Participation   Amounts   and  all
                  Outstanding Tranche B Participation  Amounts are paid in full,
                  by the  Tranche C  Participants  pro rata  according  to their
                  respective  Outstanding Tranche C Participation Amounts at the
                  time of such payment.

                           (iii) Each payment of the Outstanding Lease Amount or
                  any Portion thereof derived from:

                                    (A) the purchase  price paid by a Designated
                           Purchaser to purchase  the  Property  pursuant to the
                           Purchase Agreement;

                                    (B) the  Indemnity  Amount  paid  by  Lessee
                           pursuant to the Purchase Agreement; or

                                    (C)   Casualty   Proceeds  or   Condemnation
                           Proceeds related to any of the Property;

                  Shall be shared first by the Tranche B  Participants  pro rata
                  according   to  their   respective   Outstanding   Tranche   B
                  Participation Amounts at the time of such payment;  second, if
                  any   amounts   remain   after  all   Outstanding   Tranche  B
                  Participation  Amounts  are paid in  full,  by the  Tranche  A
                  Participants   pro  rata   according   to   their   respective
                  Outstanding  Tranche A  Participation  Amounts  at the time of
                  such  payment;  and third,  if any  amounts  remain  after all
                  Outstanding   Tranche   B   Participation   Amounts   and  all
                  Outstanding Tranche A Participation  Amounts are paid in full,
                  by the  Tranche C  Participants  pro rata  according  to their
                  respective  Outstanding Tranche C Participation Amounts at the
                  time of such payment.

                           (iv) Each payment of the Outstanding  Lease Amount or
                  any Portion  thereof  derived from the purchase  price paid by
                  any other Person to purchase the Property  (whether  after the
                  retention of such Property by Lessor  following the Expiration
                  Date of the Lease  Agreement,  upon  foreclosure or otherwise)
                  shall be shared first by the Tranche B  Participants  pro rata
                  according   to  their   respective   Outstanding   Tranche   B
                  Participation Amounts at the time of such payment;  second, if
                  any   amounts   remain   after  all   Outstanding   Tranche  B
                  Participation  Amounts  are paid in  full,  by the  Tranche  A
                  Participants pro rata according to their

                                       9



                  respective  Outstanding Tranche A Participation Amounts at the
                  time of such payment;  and third,  if any amounts remain after
                  all  Outstanding  Tranche  B  Participation  Amounts  and  all
                  Outstanding Tranche A Participation  Amounts are paid in full,
                  by the  Tranche C  Participants  pro rata  according  to their
                  respective  Outstanding Tranche C Participation Amounts at the
                  time of such payment.

                  (v)  Each  payment  of the  Outstanding  Lease  Amount  or any
                  Portion thereof  derived from Cash Collateral  shall be shared
                  (i) by the Tranche A Participants  alone pro rata according to
                  their respective  Outstanding Tranche A Participation  Amounts
                  at the time of such payment, if such payment is made after the
                  purchase of the Property by a Designated Purchaser pursuant to
                  the Marketing Option in the Purchase  Agreement or (ii) by all
                  Participants   pro  rata   according   to   their   respective
                  Outstanding  Participation Amounts at the time of such payment
                  if such payment is made in any other circumstance.

                  (b) Base  Rent.  Each  payment  applied  to Base Rent shall be
         shared by the Participants which funded the Outstanding Lease Amount or
         any  Portion   thereof  pro  rata   according  to  (i)  the  respective
         Outstanding Participation Amounts so funded by such Participants,  (ii)
         the dates on which such  Participants  so funded such amounts and (iii)
         for Base Rent  accruing at a Fixed Rental Rate,  the  respective  Fixed
         Rate Quotes of such Participants.  (If any Participant fails to provide
         a Fixed  Rate  Quote  for  determining  any Fixed  Rate for any  Rental
         Period,  such Participant  shall, for the purposes of this Subparagraph
         2.06(b),  be deemed to have  provided a Fixed Rate Quote  equal to such
         Fixed Rate.)

                  (c) Supplemental Rent. Lessor shall share each payment applied
         to Supplemental Rent among the Lessor Parties as follows:

                           (i) Each  payment  applied to  Agent's  Fees shall be
                  solely for the account of Agent.

                           (ii) Each payment applied to Commitment Fees shall be
                  shared by the  Participants  pro rata  according  to (A) their
                  respective  Proportionate  Shares  and (B) in the case of each
                  Participant  which becomes a Participant  hereunder  after the
                  date hereof,  the date upon which such Participant so became a
                  Participant.

                           (iii) Each payment applied to the 364-Day  Commitment
                  Extension  Fee shall be shared  by the  Participants  pro rata
                  according to their respective Proportionate Shares on the date
                  of such payment.

                           (iv) Each  payment  applied to  reimburse  any Lessor
                  Party for any fees, costs and expenses incurred by such Lessor
                  Party shall be solely for the account of such Lessor Party.

                           (v) Each  payment of interest  (other than Base Rent)
                  shall be shared among the Lessor  Parties owed the amount upon
                  which such  interest  accrues  pro rata  according  to (A) the
                  respective  amounts so owed such  Lessor  Parties  and (B) the
                  dates on  which  such  amounts  became  owing  to such  Lessor
                  Parties.

                                       10


                           (vi) All other  payments under this Agreement and the
                  other  Operative  Documents  shall be for the  benefit  of the
                  Person or Persons specified.

                  (d) Disproportionate  Payments,  Etc. If any Participant shall
         obtain  any  payment  (whether  voluntary,   involuntary,  through  the
         exercise of any right of setoff,  or  otherwise)  on account of amounts
         owed to it in excess of its  ratable  share of  payments  on account of
         such amounts  obtained by all  Participants  entitled to such payments,
         such Participant shall forthwith  purchase from the other  Participants
         such  participations  in the  payments  to be made under the  Operative
         Documents as shall be necessary to cause such purchasing Participant to
         share the excess payment ratably with each of them; provided,  however,
         that  if all or any  portion  of  such  excess  payment  is  thereafter
         recovered  from such  purchasing  Participant,  such purchase  shall be
         rescinded  and each other  Participant  shall  repay to the  purchasing
         Participant the purchase price to the extent of such recovery  together
         with  an  amount  equal  to  such  other  Participant's  ratable  share
         (according  to  the   proportion  of  (i)  the  amount  of  such  other
         Participant's  required repayment to (ii) the total amount so recovered
         from the purchasing  Participant)  of any interest or other amount paid
         or payable by the purchasing Participant in respect of the total amount
         so  recovered.  Lessee  agrees that any  Participant  so  purchasing  a
         participation  from another  Participant  pursuant to this Subparagraph
         2.06(d) may, to the fullest extent  permitted by law,  exercise all its
         rights of payment  (including the right of setoff) with respect to such
         participation  as fully as if such Participant were the direct creditor
         of Lessee in the amount of such participation.

         2.07.    Other Payment Terms.

                  (a) Place and Manner of Payments by Lessee.  Lessee shall make
         all payments due to any Lessor Party under this Agreement and the other
         Operative  Documents  by  payments  to Agent,  for the  account of such
         Person,  at  Agent's  office,  located  at  the  address  specified  in
         Paragraph  7.01,  with each payment due to a Participant  to be for the
         account of such Participant's  Applicable  Participating Office. Lessee
         shall make all  payments  in lawful  money of the United  States and in
         same day or immediately  available  funds not later than 11:00 a.m. New
         York  time on the  date  due.  Agent  shall  promptly  disburse  to the
         appropriate Person each such payment received by Agent for such Person.

                  (b) Date. Whenever any payment due under this Agreement or any
         other Operative  Document shall fall due on a day other than a Business
         Day,  such payment shall be made on the next  succeeding  Business Day,
         and such  extension  of time shall be  included in the  computation  of
         Rent,  interest or fees, as the case may be. Whenever this Agreement or
         any other  Operative  Document  requires a payment to be made by Lessee
         but fails to specify a time for such  payment to be made,  such payment
         shall be due and payable ten (10) days after demand for such payment is
         made upon Lessee by the applicable party.

                  (c)  Late  Payments.  If any  amounts  required  to be paid by
         Lessee under this Agreement or any other Operative Document  (including
         Rent, interest, fees or other amounts) remain unpaid after such amounts
         are due,  Lessee  shall  pay  interest  on the

                                       11


         aggregate,  outstanding balance of such amounts from the date due until
         those  amounts  are paid in full at a per annum  rate equal to the Base
         Rate plus two percent (2.0%),  such rate to change from time to time as
         the Base Rate shall change.

                  (d) Application of Payments. All payments under this Agreement
         and the other  Operative  Documents  shall be  applied  first to unpaid
         fees,  costs and expenses then due and payable under this  Agreement or
         any other Operative Document,  second to the accrued Base Rent then due
         and payable under this  Agreement or any other  Operative  Document and
         finally to reduce the Outstanding Lease Amount or any Portion thereof.

                  (e) Failure to Pay Agent.  Unless  Agent  shall have  received
         notice from Lessee at least one (1)  Business  Day prior to the date on
         which  any  payment  is due to Lessor or the  Participants  under  this
         Agreement or the other  Operative  Documents  that Lessee will not make
         such  payment  in full,  Agent may  assume  that  Lessee  has made such
         payment in full to Agent on such date and Agent may, in  reliance  upon
         such assumption,  cause to be distributed to the appropriate Persons on
         such due date an amount equal to the amount then due such  Persons.  If
         and to the extent Lessee shall not have so made such payment in full to
         Agent,  each such Person shall repay to Agent  forthwith on demand such
         amount  distributed to such Person together with interest thereon,  for
         each day from the date such amount is  distributed to such Person until
         the date such Person  repays  such amount to Agent,  at (i) the Federal
         Funds Rate for the first three (3) days and (ii) the Base Rate plus two
         percent (2.0%) thereafter, such rate to change from time to time as the
         Base Rate shall change.  A certificate of Agent submitted to any Person
         with   respect  to  any  amounts   owing  by  such  Person  under  this
         Subparagraph 2.07(e) shall be conclusive absent manifest error.

         2.08.    Commitment Reductions.

                  (a) Reduction or Cancellation  of Commitments.  Lessee may, at
         any time prior to the 364-Day  Commitment  Termination Date in the case
         of the 364-Day  Commitment or the  Commitment  Termination  Date in the
         case of the  Thirty-Month  Commitment,  upon  five  (5)  Business  Days
         written notice to Lessor,  permanently reduce the 364-Day Commitment or
         the  Thirty-Month  Commitment  by the  amount  of One  Million  Dollars
         ($1,000,000) or an integral  multiple of One Hundred  Thousand  Dollars
         ($100,000)  in excess  thereof or cancel the 364-Day  Commitment or the
         Thirty-Month  Commitment in its entirety.  Any reduction of the 364-Day
         Commitment   or  the   Thirty-Month   Commitment   shall  result  in  a
         corresponding reduction of the Total Commitment.

                  (b) Effect of Commitment  Reductions.  From the effective date
         of  any  reduction  of  the  364-Day  Commitment  or  the  Thirty-Month
         Commitment,  the Commitment  Fees shall be computed on the basis of the
         364-Day Commitment or the Thirty-Month  Commitment as so reduced.  Once
         reduced  or  cancelled,   the  364-Day  Commitment,   the  Thirty-Month
         Commitment and the Total  Commitment may not be increased or reinstated
         without the prior written consent of Lessor and all  Participants.  Any
         reduction of the 364-Day Commitment, the Thirty-Month Commitment or the
         Total  Commitment  pursuant  to this  Paragraph  2.08  shall be applied
         ratably to reduce each Participant's  Commitment pro rata in accordance
         with its Proportionate Share.

                                       12


         2.09.    Extensions.

                  (a) 364-Day Commitment Extension. Lessee may request Lessor to
         extend the 364-Day Commitment Termination Date for an additional period
         of six (6) months by appropriately completing, executing and delivering
         to Agent a written  request  in the form of  Exhibit  G(1) (a  "364-Day
         Commitment  Extension  Request").  Lessee  shall  deliver  the  364-Day
         Commitment  Extension Request to Agent not more than six (6) months and
         not less than two (2) months  before the  original  364-Day  Commitment
         Termination  Date.  Agent  shall  promptly  deliver  to Lessor and each
         Participant  three (3)  copies  of each  364-Day  Commitment  Extension
         Request received by Agent. If Lessor or a Participant,  in its sole and
         absolute  discretion,  consents  to the  364-Day  Commitment  Extension
         Request,  such Person shall  evidence  such  consent by  executing  and
         returning two (2) copies of the 364-Day Commitment Extension Request to
         Agent not later than the ten (10)  Business  Days after  receipt of the
         364-Day  Commitment  Extension  Request.  Any  failure by Lessor or any
         Participant  so to execute  and return a 364-Day  Commitment  Extension
         Request  shall be deemed a denial  thereof.  If Lessee shall  deliver a
         364-Day  Commitment  Extension  Request to Lessor pursuant to the first
         sentence of this Subparagraph 2.09(a), then not later than fifteen (15)
         Business  Days  after  receipt  of  the  364-Day  Commitment  Extension
         Request,  Agent shall notify  Lessee,  Lessor and the  Participants  in
         writing whether (i) Agent has received a copy of the 364-Day Commitment
         Extension  Request  executed by Lessor and each  Participant,  in which
         case the definition of "364-Day Commitment  Termination Date" set forth
         in  Subparagraph  2.01(a) shall be deemed extended to the date which is
         six (6) months after the original 364-Day  Commitment  Termination Date
         (subject to receipt by Agent of the 364-Day Commitment  Extension Fee),
         or  (ii)  Agent  has not  received  a copy  of the  364-Day  Commitment
         Extension  Request  executed by Lessor and each  Participant,  in which
         case such 364-Day Commitment  Extension Request shall be deemed denied.
         Lessee  acknowledges  that  neither  Lessor  nor  any  Participant  has
         promised  (either  expressly or  implicitly),  or has any obligation or
         commitment,  to extend  or  consent  to the  extension  of the  364-Day
         Commitment Termination Date at any time.

                  (b) Lease  Extension.  Lessee may, on the terms and conditions
         provided herein, request Lessor to extend the Scheduled Expiration Date
         for (i) three  consecutive  and  sequential  one year periods  (each of
         which is  referred  to herein as a "One Year  Extension"),  or (ii) one
         three year period (the "Three  Year  Extension"),  provided  that after
         giving effect to any such  extension,  the remaining  scheduled term of
         the Lease shall not exceed five (5) years.  A request by Lessee for the
         Three  Year  Extension  shall  preclude  any  request  for a  One  Year
         Extension and any request for a One Year  Extension  shall preclude any
         request for the Three Year  Extension.  Each One Year  Extension or the
         Three Year  Extension  shall be  requested  by Lessee by  appropriately
         completing,  executing and delivering to Agent a written request in the
         form of Exhibit G(2), together with an attachment thereto setting forth
         the terms upon which Lessee would propose for the  requested  extension
         (a  "Lease  Extension  Request").   Lessee  shall  deliver  each  Lease
         Extension Request to Agent not less than six (6) months before the then
         current  Scheduled  Expiration  Date.  Agent shall promptly  deliver to
         Lessor and each  Participant  three (3) copies of each Lease  Extension
         Request received by Agent. If Lessor or a Participant,  in its sole and
         absolute discretion, consents to a Lease Extension Request,

                                       13


         such Person shall  evidence such consent by executing and returning two
         (2) copies of such Lease Extension  Request to Agent not later than the
         earlier  of (i) the last  Business  Day which is not less than five (5)
         months prior to the then current Scheduled  Expiration Date or (ii) two
         (2) months after the date Agent receives the Lease  Extension  Request.
         Any  failure by Lessor or any  Participant  so to execute  and return a
         Lease Extension  Request shall be deemed a denial thereof.  Agent shall
         promptly  notify Lessee if any  Participant  has denied such  extension
         request,  and Lessee may seek to obtain an Eligible Assignee to replace
         such  Participant  pursuant to Paragraph  2.15.  Lessee shall deliver a
         Lease  Extension  Request to Lessor  pursuant to the first  sentence of
         this  Subparagraph  2.09(b),  then not later than the last Business Day
         which  is not  less  than  four (4)  months  prior to the then  current
         Scheduled  Expiration Date,  Agent shall notify Lessee,  Lessor and the
         Participants  in writing  whether (i) Agent has  received a copy of the
         Lease  Extension  Request  executed  by  Lessor  and  each  Participant
         (including any Replacement  Participant),  in which case the definition
         of "Scheduled Expiration Date" set forth in Subparagraph 2.02(a) of the
         Lease  Agreement  shall be deemed extended to the date which is one (1)
         year after the then current Scheduled  Expiration Date in the case of a
         One Year Extension, or three (3) years after the then current Scheduled
         Expiration Date in the case of the Three Year Extension (subject to the
         receipt by Agent of any amounts  payable by Lessee in  connection  with
         such  extension),  or (ii)  Agent has not  received a copy of the Lease
         Extension  Request  executed by Lessor and each  Participant,  in which
         case  such  Lease  Extension  Request  shall be deemed  denied.  Lessee
         acknowledges  that  neither  Lessor nor any  Participant  has  promised
         (either expressly or implicitly),  or has any obligation or commitment,
         to extend or consent to the extension of the Scheduled  Expiration Date
         at any  time  and that any  such  extension  shall be  subject  to then
         applicable market, interest and credit conditions.

         2.10. Nature of the Transactions.  Lessee and the Lessor Parties intend
that the  transactions  evidenced  by this  Agreement  and the  other  Operative
Documents  constitute  operating  leases  pursuant  to  FASB  13 for  accounting
purposes and loans  secured by the Property for federal,  state and local income
tax purposes and bankruptcy law purposes.  To the extent that this Agreement and
the other  Operative  Documents  reflect  the lease form  alone,  they do so for
convenience  only.  Lessee  and the Lessor  Parties  intend  that the  Operative
Documents  have  the  dual  form  referred  to in the  first  sentence  of  this
paragraph, notwithstanding the use of the lease form alone.

                  (a) Tax Treatment.  For purposes of all income,  franchise and
         other  taxes  imposed  upon or  measured  by income,  Lessee and Lessor
         Parties  intend  that  the  transactions  evidenced  by  the  Operative
         Documents  shall  be  treated  as loans  by the  Participants  (through
         Lessor) to Lessee secured by the Property,  with Lessee as owner of the
         Property.  Lessee  and the  Lessor  Parties  may only take  deductions,
         credits,  allowances and other reporting  positions on their respective
         returns,   reports  and  statements  which  are  consistent  with  such
         treatment,  unless  required to do otherwise by an  appropriate  taxing
         authority  or  after  a  clearly   applicable   change  in   applicable
         Governmental Rules;  provided,  however,  that if an appropriate taxing
         authority or a clearly  applicable  change in  applicable  Governmental
         Rules requires any Lessor Party to take such an inconsistent  position,
         such Lessor Party shall promptly notify Lessee.

                                       14



                  (b) Other Legal  Treatment.  For purposes of  bankruptcy  law,
         Lessee and Lessor Parties also intend that the  transactions  evidenced
         by  the  Operative   Documents   shall  be  treated  as  loans  by  the
         Participants  (through Lessor) to Lessee secured by the Property,  with
         Lessee as owner of the Property. Consistent with such treatment, Lessee
         and the  Lessor  Parties  intend  that,  among  other  things  for such
         purposes,  (i) the  Advances  be  treated  as  loans to  Lessee  by the
         Participants  (through  Lessor);  (ii) the  Advances  be secured by the
         Property and the Lessor Parties have the rights and remedies of secured
         lenders;  (iii) Base Rent be treated as interest on the Advances;  (iv)
         Lessee be  required  to pay on the  Expiration  Date only the  Residual
         Value  Guaranty  Amount,  the  Indemnity  Amount and the other  amounts
         required  by  Subparagraph   4.06(b)  of  the  Purchase  Agreement  (or
         Subparagraph  4.06(c) if Lessor is  retaining  the  Property) if Lessee
         exercises  the  Marketing   Option  in  accordance  with  the  Purchase
         Agreement; and (v) Lessee be required to pay on the Expiration Date the
         Outstanding  Lease Amount or any Portion  thereof and all other amounts
         outstanding  under this  Agreement  and the other  Operative  Documents
         (including  amounts  required by  Subparagraph  4.06(a) of the Purchase
         Agreement) if the Lease Agreement is terminated  prior to its Scheduled
         Expiration  Date  after an Event of  Default  occurs  under  the  Lease
         Agreement  or if  Lessee  fails  to or is  otherwise  not  entitled  to
         exercise  the  Marketing   Option  in  accordance   with  the  Purchase
         Agreement.

                  (c) No Reliance by Lessee. Lessee acknowledges and agrees that
         no Lessor Party has made any  representations  or  warranties to Lessee
         concerning  the  tax,  accounting  or  legal   characteristics  of  the
         Operative  Documents  and that Lessee has obtained and relied upon such
         tax,  accounting and legal advice concerning the Operative Documents as
         it deems appropriate.

                           (d) Modification of Operative  Documents.  Lessee and
         the Lessor  Parties shall amend or modify this  Agreement and the other
         Operative  Documents  to  the  extent  necessary  for  the  transaction
         evidenced  by this  Agreement  and the  other  Operative  Documents  to
         qualify  as an  operating  lease  pursuant  to FASB  13 for  accounting
         purposes  if, and only if, such  amendments  and  modifications  do not
         adversely  affect  either  Lessee or any  Lessor  Party in its sole and
         absolute discretion .

                  2.11.    Security.

                  (a)      Lessee Obligations.

                           (i) To the extent that the  transaction  evidenced by
                  the Lease  Agreement,  Purchase  Agreement and other Operative
                  Documents  is treated as a loan by the  Participants  (through
                  Lessor) to Lessee  secured  by the  Property,  with  Lessee as
                  owner of the Property  pursuant to Paragraph  2.10, the Lessee
                  Obligations  shall be secured by the Real Property  Collateral
                  and  the  Personal  Property  Collateral  (collectively,   the
                  "Property  Collateral") as provided in  Subparagraphs  2.07(a)
                  and 2.07(b) of the Lease  Agreement  and in an  Assignment  of
                  Construction  Agreements  in  the  form  of  Exhibit  H,  duly
                  executed   by  Lessee   (the   "Assignment   of   Construction
                  Agreements").

                                       15


                           (ii) In  addition  to the  Property  Collateral,  the
                  Lessee Obligations may be secured, at Lessee's election,  by a
                  Cash  Collateral  Agreement  in the form of  Exhibit  I,  duly
                  executed by Lessee (the "Cash Collateral Agreement"), and Cash
                  Collateral delivered to Agent or Participants  pursuant to the
                  Cash  Collateral  Agreement.  If Lessee  elects to deliver any
                  Cash Collateral  pursuant to the Cash Collateral  Agreement to
                  decrease  the  Applicable  Margin for the LIBOR Rental Rate or
                  the Fixed Rental Rate, Lessee shall deliver to Agent, five (5)
                  Business Days' prior to the delivery of such Cash  Collateral,
                  notice of such  election and an opinion of its counsel in form
                  and substance reasonably  satisfactory to Lessor regarding the
                  Cash  Collateral  Agreement and such Cash Collateral and shall
                  deliver such Cash  Collateral only on a Scheduled Rent Payment
                  Date. Lessee shall have the option to pledge and withdraw Cash
                  Collateral  on any  Scheduled  Rent  Payment  Date;  provided,
                  however,  that in order to  withdraw  Cash  Collateral  Lessee
                  shall certify that no Default or Event of Default has occurred
                  and is  continuing  and that all other  conditions of the Cash
                  Collateral  Agreement have been complied with. Cash Collateral
                  shall  consist  of  eurodollar   deposits  or  U.S.   treasury
                  securities  with a maturity of less than two (2) years. In the
                  event that U.S. treasury securities are pledged,  Lessee shall
                  be  entitled  to a credit  for  purposes  of  determining  any
                  decrease  in the  Applicable  Margin,  in the amount of ninety
                  five percent  (95%) of the market  value of the U.S.  treasury
                  securities  pledged  on the day such  pledge  is made.  Lessee
                  shall bear all breakage or other related costs associated with
                  the Cash Collateral or any withdrawal thereof.

                  In the event that Cash  Collateral is withdrawn  from the Cash
                  Collateral  Agreement after having been deposited  thereunder,
                  at the time of such  withdrawal,  Lessee shall pay to Lessor a
                  withdrawal fee equal to the Applicable Withdrawal  Percentage,
                  as  defined  below,  multiplied  by the  amount  of  the  Cash
                  Collateral  withdrawn multiplied by a fraction the denominator
                  of which shall be 360 and the  numerator of which shall be the
                  number of days  (but not more  that 180  days)  that such Cash
                  Collateral had been on deposit pursuant to the Cash Collateral
                  Agreement.  "Applicable  Withdrawal Percentage" means 0.5%, in
                  the case Level 1 pricing (as set forth in the Pricing Grid) is
                  in effect of the date of  withdrawal,  and 0.75%,  in the case
                  Level 2  pricing  (as set  forth  in the  Pricing  Grid) is in
                  effect  of the date of  withdrawal.  In the  event  that  Cash
                  Collateral is deposited under the Cash Collateral Agreement in
                  different tranches, for purposes of computing the fee provided
                  for in the previous  sentence,  sums  withdrawn  from the Cash
                  Collateral Agreement shall be deemed to have been withdrawn on
                  a first in first out basis.

                  Lessor,  Agent and the Participants shall have a full right of
                  offset against the Cash  Collateral at all times in the amount
                  of  the  Tranche  A  Participation   Amount,   the  Tranche  B
                  Participation  Amount and the Tranche C Participation  Amount;
                  provided  that there  shall be no right or offset  against the
                  Cash Collateral for the Tranche B Participation Amount and the
                  Tranche  C  Participation  Amount  if the  Lessee  elects  and
                  completes the Marketing Option.

                                       16


                           (iii) Lessee  shall  deliver to Lessor and Agent such
                  additional  mortgages,  deeds of trust,  security  agreements,
                  pledge agreements,  lessor consents and estoppels  (containing
                  appropriate  mortgagee  and lender  protection  language)  and
                  other  instruments,  agreements,  certificates,  opinions  and
                  documents   (including   Uniform   Commercial  Code  financing
                  statements and fixture filings and landlord waivers) as Lessor
                  or  Agent  may  reasonably  request  to  (A)  grant,  perfect,
                  maintain,  protect and evidence security interests in favor of
                  Lessor or Agent in the Property Collateral and Cash Collateral
                  prior to the Liens or other interests of any Person, except in
                  the case of the Property  Collateral  for  Permitted  Property
                  Liens;  and (B)  otherwise  establish,  maintain,  protect and
                  evidence  the  rights  provided  to  Lessor  and  Agent in the
                  Property  Collateral and Cash  Collateral.  Lessee shall fully
                  cooperate  with Lessor and Agent and  perform  all  additional
                  acts  reasonably  requested  by Lessor or Agent to effect  the
                  purposes of this Subparagraph 2.11(a).

                  (b)      Lessor Obligations.
                           
                           (i) The  Lessor  Obligations  shall be secured by the
                  following:

                                    (A) An  Assignment  of Lease  Agreement  and
                           Purchase  Agreement  in the form of  Exhibit  J, duly
                           executed by Lessor (the "Assignment of Lease");

                                    (B)  A  Construction   Deed  of  Trust  with
                           Assignment of Rents,  Security  Agreement and Fixture
                           Filing in the form of  Exhibit  K, duly  executed  by
                           Lessor (the "Lessor Deed of Trust"); and

                                    (C) A  Security  Agreement  in the  form  of
                           Exhibit  L,  duly  executed  by Lessor  (the  "Lessor
                           Security Agreement").

                           (ii) Lessor  shall  deliver to Agent such  additional
                  mortgages,   deeds  of  trust,  security  agreements,   pledge
                  agreements,   lessor   consents  and   estoppels   (containing
                  appropriate  mortgagee  and lender  protection  language)  and
                  other  instruments,  agreements,  certificates,  opinions  and
                  documents   (including   Uniform   Commercial  Code  financing
                  statements and fixture filings and landlord  waivers) as Agent
                  may  reasonably  request  to  (A)  grant,  perfect,  maintain,
                  protect and evidence  security  interests in favor of Agent in
                  Lessor's   rights  in  the   Property   Collateral   and  Cash
                  Collateral; and (B) otherwise establish, maintain, protect and
                  evidence  the  rights   provided  to  Agent  in  the  Property
                  Collateral and Cash  Collateral.  Lessor shall fully cooperate
                  with  Agent  and  perform  all  additional   acts   reasonably
                  requested by Agent to effect the purposes of this Subparagraph
                  2.11(b).

                           (iii) Lessee  hereby  consents to the  Assignment  of
                  Lease,  the  Lessor  Deed of  Trust  and the  Lessor  Security
                  Agreement;  the Liens granted to Agent therein;  and all other
                  Liens granted to Agent in any of the  Operative  Documents and
                  the Property to secure the Lessor Obligations.

                                       17


         2.12.    Change of Circumstances.

                  (a) Inability to Determine  Rates.  If, on or before the first
         day of any Rental  Period for any Portion,  (i) any  Participant  shall
         advise  Agent that the LIBOR  Rental  Rate for such  Rental  Period and
         Portion  cannot be  adequately  and  reasonably  determined  due to the
         unavailability of funds in or other circumstances  affecting the London
         interbank  market,  (ii) any  Participant  shall  advise Agent that the
         LIBOR  Rental  Rate  for  such  Rental  Period  and  Portion  does  not
         adequately and fairly  reflect the cost to such  Participant of funding
         its share of such  Portion  or (iii) if Lessee  has  requested  a Fixed
         Rental Rate for such Rental Period and Portion,  any Participant  shall
         advise  Agent that such  Participant  is unable to provide a Fixed Rate
         Quote  due to the  unavailability  of funds  in or other  circumstances
         affecting the domestic  interbank market,  Agent shall immediately give
         notice of such condition to Lessee,  Lessor and the other Participants.
         After the giving of any such notice  (and until  Agent shall  otherwise
         notify  Lessee and Lessor  that the  circumstances  giving rise to such
         condition no longer exist), the LIBOR Rental Rate or Fixed Rental Rate,
         as the case may be, shall be  unavailable  and the Rental Rate for each
         Rental Period shall be one of the other rental rates then available.

                  (b)  Illegality.  If,  after the date of this  Agreement,  the
         adoption of any Governmental  Rule, any change in any Governmental Rule
         or the application or requirements  thereof (whether such change occurs
         in accordance with the terms of such Governmental Rule as enacted, as a
         result of amendment or otherwise),  any change in the interpretation or
         administration of any Governmental Rule by any Governmental  Authority,
         or  compliance  by  Lessor  or any  Participant  with  any  request  or
         directive  (whether or not having the force of law) of any Governmental
         Authority (a "Change of Law") shall make it unlawful or impossible  for
         any  Participant  to fund or maintain  its  portion of the  Outstanding
         Lease Amount or any Portion thereof at the LIBOR Rental Rate or a Fixed
         Rental Rate, such Participant shall immediately  notify Agent and Agent
         shall immediately  notify Lessee,  Lessor and the other Participants of
         such  Change of Law.  After the  giving of any such  notice  (and until
         Agent shall otherwise  notify Lessee and Lessor that such Change of Law
         is no longer in effect), the LIBOR Rental Rate or Fixed Rental Rate, as
         the case may be,  shall be  unavailable  and the  Rental  Rate for each
         Rental Period shall be one of the other rental rates then available.

                  (c) Increased Costs. If, after the date of this Agreement, any
         Change of Law:

                           (i) Shall subject  Lessor or any  Participant  to any
                  tax,  duty or other  charge  with  respect to the  Outstanding
                  Lease Amount or any Portion  thereof  thereof shall change the
                  basis of taxation of Base Rent payments by Lessee to Lessor or
                  any  Participant  under this Agreement or any other  Operative
                  Document  (except  for  changes in the rate of taxation on the
                  overall net income of Lessor or any Participant imposed by its
                  jurisdiction of  incorporation or any jurisdiction in which it
                  maintains an office); or

                           (ii)  Shall  impose,  modify or hold  applicable  any
                  reserve (excluding any Reserve Requirement or other reserve to
                  the extent  included in the  calculation  of the LIBOR  Rental
                  Rate),  special deposit or similar  requirement against assets

                                       18


                  held by,  deposits or other  liabilities in or for the account
                  of, advances or loans by, or any other acquisition of funds by
                  Lessor or any  Participant  for its portion of the Outstanding
                  Lease Amount or any Portion thereof; or

                           (iii) Shall impose on Lessor or any  Participant  any
                  other condition related to the Outstanding Lease Amount or any
                  Portion thereof,  Base Rent or Lessor's or such  Participant's
                  commitments hereunder;

         And the  effect  of any of the  foregoing  is to  increase  the cost to
         Lessor or such Participant of funding or maintaining its portion of the
         Outstanding  Lease Amount or any Portion  thereof or  commitments or to
         reduce any amount  receivable by Lessor or such Participant  hereunder;
         then  Lessee  shall  from time to time  within  thirty  (30) days after
         demand by Lessor or such Participant, pay to Lessor or such Participant
         additional  amounts  sufficient to reimburse Lessor or such Participant
         for such increased  costs or to compensate  Lessor or such  Participant
         for such reduced amounts; provided,  however, that Lessee shall have no
         obligation  to make any  payment  to any  demanding  party  under  this
         Subparagraph  2.12(c) on account of any such increased costs or reduced
         amounts  relating  to any  Rental  Period  that ended more than six (6)
         months prior to such demanding party's first demand for payment (or, if
         any  increased  costs or reduced  amounts do not relate to a particular
         Rental  Period,  on  account  of any such  increased  costs or  reduced
         amounts  realized by the demanding party more than six (6) months prior
         to its first  demand  for  payment).  A  certificate  setting  forth in
         reasonable  detail  the  amount  of such  increased  costs  or  reduced
         amounts,  submitted  by Lessor  or such  Participant  to  Lessee  shall
         constitute  prima  facie  evidence  of  such  costs  or  amounts.   The
         obligations of Lessee under this Subparagraph 2.12(c) shall survive the
         payment and  performance of the Lessee  Obligations and the termination
         of this Agreement.

                  (d)  Capital   Requirements.   If,  after  the  date  of  this
         Agreement,  Lessor or any Participant determines that (i) any Change of
         Law affects the amount of capital  required  to be  maintained  by such
         Person or any other Person controlling such Person (a "Capital Adequacy
         Requirement") and (ii) the amount of capital  maintained by such Person
         or such  other  Person  which  is  attributable  to or  based  upon the
         Advances,  the  commitments  or this  Agreement  must be increased as a
         result of such Capital Adequacy  Requirement  (taking into account such
         Person's  or such  other  Person's  policies  with  respect  to capital
         adequacy), Lessee shall pay to such Person or such other Person, within
         thirty (30) Business Days after demand of such Person,  such amounts as
         such  Person  or such  other  Person  reasonably  shall  determine  are
         necessary  to  compensate  such  Person or such  other  Person  for the
         increased  costs to such Person or such other Person of such  increased
         capital;  provided,  however,  that Lessee shall have no  obligation to
         make any payment to any demanding party under this Subparagraph 2.12(d)
         on account of any such  increased  costs  relating to any Rental Period
         that  ended more than six (6) months  prior to such  demanding  party's
         first demand for payment (or, if any increased costs or reduced amounts
         do not relate to a  particular  Rental  Period,  on account of any such
         increased costs or reduced amounts realized by the demanding party more
         than  six  (6)  months  prior  to its  first  demand  for  payment).  A
         certificate  of Lessor or any  Participant  setting forth in reasonable
         detail the computation of any such increased  costs,  delivered by such
         Person to Lessee shall  constitute  prima facie evidence of such costs.
         The obligations of Lessee

                                       19


         under  this   Subparagraph   2.12(d)  shall  survive  the  payment  and
         performance  of the  Lessee  Obligations  and the  termination  of this
         Agreement.

                  (e) Mitigation.  If Lessor or any Participant becomes aware of
         (i) any Change of Law which will make it  unlawful  or  impossible  for
         such Person to fund or maintain  its portion of the  Outstanding  Lease
         Amount or any  Portion  thereof  at the LIBOR  Rental  Rate or (ii) any
         Change of Law or other event or condition which will obligate Lessee to
         pay  any  amount  pursuant  to  Subparagraph  2.12(c)  or  Subparagraph
         2.12(d),  such Person shall notify Lessee and Agent thereof as promptly
         as practical.  If any Person has given notice of any such Change of Law
         or other event or  condition  and  thereafter  becomes  aware that such
         Change of Law or other  event or  condition  has ceased to exist,  such
         Person shall notify  Lessee and Agent thereof as promptly as practical.
         Each  Person  affected  by any Change of Law which makes it unlawful or
         impossible  for such  Person to fund or  maintain  its  portion  of the
         Outstanding  Lease  Amount or any Portion  thereof at the LIBOR  Rental
         Rate or to which  Lessee is  obligated  to pay any amount  pursuant  to
         Subparagraph  2.12(c)  or  Subparagraph  2.12(d)  shall use  reasonable
         commercial  efforts   (including   changing  the  jurisdiction  of  its
         Applicable  Participating Office) to avoid the effect of such Change of
         Law or to avoid or  materially  reduce  any  amounts  which  Lessee  is
         obligated  to pay  pursuant  to  Subparagraph  2.12(c) or  Subparagraph
         2.12(d) if, in the  reasonable  opinion of such  Person,  such  efforts
         would not be disadvantageous to such Person.

         2.13.    Taxes on Payments.

                  (a) Payments Free of Taxes.  All payments made by Lessee under
         this Agreement and the other Operative Documents shall be made free and
         clear of, and without  deduction or  withholding  for or on account of,
         any present or future  Indemnified  Taxes,  now or  hereafter  imposed,
         levied, collected,  withheld or assessed by any Governmental Authority.
         If any  Indemnified  Taxes are required to be withheld from any amounts
         payable  to any Lessor  Party  hereunder  or under the other  Operative
         Documents,  the  amounts  so  payable  to such  Lessor  Party  shall be
         increased to the extent  necessary to yield to such Lessor Party (after
         payment  of all  Indemnified  Taxes)  the Base  Rent or any such  other
         amounts payable  hereunder at the rates or in the amounts  specified in
         this  Agreement  and  the  other  Operative  Documents.   Whenever  any
         Indemnified  Taxes are  payable  by Lessee,  as  promptly  as  possible
         thereafter,  Lessee  shall send to Agent for its own account or for the
         account of Lessor or such Participant,  as the case may be, a certified
         copy of an original official receipt received by Lessee showing payment
         thereof.  If Lessee fails to pay any Indemnified  Taxes when due to the
         appropriate  taxing  authority  or fails to remit to Agent the required
         receipts or other required documentary evidence, Lessee shall indemnify
         the Lessor  Parties for any  incremental  taxes,  interest or penalties
         that may become  payable by the Lessor  Parties as a result of any such
         failure.  The  obligations  of Lessee under this  Subparagraph  2.13(a)
         shall survive the payment and performance of the Lessee Obligations and
         the termination of this Agreement.

                  (b)  Withholding  Exemption  Certificates.  On or prior to the
         Closing  Date or, if such date does not occur  within  thirty (30) days
         after the date of this  Agreement,  by the end of such  30-day  period,
         Lessor,  if it is not incorporated  under the laws of the United

                                       20


         States of America or a state thereof, and each Participant which is not
         incorporated  under the laws of the United States of America or a state
         thereof shall deliver to Lessee and Agent two duly completed  copies of
         United States Internal  Revenue Service Form 1001 or 4224 (or successor
         applicable  form),  as the case may be,  certifying  in each  case that
         Lessor or such Participant,  as the case may be, is entitled to receive
         payments under this Agreement and the other Operative Documents without
         deduction or  withholding  of any United States  federal  income taxes.
         Each  Person  which  delivers  to Lessee  and Agent a Form 1001 or 4224
         pursuant to the immediately  preceding  sentence further  undertakes to
         deliver to Lessee and Agent two further copies of Form 1001 or 4224 (or
         successor  applicable  forms),  or other  manner  of  certification  or
         procedure, as the case may be, on or before the date that any such form
         expires  or  becomes  obsolete  or after  the  occurrence  of any event
         requiring a change in the most recent form  previously  delivered by it
         to Lessee and Agent,  and such  extensions  or renewals  thereof as may
         reasonably be requested by Lessee or Agent, certifying in the case of a
         Form 1001 or 4224 that such  Person is  entitled  to  receive  payments
         under  this  Agreement  and  the  other  Operative   Documents  without
         deduction or  withholding  of any United States  federal  income taxes,
         unless in any such cases an event  (including  without  limitation  any
         change in treaty,  law or regulation) has occurred prior to the date on
         which any such delivery  would  otherwise be required which renders all
         such forms  inapplicable or which would prevent Lessor or a Participant
         from duly  completing  and  delivering any such form with respect to it
         and Lessor or such Participant  advises Lessee and Agent that it is not
         capable of receiving  payments  without any deduction or withholding of
         United States federal income tax.

                  (c)  Mitigation.  If any Lessor  Party  claims any  additional
         amounts to be payable  to it  pursuant  to this  Paragraph  2.13,  such
         Lessor  Party  shall  use  reasonable  commercial  efforts  to file any
         certificate  or  document  requested  in writing  by Lessee  (including
         copies of  Internal  Revenue  Service  Form 1001 (or  successor  forms)
         reflecting a reduced rate of withholding) or to change the jurisdiction
         of its Applicable  Participating  Office if the making of such a filing
         or such  change in the  jurisdiction  of its  Applicable  Participating
         Office would avoid the need for or materially  reduce the amount of any
         such  additional  amounts  which may  thereafter  accrue and if, in the
         reasonable  opinion  of a  Participant,  in the case of a change in the
         jurisdiction of its Applicable  Participating Office, such change would
         not be disadvantageous to such Person.

                  (d) Tax  Returns.  Nothing  contained in this  Paragraph  2.13
         shall require any Lessor Party to make available any of its tax returns
         (or any other  information  relating  to its taxes which it deems to be
         confidential).

         2.14. Funding Loss Indemnification.  If Lessee shall (a) pay all or any
portion of the Outstanding  Lease Amount or any Portion thereof on any day other
than the last day of a Rental Period therefor  (whether an optional  payment,  a
mandatory  payment or otherwise)  or (b) cancel or otherwise  fail to consummate
any Advance  Request which has been  delivered to Agent  (whether as a result of
the failure to satisfy any applicable  conditions or  otherwise),  Lessee shall,
upon  demand by Lessor or any  Participant,  reimburse  such Person for and hold
such  Person  harmless  from all costs and losses  incurred  by such Person as a
result of such payment,  cancellation or failure.  Lessee  understands that such
costs and losses may include, without limitation, losses incurred by Lessor or a
Participant  as a result of funding  and other  contracts

                                       21


entered into by such Person to fund its portion of the Outstanding  Lease Amount
or any Portion thereof.  Each Person demanding payment under this Paragraph 2.14
shall deliver to Lessee,  with a copy to Agent, a certificate  setting forth the
amount of costs and losses for which demand is made, which certificate shall set
forth in  reasonable  detail  the  calculation  of the amount  demanded.  Such a
certificate so delivered to Lessee shall constitute prima facie evidence of such
costs and losses.  The  obligations  of Lessee under this  Paragraph  2.14 shall
survive  the  payment  and  performance  of  the  Lessee   Obligations  and  the
termination of this Agreement.

         2.15. Replacement of Participants.  If any Participant shall (a) become
a  Defaulting   Participant  more  than  once,  (b)  continue  as  a  Defaulting
Participant  for more than five (5)  Business  Days at any  time,  (c)  deliver,
pursuant  to  Subparagraph  2.12(b),  a notice of a Change of Law which does not
affect Majority Participants, (d) demand any payment under Subparagraph 2.12(c),
2.12(d)  or  2.13(a)  for  a  reason  which  is  not   applicable   to  Majority
Participants,   or  (e)  deny  a  Lease  Extension   Request  made  pursuant  to
Subparagraph  2.09(b),  then Agent may (or upon the written request of Lessee if
no  Event of  Default  has  occurred  and is  continuing,  shall)  replace  such
Participant (the "affected Participant"),  or cause such affected Participant to
be replaced, with another financial institution (the "replacement  Participant")
satisfying the requirements of an Eligible Assignee under Subparagraph  7.05(b),
by having  the  affected  Participant  sell and  assign  all of its  rights  and
obligations  under  this  Agreement  and the other  Operative  Documents  to the
replacement  Participant pursuant to Subparagraph  7.05(b);  provided,  however,
that if Lessee  seeks to exercise  such right,  it must do so within  sixty (60)
days after it first  receives  notice of the event,  condition or demand  giving
rise to such right,  or within  thirty (30) days after such notice in the case a
denial  of a Lease  Extension  Request,  and no  Lessor  Party  shall  have  any
obligation  to identify or locate a  replacement  Participant  for Lessee.  Upon
receipt by any affected  Participant of a written notice from Agent stating that
Agent is exercising the replacement right set forth in this Paragraph 2.15, such
affected  Participant  shall sell and  assign all of its rights and  obligations
under  this  Agreement  and the other  Operative  Documents  to the  replacement
Participant  pursuant to an Assignment  Agreement and Subparagraph 7.05(b) for a
purchase price equal to the sum of its portion of the  Outstanding  Lease Amount
or any Portion thereof, the accrued and unpaid portion of the Base Rent relating
to such portion and its ratable share of all fees to which it is entitled.


SECTION 3.        CONDITIONS PRECEDENT.

         3.01. Initial Acquisition Advance. The obligation of Lessor to make the
Initial  Acquisition  Advance (and the  obligations of the  Participants to fund
their respective  Proportionate  Shares of the Initial  Acquisition  Advance) is
(are) subject to receipt by Agent, on or prior to the Closing Date, of each item
listed in Schedule  3.01,  each in form and  substance  satisfactory  to Lessor,
Agent and each Participant,  and with sufficient  copies for, Lessor,  Agent and
each Participant.

         3.02. Tract 2 Acquisition Advance. The obligation of Lessor to make the
Tract 2 Acquisition  Advance (and the  obligations of the  Participants  to fund
their  respective  Proportionate  Shares of the Tract 2 Acquisition  Advance) is
(are) subject to receipt by Agent, on or prior to the Tract 2 Acquisition  Date,
of each item listed in Schedule 3.02, each in form and

                                       22


substance  satisfactory  to  Lessor,  Agent  and  each  Participant,   and  with
sufficient copies for, Lessor, Agent and each Participant.

         3.03.  Improvement/Expense  Advances.  The obligation of Lessor to make
each  Improvement/Expense  Advance (and the  obligations of the  Participants to
fund their respective  Proportionate Shares of such Advance) is (are) subject to
(i)  satisfaction of the conditions set forth in Paragraph 3.01, (ii) receipt by
Agent  pursuant  to  Paragraph  2.03 of the Advance  Request  for such  Advance,
appropriately  completed and duly executed by Lessee, and (iii) receipt by Agent
of date-down  endorsements to Agent's and Lessor's title  insurance  policies or
binders acceptable to Agent and Lessor.

         3.04. Other Conditions  Precedent.  The occurrence of each Credit Event
(including  the making of each Advance by Lessor and the funding of each Advance
by the Participants) is subject to the further conditions that, on the date such
Credit  Event is to occur and after  giving  effect to such  Credit  Event,  the
following shall be true and correct:

                  (a) The  representations and warranties of Lessee set forth in
         Paragraph  4.01  and in the  other  Operative  Documents  are  true and
         correct in all  material  respects as if made on such date  (except for
         representations  and warranties  expressly made as of a specified date,
         which shall be true as of such date);

                  (b) No Default has occurred and is  continuing  or will result
         from such Credit Event; and

                  (c)  All of the  Operative  Documents  are in full  force  and
         effect.

The  submission  by Lessee to Lessor  and Agent of each  Advance  Request,  each
Notice of Rental  Period  Selection  and a Notice of Marketing  Option  Exercise
shall be deemed to be a  representation  and warranty by Lessee that each of the
statements  set forth above in this Paragraph 3.03 is true and correct as of the
date of such request and notice.

         3.05.  Covenant to Deliver.  Lessee agrees (not as a condition but as a
covenant)  to deliver to Lessor and Agent each item  required to be delivered to
Lessor and Agent as a condition to each Advance if such Advance is made.  Lessee
expressly  agrees that the making of any Advance  prior to the receipt by Lessor
and Agent of any such item shall not constitute a waiver by Lessor, Agent or any
Participant of Lessee's obligation to deliver such item, unless expressly waived
in writing.


SECTION 4. REPRESENTATIONS AND WARRANTIES.

         4.01. Lessee's  Representations and Warranties.  In order to induce the
Lessor Parties to enter into this Agreement and the other Operative Documents to
which they are  parties,  Lessee  hereby  represents  and warrants to the Lessor
Parties as follows:

                  (a) Due Incorporation,  Qualification, etc. Each of Lessee and
         Lessee's  Subsidiaries  (i) is a corporation  duly  organized,  validly
         existing  and  in  good  standing  under  the  laws  of  its  state  of
         incorporation;  (ii) has the  power  and  authority  to own,  lease

                                       23


         and operate its  properties and carry on its business as now conducted;
         and  (iii)  is duly  qualified,  licensed  to do  business  and in good
         standing  as a  foreign  corporation  in each  jurisdiction  where  the
         failure to be so qualified or licensed is  reasonably  likely to have a
         Material Adverse Effect.

                  (b)  Authority.  The  execution,  delivery and  performance by
         Lessee of each  Operative  Document  executed,  or to be  executed,  by
         Lessee and the  consummation of the transactions  contemplated  thereby
         (i) are within  the power of Lessee and (ii) have been duly  authorized
         by all necessary actions on the part of Lessee.

                  (c) Enforceability. Each Operative Document executed, or to be
         executed,  by Lessee has been,  or will be, duly executed and delivered
         by Lessee  and  constitutes,  or will  constitute,  a legal,  valid and
         binding obligation of Lessee,  enforceable against Lessee in accordance
         with its terms,  except as limited by  bankruptcy,  insolvency or other
         laws of general application relating to or affecting the enforcement of
         creditors' rights generally and general principles of equity.

                  (d) Non-Contravention. The execution and delivery by Lessee of
         the  Operative  Documents  executed by Lessee and the  performance  and
         consummation  of the  transactions  contemplated  thereby  do  not  (i)
         violate any  Requirement of Law applicable to Lessee;  (ii) violate any
         provision  of,  or  result in the  breach  or the  acceleration  of, or
         entitle any other  Person to  accelerate  (whether  after the giving of
         notice or lapse of time or both), any Contractual Obligation of Lessee;
         or (iii)  result  in the  creation  or  imposition  of any Lien (or the
         obligation  to create or impose any Lien) upon any  property,  asset or
         revenue of Lessee  (except such Liens as may be created in favor of the
         Lessor  Parties  pursuant  to this  Agreement  or the  other  Operative
         Documents).

                  (e) Approvals.  No consent,  approval,  order or authorization
         of, or  registration,  declaration  or filing  with,  any  Governmental
         Authority  or  other  Person  (including,   without   limitation,   the
         shareholders  of  any  Person)  is  required  in  connection  with  the
         execution  and delivery of the Operative  Documents  executed by Lessee
         and the  performance  and  consummation  by Lessee of the  transactions
         contemplated thereby, except such as have been made or obtained and are
         in full force and effect.

                  (f) No  Violation  or Default.  Neither  Lessee nor any of its
         Subsidiaries  is in  violation of or in default with respect to (i) any
         Requirement  of Law  applicable  to such Person;  (ii) any  Contractual
         Obligation of such Person (nor is there any waiver in effect which,  if
         not in effect, would result in such a violation or default),  where, in
         each case,  such  violation or default is  reasonably  likely to have a
         Material  Adverse  Effect.  Without  limiting  the  generality  of  the
         foregoing,  except as disclosed in the reports and documents  described
         on Schedule 4.01(f) (the "Environmental  Reports"),  neither Lessee nor
         any of its  Subsidiaries (A) has violated any  Environmental  Laws, (B)
         has any  liability  under any  Environmental  Laws or (C) has  received
         notice  or  other   communication  of  an  investigation  or  is  under
         investigation by any Governmental Authority having authority to enforce
         Environmental Laws, where such violation, liability or investigation is
         reasonably  likely to have a Material  Adverse  Effect.  No Default has
         occurred and is continuing.

                                       24


                  (g)  Litigation.  Except as set forth (with  estimates  of the
         dollar amounts  involved) in Schedule 4.01(g),  no actions  (including,
         without  limitation,   derivative  actions),   suits,   proceedings  or
         investigations  are pending or, to the knowledge of Lessee,  threatened
         against  Lessee or any of its  Subsidiaries  at law or in equity in any
         court  or  before  any  other  Governmental   Authority  which  (i)  is
         reasonably  likely  (alone  or in the  aggregate)  to  have a  Material
         Adverse Effect or (ii) seeks to enjoin,  either directly or indirectly,
         the  execution,  delivery  or  performance  by Lessee of the  Operative
         Documents or the transactions contemplated thereby.

                  (h)   Title;   Possession   Under   Leases.   Lessee  and  its
         Subsidiaries  own  and  have  good  and  marketable  title,  or a valid
         leasehold  interest in, all their  respective  properties and assets as
         reflected in the most recent  Financial  Statements  delivered to Agent
         (except those assets and properties  disposed of in the ordinary course
         of business or otherwise in compliance  with this  Agreement  since the
         date of  such  Financial  Statements)  and all  respective  assets  and
         properties  acquired  by Lessee  and its  Subsidiaries  since such date
         (except  those  disposed  of in the  ordinary  course  of  business  or
         otherwise  in  compliance  with  this   Agreement).   Such  assets  and
         properties are subject to no Lien,  except for Permitted Liens. Each of
         Lessee and its Subsidiaries has complied with all material  obligations
         under all  material  leases to which it is a party and all such  leases
         are in full  force  and  effect.  Each of Lessee  and its  Subsidiaries
         enjoys peaceful and undisturbed possession under such leases.

                  (i) Financial  Statements.  The Financial Statements of Lessee
         and its  Subsidiaries  which have been  delivered to Agent,  (i) are in
         accordance  with the books and records of Lessee and its  Subsidiaries,
         which have been maintained in accordance  with good business  practice;
         (ii) have been  prepared  in  conformity  with GAAP;  and (iii)  fairly
         present the  financial  conditions  and results of operations of Lessee
         and its  Subsidiaries as of the date thereof and for the period covered
         thereby.  Neither Lessee nor any of its Subsidiaries has any contingent
         obligations, liability for taxes or other outstanding obligations which
         are  material  in the  aggregate,  except as  disclosed  in the audited
         Financial  Statements dated September 30, 1997,  furnished by Lessee to
         Agent  prior  to  the  date  hereof,  or in  the  Financial  Statements
         delivered to Agent pursuant to clause (i) or (ii) of Subparagraph 5.01.

                  (j) Equity  Securities.  All outstanding  Equity Securities of
         Lessee   are  duly   authorized,   validly   issued,   fully  paid  and
         non-assessable.  All Equity  Securities of Lessee have been offered and
         sold in compliance  with all federal and state  securities laws and all
         other Requirements of Law.

                  (k) No  Agreements  to Sell Assets;  Etc.  Except as otherwise
         permitted by  Subparagraph  5.02(c) or  Subparagraph  5.02(d),  neither
         Lessee nor any of its Subsidiaries has any legal  obligation,  absolute
         or contingent, to any Person to sell the assets of Lessee or any of its
         Subsidiaries (other than sales in the ordinary course of business),  or
         to effect any merger,  consolidation or other  reorganization of Lessee
         or any of its  Subsidiaries or to enter into any agreement with respect
         thereto.

                                       25



                  (l)      Employee Benefit Plans.

                           (i) Based upon the latest  valuation of each Employee
                  Benefit  Plan  that  either  Lessee  or  any  ERISA  Affiliate
                  maintains  or  contributes  to,  or has any  obligation  under
                  (which  occurred  within  twelve  months  of the  date of this
                  representation),  the current  liabilities of such plan within
                  the  meaning  of  ss.302(d)(7)  of ERISA  did not  exceed  the
                  aggregate value of the assets of such plan. Neither Lessee nor
                  any ERISA  Affiliate  has any  liability  with  respect to any
                  post-retirement  benefit under any Employee Benefit Plan which
                  is a welfare plan (as defined in section 3(1) of ERISA), other
                  than liability for health plan continuation coverage described
                  in Part 6 of Title I(B) of ERISA,  which  liability for health
                  plan contribution  coverage is not reasonably likely to have a
                  Material Adverse Effect.

                           (ii) Each  Employee  Benefit Plan  complies,  in both
                  form and operation,  in all material respects, with its terms,
                  ERISA  and the IRC,  and no  condition  exists  or  event  has
                  occurred  with  respect to any such plan which would result in
                  the incurrence by either Lessee or any ERISA  Affiliate of any
                  liability, fine or penalty that is reasonably likely to have a
                  Material Adverse Effect.  Each Employee Benefit Plan,  related
                  trust  agreement,  arrangement and commitment of Lessee or any
                  ERISA Affiliate is legally valid and binding and in full force
                  and  effect.  No  Employee  Benefit  Plan is being  audited or
                  investigated  by any  government  agency or is  subject to any
                  pending or threatened claim or suit that is reasonably  likely
                  to have a  Material  Adverse  Effect.  Neither  Lessee nor any
                  ERISA Affiliate nor any fiduciary of any Employee Benefit Plan
                  has engaged in a prohibited  transaction  under section 406 of
                  ERISA or section 4975 of the IRC.

                           (iii)   Neither   Lessee  nor  any  ERISA   Affiliate
                  contributes to or has any material  contingent  obligations to
                  any Multiemployer Plan. Neither Lessee nor any ERISA Affiliate
                  has incurred any liability  (including secondary liability) to
                  any  Multiemployer  Plan as a result of a complete  or partial
                  withdrawal from such  Multiemployer Plan under Section 4201 of
                  ERISA or as a result of a sale of assets  described in Section
                  4204 of ERISA  that is  reasonably  likely to have a  Material
                  Adverse  Effect.  Neither  Lessee nor any ERISA  Affiliate has
                  been notified that any Multiemployer Plan is in reorganization
                  or  insolvent  under and within the meaning of Section 4241 or
                  Section 4245 of ERISA or that any  Multiemployer  Plan intends
                  to terminate or has been  terminated  under  Section  4041A of
                  ERISA.

                  (m) Other  Regulations.  Lessee is not  subject to  regulation
         under the Investment  Company Act of 1940,  the Public Utility  Holding
         Company Act of 1935,  the Federal  Power Act, the  Interstate  Commerce
         Act, any state public utilities code or to any other  Governmental Rule
         limiting its ability to incur indebtedness.

                  (n) Patent and Other Rights.  Lessee and its  Subsidiaries own
         or license under validly  existing  agreements  all patents,  licenses,
         trademarks,  trade names, trade secrets,  service marks, copyrights and
         all rights with respect  thereto,  which are required to conduct  their
         businesses as now conducted.

                                       26


                  (o) Governmental  Charges and Other  Indebtedness.  Lessee and
         its Subsidiaries have filed or caused to be filed all tax returns which
         are  required to be filed by them where  failure to file is  reasonably
         likely to have a Material  Adverse Effect.  Lessee and its Subsidiaries
         have paid,  or made  provision  for the payment of, all taxes and other
         Governmental Charges which have or may have become due pursuant to said
         returns  or  otherwise   and  all  other   indebtedness,   except  such
         Governmental Charges or indebtedness, if any, which are being contested
         in  good  faith  and  as to  which  adequate  reserves  (determined  in
         accordance  with GAAP) have been  provided or which are not  reasonably
         likely to have a Material Adverse Effect if unpaid.

                  (p) Margin  Stock.  Lessee owns no Margin Stock which,  in the
         aggregate, would constitute a substantial part of the assets of Lessee,
         and no proceeds of any Loan will be used to purchase or carry, directly
         or  indirectly,  any  Margin  Stock or to extend  credit,  directly  or
         indirectly, to any Person for the purpose of purchasing or carrying any
         Margin Stock.

                  (q)  Subsidiaries,  etc.  Set forth in  Schedule  4.01(q)  (as
         supplemented  by Lessee from time to time in a written notice to Agent)
         is a complete list of all of Lessee's Subsidiaries, the jurisdiction of
         incorporation of each, the classes of Equity Securities of each and the
         number of shares and  percentages  of shares of each such  class  owned
         directly or  indirectly  by Lessee.  To the  knowledge  of Lessee after
         reasonable   investigation,   set  forth  on   Schedule   4.01(q)   (as
         supplemented  by Lessee from time to time in a written notice to Agent)
         is a description  of each  partnership or joint venture in which Lessee
         is a partner or a venturer.  Except as disclosed  on Schedule  4.01(q),
         Lessee  has no  Subsidiaries,  and to the  knowledge  of  Lessee  after
         reasonable  investigation Lessee is not a partner in any partnership or
         a joint venturer in a joint venture.

                  (r)  Catastrophic  Events.  Neither  Lessee  nor  any  of  its
         Subsidiaries  and none of their  properties  is or has been affected by
         any fire, explosion,  accident, strike, lockout or other labor dispute,
         drought, storm, hail, earthquake, embargo, act of God or other casualty
         that is reasonably likely to have a Material Adverse Effect.  There are
         no disputes  presently subject to grievance  procedure,  arbitration or
         litigation   under  any  of  the  collective   bargaining   agreements,
         employment  contracts or employee  welfare or incentive  plans to which
         Lessee or any of its Subsidiaries is a party, and there are no strikes,
         lockouts,  work  stoppages or slowdowns,  or, to the best  knowledge of
         Lessee,  jurisdictional  disputes or organizing activities occurring or
         threatened  which alone or in the  aggregate are  reasonably  likely to
         have a Material Adverse Effect.

                  (s) Burdensome  Contractual  Obligations,  Etc. Neither Lessee
         nor any of its  Subsidiaries and none of their properties is subject to
         any  Contractual  Obligation or  Requirement of Law which is reasonably
         likely to have a Material Adverse Effect.

                  (t) No Material  Adverse Effect.  No event has occurred and no
         condition exists which is reasonably  likely to have a Material Adverse
         Effect.

                                       27


                  (u) The Property.  The representations and warranties relating
         to each Tract set forth in Parts 1 and 2 of  Schedule  4.01(u) are true
         and correct. The following  representations and warranties apply to all
         Tracts on the Acquisition Date thereof:

                           (i) All of the  Property  complies and will comply at
                  all times (whether before  commencement  of any  construction,
                  during any construction or after completion of construction of
                  any New Improvements)  with all applicable  Governmental Rules
                  (including Title III of the Americans with  Disabilities  Act;
                  Environmental Laws; and zoning,  land use, building,  planning
                  and fire laws,  rules,  regulations  and codes) and  Insurance
                  Requirements,  except for violations  which are not reasonably
                  likely to have a Material Adverse Effect.  Except as disclosed
                  in the Environmental  Reports, (A) no Hazardous Materials have
                  been used, generated,  manufactured, stored, treated, disposed
                  of,  transported or present on or released or discharged  from
                  the Property in any manner that is reasonably likely to have a
                  Material Adverse Effect and (B) there are no claims or actions
                  which are reasonably  likely to have a Material Adverse Effect
                  pending or, to Lessee's  knowledge,  threatened against any of
                  the Property by any Governmental Authority or any other Person
                  relating   to   Hazardous   Materials   or   pursuant  to  any
                  Environmental Laws.

                           (ii)  None  of  the   Improvements   (whether  before
                  commencement of any  construction,  during any construction or
                  after  completion  of  construction  of any New  Improvements)
                  encroach  or will at any time  encroach in any manner onto any
                  adjoining  land,  except as permitted  by express  written and
                  recorded  encroachment  agreements  approved  by  Agent  or as
                  affirmatively insured against by appropriate title insurance.

                           (iii)  All   licenses,   approvals,   authorizations,
                  consents,  permits,  easements and rights-of-way  required for
                  the use of any of the Property  have been  obtained or, if not
                  yet required, will be obtained before required.

                           (iv) After the  Closing  Date,  Lessor will have good
                  and valid fee  interest in the  Property,  subject to no Liens
                  except for Permitted Property Liens.

                  (v) Chief Executive Office. Lessee's chief executive office is
         located at 120 North Redwood Drive, San Rafael, California.

                  (w) Accuracy of Information  Furnished.  None of the Operative
         Documents and none of the other certificates, statements or information
         furnished  to any Lessor  Party by or on behalf of Lessee or any of its
         Subsidiaries  in  connection  with  the  Operative   Documents  or  the
         transactions  contemplated  thereby contains or will contain any untrue
         statement of a material  fact or omits or will omit to state a material
         fact  necessary  to  make  the  statements  therein,  in  light  of the
         circumstances under which they were made, not misleading.

                  (x) The Budget attached hereto as Schedule 4.01(x) is based on
         reasonable  assumptions as to all legal and factual matters material to
         the estimates set forth therein

                                       28


         and is consistent  with the provisions of the  Construction  Agreements
         and the Operative  Documents.  To the best of Lessee's  knowledge,  the
         Budget  includes all costs necessary to complete the acquisition of the
         Property and the construction of the New Improvements.

Lessee  shall be  deemed  to have  reaffirmed,  for the  benefit  of the  Lessor
Parties,  each  representation  and warranty contained in this Paragraph 4.01 on
and as of the  date  of  each  Credit  Event  (except  for  representations  and
warranties expressly made as of a specified date, which shall be true as of such
date).

         4.02.  Lessor's  Representations  and  Warranties.  In order to  induce
Lessee,  Agent and the  Participants  to enter into this Agreement and the other
Operative  Documents to which they are parties,  Lessor  hereby  represents  and
warranties to Lessee, Agent and the Participants as follows:

                  (a) Due  Incorporation,  Qualification,  etc.  Lessor (i) is a
         corporation duly organized, validly existing and in good standing under
         the laws of Delaware and (ii) has the power and authority to own, lease
         and operate its properties and carry on its business as now conducted.

                  (b)  Authority.  The  execution,  delivery and  performance by
         Lessor of each  Operative  Document  executed,  or to be  executed,  by
         Lessor and the  consummation of the transactions  contemplated  thereby
         (i) are within  the power of Lessor and (ii) have been duly  authorized
         by all necessary actions on the part of Lessor.

                  (c) Enforceability. Each Operative Document executed, or to be
         executed,  by Lessor has been,  or will be, duly executed and delivered
         by Lessor  and  constitutes,  or will  constitute,  a legal,  valid and
         binding obligation of Lessor,  enforceable against Lessor in accordance
         with its terms,  except as limited by  bankruptcy,  insolvency or other
         laws of general application relating to or affecting the enforcement of
         creditors' rights generally and general principles of equity.

                  (d) Non-Contravention. The execution and delivery by Lessor of
         the  Operative  Documents  executed by Lessor and the  performance  and
         consummation  of the  transactions  contemplated  thereby  do  not  (i)
         violate any  Requirement of Law applicable to Lessor;  (ii) violate any
         provision  of,  or  result in the  breach  or the  acceleration  of, or
         entitle any other  Person to  accelerate  (whether  after the giving of
         notice or lapse of time or both), any Contractual Obligation of Lessor;
         or (iii)  result  in the  creation  or  imposition  of any Lien (or the
         obligation  to create or impose any Lien) upon any  property,  asset or
         revenue  of Lessor  (except  such  Liens as may be  created in favor of
         Agent pursuant to this Agreement or the other Operative Documents).

                  (e) Approvals.  No consent,  approval,  order or authorization
         of, or  registration,  declaration  or filing  with,  any  Governmental
         Authority  or  other  Person  (including,   without   limitation,   the
         shareholders  of  any  Person)  is  required  in  connection  with  the
         execution  and delivery of the Operative  Documents  executed by Lessor
         and the

                                       29


         performance and consummation of the transactions  contemplated thereby,
         except  such as have been made or  obtained  and are in full  force and
         effect.

                  (f) Litigation.  No actions  (including,  without  limitation,
         derivative actions),  suits,  proceedings or investigations are pending
         or, to the knowledge of Lessor,  threatened against Lessor at law or in
         equity in any court or before any other  Governmental  Authority  which
         (i) is reasonably  likely (alone or in the aggregate) to materially and
         adversely affect the ability of Lessor to perform its obligations under
         the Operative Documents to which it is a party or (ii) seeks to enjoin,
         either directly or indirectly,  the execution,  delivery or performance
         by Lessor of the Operative  Documents or the transactions  contemplated
         thereby.

                  (g) Other  Regulations.  Lessor is not  subject to  regulation
         under the Investment  Company Act of 1940,  the Public Utility  Holding
         Company Act of 1935,  the Federal  Power Act, the  Interstate  Commerce
         Act, any state public utilities code or to any other  Governmental Rule
         limiting its ability to incur indebtedness.

                  (h) Chief Executive Office. Lessor's chief executive office is
         located at 135 S. LaSalle Street, Suite 660, Chicago, Illinois, 60603.

         4.03. Participants'  Representations and Warranties. In order to induce
Lessee,  Lessor and Agent to enter into this  Agreement and the other  Operative
Documents to which they are parties,  each  Participant  hereby  represents  and
warranties to Lessee, Lessor and Agent as follows:

                  (a) Due  Incorporation,  Qualification,  etc. Such Participant
         (i) is a  corporation  duly  organized,  validly  existing  and in good
         standing under the laws of its  jurisdiction of  organization  and (ii)
         has the power and  authority to own,  lease and operate its  properties
         and carry on its business as now conducted.

                  (b) Authority. The execution, delivery and performance by such
         Participant of each Operative Document executed,  or to be executed, by
         such Participant and the consummation of the transactions  contemplated
         thereby (i) are within the power of such Participant and (ii) have been
         duly  authorized  by  all  necessary   actions  on  the  part  of  such
         Participant.

                  (c) Enforceability. Each Operative Document executed, or to be
         executed,  by such  Participant has been, or will be, duly executed and
         delivered by such  Participant and constitutes,  or will constitute,  a
         legal,  valid and binding  obligation of such Participant,  enforceable
         against  such  Participant  in  accordance  with its  terms,  except as
         limited by bankruptcy,  insolvency or other laws of general application
         relating to or affecting the enforcement of creditors' rights generally
         and general principles of equity.

                  (d)  Non-Contravention.  The  execution  and  delivery by such
         Participant of the Operative Documents executed by such Participant and
         the  performance  and  consummation  of the  transactions  contemplated
         thereby do not (i) violate any  Requirement  of Law  applicable to such
         Participant;  (ii) violate any provision of, or result in the breach or
         the acceleration of, or entitle any other Person to accelerate (whether

                                       30


         after the giving of notice or lapse of time or both),  any  Contractual
         Obligation  of such  Participant;  or (iii)  result in the  creation or
         imposition of any Lien (or the obligation to create or impose any Lien)
         upon any property,  asset or revenue of such  Participant  (except such
         Liens as may be  created in favor of Lessor or Agent  pursuant  to this
         Agreement or the other Operative Documents).

                  (e) Approvals.  No consent,  approval,  order or authorization
         of, or  registration,  declaration  or filing  with,  any  Governmental
         Authority  or  other  Person  (including,   without   limitation,   the
         shareholders  of  any  Person)  is  required  in  connection  with  the
         execution  and  delivery of the  Operative  Documents  executed by such
         Participant and the performance  and  consummation of the  transactions
         contemplated thereby, except such as have been made or obtained and are
         in full force and effect.

                  (f) Litigation.  No actions  (including,  without  limitation,
         derivative actions),  suits,  proceedings or investigations are pending
         or, to the  knowledge  of such  Participant,  threatened  against  such
         Participant  at law or in  equity  in any  court or  before  any  other
         Governmental  Authority which (i) is reasonably likely (alone or in the
         aggregate)  to  materially  and  adversely  affect the  ability of such
         Participant to perform its obligations under the Operative Documents to
         which  it is a party  or (ii)  seeks  to  enjoin,  either  directly  or
         indirectly, the execution,  delivery or performance by such Participant
         of the Operative Documents or the transactions contemplated thereby.

                  (g)  Own  Account.   Such   Participant   is   acquiring   its
         participation interest hereunder for its own account for investment and
         not with a view to any  distribution  (as such term is used in  Section
         2(11) of the Securities Act of 1933) thereof,  and, if in the future it
         should decide to dispose of its participation  interest, it understands
         that it may do so only in compliance  with the  Securities  Act of 1933
         and the rules and regulations of the Securities and Exchange Commission
         thereunder and any applicable state securities laws.


SECTION 5. COVENANTS.

         5.01.  Lessee's  Affirmative  Covenants.  Until the termination of this
Agreement  and the  satisfaction  in full by Lessee of all  Lessee  Obligations,
Lessee will comply,  and will cause compliance,  with the following  affirmative
covenants,  unless Lessor and Required  Participants  shall otherwise consent in
writing:

                  (a) Financial  Statements,  Reports, etc. Lessee shall furnish
         to Agent, with sufficient  copies for Lessor and each Participant,  the
         following,  each in such form and such  detail as Agent,  Lessor or the
         Required Participants shall reasonably request:

                           (i) As soon as  available  and in no event later than
                  ninety (90) days after the last day of each fiscal  quarter of
                  Lessee  (other than the last quarter of each fiscal  year),  a
                  copy  of  the   Financial   Statements   of  Lessee   and  its
                  Subsidiaries  (prepared  on a  consolidated  basis)  for  such
                  quarter  and for the  fiscal  year to date,  certified  by the
                  president  or chief  financial  officer  of Lessee to  present
                  fairly the  financial  condition,  results of  operations  and
                  other information  reflected therein

                                       31


                  and to have been prepared in accordance  with GAAP (subject to
                  normal year-end audit adjustments);

                           (ii) As soon as available  and in no event later than
                  one hundred,  twenty (120) days after the close of each fiscal
                  year of Lessee, (A) copies of the audited Financial Statements
                  of Lessee and its  Subsidiaries  (prepared  on a  consolidated
                  basis) for such year, audited by independent  certified public
                  accountants  of  recognized  national  standing  acceptable to
                  Agent and Required Participants, (B) copies of the unqualified
                  opinions (or qualified opinions reasonably acceptable to Agent
                  and Required  Participants)  delivered by such  accountants in
                  connection   with  all  such  Financial   Statements  and  (C)
                  certificates  of such  accountants  to Agent  stating  that in
                  making the  examination  necessary for their opinion they have
                  reviewed  Paragraph 5.03 and have obtained no knowledge of any
                  violation by Lessee and its  Subsidiaries of the covenants set
                  forth therein, or if, in the opinion of such accountants,  any
                  such  violation  has  occurred,  a statement  as to the nature
                  thereof;

                           (iii)   Contemporaneously   with  the  quarterly  and
                  year-end  Financial   Statements  required  by  the  foregoing
                  clauses  (i)  and  (ii),  a  compliance   certificate  of  the
                  president or chief financial  officer of Lessee (a "Compliance
                  Certificate")  which (A) states that no Default  has  occurred
                  and is continuing, or, if any such Default has occurred and is
                  continuing,  a  statement  as to the nature  thereof  and what
                  action  Lessee  proposes to take with respect  thereto and (B)
                  sets forth,  for the quarter or year covered by such Financial
                  Statements  or as of the last day of such  quarter or year (as
                  the case may be), the calculation of the financial  ratios and
                  tests provided in Paragraph 5.03;

                           (iv) As soon as  possible  and in no event later than
                  five (5)  Business  Days after any officer of Lessee  knows of
                  the occurrence or existence of (A) any Reportable  Event under
                  any  Employee  Benefit  Plan or  Multiemployer  Plan;  (B) any
                  actual or  threatened  litigation,  suits,  claims or disputes
                  against Lessee or any of its Subsidiaries  involving potential
                  monetary  damages  payable  by Lessee or its  Subsidiaries  of
                  $20,000,000  or more (alone or in the  aggregate),  other than
                  any  frivolous  claim or  litigation;  (C) any other  event or
                  condition  which  is  reasonably  likely  to  have a  Material
                  Adverse  Effect;  or (D) any  Default;  the  statement  of the
                  president or chief  financial  officer of Lessee setting forth
                  details of such  event,  condition  or Default  and the action
                  which Lessee proposes to take with respect thereto;

                           (v) As soon as  available  and in no event later than
                  five (5) Business Days after they are sent,  made available or
                  filed,  copies of (A) all registration  statements and reports
                  filed by Lessee or any of its Subsidiaries with any securities
                  exchange or the Securities and Exchange Commission (including,
                  without limitation,  all 10-Q, 10-K and 8-Q reports);  (B) all
                  reports,  proxy  statements and financial  statements  sent or
                  made  available  by Lessee or any of its  Subsidiaries  to its
                  security holders; and (C) all press releases and other similar
                  public concerning any material developments in the business of
                  Lessee or any of

                                       32


                  its  Subsidiaries  made  available  by  Lessee  or  any of its
                  Subsidiaries to the public generally;

                           (vi) As soon as available,  the consolidated plan and
                  forecast of Lessee and its  Subsidiaries for such fiscal year,
                  including quarterly cash flow projections; and

                           (vii)    Such    other    instruments,    agreements,
                  certificates,  opinions, statements, documents and information
                  relating  to  the   operations  or  condition   (financial  or
                  otherwise) of Lessee or its  Subsidiaries,  and  compliance by
                  Lessee  with  the  terms  of  this  Agreement  and  the  other
                  Operative  Documents as Agent may from time to time reasonably
                  request.

                  (b) Books and Records.  Lessee and its  Subsidiaries  shall at
         all times keep proper  books of record and account in which full,  true
         and correct  entries will be made of their  transactions  in accordance
         with GAAP.

                  (c) Inspections.  Lessee and its Subsidiaries shall permit any
         Person designated by any Participant, upon reasonable notice and during
         normal  business  hours, to visit and inspect any of the properties and
         offices  of  Lessee  and its  Subsidiaries,  to  examine  the books and
         records of Lessee and its  Subsidiaries  and make copies thereof and to
         discuss  the   affairs,   finances  and  business  of  Lessee  and  its
         Subsidiaries with, and to be advised as to the same by, their officers,
         auditors  and  accountants,  all at such  times  and  intervals  as any
         Participant  may reasonably  request;  provided,  however,  that, if no
         Default has occurred and is continuing, Lessee shall not be required to
         permit more than four (4) such visits for inspection and examination in
         any fiscal year.

                  (d) Insurance.  In addition to the insurance  requirements set
         forth in the Lease  Agreement with respect to the Property,  Lessee and
         its Subsidiaries shall:

                           (i) Carry and maintain  insurance of the types and in
                  the amounts  customarily  carried from time to time during the
                  term of this Agreement by others engaged in substantially  the
                  same  business  as  such  Person  and  operating  in the  same
                  geographic area as such Person, including, but not limited to,
                  fire,   public   liability,   property   damage  and  worker's
                  compensation;

                           (ii)  Carry  and   maintain   each  policy  for  such
                  insurance with (A) a company which has a general policy holder
                  of A or better and a financial rating of at least 10 from A.M.
                  Best and  Company at the time such policy is placed and at the
                  time of each annual  renewal  thereof or (B) any other insurer
                  which is reasonably satisfactory to Agent; and

                           (iii)  Deliver to Agent  from time to time,  as Agent
                  may request,  schedules  setting forth all  insurance  then in
                  effect.

                  (e) Governmental  Charges and Other  Indebtedness.  Lessee and
         its  Subsidiaries  shall  promptly pay and  discharge  when due (i) all
         taxes  and other  Governmental  Charges  prior to the date  upon  which
         penalties accrue thereon, (ii) all

                                       33


         Indebtedness which, if unpaid, could become a Lien upon the property of
         Lessee or its Subsidiaries and (iii) all other  indebtedness  which, if
         unpaid, is reasonably likely to have a Material Adverse Effect,  except
         such Indebtedness as may in good faith be contested or disputed, or for
         which  arrangements for deferred payment have been made,  provided that
         in each such case appropriate reserves are maintained to the reasonable
         satisfaction of Agent.

                  (f) Use of  Proceeds.  Lessee  shall  not use any  part of the
         proceeds of any  Advance,  directly or  indirectly,  for the purpose of
         purchasing  or  carrying  any  Margin  Stock  or  for  the  purpose  of
         purchasing  or  carrying  or  trading  in  any  securities  under  such
         circumstances  as to involve  Lessee or any Lessor Party in a violation
         of Regulations G, T, U or X issued by the Federal Reserve Board.

                  (g)  General  Business  Operations.  Each  of  Lessee  and its
         Subsidiaries  shall (i) preserve and maintain its  corporate  existence
         and all of its rights,  privileges and franchises  reasonably necessary
         to the conduct of its business, (ii) conduct its business activities in
         compliance with all  Requirements  of Law and  Contractual  Obligations
         applicable to such Person,  the violation of which is reasonably likely
         to have a Material  Adverse  Effect and (iii) keep all property  useful
         and  necessary  in its business in good  working  order and  condition,
         ordinary  wear and tear  excepted.  Lessee  shall  maintain  its  chief
         executive  office and principal  place of business in the United States
         and shall not relocate its chief executive office or principal place of
         business  outside of  California  except upon not less than ninety (90)
         days prior written notice to Agent.

                  (h) Plans and  Specifications.  As soon as  available,  Lessee
         shall   deliver   to  Lessor   and  Agent  a  copy  of  the  Plans  and
         Specifications for the New Improvements, together with a certificate of
         each  engineer or architect  who drafted a material  part of such plans
         and  specifications  certifying that such plans and  specifications are
         complete and comply with all applicable  laws, and either (i) a revised
         Expiration   Date   Appraisal   which  conforms  with  such  Plans  and
         Specifications  or (ii) a  certificate  from the appraiser who prepared
         the  Expiration  Date  Appraisal  to the  effect  that  such  Plans and
         Specifications  do not cause the value of any Sub-Tract to be less than
         the  value  of such  Sub-Tract  as set  forth  in the  Expiration  Date
         Appraisal delivered on the Closing Date.

         5.02.  Lessee's  Negative  Covenants.  Until  the  termination  of this
Agreement  and the  satisfaction  in full by Lessee of all  Lessee  Obligations,
Lessee will  comply,  and will cause  compliance,  with the  following  negative
covenants,  unless Lessor and Required  Participants  shall otherwise consent in
writing:

                  (a)  Indebtedness.  Neither Lessee nor any of its Subsidiaries
         shall create,  incur, assume or permit to exist any Indebtedness or any
         Guaranty    Obligations   except   for   the   following    ("Permitted
         Indebtedness"):

                           (i)  The  Lessee   Obligations  under  the  Operative
                  Documents;

                           (ii)  Indebtedness  of  Lessee  and its  Subsidiaries
                  listed  in  Schedule  5.02(a)  and  existing  on the  date  of
                  this Agreement;

                                       34


                           (iii)  Indebtedness  of Lessee  and its  Subsidiaries
                  arising from the  endorsement of instruments for collection in
                  the ordinary course of Lessee's or a Subsidiary's business;

                           (iv)  Indebtedness of Lessee and its Subsidiaries for
                  trade accounts payable,  provided that (A) such accounts arise
                  in the ordinary course of business and (B) no material part of
                  such  account is more than  ninety  (90) days past due (unless
                  subject to a bona fide dispute and for which adequate reserves
                  have been established);

                           (v) Indebtedness of Lessee and its Subsidiaries under
                  Rate  Contracts,  provided  that  all  such  arrangements  are
                  entered into in connection  with bona fide hedging  operations
                  and not for speculation;

                           (vi)  Indebtedness  of  Lessee  and its  Subsidiaries
                  under  purchase  money  loans and Capital  Leases  incurred by
                  Lessee or any of its  Subsidiaries  to finance the acquisition
                  by  such  Person  of  real  property,  fixtures  or  equipment
                  provided that in each case, (A) such  Indebtedness is incurred
                  by such  Person at the time of, or not later than  ninety (90)
                  days  after,  the first  functional  use by such Person of the
                  property so financed and (B) such Indebtedness does not exceed
                  the purchase price of the property so financed;

                           (vii)  Subordinated  Indebtedness  of Lessee  and its
                  Subsidiaries;

                           (viii)  Indebtedness  of Lessee and its  Subsidiaries
                  under initial or successive  refinancings of any  Indebtedness
                  permitted by clause (ii) above or under  replacements of lines
                  of credit or other credit commitments permitted by clause (ii)
                  above,  provided  that (A) the  principal  amount  of any such
                  refinancing  or  replacement  does not  exceed  the  principal
                  amount of the  Indebtedness  being  refinanced  or  commitment
                  being  replaced and (B) the material  terms and  provisions of
                  any such  refinancing  or replacement  (including  redemption,
                  prepayment,  default  and  subordination  provisions)  are not
                  substantially  less favorable than the comparable terms of the
                  Indebtedness  being  refinanced or commitment  being replaced,
                  except that the maturity of the new Indebtedness or commitment
                  may be longer;

                           (ix) Indebtedness of Lessee and its Subsidiaries with
                  respect to Surety Instruments  incurred in the ordinary course
                  of  business   (including   surety   bonds  issued  to  secure
                  obligations  of Lessee  and its  Subsidiaries  in  respect  of
                  equipment ordered from Lessee and its Subsidiaries);

                           (x)  Guaranty  Obligations  of Lessee in  respect  of
                  Permitted  Indebtedness of its Subsidiaries and joint ventures
                  described on Schedule 4.01(q);

                           (xi)   Indebtedness   of   Lessee   to   any  of  its
                  Subsidiaries,  Indebtedness of any of Lessee's Subsidiaries to
                  Lessee or Indebtedness of any of Lessee's  Subsidiaries to any
                  of  Lessee's  other   Subsidiaries,   provided  that  (A)  any
                  Indebtedness  of  Lessee  to any of its  Subsidiaries  and any
                  Indebtedness  of any

                                       35


                  of  Lessee's  Subsidiaries  to  Lessee  shall  be  subject  to
                  Subparagraph 5.02(j) and (B) any Indebtedness of Lessee to any
                  of its Subsidiaries is Subordinated Indebtedness;

                           (xiii)   Other   Indebtedness   of  Lessee   and  its
                  Subsidiaries, provided that the aggregate amount of such other
                  Indebtedness   outstanding   at  any  time  does  not   exceed
                  twenty-five  percent  (25%) of Lessee's  Tangible Net Worth on
                  the last day of the immediately preceding fiscal year.

                  (b) Liens.  Neither Lessee nor any of its  Subsidiaries  shall
         create, incur, assume or permit to exist any Lien on or with respect to
         any of its assets or  property of any  character,  whether now owned or
         hereafter acquired, except for the following ("Permitted Liens"):

                           (i) Liens in favor of any Lessor  Party  securing the
                  Lessee Obligations;

                           (ii) Liens listed in Schedule 5.02(b) and existing on
                  the date of this Agreement;

                           (iii) Liens for taxes or other  Governmental  Charges
                  not at the  time  delinquent  or  thereafter  payable  without
                  penalty  or  being  contested  in good  faith,  provided  that
                  adequate   reserves   for  the  payment   thereof   have  been
                  established in accordance with GAAP;

                           (iv)  Liens  of  carriers,  warehousemen,  mechanics,
                  materialmen,  vendors,  and  landlords and other similar Liens
                  imposed by law incurred in the ordinary course of business for
                  sums not overdue or being  contested  in good faith,  provided
                  that  adequate  reserves  for the  payment  thereof  have been
                  established in accordance with GAAP;

                           (v)    Deposits    under    workers'    compensation,
                  unemployment  insurance and social  security laws or to secure
                  the performance of bids,  tenders,  contracts  (other than for
                  the  repayment  of  borrowed  money) or  leases,  or to secure
                  statutory  obligations  of surety or appeal bonds or to secure
                  indemnity,  performance or other similar bonds in the ordinary
                  course of business;

                           (vi) Zoning restrictions,  easements,  rights-of-way,
                  title  irregularities  and other similar  encumbrances,  which
                  alone or in the aggregate are not substantial in amount and do
                  not materially  detract from the value of the property subject
                  thereto or interfere with the ordinary conduct of the business
                  of Lessee or any of its Subsidiaries;

                           (vii)  Banker's  Liens and similar  Liens  (including
                  set-off rights) in respect of bank deposits;

                           (viii) Liens on any property or assets  acquired,  or
                  on the property or assets of any Persons  acquired,  by Lessee
                  or any of its  Subsidiaries  after the date of this  Agreement
                  pursuant to Subparagraph 5.02(d), provided that (A) such Liens

                                       36


                  exist at the time such  property or assets or such Persons are
                  so   acquired   and  (B)  such  Liens  were  not   created  in
                  contemplation of such acquisitions;

                           (ix) Judgement Liens, provided that such Liens do not
                  have a value in excess of twenty million dollars ($20,000,000)
                  or such  Liens are  released,  stayed,  vacated  or  otherwise
                  dismissed  within thirty (30) days after issue or levy and, if
                  so stayed, such stay is not thereafter removed;

                           (x)  Rights  of  (A)   vendors   or   lessors   under
                  conditional  sale  agreements,  Capital  Leases or other title
                  retention  agreements,  provided  that, in each case, (1) such
                  rights secure or otherwise  relate to Permitted  Indebtedness,
                  (2) such  rights do not  extend  to any  property  other  than
                  property   acquired  with  the  proceeds  of  such   Permitted
                  Indebtedness   and  (3)  such   rights  do  not   secure   any
                  Indebtedness  other than such Permitted  Indebtedness  and (B)
                  lessors under operating leases;

                           (xi)   Liens  in  favor  of   customs   and   revenue
                  authorities  arising  as a matter of law to secure  payment of
                  customs duties and in connection with the importation of goods
                  in the  ordinary  course  of  Lessee's  and its  Subsidiaries'
                  businesses;

                           (xii) Liens securing  Indebtedness  which constitutes
                  Permitted  Indebtedness  under  clause  (vi)  of  Subparagraph
                  5.02(a) provided that, in each case, such Lien (A) covers only
                  those assets,  the  acquisition  of which was financed by such
                  Permitted  Indebtedness,  and (B) secures only such  Permitted
                  Indebtedness;

                           (xiii)  Liens  on  the  property  or  assets  of  any
                  Subsidiary   of  Lessee  in  favor  of  Lessee  or  any  other
                  Subsidiary of Lessee;

                           (xiv)   Liens   incurred  in   connection   with  the
                  extension,  renewal or refinancing of the Indebtedness secured
                  by the Liens described in clause (ii) or (xii) above, provided
                  that any extension, renewal or replacement Lien (A) is limited
                  to the property  covered by the existing  Lien and (B) secures
                  Indebtedness  which is no greater  in amount and has  material
                  terms  no  less  favorable  to  the   Participants   than  the
                  Indebtedness secured by the existing Lien;

                           (xv)  Liens  on   insurance   proceeds  in  favor  of
                  insurance companies with respect to the financing of insurance
                  premiums;

                           (xvi)   Liens  in   inventory   of  Lessee   and  its
                  Subsidiaries  in  favor of (A)  customers  of  Lessee  and its
                  Subsidiaries  to secure  the  obligations  of  Lessee  and its
                  Subsidiaries  in respect of equipment  ordered from Lessee and
                  its  Subsidiaries  by such customers or (B) sureties that have
                  issued   surety  bonds  to  such   customers  to  secure  such
                  obligations,  provided that each such Lien (1) covers only (y)
                  the  equipment  ordered by a customer  pursuant  to a purchase
                  order  which  has  been  delivered  to  Lessee  or  one of its
                  Subsidiaries  and (z) the parts and other  inventory of Lessee
                  and  its  Subsidiaries  which  will  be  used  to  build  such
                  equipment,  (2) secures only the obligations of Lessee and its
                  Subsidiaries  in respect of such

                                       37


                  equipment  and  (3)  terminates  upon  the  delivery  of  such
                  equipment to such customer or the ultimate  purchaser  thereof
                  or the return to such customer of such deposit;

                           (xvii) Permitted Property Liens in the Property; and

                           (xviii)  Other  Liens,  provided  that the  aggregate
                  amount of the Indebtedness outstanding at any time and secured
                  by such other Liens does not exceed  fifteen  percent (15%) of
                  Lessee's Tangible Net Worth on the last day of the immediately
                  preceding fiscal year;

         Provided, however, that the foregoing exceptions shall not be construed
         to permit any Liens, except for Permitted Property Liens, in any of the
         Property.

                  (c)  Asset  Dispositions.   Neither  Lessee  nor  any  of  its
         Subsidiaries shall sell, lease, transfer or otherwise dispose of all or
         any part of its  assets or  property,  whether  now owned or  hereafter
         acquired, except for the following:

                           (i) Sales of inventory by Lessee and its Subsidiaries
                  in the ordinary course of their businesses;

                           (ii) Sales or other dispositions of surplus, damaged,
                  worn or obsolete equipment or inventory;

                           (iii)  Sales or  other  dispositions  of  Investments
                  permitted by clause (i) of  Subparagraph  5.02(e) for not less
                  than fair market value;

                           (iv) Sales or assignments of defaulted receivables to
                  a collection agency in the ordinary course of business;

                           (v)  Licenses  by Lessee or its  Subsidiaries  of its
                  patents, copyrights, trademarks, trade names and service marks
                  in the ordinary course of its business  provided that, in each
                  case, the terms of the  transaction are terms which then would
                  prevail  in  the  market  for  similar   transactions  between
                  unaffiliated parties dealing at arm's length;

                           (vi)  Sales  or  other  dispositions  of  assets  and
                  property by Lessee to any of Lessee's  Subsidiaries  or by any
                  of  Lessee's  Subsidiaries  to  Lessee  or any  of  its  other
                  Subsidiaries,  provided  that the  terms of any such  sales or
                  other dispositions by or to Lessee are terms which are no less
                  favorable  to Lessee  then  would  prevail  in the  market for
                  similar  transactions  between unaffiliated parties dealing at
                  arm's length;

                           (vii)  Sales,  for cash,  in the  ordinary  course of
                  business of accounts receivable of Lessee and its Subsidiaries
                  and certain rights and property of Lessee and its Subsidiaries
                  related to the collection of or constituting  proceeds of such
                  accounts receivable,  with or without recourse,  at a discount
                  rate  not to  exceed  ten  percent  (10%),  provided  that the
                  aggregate  amount of accounts  receivable so sold

                                       38


                  by Lessee in any fiscal quarter does not exceed twenty million
                  dollars ($20,000,000);

                           (viii) Other sales,  leases,  transfers and disposals
                  of assets and property,  provided that the aggregate  value of
                  all such  assets and  property  (based  upon the book value of
                  such assets and  property)  so sold,  leased,  transferred  or
                  otherwise  disposed  for cash of in any  fiscal  year does not
                  exceed twenty percent (20%) of Lessee's  Tangible Net Worth on
                  the last day of the immediately preceding fiscal year;

         Provided, however, that the foregoing exceptions shall not be construed
         to permit any sales, leases, transfers or other disposals of any of the
         Property, except as expressly permitted by the Lease Agreement.

                  (d) Mergers, Acquisitions,  Etc. Neither Lessee nor any of its
         Subsidiaries  shall acquire any other Person  (whether  through  merger
         with  such  Person,  acquisition  of such  Person  as a  Subsidiary  or
         otherwise)  or all or  substantially  all of the  assets  of any  other
         Person,  except  that  Lessee  and its  Subsidiaries  may make any such
         acquisitions if (i) the aggregate  consideration paid by Lessee and its
         Subsidiaries in cash for all such  acquisitions  after the date of this
         Agreement does not exceed $50,000,000; (ii) the aggregate consideration
         paid by Lessee and its Subsidiaries in stock for all such  acquisitions
         after the date of this  Agreement  does not  exceed  $75,000,000  (such
         stock to be  valued at the  market  value  thereof  at the time paid as
         consideration);  (iii) in any merger  involving  Lessee,  Lessee is the
         surviving  corporation;  and (iv)  both  immediately  before  and after
         giving effect to any such  acquisition,  no Default shall have occurred
         and be continuing.

                  (e)  Investments.  Neither Lessee nor any of its  Subsidiaries
         shall make any Investment except for Investments in the following:

                           (i)      Investments in Cash Equivalents;

                           (ii) Investments  permitted by the investment  policy
                  of Lessee set forth in Schedule  5.02(e) or, if any changes to
                  the investment policy of Lessee are hereafter duly approved by
                  the Board of Directors of Lessee, in any subsequent investment
                  policy which is the most recent investment policy delivered by
                  Lessee to Agent with a certificate of Lessee's chief financial
                  officer to the  effect  that such  investment  policy has been
                  duly  approved by Lessee's  Board of Directors  and is then in
                  effect;

                           (iii) Loans and other  extensions of credit by Lessee
                  and its  Subsidiaries to each other to the extent permitted by
                  clause  (xi)  of  Subparagraph  5.02(a)  and  other  types  of
                  Investments by Lessee and its Subsidiaries to each other;

                           (iv)  Investments  consisting  of loans to employees,
                  officers and directors,  provided that the aggregate principal
                  amount of such loans does not exceed $10,000,000 at any time;

                                       39


                           (v)  Investments  of Lessee and its  Subsidiaries  in
                  Rate  Contracts,  provided  that  all  such  arrangements  are
                  entered into in connection  with bona fide hedging  operations
                  and not for speculation;

                           (vi) Investments  permitted by Subparagraph  5.02(d);
                  and

                           (vii) Money market mutual funds  registered  with the
                  Securities and Exchange Commission, meeting the requirement of
                  Rule 2a-7 promulgated under the Investment Company Act of 1940

                           (viii) Other Investments, provided that the aggregate
                  amount of such other  Investments  plus the aggregate  cost of
                  all  mergers  and  consolidations  consummated,   Subsidiaries
                  established  and  Subsidiaries  and assets  acquired by Lessee
                  pursuant to Subparagraph 5.02(d) does not exceed in any fiscal
                  year  (A)  $50,000,000  for any  amounts  paid in cash and (B)
                  $75,000,000  for any amounts  paid with shares of common stock
                  of Lessee (as determined  according to the stock price of such
                  shares on the date of transfer) and accounted for on a pooling
                  basis in accordance with GAAP.

                  (f) Dividends, Redemptions, Etc. Neither Lessee nor any of its
         Subsidiaries  shall pay any dividends or make any  distributions on its
         Equity  Securities;  purchase,  redeem,  retire,  defease or  otherwise
         acquire for value any of its Equity  Securities;  return any capital to
         any holder of its Equity  Securities as such; make any  distribution of
         assets,  Equity Securities,  obligations or securities to any holder of
         its  Equity  Securities  as  such;  or set  apart  any sum for any such
         purpose; except as follows:

                           (i) Either Lessee or any of its  Subsidiaries may pay
                  dividends on its capital stock payable solely in such Person's
                  own capital stock;

                           (ii) Any  Subsidiary  of Lessee may pay  dividends to
                  Lessee;

                           (iii) Lessee may  repurchase  its Equity  Securities,
                  provided that the cost of any such  repurchase,  when added to
                  the aggregate cost of all other  repurchases  made pursuant to
                  this clause (iii) since the date of this  Agreement,  does not
                  exceed five percent (5%) of Lessee's Tangible Net Worth on the
                  last day of the immediately preceding fiscal year; and

                           (iv) Lessee may pay  dividends  in cash in any fiscal
                  year in an aggregate  amount of not more than three percent of
                  Lessee's Tangible Net Worth on the last day of the immediately
                  preceding fiscal year.

                  (g)  Change  in  Business.  Neither  Lessee  nor  any  of  its
         Subsidiaries  shall  engage,  either  directly  or  indirectly  through
         Affiliates,  in any  business  other  than the  business  of  providing
         technology based services and solutions, data processing services, data
         analysis services or related services.

                  (h) Indebtedness Payments,  Etc. Neither Lessee nor any of its
         Subsidiaries shall (i) prepay, redeem,  purchase,  defease or otherwise
         satisfy  in any  manner  prior to the

                                       40


         scheduled payment thereof any Subordinated  Indebtedness or (ii) amend,
         modify or otherwise change any of the subordination or other provisions
         of  any  document,  instrument  or  agreement  evidencing  Subordinated
         Indebtedness in a manner which adversely affects the material rights of
         the Lessor Parties.

                  (i) ERISA.  Neither Lessee nor any ERISA  Affiliate  shall (i)
         adopt or  institute  any  Employee  Benefit  Plan  that is an  employee
         pension benefit plan within the meaning of Section 3(2) of ERISA,  (ii)
         take  any  action   which  will  result  in  the  partial  or  complete
         withdrawal,  within the  meanings of  sections  4203 and 4205 of ERISA,
         from a Multiemployer  Plan, (iii) engage or permit any Person to engage
         in any  transaction  prohibited by section 406 of ERISA or section 4975
         of the IRC involving any Employee  Benefit Plan or  Multiemployer  Plan
         which would subject  either  Lessee or any ERISA  Affiliate to any tax,
         penalty or other  liability  including a liability to  indemnify,  (iv)
         incur or allow to exist any accumulated  funding deficiency (within the
         meaning of section 412 of the IRC or section 302 of ERISA), (v) fail to
         make full payment when due of all amounts due as  contributions  to any
         Employee Benefit Plan or  Multiemployer  Plan, (vi) fail to comply with
         the requirements of section 4980B of the IRC or Part 6 of Title I(B) of
         ERISA, or (vii) adopt any amendment to any Employee  Benefit Plan which
         would require the posting of security pursuant to section 401(a)(29) of
         the IRC, where singly or cumulatively,  the above would have a Material
         Adverse Effect.

                  (j) Transactions  With  Affiliates.  Neither Lessee nor any of
         its Subsidiaries  shall enter into any Contractual  Obligation with any
         Affiliate or engage in any other  transaction with any Affiliate except
         upon terms at least as  favorable  to Lessee or such  Subsidiary  as an
         arms-length transaction with unaffiliated Persons.

                  (k)  Accounting  Changes.   Neither  Lessee  nor  any  of  its
         Subsidiaries  shall (i)  change its fiscal  year  (currently  October 1
         through  September  30) or (ii) except as required by GAAP,  change its
         accounting   practices  in  any  manner  which  would  affect  Lessee's
         compliance with Paragraph 5.03.

                  (l) Capital  Expenditures.  Lessee and its Subsidiaries  shall
         not pay or incur Capital  Expenditures which exceed in aggregate in any
         fiscal year $50,000,000.

         5.03.  Lessee's  Financial  Covenants.  Until the  termination  of this
Agreement  and the  satisfaction  in full by Lessee of all  Lessee  Obligations,
Lessee will comply,  and will cause  compliance,  with the  following  financial
covenants,  unless Lessor and Required  Participants  shall otherwise consent in
writing:

                  (a) Tangible  Net Worth.  Lessee shall not permit its Tangible
         Net  Worth on the  last  day of any  fiscal  quarter  (such  date to be
         referred  to herein  as a  "determination  date")  which  occurs  after
         December  31,  1997  (such date to be  referred  to herein as the "base
         date")  to be  less  than  the sum on  such  determination  date of the
         following:

                           (i)  Eighty-five  percent  (85%) of the  Tangible Net
                  Worth of Lessee and its Subsidiaries on the base date;

                                      plus

                                       41


                           (ii)  Seventy-five   percent  (75%)  of  the  sum  of
                  Lessee's  consolidated  quarterly  net  income  (ignoring  any
                  quarterly losses, except as otherwise provided in clause (iii)
                  below) for each fiscal quarter after the base date through and
                  including the fiscal quarter ending on the determination date;

                                      minus

                           (iii)  the  sum of  Lessee's  consolidated  quarterly
                  "in-process R & D loss" for each fiscal quarter after the base
                  date through and  including the fiscal  quarter  ending on the
                  determination date;

                                      plus

                           (iv) One hundred  percent  (100%) of the Net Proceeds
                  of all Equity Securities issued by Lessee and its Subsidiaries
                  (to Persons other than Lessee or its Subsidiaries)  during the
                  period   commencing  on  the  base  date  and  ending  on  the
                  determination date; and

         As used in this  Subparagraph  5.03(a),  "in-process  R & D loss" shall
         mean, with respect to any fiscal quarter in which Lessee  experiences a
         consolidated  net loss,  the  lesser of (A) the amount of such net loss
         and (B) the sum of all  in-process  research and  development  charges,
         determined on a consolidated  basis in accordance  with GAAP,  taken by
         Lessee and its Subsidiaries during such quarter.

                  (b) Leverage Ratio. Lessee shall not permit its Leverage Ratio
         to be greater than 1.15 to 1.00 at any time.

                  (c) Quick  Ratio.  Lessee  shall not permit its Quick Ratio on
         the last day of any fiscal quarter to be less than (i) 1.00 to 1.00 for
         each fiscal  quarter ending on June 30, 1998 and September 30, 1998 and
         (ii) 1.25 to 1.00 for each fiscal quarter thereafter.

                  (d) Fixed Charge Coverage  Ratio.  Lessee shall not permit its
         Fixed Charge Coverage Ratio for any consecutive  four-quarter period to
         be less than 2.00 to 1.00.

         5.04. Lessor's  Covenants.  Until the termination of this Agreement and
the  satisfaction  in full by  Lessor of all  Lessor  Obligations,  Lessor  will
comply, and will cause compliance,  with the following covenants,  unless Lessee
and Required Participants shall otherwise consent in writing:

                  (a) Use of  Proceeds.  Lessor  shall use the  proceeds  of all
         amounts  delivered to Lessor by  Participants  pursuant to Subparagraph
         2.05(a) solely to fund Advances.

                  (b) Lessor Liens.  Lessor shall not create,  incur,  assume or
         permit to exist any Lessor Lien  (other than any Lien  granted to Agent
         or any  Participant  pursuant to the Operative  Documents to secure the
         Lessor Obligations) and shall promptly discharge,  at its sole cost and
         expense,  any Lessor Lien on the Property (other than any Liens granted
         to Agent or any  Participant  pursuant to the  Operative  Documents  to
         secure the Lessor Obligations);  provided,  however,  that Lessor shall
         not be  required  so to  discharge  any

                                       42


         such Lessor Lien if the same is being (or promptly  will be)  contested
         in  good  faith  by  appropriate   proceedings  diligently  prosecuted,
         provided  that any such contest is  completed  and all Lessor Liens are
         discharged on or prior to the Expiration Date.

                  (c)  Property  Disposition.  Lessor  shall  not  sell,  lease,
         transfer or otherwise  dispose of its right,  title and interest in the
         Property and the Operative Documents except as provided in Subparagraph
         2.11(b) or Subparagraph  7.05(d) hereof or in the Purchase Agreement or
         after retaining the Property following the Expiration Date.

                  (d) Chief Executive Office.  Lessor shall not change its chief
         executive office without giving Agent prompt written notice.

         5.05. Participants' Covenants.  Each Participant covenants that it will
not fund its portion of any  Advance  with the assets of any  "employee  benefit
plan" (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA
or any "plan" (as defined in Section 4975(e)(1) of the IRC.


SECTION 6.        LESSOR, AGENT AND THEIR RELATIONS WITH PARTICIPANTS.

         6.01.  Appointment  of Agent.  Each  Participant  hereby  appoints  and
authorizes  Agent to act as its agent  hereunder  and under the other  Operative
Documents  with such powers as are expressly  delegated to Agent by the terms of
this  Agreement  and the other  Operative  Documents,  together  with such other
powers  as are  reasonably  incidental  thereto.  Lessor is not an agent for the
Participants  or Agent,  and  neither  this  Agreement  nor any other  Operative
Document  shall be construed to constitute  or evidence a partnership  among the
Lessor Parties or otherwise to impose upon Lessor or Agent any fiduciary duty.

         6.02.  Powers and  Immunities.  Neither Lessor nor Agent shall have any
duties or responsibilities except those expressly set forth in this Agreement or
in any other  Operative  Document,  be a trustee for any Participant or have any
fiduciary  duty to any  Participant.  Notwithstanding  anything to the  contrary
contained herein,  neither Lessor nor Agent shall be required to take any action
which is  contrary  to this  Agreement  or any other  Operative  Document or any
applicable Governmental Rule. Neither Lessor nor Agent nor any Participant shall
be responsible to any Participant for any recitals, statements,  representations
or  warranties  made by  Lessee  or any of its  Subsidiaries  contained  in this
Agreement  or  in  any  other  Operative  Document,  for  the  value,  validity,
effectiveness,  genuineness,  enforceability or sufficiency of this Agreement or
any  other  Operative  Document  or for  any  failure  by  Lessee  or any of its
Subsidiaries to perform their  respective  obligations  hereunder or thereunder.
Lessor  and Agent  may  employ  agents  and  attorneys-in-fact  and shall not be
responsible  to any  Participant  for the  negligence  or misconduct of any such
agents or attorneys-in-fact  selected by it with reasonable care. Neither Lessor
nor Agent nor any of their respective directors,  officers, employees, agents or
advisors shall be responsible to any Participant for any action taken or omitted
to be taken by it or them hereunder or under any other Operative  Document or in
connection  herewith or therewith,  except for its or their own gross negligence
or willful misconduct. Except as otherwise provided under this Agreement, Lessor
and Agent shall take such  action with  respect to the  Operative  Documents  as
shall be directed by the Required Participants.

                                       43


         6.03.  Reliance.  Lessor or Agent  shall be  entitled  to rely upon any
certificate,  notice or other document (including any cable, telegram, facsimile
or telex)  believed  by it in good faith to be genuine  and  correct and to have
been signed or sent by or on behalf of the proper  Person or  Persons,  and upon
advice  and  statements  of legal  counsel,  independent  accountants  and other
experts  selected  by  Lessor or Agent  with  reasonable  care.  As to any other
matters not expressly  provided for by this Agreement,  neither Lessor nor Agent
shall be required to take any action or exercise  any  discretion,  but shall be
required  to act or to refrain  from acting upon  instructions  of the  Required
Participants  and shall in all cases be fully  protected by the  Participants in
acting,  or in refraining  from acting,  hereunder or under any other  Operative
Document in accordance with the instructions of the Required  Participants,  and
such  instructions of the Required  Participants and any action taken or failure
to act pursuant thereto shall be binding on all of the Participants.

         6.04.  Defaults.  Neither  Lessor  nor  Agent  shall be  deemed to have
knowledge or notice of the  occurrence  of any Default  unless  Lessor and Agent
have received a written notice from a Participant  or Lessee,  referring to this
Agreement,  describing such Default and stating that such notice is a "Notice of
Default".  If Lessor  and Agent  receive  such a notice of the  occurrence  of a
Default, Agent shall give prompt notice thereof to the Participants.  Lessor and
Agent shall take such action with respect to such Default as shall be reasonably
directed by the Required Participants;  provided, however, that until Lessor and
Agent shall have received such directions, Lessor or Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to  such  Default  as it  shall  deem  advisable  in the  best  interest  of the
Participants.

         6.05.  Indemnification.  Without  limiting  the  Obligations  of Lessee
hereunder,  each Participant  agrees to indemnify  Lessor and Agent,  ratably in
accordance  with  such  Participant's  Proportionate  Share,  for  any  and  all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs,  expenses or disbursements of any kind or nature  whatsoever which may at
any time be imposed on,  incurred by or asserted  against Lessor or Agent in any
way relating to or arising out of this  Agreement or any documents  contemplated
by or referred to herein or therein or the transactions  contemplated  hereby or
thereby or the  enforcement  of any of the terms  hereof or  thereof;  provided,
however,  that no  Participant  shall be liable for any of the  foregoing to the
extent  they  arise  from  Lessor's  or  Agent's  gross  negligence  or  willful
misconduct.  Lessor or Agent shall be fully  justified in refusing to take or in
continuing to take any action  hereunder unless it shall first be indemnified to
its satisfaction by the  Participants  against any and all liability and expense
which may be incurred by it by reason of taking or  continuing  to take any such
action.  The  obligations  of each  Participant  under this Paragraph 6.05 shall
survive the payment and performance of the Lessee  Obligations,  the termination
of this  Agreement and any  Participant  ceasing to be a party to this Agreement
(with respect to events which occurred prior to the time such Participant ceased
to be a Participant hereunder).

         6.06.   Non-Reliance.   Each   Participant   represents  that  it  has,
independently and without reliance on Lessor,  Agent, or any other  Participant,
and based on such documents and information as it has deemed  appropriate,  made
its own appraisal of the business,  prospects,  management,  financial condition
and affairs of Lessee and the  Subsidiaries  and its own  decision to enter into
this Agreement and agrees that it will,  independently and without reliance upon
Lessor,  Agent  or any  other  Participant,  and  based  on such  documents  and
information as it shall deem  appropriate at the time,  continue to make its own
appraisals  and decisions in taking or not

                                       44


taking  action under this  Agreement or any other  Operative  Document.  Neither
Lessor  nor  Agent  nor any of  their  respective  affiliates  nor any of  their
respective  directors,  officers,  employees,  agents or  advisors  shall (a) be
required to keep any Participant informed as to the performance or observance by
Lessee or any of its Subsidiaries of the obligations under this Agreement or any
other  document  referred to or provided for herein or to make inquiry of, or to
inspect the properties or books of Lessee or any of its  Subsidiaries;  (b) have
any duty or  responsibility  to provide any Participant with any credit or other
information concerning Lessee or any of its Subsidiaries which may come into the
possession of Lessor or Agent,  except for notices,  reports and other documents
and information expressly required to be furnished to the Participants by Lessor
or  Agent  hereunder;  or (c) be  responsible  to any  Participant  for  (i) any
recital,  statement,  representation  or warranty made by Lessee or any officer,
employee or agent of Lessee in this  Agreement or in any of the other  Operative
Documents, (ii) the value, validity, effectiveness,  genuineness, enforceability
or sufficiency of this Agreement or any Operative  Document,  (iii) the value or
sufficiency of the Property or the validity or perfection of any of the liens or
security  interests intended to be created by the Operative  Documents,  or (iv)
any failure by Lessee to perform its  obligations  under this  Agreement  or any
other Operative Document.

         6.07.  Resignation or Removal of Agent. Agent may resign at any time by
giving  thirty  (30)  days  prior  written  notice  thereof  to  Lessee  and the
Participants,  and Agent may be removed at any time with or without cause by the
Required  Participants.  Upon any such  resignation  or  removal,  the  Required
Participants  shall have the right to appoint a successor Agent, which Agent, if
not a Participant,  shall be reasonably acceptable to Lessee; provided, however,
that Lessee  shall have no right to approve a  successor  Agent if a Default has
occurred and is  continuing.  Upon the  acceptance of any  appointment  as Agent
hereunder by a successor Agent,  such successor Agent shall thereupon succeed to
and become  vested with all the  rights,  powers,  privileges  and duties of the
retiring  Agent,  and the retiring Agent shall be discharged from the duties and
obligations thereafter arising hereunder. After any retiring Agent's resignation
or removal  hereunder as Agent,  the provisions of this Section VI and any other
provision of this Agreement or any other  Operative  Document which by its terms
survives the  termination  of this  Agreement  shall  continue in effect for its
benefit in respect  of any  actions  taken or omitted to be taken by it while it
was acting as Agent.

         6.08. Authorization.  Agent is hereby authorized by the Participants to
execute,  deliver and perform, each of the Operative Documents to which Agent is
or is intended to be a party and each  Participant  agrees to be bound by all of
the agreements of Agent contained in the Operative Documents.

         6.09. Lessor and Agent in their Individual  Capacities.  Lessor,  Agent
and their  respective  affiliates  may make loans to,  accept  deposits from and
generally  engage in any kind of banking or other  business  with Lessee and its
Subsidiaries and affiliates as though Lessor were not Lessor hereunder and Agent
were not Agent hereunder. With respect to Advances, if any, made by Agent in its
capacity as a Participant, Agent in its capacity as a Participant shall have the
same rights and powers under this Agreement and the other Operative Documents as
any other Participant and may exercise the same as though it were not Agent, and
the terms "Participant" or "Participants" shall include Agent in its capacity as
a Participant.

                                       45


SECTION 7.        MISCELLANEOUS

         7.01.  Notices.  Except as  otherwise  provided  herein,  all  notices,
requests,  demands,  consents,  instructions or other  communications to or upon
Lessor,  Lessee,  any  Participant  or Agent under this  Agreement  or the other
Operative  Documents shall be in writing and faxed,  mailed or delivered,  if to
Lessor, Lessee or Agent, at its respective facsimile number or address set forth
below or, if to any  Participant,  at the address or facsimile  number specified
beneath the heading  "Address for Notices" under the name of such Participant in
Part B of Schedule I (or to such other facsimile number or address for any party
as indicated in any notice given by that party to the other  parties).  All such
notices and  communications  shall be effective (a) when sent by Federal Express
or other overnight service of recognized standing, on the Business Day following
the deposit with such service;  (b) when mailed, first class postage prepaid and
addressed as aforesaid  through the United States Postal Service,  upon receipt;
(c) when delivered by hand, upon delivery; and (d) when faxed, upon confirmation
of receipt; provided, however, that any Advance Request, Notice of Rental Period
Selection, Extension Request, Notice of Term Purchase Option Exercise, Notice of
Marketing  Option Exercise or Notice of Expiration Date Purchase Option Exercise
delivered to Lessor or Agent shall not be effective  until received by Lessor or
Agent.

                                       46


                  Lessee:           Fair, Isaac and Company, Inc.
                                    120 North Redwood Drive
                                    San Rafael, CA 94903-1996
                                    Attn:  Peter L. McCorkell, General Counsel
                                    Tel. No:  (415) 472-2211
                                    Fax. No:  (415) 444-5029

                                    With copies to:

                                    Fair, Isaac and Company, Inc.
                                    120 North Redwood Drive
                                    San Rafael, CA 94903-1996
                                    Attn: Chief Financial Officer
                                    Tel. No:  (415) 472-2211
                                    Fax. No:  (415) 444-5069

                                    Fair, Isaac and Company, Inc.
                                    120 North Redwood Drive
                                    San Rafael, CA 94903-1996
                                    Attn: Treasurer
                                    Tel. No:  (415) 472-2211
                                    Fax. No:  (415) 444-5069

                  Lessor:           Lease Plan North America, Inc.
                                    c/o ABN AMRO Bank N.V.
                                    135 South LaSalle Street, Suite 660
                                    Chicago, IL 60603
                                    Attn: David M. Shipley
                                    Tel. No: (312) 904-2183
                                    Fax. No: (312) 904-6217

                  Agent:            ABN AMRO Bank N.V.
                                    Syndications Group
                                    1325 Avenue of the Americas, 9th Floor
                                    New York, NY  10019
                                    Attn:  Linda Boardman
                                    Tel. No: (212) 314-1724
                                    Fax. No: (212) 314-1712

                                    With a copy to:

                                    ABN AMRO Bank N.V.
                                    101 California Street, Suite 4550
                                    San Francisco, CA  94111-5812
                                    Attn:  Jamie Dillon
                                    Tel. No: (415) 984-3750

                                       47



                                    Fax. No: (415) 362-3524

Each Advance  Request,  Notice of Rental Period  Selection,  Extension  Request,
Notice of Term Purchase Option Exercise, Notice of Marketing Option Exercise and
Notice of Expiration  Date Purchase  Option Exercise shall be given by Lessee to
Agent's  office  located  at its  address  referred  to above  during its normal
business hours; provided,  however, that any such notice received by Agent after
10:00 a.m.  on any  Business  Day shall be deemed  received by Agent on the next
Business Day. In any case where this  Agreement  authorizes  notices,  requests,
demands  or other  communications  by Lessee to any  Lessor  Party to be made by
telephone or facsimile,  any Lessor Party may  conclusively  presume that anyone
purporting to be a person  designated  in any  incumbency  certificate  or other
similar document received by such Lessor Party is such a person.

         7.02. Expenses.  Lessee shall pay on demand, whether or not any Advance
is made hereunder,  (a) all reasonable fees and expenses,  including  reasonable
attorneys'  fees and expenses,  incurred by Lessor and Agent in connection  with
the preparation, negotiation, execution and delivery of, the consummation of the
transactions  contemplated  by and the  exercise  of their  duties  under,  this
Agreement and the other Operative Documents,  and the preparation,  negotiation,
execution and delivery of amendments  and waivers  hereunder and  thereunder and
(b) all reasonable fees and expenses,  including reasonable  attorneys' fees and
expenses,  incurred  by the  Lessor  Parties  in the  enforcement  or  attempted
enforcement of any of the Lessee  Obligations or in preserving any of the Lessor
Parties' rights and remedies  (including all such fees and expenses  incurred in
connection with any "workout" or restructuring affecting the Operative Documents
or the Lessee  Obligations  or any  bankruptcy or similar  proceeding  involving
Lessee  or any of its  Subsidiaries).  As  used  herein,  the  term  "reasonable
attorneys' fees and expenses" shall include, without limitation, allocable costs
and expenses of Agent's and Participants'  in-house legal counsel and staff. The
obligations  of Lessee under this  Paragraph  7.02 shall survive the payment and
performance of the Lessee Obligations and the termination of this Agreement.

         7.03.  Indemnification.  To the fullest extent permitted by law, Lessee
agrees to protect,  indemnify,  defend and hold harmless, on an after-tax basis,
the  Lessor  Parties  and the other  Indemnitees  from and  against  any and all
liabilities,  losses,  damages  or  expenses  of any kind or  nature  (including
Indemnified  Taxes) and from any suits,  claims or demands (including in respect
of or for reasonable  attorney's fees and other expenses)  arising on account of
or in  connection  with any  matter  or thing or  action  or  failure  to act by
Indemnitees,  or any  of  them,  arising  out of or  relating  to the  Operative
Documents, any transaction  contemplated thereby or the Property,  including any
use by  Lessee of the  Property  or the  Advances,  except  to the  extent  such
liability  arises  from  the  willful  misconduct  or gross  negligence  of such
Indemnitee.  Upon receiving knowledge of any suit, claim or demand asserted by a
third party that any Lessor Party  believes is covered by this  indemnity,  such
Lessor Party shall give Lessee notice of the matter and an opportunity to defend
it,  at  Lessee's  sole  cost  and  expense,   with  legal  counsel   reasonably
satisfactory  to such Lessor Party.  Such Lessor Parties may also require Lessee
to defend the matter.  Any failure or delay of any Lessor Party to notify Lessee
of any such suit,  claim or demand shall not relieve  Lessee of its  obligations
under this Paragraph 7.03 but shall reduce such obligations to the extent of any
increase in those obligations caused solely by any such failure or

                                       48


delay that is unreasonable.  The obligations of Lessee under this Paragraph 7.03
shall  survive the payment and  performance  of the Lessee  Obligations  and the
termination of this Agreement.

         7.04. Waivers;  Amendments. Any term, covenant,  agreement or condition
of this  Agreement or any other  Operative  Document may be amended or waived if
such  amendment or waiver is in writing and is signed by Lessor,  Lessee and the
Required Participants; provided, however that:

                  (a) Any  amendment,  waiver or consent which (i) increases the
         364-Day Commitment,  Thirty-Month Commitment or Total Commitment,  (ii)
         extends the Scheduled Expiration Date, (iii) reduces the Rental Rate or
         any fees or other amounts  payable for the account of the  Participants
         hereunder,  (iv)  postpones any date  scheduled for any payment of Base
         Rent or any  fees or  other  amounts  payable  for the  account  of the
         Participants hereunder or thereunder, (v) amends Paragraph 2.06 or this
         Paragraph 7.04, (vi) amends the definition of Required  Participants or
         (vii)  releases  Lessor's  interest  in  any  substantial  part  of the
         Property,  must be in writing  and signed or approved in writing by all
         Participants;

                  (b) Any  amendment,  waiver  or  consent  which  increases  or
         decreases the Proportionate Share of any Participant must be in writing
         and signed by such Participant; and

                  (c) Any amendment,  waiver or consent which affects the rights
         or obligations of Agent must be in writing and signed by Agent.

No failure or delay by any Lessor Party in exercising any right  hereunder shall
operate  as a waiver  thereof  or of any other  right  nor  shall any  single or
partial  exercise of any such right preclude any other further  exercise thereof
or of any other right.  Unless otherwise  specified in such waiver or consent, a
waiver or  consent  given  hereunder  shall be  effective  only in the  specific
instance and for the specific purpose for which given.

         7.05.    Successors and Assigns.

                  (a) Binding  Effect.  This  Agreement and the other  Operative
         Documents  shall be  binding  upon and inure to the  benefit of Lessee,
         Lessor,  the  Participants,   Agent  and  their  respective   permitted
         successors and assigns.  All references in this Agreement to any Person
         shall be deemed to include all successors and assigns of such Person.

                  (b)      Participant Assignments.

                           (i) Any Participant may, at any time, sell and assign
                  to   any   other   Participant   or  any   Eligible   Assignee
                  (individually,  an "Assignee Participant") all or a portion of
                  its rights and obligations  under this Agreement and the other
                  Operative Documents (such a sale and assignment to be referred
                  to  herein  as an  "Assignment")  pursuant  to  an  assignment
                  agreement   in  the  form  of   Exhibit   M  (an   "Assignment
                  Agreement"),  executed by each Assignee  Participant  and such
                  assignor Participant (an "Assignor Participant") and delivered
                  to Agent for its  acceptance  and  recording in the  Register;
                  provided, however, that:

                                       49


                                    (A) Without  the written  consent of Lessor,
                           Agent  and,  if  no  Default  has   occurred  and  is
                           continuing,  Lessee (which  consent of Lessor,  Agent
                           and Lessee shall not be  unreasonably  withheld),  no
                           Participant  may make any  Assignment to any Assignee
                           Participant  which is not,  immediately prior to such
                           Assignment,  a Participant  hereunder or an Affiliate
                           thereof; or

                                    (B) Without  the written  consent of Lessor,
                           Agent  and,  if  no  Default  has   occurred  and  is
                           continuing,  Lessee (which  consent of Lessor,  Agent
                           and Lessee shall not be  unreasonably  withheld),  no
                           Participant  may make any  Assignment to any Assignee
                           Participant   if,   after   giving   effect  to  such
                           Assignment,  the  Commitment of such  Participant  or
                           such  Assignee  Participant  would be less  than Five
                           Million   Dollars   ($5,000,000)   (except   that   a
                           Participant may make an Assignment  which reduces its
                           Commitment  to zero  without the  written  consent of
                           Lessor, Agent or Lessee); or

                                    (C) Without  the written  consent of Lessor,
                           Agent  and,  if  no  Default  has   occurred  and  is
                           continuing,  Lessee (which  consent of Lessor,  Agent
                           and Lessee shall not be  unreasonably  withheld),  no
                           Participant   may   make   any   Assignment   of  its
                           Outstanding  Tranche  A  Participation  Amount or its
                           Outstanding Tranche B Participation Amount which does
                           not assign and delegate an equal pro rata interest in
                           (1)  such   Participant's   Outstanding   Tranche   A
                           Participation  Amount and its  Outstanding  Tranche B
                           Participation  Amount, (2) such Participant's Tranche
                           A Percentage  and its Tranche B  Percentage,  and (3)
                           such   Participant's   other   rights,   duties   and
                           obligations relating to the Tranche A Portion and the
                           Tranche B Portion under this  Agreement and the other
                           Operative Documents.

                                    (D) Without  the written  consent of Lessor,
                           Agent  and,  if  no  Default  has   occurred  and  is
                           continuing,  Lessee (which  consent of Lessor,  Agent
                           and Lessee shall not be  unreasonably  withheld),  no
                           Tranche C Participant  may make any Assignment of its
                           Outstanding Tranche C Participation Amount which does
                           not assign and delegate an equal pro rata interest in
                           (1)  such   Participant's   Outstanding   Tranche   C
                           Participation  Amount, (2) such Participant's Tranche
                           C  Percentage,   and  (3)  such  Participant's  other
                           rights,   duties  and  obligations  relating  to  the
                           Tranche C Portion under this  Agreement and the other
                           Operative Documents.

                  Upon such  execution,  delivery,  acceptance  and recording of
                  each  Assignment  Agreement,  from and  after  the  Assignment
                  Effective  Date   determined   pursuant  to  such   Assignment
                  Agreement, (y) each Assignee Participant thereunder shall be a
                  Participant  hereunder with a Tranche A Percentage,  Tranche B
                  Percentage,  Tranche C Percentage and  Proportionate  Share as
                  set forth on Attachment 1 to such Assignment  Agreement (under
                  the caption  "Tranche  Percentages  and  Proportionate  Shares
                  After  Assignment")  and shall  have the  rights,  duties  and
                  obligations of such a Participant under this Agreement and the
                  other Operative

                                       50


                  Documents,  and (z) the Assignor Participant  thereunder shall
                  be a  Participant  with a  Tranche  A  Percentage,  Tranche  B
                  Percentage,  Tranche C Percentage and  Proportionate  Share as
                  set forth on Attachment 1 to such Assignment  Agreement (under
                  the caption  "Tranche  Percentages  and  Proportionate  Shares
                  After  Assignment"),  or,  if the  Proportionate  Share of the
                  Assignor  Participant  has been  reduced to 0%,  the  Assignor
                  Participant  shall cease to be a  Participant  and to have any
                  obligation  to fund  any  portion  of any  Advance;  provided,
                  however, that any such Assignor Participant which ceases to be
                  a Participant shall continue to be entitled to the benefits of
                  any provision of this  Agreement  which by its terms  survives
                  the termination of this Agreement.  Each Assignment  Agreement
                  shall be deemed to amend Schedule I to the extent, and only to
                  the extent, necessary to reflect the addition of each Assignee
                  Participant,  the deletion of each Assignor  Participant which
                  reduces  its  Proportionate  Share  to 0%  and  the  resulting
                  adjustment of Tranche A  Percentages,  Tranche B  Percentages,
                  Tranche C Percentages  and  Proportionate  Shares arising from
                  the purchase by each Assignee  Participant of all or a portion
                  of the rights and obligations of an Assignor Participant under
                  this  Agreement  and  the  other  Operative  Documents.   Each
                  Assignee  Participant  which was not  previously a Participant
                  hereunder and which is not incorporated  under the laws of the
                  United  States of America  or a state  thereof  shall,  within
                  three (3) Business Days of becoming a Participant,  deliver to
                  Lessee and Agent two duly  completed  copies of United  States
                  Internal  Revenue  Service  Form  1001 or 4224  (or  successor
                  applicable  form), as the case may be, certifying in each case
                  that such  Participant  is entitled to receive  payments under
                  this Agreement  without deduction or withholding of any United
                  States federal income taxes.

                           (ii) Agent shall maintain at its address  referred to
                  in  Paragraph  7.01  a  copy  of  each  Assignment   Agreement
                  delivered  to it  and a  register  (the  "Register")  for  the
                  recordation of the names and addresses of the Participants and
                  the  Tranche A  Percentage,  Tranche B  Percentage,  Tranche C
                  Percentage and  Proportionate  Share of each  Participant from
                  time to time.  The entries in the Register shall be conclusive
                  in the absence of manifest  error,  and Lessee,  Agent and the
                  Participants  may treat each Person  whose name is recorded in
                  the Register as the owner of the  interests  recorded  therein
                  for all  purposes of this  Agreement.  The  Register  shall be
                  available for  inspection by Lessee or any  Participant at any
                  reasonable  time and from time to time upon  reasonable  prior
                  notice.

                           (iii)  Upon its  receipt of an  Assignment  Agreement
                  executed   by  an   Assignor   Participant   and  an  Assignee
                  Participant (and, to the extent required by clause (i) of this
                  Subparagraph  7.05(b), by Lessor, Agent and Lessee),  together
                  with   payment  to  Agent  by   Assignor   Participant   of  a
                  registration  and  processing  fee of $2,500,  Agent shall (A)
                  promptly  accept  such  Assignment  Agreement  and  (B) on the
                  Assignment  Effective Date determined  pursuant thereto record
                  the  information  contained  therein in the  Register and give
                  notice of such  acceptance  and  recordation  to  Lessor,  the
                  Participants  and Lessee.  Agent may, from time to time at its
                  election,  prepare and deliver to Lessor, the Participants and
                  Lessee a

                                       51


                  revised  Schedule  I  reflecting  the  names,   addresses  and
                  respective  Proportionate  Shares  of  all  Participants  then
                  parties hereto.

                           (iv)  Subject  to  Subparagraph  7.13(g),  the Lessor
                  Parties may disclose the Operative Documents and any financial
                  or other  information  relating to Lessee or any Subsidiary to
                  each other or to any potential Assignee Participant.

                  (c) Participant Subparticipations.  Any Participant may at any
         time  sell  to  one or  more  banks  or  other  financial  institutions
         ("Subparticipants")   subparticipation  interests  in  the  rights  and
         interests  of such  Participant  under  this  Agreement  and the  other
         Operative Documents.  In the event of any such sale by a Participant of
         subparticipation  interests,  such Participant's obligations under this
         Agreement and the other  Operative  Documents  shall remain  unchanged,
         such  Participant  shall remain solely  responsible for the performance
         thereof and Lessee and the other Lessor  Parties shall continue to deal
         solely and  directly  with such  Participant  in  connection  with such
         Participant's   rights  and  obligations  under  this  Agreement.   Any
         agreement  pursuant to which any such sale is effected  may require the
         selling  Participant  to obtain the  consent of the  Subparticipant  in
         order for such Participant to agree in writing to any amendment, waiver
         or consent of a type  specified in clause (i),  (ii),  (iii) or (iv) of
         Subparagraph   7.04(a)  but  may  not  otherwise  require  the  selling
         Participant to obtain the consent of such  Subparticipant  to any other
         amendment,   waiver  or  consent  hereunder.  Lessee  agrees  that  any
         Participant which has transferred any subparticipation  interest shall,
         notwithstanding  any such  transfer,  be entitled to the full  benefits
         accorded such  Participant  under Paragraph  2.12,  Paragraph 2.13, and
         Paragraph 2.14, as if such Participant had not made such transfer.

                  (d) Lessor Assignments. Lessor may, upon one (1) month's prior
         written  notice to Lessee and Agent,  sell and assign all of its right,
         title and interest in the Property and its rights, powers,  privileges,
         duties and  obligations  under this  Agreement and the other  Operative
         Documents, provided that:

                           (i) If such sale and  assignment  is  effected  after
                  either (A) the  occurrence  of a Change of Law which  makes it
                  unlawful or  unreasonably  burdensome for Lessor to hold legal
                  or  beneficial  title  to  the  Property  or  to  perform  its
                  obligations  and  duties  under this  Agreement  and the other
                  Operative  Documents or (B) the  resignation or removal of the
                  Agent  which  was the  Agent at the  time  Lessor  became  the
                  Lessor, the purchaser/assignee  (the "successor Lessor") shall
                  be either (1) a Participant or an Eligible  Assignee that will
                  not cause the transaction  evidenced by this Agreement and the
                  other  Operative   Documents  to  lose  its  treatment  as  an
                  operating  lease  under  FASB 13 or (2) a Person  approved  as
                  provided in clause (ii) below; or

                           (ii) If such sale and  assignment  is effected in any
                  other  circumstance,  the  successor  Lessor shall be a Person
                  that is (A) a financial  institution or a Person controlled by
                  a financial  institution and (B) approved in writing by Agent,
                  Required  Participants  and, if no Default has occurred and is
                  continuing,   Lessee  (which   consents  of  Agent,   Required
                  Participants  and Lessee shall not be unreasonably  withheld);
                  and

                                       52


                           (iii) The successor  Lessor  executes such documents,
                  instruments  and  agreements as may reasonably be necessary to
                  evidence its  agreement to assume all of the  obligations  and
                  duties  of the  Lessor  under  this  Agreement  and the  other
                  Operative Documents.

         Upon  the  consummation  of any  such  sale  and  assignment,  (A)  the
         successor  Lessor shall  become the  "Lessor" and shall  succeed to and
         become  vested  with all the  rights,  powers,  privileges,  duties and
         obligations of the Lessor under this Agreement and the other  Operative
         Documents  and (B) the  retiring  Lessor shall be  discharged  from the
         duties and  obligations  of the Lessor  thereafter  arising  under this
         Agreement  and  the  other  Operative  Documents.  After  any  retiring
         Lessor's  discharge as the Lessor, the provisions of Section VI and any
         other provision of this Agreement or any other Operative Document which
         by its terms survives the  termination of this Agreement shall continue
         in effect for its benefit in respect of any actions taken or omitted to
         be taken by it while it was acting as the Lessor.

         7.06.   Setoff.   In  addition  to  any  rights  and  remedies  of  the
Participants  provided by law, each Participant  shall have the right,  with the
prior  written  consent  of Agent,  but  without  prior  notice to or consent of
Lessee,  any such notice and  consent  being  expressly  waived by Lessee to the
extent  permitted  by  applicable  law,  upon  the  occurrence  and  during  the
continuance  of an Event of  Default,  to set-off  and apply  against the Lessee
Obligations,   whether  matured  or  unmatured,   any  amount  owing  from  such
Participant to Lessee,  at or at any time after, the occurrence of such Event of
Default.  The  aforesaid  right of set-off may be exercised by such  Participant
against  Lessee or against  any  trustee in  bankruptcy,  debtor in  possession,
assignee  for the  benefit of  creditors,  receiver  or  execution,  judgment or
attachment creditor of Lessee or against anyone else claiming through or against
Lessee or such trustee in  bankruptcy,  debtor in  possession,  assignee for the
benefit of creditors,  receiver, or execution,  judgment or attachment creditor,
notwithstanding  the  fact  that  such  right of  set-off  shall  not have  been
exercised by such  Participant  prior to the  occurrence of an Event of Default.
Each  Participant  agrees  promptly to notify  Lessee after any such set-off and
application  made by such  Participant,  provided  that the failure to give such
notice shall not affect the validity of such set-off and application.

         7.07. No Third Party Rights. Nothing expressed in or to be implied from
this  Agreement is intended to give, or shall be construed to give,  any Person,
other  than the  parties  hereto  and their  permitted  successors  and  assigns
hereunder,  any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.

         7.08.  Partial  Invalidity.  If at  any  time  any  provision  of  this
Agreement  or any other  Operative  Document is or becomes  illegal,  invalid or
unenforceable  in any  respect  under the law or any  jurisdiction,  neither the
legality,  validity  or  enforceability  of the  remaining  provisions  of  this
Agreement  or the  other  Operative  Documents  nor the  legality,  validity  or
enforceability of such provision under the law of any other  jurisdiction  shall
in any way be affected or impaired thereby.

         7.09. JURY TRIAL. EACH OF LESSEE AND THE LESSOR PARTIES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY

                                       53


WAIVES  ALL RIGHT TO TRIAL BY JURY AS TO ANY  ISSUE  RELATING  TO THE  OPERATIVE
DOCUMENTS IN ANY ACTION,  PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING
TO ANY OPERATIVE DOCUMENT.

         7.10.  Counterparts.  This  Agreement  may be executed in any number of
identical counterparts,  any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.

         7.11.  No Joint  Venture,  Etc.  Neither this  Agreement  nor any other
Operative Document nor any transaction  contemplated  hereby or thereby shall be
construed to (a)  constitute a partnership  or joint venture  between Lessee and
any Lessor  Party or (b) impose  upon any Lessor  Party any agency  relationship
with or fiduciary duty to Lessee.

         7.12. Usury Savings Clause.  Nothing contained in this Agreement or any
other Operative  Documents shall be deemed to require the payment of interest or
other charges by Lessee in excess of the amount the  applicable  Lessor  Parties
may lawfully charge under  applicable  usury laws. In the event any Lessor Party
shall  collect  monies  which are  deemed to  constitute  interest  which  would
increase the effective interest rate to a rate in excess of that permitted to be
charged by applicable  law, all such sums deemed to constitute  excess  interest
shall, upon such  determination,  at the option of Lessor, be returned to Lessee
or credited against other Lessee Obligations.

         7.13. Confidentiality. No Lessor Party shall disclose to any Person any
information with respect to Lessee or any of its Subsidiaries which is furnished
pursuant to this Agreement or under the other Operative  Documents,  except that
any Lessor  Party may disclose any such  information  (a) to its own  directors,
officers, employees,  auditors, counsel and other advisors and to its Affiliates
to the extent reasonably determined by such Lessor Party to be necessary for the
administration  or  enforcement  of the  Operative  Documents;  (b) to any other
Lessor Party; (c) which is otherwise available to the public; (d) if required or
appropriate in any report,  statement or testimony submitted to any Governmental
Authority having or claiming to have jurisdiction over such Lessor Party; (e) if
required  in response to any summons or  subpoena;  (f) in  connection  with any
litigation  among  the  parties  relating  to  the  Operative  Documents  or the
transactions  contemplated  thereby;  (g) to comply with any  Requirement of Law
applicable  to  such  Lessor  Party;   (h)  to  any  Assignee   Participant   or
Subparticipant  or  any  prospective  Assignee  Participant  or  Subparticipant,
provided  that  such  Assignee  Participant  or  Subparticipant  or  prospective
Assignee  Participant  or  Subparticipant  agrees to be bound by this  Paragraph
7.13; or (i) otherwise with the prior consent of Lessee; provided, however, that
(i) any  Lessor  Party  served  with  any  summons  or  subpoena  demanding  the
disclosure of any such information shall use reasonable efforts to notify Lessee
promptly  of such  summons  or  subpoena  and,  if  requested  by Lessee and not
materially  disadvantageous  to such Lessor Party,  to cooperate  with Lessee in
obtaining  a  protective  order  restricting  such  disclosure,   and  (ii)  any
disclosure  made in violation of this Agreement shall not affect the obligations
of Lessee and its  Subsidiaries  under this  Agreement  and the other  Operative
Documents.

         7.14.  Governing Law. This Agreement and the other Operative  Documents
shall  be  governed  by the  laws of the  State  of  California.  Lessee  hereby
unconditionally  and irrevocably

                                       54


waives, to the fullest extent permitted by law, any claim to assert that the law
of any jurisdiction  other than California  governs this Agreement and the other
Operative Documents.

         7.15.  Consent  to  Jurisdiction.  Lessee  irrevocably  submits  to the
jurisdiction  of: any state or federal  court sitting in the state of California
over any suit, action, or proceeding,  brought by Lessee against Lessor Parties,
arising out of or relating to this Agreement or the other  Operative  Documents;
and (b) any state  court  sitting  in Marin  County  over any suit,  action,  or
proceeding,  brought by Lessor Parties to exercise their STATUTORY POWER OF SALE
under this  Agreement or any action  brought by Lessor  Parties to enforce their
rights with respect to the Collateral. Lessee irrevocably waives, to the fullest
extent  permitted by law, any objection that Lessee may now or hereafter have to
the laying of venue of any such suit,  action, or proceeding brought in any such
court and any claim that any such suit,  action,  or  proceeding  brought in any
such court has been brought in an inconvenient forum.

                       [The first signature page follows.]


                                       55



         IN WITNESS  WHEREOF,  Lessee,  Lessor,  the Participants and Agent have
caused this Agreement to be executed as of the day and year first above written.


LESSEE:                               FAIR, ISAAC AND COMPANY, INC.

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________


LESSOR:                                LEASE PLAN NORTH AMERICA, INC.

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________


AGENT:                                 ABN AMRO BANK N.V.

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________


PARTICIPANTS:                          ABN AMRO BANK N.V.

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________


                                       KEYBANK NATIONAL ASSOCIATION

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________

                                       56




                                       BANQUE NATIONALE de PARIS

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________


                                       FLEET NATIONAL BANK

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________


                                       THE DAI-ICHI KANGO BANK,  LIMITED
                                            Los Angeles Agency

                                       By:______________________________________
                                          Name:_________________________________
                                          Title:________________________________


                                       57



                                                             SCHEDULE I

                                                            PARTICIPANTS

                                                              PART A(1)

                                            TRANCHE PERCENTAGES AND PROPORTIONATE SHARES
                                                PRIOR TO COMMITMENT TERMINATION DATE
- ------------------------- --------------- ------------------ -------------------- ----------------- ------------------- Participant Tranche A Tranche B Tranche C Proportionate Percentange Percentage Percentage Share - ------------------------- --------------- ------------------ -------------------- ----------------- ------------------- ABN AMRO Bank N.V. 13,350,000 22.49606373% 1.77666354% 0.0% 24.27272727% - ------------------------- --------------- ------------------ -------------------- ----------------- ------------------- KeyBank National 15,000,000 25.27647610% 1.99625117% 0.0% 27.27272727% Association - ------------------------- --------------- ------------------ -------------------- ----------------- ------------------- Banque National de Paris 10,000,000 16.85098407% 1.33083411% 0.0% 18.18181818% - ------------------------- --------------- ------------------ -------------------- ----------------- ------------------- Fleet National Bank 10,000,000 16.85098407% 1.33083411% 0.0% 18.18181818% - ------------------------- --------------- ------------------ -------------------- ----------------- ------------------- The Dai-Ichi Kangyo 5,000,000 8.42549203% 0.66541706% 0.0% 9.09090909% Bank, Limited - ------------------------- --------------- ------------------ -------------------- ----------------- ------------------- Lease Plan North 1,650,000 0.0% 0.0% 3.0% 3.0% America, Inc. - ------------------------- --------------- ------------------ -------------------- ----------------- ------------------- Total 55,000,000 89.9% 7.1% 3.0% 100.0% - ------------------------- --------------- ------------------ -------------------- ----------------- -------------------
I-1 PART A(2) TRANCHE PERCENTAGES AND PROPORTIONATE SHARES ON AND AFTER COMMITMENT TERMINATION DATE
- ------------------------- -------------- ----------------- ------------------ ----------------- -------------------- Participant Tranche A Tranche B Tranche C Proportionate Share Percentange Percentage Percentage - ------------------------- -------------- ----------------- ------------------ ----------------- -------------------- ABN AMRO Bank N.V. 13,350,000 20.89456420% 3.37816307% 0.0% 24.27272727% - ------------------------- -------------- ----------------- ------------------ ----------------- -------------------- KeyBank National 15,000,000 23.47703843% 3.79568885% 0.0% 27.27272727% Association - ------------------------- -------------- ----------------- ------------------ ----------------- -------------------- Banque National de Paris 10,000,000 15.65135895% 2.53045923% 0.0% 18.18181818% - ------------------------- -------------- ----------------- ------------------ ----------------- -------------------- Fleet National Bank 10,000,000 15.65135895% 2.53045923% 0.0% 18.18181818% - ------------------------- -------------- ----------------- ------------------ ----------------- -------------------- The Dai-Ichi Kangyo 5,000,000 7.82567948% 1.26522962% 0.0% 9.09090909% Bank, Limited - ------------------------- -------------- ----------------- ------------------ ----------------- -------------------- Lease Plan North 1,650,000 0.0% 0.0% 3.0% 3.0% America, Inc. - ------------------------- -------------- ----------------- ------------------ ----------------- -------------------- Total 55,000,000 83.5% 13.5% 3.0% 100.0% - ------------------------- -------------- ----------------- ------------------ ----------------- --------------------
I-2 PART B - ADDRESSES, ETC. ABN AMRO BANK N.V. Applicable Participating Office: ABN AMRO Bank N.V. San Francisco International Branch 101 California Street, Suite 4550 San Francisco, CA 94111 Address for Notices: ABN AMRO Bank N.V. San Francisco International Branch 101 California Street, Suite 4550 San Francisco, CA 94111 Attention: Jamie Dillon Telephone: (415) 984-3750 Fax: (415) 362-3524 ABN AMRO North America, Inc. Syndications Group 1325 Avenue of the Americas, 9th Floor New York, NY 10019 Attention: Linda Boardman Telephone: (212) 314-1724 Fax: (212) 314-1712 Wiring Instructions: ABN AMRO Bank N.V. New York, New York ABA No.: 026009580 Account Name: ABN AMRO Bank - Chicago CPU Account No.: 650-001-1789-41 Reference: Fair, Isaac and Company, Inc. Synthetic Lease I-3 KEYBANK NATIONAL ASSOCIATION Applicable Participating Office: KeyBank National Association 700 Fifth Ave., 46th Floor Seattle, Washington 98104 Address for Notices: KeyBank National Association 700 Fifth Ave., 46th Floor Seattle, Washington 98104 Telephone: 206-684-6085 Fax: 206-684-6035 KeyBank National Association 431 E. Parkcenter Blvd. Boise, Idaho 83704 Telephone: 800-297-5518 Fax: 800-297-5495 Wiring Instructions: KeyBank National Association Seattle, Washington Attn: Specialty Services ABA No. 125000574 Account No.: 01500163 Reference: Fair Isaac I-4 BANQUE NATIONAL de PARIS Applicable Participating Office: Banque National de Paris 180 Montgomery Street, 3rd floor San Francisco, CA 94104 Address for Notices: Banque National de Paris 180 Montgomery Street, 3rd floor San Francisco, CA 94104 Attn: William LaHerran, Vice President Telephone: 415-956-0707 Fax: 415-296-8954 Banque National de Paris Treasury Department 180 Montgomery Street, 3rd floor San Francisco, CA 94104 Attn: Don Hart, Vice President Telephone: 415-956-2511 Fax: 415-989-9041 Wiring Instructions: Federal Reserve Bank of New York ABA 026007689 Account name: Banque National de Paris, San Francisco Account No.: 14334000176 Reference: Fair Isaac and Company Attn: Peggy T. I-5 FLEET NATIONAL BANK Applicable Participating Office: Fleet National Bank One Federal Street Boston, MA 02110 Address for Notices: Fleet National Bank One Federal Street Boston, MA 02110 Attn: Mathew M. Glauninger Telephone: 617-346-0622 Fax: 617-346-0151 Fleet National Bank One Federal Street Boston, MA 02110 Attn: Pauline Kowalczyk Telephone: 617-346-0622 Fax: 617-346-0151 Wiring Instructions: Fleet National Bank Boston, MA ABA 011000138 Account No.: 1510351-03156 For further credit to: Commercial Loan Wire Suspense Reference: Fair Isaac and Company, Inc. I-6 THE DAI-ICHI KANGYO BANK, LIMITED Los Angeles Agency Applicable Participating Office: The Dai-Ichi Kango Bank Limited Los Angeles Agency 101 California Street, Suite 4000 San Francisco, CA 94111 Address for Notices: The Dai-Ichi Kango Bank Limited Los Angeles Agency 101 California Street, Suite 4000 San Francisco, CA 94111 Telephone: 415-393-1813 Fax: 415-788-7868 The Dai-Ichi Kango Bank Limited Los Angeles Agency 555 West 5th Street Los Angeles, CA 90013 Telephone: 213-243-4774 Fax: 213-243-4896 Wiring Instructions: The Dai-Ichi Kango Bank Limited New York Branch New York, NY ABA: Account No.: 79740111195 Attn: Credit Administration I-7 SCHEDULE II PRICING GRID (For LIBOR Rental Rate or Fixed Rental Rate, when not cash-secured) LEVERAGE RATIO PRICING APPLICABLE MARGIN PERIOD FOR TRANCHES A & B RATIO LEVEL LIBOR RENTAL RATE ----- ----- ----------------- More than 0.85 1 0.75% Less than or equal to 0.85 2 1.00% EXPLANATION 1. During any period when Agent does not have, in accordance with the Cash Collateral Agreement, a first priority perfected security interest in Cash Collateral with a value equal to or greater than the aggregate Outstanding Lease Amount or any Portion thereof, the Applicable Margin with respect to the LIBOR Rental Rate will be set for each Pricing Period and will vary depending upon whether such period is a Level 1 Period, or a Level 2 Period. 2. Each Pricing Period will be a Level 1 Period or a Level 2 Period depending upon Lessee's Leverage Ratio for the most recent consecutive four-fiscal quarters ending prior to the first day of such Pricing Period. II-1 SCHEDULE 1.01 DEFINITIONS "364-Day Commitment" shall have the meaning given to that term in Subparagraph 2.03(b) of the Participation Agreement. "364-Day Commitment Extension Fee" shall have the meaning given to that term in Subparagraph 2.04(c) of the Participation Agreement. "364-Day Commitment Period" shall have the meaning given to that term in Subparagraph 2.03(b) of the Participation Agreement. "364-Day Commitment Termination Date" shall have the meaning given to that term in Subparagraph 2.03(b) of the Participation Agreement. "ABN AMRO" shall mean ABN AMRO Bank N.V. "Acquisition Advances" shall have the meaning given to that term in Subparagraph 2.01(b) of the Participation Agreement. "Acquisition Agreement" shall mean, in the case of the Tract 1 Land, that certain Asset Sale Agreement, dated as of June 25, 1996, between PG&E, as seller, and Village Builders, L.P., as buyer, as amended by the First Amendment to Asset Sale Agreement dated as of August 15, 1997 and assigned by the Assignment of Asset Sale Agreement between Village Builders, L.P. and Lessee, and in the case of the Tract 2 Land, that certain Owner Participation, Disposition and Development Agreement, dated on or about May 19, 1998, between the San Rafael Redevelopment Agency, as seller, and Lessee, as buyer. "Acquisition Date" shall mean the date on which Lessor acquires a Tract of Land pursuant to the applicable Acquisition Agreement. "Acquisition Price" shall mean, with respect to each Tract of Land, the total purchase price payable by Lessor for such property on the Acquisition Date thereof. "Acquisition Request" shall have the meaning given to that term in Subparagraph 2.03(a) of the Participation Agreement. "Adjusted Net Income" shall mean, with respect to Lessee for any period, the sum, determined on a consolidated basis in accordance with GAAP, of the following: (a) The net income or net loss of Lessee and its Subsidiaries for such period before provision for income taxes; plus 1.01-1 (b) The sum (to the extent deducted in calculating net income or loss in clause (a) above) of (i) all Interest Expenses of Lessee and its Subsidiaries accruing during such period, (ii) all rental expenses of Lessee and its Subsidiaries accruing during such period, (iii) all income tax expense of Lessee and its Subsidiaries payable to any governmental authority and accruing during such period, and (iv) all payments of principal (or, in the case of Capital Leases, synthetic leases or other off-balance sheet financings, amounts attributable to principal) of Indebtedness paid or scheduled to be paid by Lessee and its Subsidiaries during such period; plus (c) The sum of all charges taken by Lessee and its Subsidiaries during such period in connection with the acquisition of in-process research and development. "Advances" shall have the meaning given to that term in Subparagraph 2.01(b) of the Participation Agreement. "Advance Requests" shall have the meaning given to that term in Subparagraph 2.03(c) of the Participation Agreement. "Affiliate" shall mean, with respect to any Person, (a) each Person that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, twenty (20%) or more of any class of Equity Securities of such Person, (b) each Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person or (c) each of such Person's officers, directors, joint venturers and partners; provided, however, that in no case shall any Lessor Party be deemed to be an Affiliate of Lessee or any of its Subsidiaries for purposes of the Operative Documents. For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Agent" shall mean ABN AMRO, acting in its capacity as Agent for the Participants under the Operative Documents. "Agent's Fee Letter" shall mean the letter agreement dated as of April 6, 1998 between Lessee and Agent regarding certain fees payable by Lessee to Agent. "Agent's Fees" shall have the meaning given to that term in Subparagraph 2.04(a) of the Participation Agreement. "Alternate Rental Rate" shall mean, for any Rental Period (or portion thereof), the per annum rate equal to the Base Rate in effect from time to time during such period plus the Applicable Margin, such rate to change from time during such period as the Base Rate or Applicable Margin shall change. "Applicable Margin" shall mean: 1.01-2 (a) Tranche A and Tranche B. With respect to the Outstanding Tranche A Amount and Outstanding Tranche B Amount: (i) No Cash Collateral. During any period when Agent does not have, in accordance with the Cash Collateral Agreement, a first priority perfected security interest in any Cash Collateral securing the Lessee Obligations: (A) The per annum margin which is determined pursuant to the Pricing Grid and added to the LIBO Rate with respect to the LIBOR Rental Rate or the Fixed Rate with respect to the Fixed Rental Rate ; or (B) Zero percent (0%) per annum with respect to the Alternate Rental Rate; (ii) Full Cash Collateral. During any period when Agent has, in accordance with the Cash Collateral Agreement, a first priority perfected security interest in Cash Collateral that secures the Lessee Obligations and has a value equal to or greater than the full Outstanding Lease Amount or any Portion thereof: (A) Twenty-five hundredths of one percent (0.25%) per annum with respect to the LIBOR Rental Rate or the Fixed Rental Rate; or (B) Zero percent (0%) per annum with respect to the Alternate Rental Rate; or (iii) Partial Cash Collateral. During any period when Agent has, in accordance with the Cash Collateral Agreement, a first priority perfected security interest in Cash Collateral that secures the Lessee Obligations but has a value less than the full Outstanding Lease Amount or any Portion thereof: (A) The per annum margin equal to the sum of the following with respect to the LIBOR Rental Rate or the Fixed Rental Rate: (1) The product of (y) the per annum margin which is determined pursuant to the Pricing Grid and added to the LIBO Rate or the Fixed Rate as the case may be (z) a fraction, the numerator of which is the remainder of the Outstanding Lease Amount or any Portion thereof minus the value of the Cash Collateral and the denominator of which is the Outstanding Lease Amount or any Portion thereof; plus (2) The product of (y) twenty-five hundredths of one percent (0.25%) per annum above times (z) a fraction, the numerator of which is the value of the Cash Collateral and the denominator of which is the Outstanding Lease Amount or any Portion thereof; or 1.01-3 (B) Zero percent (0%) per annum with respect to the Alternate Rental Rate; and (b) Tranche C. With respect to the Outstanding Tranche C Amount: (i) Two and one-half percent (2.5%) per annum with respect to the LIBOR Rental Rate; or (ii) Two and one-half percent (2.5%) per annum with respect to the Alternate Rental Rate; provided, however, that each Applicable Margin set forth in subparagraphs (a) and (b) of this definition shall be increased by two percent (2.0%) per annum on the date an Event of Default occurs and shall continue at such increased rate unless and until such Event of Default is waived in accordance with the Operative Documents. "Applicable Participating Office" shall mean, with respect to any Participant, (a) initially, its office designated as such in Part B of Schedule I (or, in the case of any Participant which becomes a Participant by an assignment pursuant to Subparagraph 7.05(b) of the Participation Agreement, its office designated as such in the applicable Assignment Agreement) and (b) subsequently, such other office or offices as such Participant may designate to Agent as the office at which such Participant's interest in the Lease Agreement will thereafter be maintained and for the account of which all payments of Rent and other amounts payable to such Participant under the Operative Documents will thereafter be made. "Appraisal" shall mean an appraisal of the Property or a portion thereof in a form satisfactory to Lessee, Lessor, Agent and the Required Participants, prepared by an independent MAI appraiser that (a) complies with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and all other applicable Governmental Rules and (b) is approved by Lessor, Agent and the Required Participants (at the time such appraiser is selected). "Appurtenant Rights" shall mean all easements and rights-of-way, strips and gores of land, streets, ways, alleys, passages, sewer rights, water, water courses, water rights and powers, air rights and development rights, liberties, tenements, hereditaments and appurtenances of any nature whatsoever, in any way belonging, relating or pertaining to any Land or the Improvements thereto and the reversions, remainders, and all the estates, rights, titles, interests, property, possession, claim and demand whatsoever, both in law and in equity, of, in and to such Land and Improvements and every part and parcel thereof, with the appurtenances thereto. "Assignee Participant" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. "Assignment" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. "Assignment Agreement" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. 1.01-4 "Assignment Effective Date" shall have, with respect to each Assignment Agreement, the meaning set forth therein. "Assignment of Construction Agreements" shall have the meaning given to that term in Subparagraph 2.11(a) of the Participation Agreement. "Assignment of Lease" shall have the meaning given to that term in Subparagraph 2.11(b). "Assignor Participant" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. "Assumed Appraisal" shall have the meaning given to that term in Subparagraph 3.02(h) of the Purchase Agreement. "Base Rate" shall mean, on any day, the greater of (a) the Prime Rate in effect on such date and (b) the Federal Funds Rate for such day plus one-half percent (0.50%). "Base Rent" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Budget" shall mean the budget for the acquisition of the Property and the New Improvements set forth on Schedule 4.01(x). "Business Day" shall mean any day on which (a) commercial banks are not authorized or required to close in San Francisco, California, Chicago, Illinois or New York, New York and (b) if such Business Day is related to a LIBOR Rental Rate, dealings in Dollar deposits are carried out in the London interbank market. "Capital Adequacy Requirement" shall have the meaning given to that term in Subparagraph 2.12(d) of the Participation Agreement. "Capital Asset" shall mean, with respect to any Person, any tangible fixed or capital asset owned or leased (in the case of a Capital Lease) by such Person, or any expense incurred by such Person that is required by GAAP to be reported as a non-current asset on such Person's balance sheet. "Capital Expenditures" shall mean, with respect to Lessee and its Subsidiaries for any period, the sum, determined on a consolidated basis in accordance with GAAP, of all amounts expended and indebtedness incurred or assumed by Lessee and its Subsidiaries during such period for the acquisition of Capital Assets (including all amounts expended and indebtedness incurred or assumed in connection with Capital Leases). "Capital Leases" shall mean any and all lease obligations that, in accordance with GAAP, are required to be capitalized on the books of a lessee. "Cash Collateral" shall mean eurodollar deposits or United States Treasury Securities and deposit accounts held or maintained by Agent and Participants to the extent such securities and 1.01-5 accounts are held and maintained in accordance with the Cash Collateral Agreement and Lessor has a first priority perfected security interest therein securing the Lessee Obligations. "Cash Collateral Agreement" shall have the meaning given to that term in Subparagraph 2.11(a) of the Participation Agreement. "Cash Equivalents" shall mean, on any date: (a) Any debt investments that mature within one year from such date if such investments are permitted by the investment policy of Lessee set forth in Schedule 5.02(e) to the Participation Agreement; or (b) If the investment policy of Lessee is changed after the date of the Participation Agreement, any debt investments that mature within one year from such date if (i) such investments are permitted by the most recent investment policy of Lessee and (ii) such investment policy has been approved by Lessee's Board of Directors and by Lessor and Required Participants. "Casualty" shall mean any damage to, destruction of or decrease in the value of all or any portion of any of the Property as a result of fire, flood, earthquake or other natural cause; the actions or inactions of any Person or Persons (whether willful or unintentional and whether or not constituting negligence); or any other cause. "Casualty and Condemnation Proceeds" shall mean all awards, damages, compensation, reimbursement and other payments made or to be made to Lessee, Lessor or Agent from any insurer, Governmental Authority or other Person (other than Lessee or any Lessor Party) on account of any Casualty or Condemnation. "Change of Control" shall mean (a) with respect to Lessee, the occurrence of any of the following events: (i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall (A) acquire beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of twenty-five percent (25%) or more of the outstanding Equity Securities of Lessee entitled to vote for members of the board of directors, or (B) acquire all or substantially all of the assets of Lessee and its Subsidiaries taken as a whole, or (ii) during any period of twelve (12) consecutive calendar months, individuals who are directors of Lessee on the first day of such period ("Initial Directors") and any directors of Lessee who are specifically approved by two-thirds of the Initial Directors and previously-approved Directors ("Approved Directors") shall cease to constitute a majority of the Board of Directors of Lessee before the end of such period; and (b) with respect to Lessee's Japanese Subsidiary, Lessee shall cease to own at least fifty-one percent (51%) of the Equity Securities of such Subsidiary except for nominal amounts of director stock necessary to do business in Japan. "Change of Law" shall have the meaning given to that term in Subparagraph 2.12(b) of the Participation Agreement. "Closing Date" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. 1.01-6 "Closing Date Appraisal" shall mean, with respect to any Tract of Land, on or as of a recent date prior to its Acquisition Date, an Appraisal that assesses at such time the Fair Market Value of such property on such date. "Collateral" shall mean the Property Collateral, the Cash Collateral and all other property in which any Lessor Party has a Lien to secure any of the Lessee Obligations. "Commencement Date" shall have the meaning given to that term in Subparagraph 2.02(a) of the Lease Agreement. "Commitment" shall mean, with respect to any Participant at any time, such Participant's Proportionate Share of the Total Commitment at such time. "Commitment Fees" shall have the meaning given to that term in Subparagraph 2.04(b) of the Participation Agreement. "Commitment Period" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. "Commitment Termination Date" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. "Completion" shall have the meaning given to that term in Subparagraph 3.05(c) of the Construction Agency Agreement. "Complete", "Completed" and "Completion" shall have comparable meanings. "Completion Date" shall mean the first date on which all of the conditions set forth in Subparagraph 3.05(c) of the Construction Agency Agreement are satisfied. "Compliance Certificate" shall have the meaning given to that term in Subparagraph 5.01(a) of the Participation Agreement. "Condemnation" shall mean any condemnation, requisition, confiscation, seizure or other taking or sale of the use, access, occupancy or other right in or to all or any portion of any of the Property (whether wholly or partially, temporarily or permanently), by or on account of any actual or threatened eminent domain proceeding or other taking of action by any Governmental Authority or other Person having the power of eminent domain, including an action by any such Governmental Authority or Person to change the grade of, or widen the streets adjacent to, such Property or alter the pedestrian or vehicular traffic flow to such Property so as to result in change in access to such Property, or by or on account of an eviction by paramount title or any transfer made in lieu of any such proceeding or action. A "Condemnation" shall be deemed to have occurred on the earliest of the dates that use, access, occupancy or other right is taken. "Conforming Bid" shall have the meaning given to that term in Subparagraph 3.02(c) of the Purchase Agreement. "Construction Agency Agreement" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. 1.01-7 "Construction Agreements" shall have the meaning given to that term in Paragraph 3.02 of the Construction Agency Agreement. "Contingent Obligation" shall mean, with respect to any Person, (a) any Guaranty Obligation of that Person; and (b) any direct or indirect obligation or liability, contingent or otherwise, of that Person (i) in respect of any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments, (ii) as a partner or joint venturer in any partnership or joint venture, (iii) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (iv) in respect to any Rate Contract that is not entered into in connection with a bona fide hedging operation that provides offsetting benefits to such Person. The amount of any Contingent Obligation shall (subject, in the case of Guaranty Obligations, to the last sentence of the definition of "Guaranty Obligation") be deemed equal to the maximum reasonably anticipated liability in respect thereof, and shall, with respect to item (b)(iv) of this definition be marked to market on a current basis. "Contractual Obligation" of any Person shall mean, any indenture, note, lease, loan agreement, security, deed of trust, mortgage, security agreement, guaranty, instrument; contract, agreement or other form of contractual obligation or undertaking to which such Person is a party or by which such Person or any of its property is bound. "Credit Event" shall mean the making of each Advance, the selection of a new Rental Period or the exercise of the Marketing Option under the Purchase Agreement. "Current Appraisal" shall have the meaning given to that term in Subparagraph 3.02(h) of the Purchase Agreement. "Default" shall mean any Event of Default under the Lease Agreement or any event or circumstance not yet constituting an Event of Default under the Lease Agreement which, with the giving of any notice or the lapse of any period of time or both, would become an Event of Default under the Lease Agreement. "Defaulting Participant" shall mean a Participant which has failed to fund its portion of any Advance which it is required to fund under the Participation Agreement and has continued in such failure for three (3) Business Days after written notice from Agent. "Deposit Accounts" shall have the meaning given to that term in Subparagraph 2.01(a) of the Cash Collateral Agreement. "Depositary Bank" shall have the meaning given to that term in Paragraph 2.02 of the Cash Collateral Agreement. "Designated Purchaser" shall have the meaning given to that term in Subparagraph 3.02(e) of the Purchase Agreement. 1.01-8 "Dollars" and "$" shall mean the lawful currency of the United States of America and, in relation to any payment under the Operative Documents, same day or immediately available funds. "Eligible Assignee" shall mean (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; or (c) a Person that is (i) a Subsidiary of a Participant, (ii) a Subsidiary of a Person of which a Participant is a Subsidiary, or (iii) a Person of which a Participant is a Subsidiary. "Employee Benefit Plan" shall mean any employee benefit plan within the meaning of section 3(3) of ERISA maintained or contributed to by Lessee or any ERISA Affiliate, other than a Multiemployer Plan. "Environmental Laws" shall mean the Clean Air Act, 42 U.S.C. Section 7401 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq.; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq.; the Comprehensive Environment Response, Compensation and Liability Act of 1980 (including the Superfund Amendments and Reauthorization Act of 1986, "CERCLA"), 42 U.S.C. Section 9601 et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; the Occupational Safety and Health Act, 29 U.S.C. Section 651; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 et seq.; the Mine Safety and Health Act of 1977, 30 U.S.C. Section 801 et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; and all other Governmental Rules relating to the protection of human health and the environment, including all Governmental Rules pertaining to reporting, licensing, permitting, transportation, storage, disposal, investigation, and remediation of emissions, discharges, releases, or threatened releases of Hazardous Materials into the air, surface water, groundwater, or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of Hazardous Materials. "Environmental Reports" shall have the meaning set forth in Subparagraph 4.01(f) of the Participation Agreement. "Equity Securities" of any Person shall mean (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b) all warrants, options and other rights to acquire any of the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may from time to time be amended or supplemented, including any rules or regulations issued in connection therewith. "ERISA Affiliate" shall mean any Person which is treated as a single employer with Lessee under Section 414 of the IRC. 1.01-9 "Event of Default" shall have the meaning given to that term in Paragraph 5.01 of the Lease Agreement. "Exhibit B Supplement" shall have the meaning given to that term in Subparagraph 2.03(b) of the Participation Agreement. "Existing Improvements" shall mean, with respect to the Land, all Improvements existing on the Land on the Closing Date. "Expiration Date" shall mean the earlier of (a) the Scheduled Expiration Date under the Lease Agreement, as such date may be extended pursuant to this Agreement, and (b) the Termination Date for the Lease Agreement, if the Lease Agreement is terminated prior to its Scheduled Expiration Date in accordance with its terms. "Expiration Date Appraisal" shall mean, with respect to any Tract of Land at any time, an Appraisal that assesses at such time the Fair Market Value of such property on the Scheduled Expiration Date and as improved in accordance with the Budget for the New Improvements, as such Appraisal may be revised as contemplated by Subparagraph 5.01(h) of the Participation Agreement. Until the first Appraisal complying with this definition is delivered, the term "Expiration Date Appraisal" shall include the preliminary market valuation delivered pursuant to Item F(2) of Schedule 3.01 to the Participation Agreement. "Expiration Date Purchase Option" shall have the meaning given to that term in Subparagraph 3.01(b) of the Purchase Agreement. "Fair Market Value" shall mean, with respect to any of the Property or any portion thereof, the maximum reasonable amount (not less than zero) that would be paid in cash in an arm's-length transaction between an informed and willing purchaser and an informed and willing seller, neither of whom is under any compulsion to purchase or sell, for the ownership of the Property or such portion. "FASB 13" shall mean Financial Accounting Standards Board Statement No. 13. "Federal Funds Rate" shall mean, for any day, the rate per annum set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Board (including any such successor publication, "H.15 (519)") for such day opposite the caption "Federal Funds (Effective)". If on any relevant day, such rate is not yet published in H.15 (519), the rate for such day shall be the rate set forth in the daily statistical release designated as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any successor publication, published by the Federal Reserve Bank of New York (including any such successor publication, the "Composite 3:30 p.m. Quotations") for such day under the caption "Federal Funds Effective Rate". If on any relevant day, such rate is not yet published in either H.15 (519) or the Composite 3:30 p.m. Quotations, the rate for such day shall be the arithmetic means, as determined by Agent, of the rates quoted to Agent for such day by three (3) Federal funds brokers of recognized standing selected by Agent. "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System. 1.01-10 "Financial Statements" shall mean, with respect to any accounting period for any Person, statements of income, shareholders' equity and cash flows of such Person for such period, and a balance sheet of such Person as of the end of such period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year if such period is less than a full fiscal year or, if such period is a full fiscal year, corresponding figures from the preceding annual audit, all prepared in reasonable detail and in accordance with GAAP. "Fixed Charge Coverage Ratio" shall mean, with respect to Lessee for any period, the ratio, determined on a consolidated basis in accordance with GAAP, of: (a) The Adjusted Net Income of Lessee and its Subsidiaries for such period; divided by (b) The sum of (i) all Interest Expenses of Lessee and its Subsidiaries accruing during such period, (ii) all rental expenses of Lessee and its Subsidiaries accruing during such period, (iii) all current maturities of long term Indebtedness (including, in the case of Capital Leases, amounts attributable to current maturities of principal) paid or scheduled to be paid by Lessee and its Subsidiaries during such period and (iv) 20% of all Indebtedness and all synthetic leases and other off balance sheet obligations. "Fixed Rate" shall mean, with respect to any Rental Period and Portion for which Lessee accepts a Fixed Rate Offer pursuant to clause (iv)(D) of Subparagraph 2.03(a) of the Lease Agreement, the weighted average per annum rate set forth in such Fixed Rate Offer. "Fixed Rate Acceptance" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Fixed Rate Offer" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Fixed Rate Quote" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Fixed Rate Rejection" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Fixed Rate Request" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Fixed Rental Rate" shall mean, for any Rental Period and Portion, the per annum rate equal to the Fixed Rate for such Rental Period, plus the Applicable Margin, such rate to change from time to time during such period as the Applicable Margin shall change. "Force Majeure Events" shall mean any Acts of God, riots, civil commotions, insurrections, wars, strikes, lockouts or other events beyond the control of Lessee, except for (a) any such events that are known to or should be known to Lessee on the Closing Date; (b) any such events that are caused by the financial condition of Lessee or the failure of Lessee to make 1.01-11 any payments under any Construction Agreements, any Operative Documents or any related agreements or (c) any events that could be remedied through the payment of money or the exercise of other commercially reasonable efforts. "GAAP" shall mean generally accepted accounting principles and practices as in effect in the United States of America from time to time, consistently applied. "Governmental Authority" shall mean any domestic or foreign national, state or local government, any political subdivision thereof, any department, agency, authority or bureau of any of the foregoing, or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Comptroller of the Currency, any central bank or any comparable authority. "Governmental Charges" shall mean taxes, levies, assessments, fees, imposts, duties, licenses, recording charges, claims or other charges imposed by any Governmental Authority. "Governmental Rule" shall mean any law, rule, regulation, ordinance, order, code, interpretation, judgment, decree, directive, guidelines, policy or similar form of decision of any Governmental Authority. "Guaranty Obligation" shall mean, with respect to any Person, any direct or indirect liability of that Person with respect to any indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person, whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. The amount of any Guaranty Obligation shall be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof. "Hazardous Materials" shall mean all materials, substances and wastes which are classified or regulated as "hazardous," "toxic" or similar descriptions under any Environmental Law. "Improvement/Expense Advance Request" shall have the meaning given to that term in Subparagraph 2.03(b) of the Participation Agreement. "Improvement/Expense Advances" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. 1.01-12 "Improvements" shall mean all buildings, structures, facilities, fixtures and other improvements of every kind and description now or hereafter located on any of the Land, including (a) all parking areas, roads, driveways, walks, fences, walls, drainage facilities and other site improvements; (b) all water, sanitary and storm sewer, drainage, electricity, steam, gas, telephone and other utility equipment and facilities, all plumbing, lighting, heating, ventilating, air-conditioning, refrigerating, incinerating, compacting, fire protection and sprinkler, surveillance and security, public address and communications equipment and systems, partitions, elevators, escalators, motors, machinery, pipes, fittings and other items of equipment of every kind and description now or hereafter located on such Land or attached to the Improvements thereto which by the nature of their location thereon or attachment thereto are real property under applicable law; and (c) all Modifications to such Land or its Improvements, except for any Modifications removed by Lessee from the Property pursuant to Subparagraph 3.10 of the applicable Lease Agreement. "Indebtedness" of any Person shall mean, without duplication: (a) All obligations of such Person evidenced by notes, bonds, debentures or other similar instruments and all other obligations of such Person for borrowed money (including recourse obligations of such Person in connection with receivables and other assets sold by such Person); (b) All obligations of such Person for the deferred purchase price of property or services (including obligations under letters of credit and other credit facilities which secure or finance such purchase price and obligations under "synthetic" leases but excluding trade payables incurred in the ordinary course of business on ordinary terms which are not overdue); (c) All obligations of such Person under conditional sale or other title retention agreements with respect to property acquired by such Person (to the extent of the value of such property if the rights and remedies of the seller or lender under such agreement in the event of default are limited solely to repossession or sale of such property); (d) All obligations of such Person as lessee under or with respect to Capital Leases; (e) All non-contingent payment or reimbursement obligations of such Person, contingent or otherwise, under or with respect to Surety Instruments; (f) All net obligations of such Person, contingent or otherwise, under or with respect to Rate Contracts; (g) All Guaranty Obligations of such Person with respect to the obligations of other Persons of the types described in clauses (a) - (f) above; and (h) All obligations of other Persons of the types described in clauses (a) - (f) above to the extent secured by (or for which any holder of such obligations has an existing right, contingent or otherwise, to be secured by) any Lien in any property 1.01-13 (including accounts and contract rights) of such Person, even though such Person has not assumed or become liable for the payment of such obligations "Indemnified Taxes" shall mean all income taxes, stamp taxes, sales taxes, use taxes, rental taxes, gross receipts taxes, property (tangible and intangible) taxes, franchise taxes, excise taxes, value added taxes, turnover taxes, withholding taxes and other taxes and Governmental Charges, together with any and all assessments, penalties, fines, additions and interest thereon, except: (a) Net income taxes and franchise taxes in lieu of net income taxes imposed on any Lessor Party by its jurisdiction of incorporation or a jurisdiction in which it maintains an office (provided, however, that this definition shall not be construed to prevent a payment from being made on an after-tax basis); (b) Any tax or other Governmental Charge that has not become a Lien on any of the Property and that Lessee is contesting pursuant to Paragraph 3.12 of the Lease Agreement (but only while Lessee is so contesting such tax or Governmental Charge); or (c) Any tax or other Governmental Charge that is imposed upon an Indemnitee primarily as a result of the gross negligence or willful misconduct of such Indemnitee itself (as opposed to gross negligence or willful misconduct imputed to such Indemnitee), but not taxes or other Governmental Charges imposed as a result of ordinary negligence of such Indemnitee. "Indemnitees" shall mean the Lessor Parties and their Affiliates and their respective directors, officers, employees, agents, attorneys and advisors. "Indemnity Amount" shall have the meaning given to that term in Subparagraph 3.02(g) of the Purchase Agreement. "Initial Acquisition Advance" shall have the meaning given to the term in Subparagraph 2.03(a) of the Participation Agreement. "Initial Bid" shall have the meaning given to that term in Subparagraph 3.02(b) of the Purchase Agreement. "Initial Marketing Period" shall have the meaning given to that term in Subparagraph 3.02(b) of the Purchase Agreement. "Insurance Requirements" shall mean all terms, conditions and requirements imposed by the policies of insurance which Lessee is required to maintain by the Operative Documents. "Interest Expenses" shall mean, with respect to Lessee and its Subsidiaries for any period, the sum, determined on a consolidated basis in accordance with GAAP, of (a) all interest accrued on the Indebtedness of Lessee and its Subsidiaries during such period (including interest attributable to Capital Leases, synthetic leases and other off-balance sheet financings) and (b) all letter of credit fees payable by Lessee and its Subsidiaries accrued during such period. 1.01-14 "Investment" of any Person shall mean any loan or advance of funds by such Person to any other Person (other than advances to employees of such Person for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business), any purchase or other acquisition of any Equity Securities or Indebtedness of any other Person, any capital contribution by such Person to or any other investment by such Person in any other Person (including any Guaranty Obligations of such Person and any indebtedness of such Person of the type described in clause (h) of the definition of "Indebtedness" on behalf of any other Person); provided, however, that Investments shall not include (a) accounts receivable or other indebtedness owed by customers of such Person which are current assets and arose from sales of inventory in the ordinary course of such Person's business or (b) prepaid expenses of such Person incurred and prepaid in the ordinary course of business. "IRC" shall mean the Internal Revenue Code of 1986. "Issues and Profits" shall mean all present and future rents, royalties, issues, profits, receipts, revenues, income, earnings and other benefits accruing from any of the Land, Improvements or Appurtenant Rights (whether in the form of accounts, chattel paper, instruments, documents, investment property, general intangibles or otherwise) including all rents and other amounts payable pursuant to any Subleases. "Land" shall mean all lots, pieces, tracts or parcels of land described in Exhibit A to the Lease Agreement and leased by Lessee pursuant to the Lease Agreement. "Lease Agreement" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. "Lease Extension Request" shall have the meaning given to that term in Subparagraph 2.09(b) of the Participation Agreement. "Lease Reduction Payments" shall mean each of the following to the extent applied to reduce the Outstanding Lease Amount or any Portion thereof pursuant to the Operative Documents: (a) Casualty and Condemnation Proceeds; (b) The purchase price paid for the Property (or any portion thereof) by Lessee, an Assignee Purchaser or a Designated Purchaser pursuant to the Purchase Agreement; (c) The Residual Value Guaranty and Indemnity Amount paid by Lessee pursuant to the Purchase Agreement; (d) Any proceeds received by Lessee from any sale of the Property after the Expiration Date if such Property is retained by Lessor after such Expiration Date pursuant to the applicable Purchase Agreement; and 1.01-15 (e) Any proceeds received by any Lessor Party from the exercise of any of its remedies under the Operative Documents after the occurrence of an Event of Default under the Lease Agreement. "Lessee" shall mean Fair Isaac and Company, Inc., acting in its capacity as Lessee under the Operative Documents. "Lessee Obligations" shall mean and include all liabilities and obligations owed by Lessee to any Lessor Party under any of the Operative Documents of every kind and description and however arising (whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising), including the obligation of Lessee to pay Rent, to pay the Residual Value Guaranty Amount, Indemnity Amount and/or Outstanding Lease Amount or any Portion thereof and to pay all interest, fees, charges, expenses, attorneys' fees and accountants' fees chargeable to Lessee or payable by Lessee under the Operative Documents. "Lessee Security Documents" shall mean and include the Lease Agreement, the Cash Collateral Agreement, the Assignment of Construction Agreements, and all other instruments, agreements, certificates, opinions and documents (including Uniform Commercial Code financing statements and fixture filings and landlord waivers) delivered to any Lessor Party in connection with any Collateral or to secure the Lessee Obligations. "Lessor" shall mean Lease Plan North America, Inc. , acting in its capacity as Lessor under the Operative Documents. "Lessor Deed of Trust" shall have the meaning given to that term in Subparagraph 2.11(b) of the Participation Agreement. "Lessor Liens" shall mean any Liens or other interests in any of the Property of any Person other than Lessee or a Lessor Party arising as a result of (a) any transfer or assignment by Lessor to such Person of any of Lessor's interests in such Property in violation of any of the Operative Documents or (b) any claim against Lessor by any such Person unrelated to any of the Operative Documents or the transactions contemplated thereby. (Lessor Liens shall include Liens granted by Lessor to Agent or any Participant to secure the Lessor Obligations.) "Lessor Obligations" shall mean and include all liabilities and obligations owed by Lessor to Agent or any Participant under any of the Operative Documents of every kind and description and however arising (whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising), including the obligation of Lessor to share payments made by Lessee to Lessor under the Operative Documents as provided in Paragraph 2.06 of the Participation Agreement. "Lessor Parties" shall mean Lessor, the Participants and Agent. "Lessor Security Agreement" shall have the meaning given to that term in Subparagraph 2.11(b) of the Participation Agreement. "Leverage Ratio" shall mean, with respect to Lessee and its Subsidiaries at any time, the ratio, determined on a consolidated basis in accordance with GAAP, of (a) total liabilities, 1.01-16 including all Indebtedness of Lessee and its Subsidiaries at such time as reflected on Lessee's balance sheet plus the total amount of all synthetic leases and other off balance sheet obligations of Lessee and its Subsidiaries to (b) the Tangible Net Worth of Lessee and its Subsidiaries at such time. "LIBO Rate" shall mean, with respect to any Rental Period and Portion, a rate per annum equal to the quotient (rounded upward if necessary to the nearest 1/100 of one percent) of (a) the arithmetic mean (rounded up if necessary to the nearest 1/16 of one percent) of the rates per annum appearing on the Telerate Page 3750 (or any successor publication) on the second Business Day prior to the first day of such Rental Period, at or about 11:00 A.M. (London time) (for delivery on the first day of such Rental Period for a term comparable to such Rental Period, (or for a term of one (1) month for any Rental Period that is less than one (1) month but is at least seven (7 days), divided by (b) one minus the Reserve Requirement in effect from time to time. If for any reason rates are not available as provided in clause (a) of the preceding sentence, the rate to be used in clause (a) shall be, the rate per annum at which Dollar deposits are offered to ABN AMRO by prime banks in the London interbank market on the second Business Day prior to the first day of such Rental Period at or about 11:00 A.M. (London time) (for delivery on the first day of such Interest Period) in an amount substantially equal to ABN AMRO's Proportionate Share of the applicable Portion and for a term comparable to such Rental Period (or for a term of one (1) month for any Rental Period that is less than one (1) month but is at least seven (7) days. The LIBO Rate shall be adjusted automatically as of the effective date of any change in the Reserve Requirement. "LIBOR Rental Rate" shall mean, for any Rental Period and Portion, the per annum rate equal to the LIBO Rate for such Rental Period and Portion, plus the Applicable Margin, such rate to change from time to time during such period as the Applicable Margin shall change. "Lien" shall mean, with respect to any property, any security interest, mortgage, pledge, lien, charge or other encumbrance in, of, or on such property or the income therefrom, including the interest of a vendor or lessor under a conditional sale agreement, Capital Lease, "synthetic" lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction. "Line Item" shall mean each line item set forth in the Budget. "Major Casualty" shall mean, with respect to the Property, any Casualty affecting such Property where (a) the damage to such Property is treated by any insurer of such Property as a total loss; (b) such Property cannot reasonably be repaired and restored to the condition in which it existed immediately prior to such Casualty; or (c) the reasonably anticipated cost to repair and restore such Property to the condition in which it existed immediately prior to such Casualty would exceed twenty-five percent (25%) of the Outstanding Lease Amount or any Portion thereof. "Major Condemnation" shall mean, with respect to the Property, any Condemnation affecting such Property where (a) all or substantially all of such Property is taken by such Condemnation; (b) such Property cannot reasonably be repaired and restored to the condition in 1.01-17 which it existed immediately prior to such Condemnation; or (c) the reasonably anticipated cost to repair and restore such Property to the condition in which it existed immediately prior to such Condemnation would exceed twenty-five percent (25%) of the Outstanding Lease Amount or any Portion thereof. "Majority Participants" shall mean (a) at any time the aggregate Outstanding Lease Amount or any Portion thereof is greater than $0, Participants whose aggregate Outstanding Participation Amounts equal or exceed fifty percent (50%) of the aggregate Outstanding Lease Amount or any Portion thereof at such time and (b) at any time the aggregate Outstanding Lease Amount or any Portion thereof is $0, Participants whose Proportionate Shares equal or exceed fifty percent (50%). "Margin Stock" shall have the meaning given to that term in Regulation U issued by the Federal Reserve Board, as amended from time to time, and any successor regulation thereto. "Marketing Option" shall have the meaning given to that term in Subparagraph 3.01(a) of the Purchase Agreement. "Marketing Option Event of Default" shall mean any Event of Default other than a Non-Marketing Option Event of Default. "Material Adverse Effect" shall mean a material adverse effect on (a) the business, assets, operations or financial or other condition of Lessee and its Subsidiaries, taken as a whole; (b) the ability of Lessee to pay or perform the Lessee Obligations when due in accordance with the terms of the Operative Documents; (c) the rights and remedies of any Lessor Party under the Operative Documents or any related document, instrument or agreement; or (d) the value of the Property and the Collateral, any Lessor Party's security interests, Liens or other rights in the Property and the Collateral or the perfection or priority of such security interests, Liens or rights. "Material Casualty" shall mean any Casualty to the Property that alone, or in combination with any prior Casualties to the Property for which repairs to restore the Property to its prior condition have not been completed, will require repairs costing $1,000,000 or more to restore the Property to its prior condition. "Maturity" shall mean, with respect to any Rent, interest, fee or other amount payable by Lessee under the Operative Documents, the date such Rent, interest, fee or other amount becomes due, whether upon the stated maturity or due date, upon acceleration or otherwise. "Modifications" shall have the meaning given to that term in Subparagraph 3.01(c) of the Lease Agreement. "Multiemployer Plan" shall mean any multiemployer plan within the meaning of section 3(37) of ERISA maintained or contributed to by Lessee or any ERISA Affiliate. "Net Proceeds" shall mean, with respect to any issuance of Equity Securities by Lessee or any of its Subsidiaries, the aggregate consideration received by Lessee or such Subsidiary from such issuance less the sum of the actual amount of the reasonable fees and commissions payable to Persons other than Lessee or any Affiliate of Lessee and the other reasonable costs and 1.01-18 expenses (including reasonable legal expenses) directly related to such issuance that are to be paid by Lessee or any of its Subsidiaries. "New Improvements" shall mean, with respect to the Land, all new Improvements to the Land contemplated by the Plans and Specifications. "Non-Marketing Option Event of Default" shall mean: (a) An Event of Default under Subparagraph 5.01(m) of the Lease Agreement; or (b) An Event of Default under Subparagraph 5.01(c) of the Lease Agreement resulting from Lessee's failure to start and complete the construction of the New Improvements in accordance with the Construction Agency Agreement where such failure is caused solely by a Force Majeure Event. "Notice of Expiration Date Purchase Option Exercise" shall have the meaning given to that term in Paragraph 3.01 of the Purchase Agreement. "Notice of Marketing Option Exercise" shall have the meaning given to that term in Paragraph 3.01 of the Purchase Agreement. "Notice of Rental Period Selection" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Notice of Term Purchase Option Exercise" shall have the meaning given to that term in Subparagraph 2.01(a) of the Purchase Agreement. "Operative Documents" shall mean and include the Participation Agreement, the Lease Agreement, the Construction Agency Agreement, the Purchase Agreement, the Lessee Security Documents, the Lessor Deed of Trust, the Lessor Security Agreement, the Assignment of Lease, the Acquisition Agreements, the PG&E Agreements and the Agent's Fee Letter; all other notices, requests, certificates, documents, instruments and agreements delivered to any Lessor Party pursuant to Paragraph 3.01 or 3.02 of the Participation Agreement; and all notices, requests, certificates, documents, instruments and agreements delivered to any Lessor Party in connection with any of the foregoing on or after the date of the Participation Agreement. (Without limiting the generality of the preceding definition, the term "Operative Documents" shall include all written waivers, amendments and modifications to any of the notices, requests, certificates, documents, instruments and agreements referred to therein.) "Outside Completion Date" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. "Outstanding Lease Amount or any Portion thereof" shall mean, on any date, the remainder of (a) the sum of all Advances made by Lessor on or prior to such date, minus (b) the sum of all Lease Reduction Payments applied by Lessor on or prior to such date. 1.01-19 "Outstanding Participation Amount" shall mean, with respect to any Participant on any date, the remainder of (a) the sum of the portions of all Advances funded by such Participant on or prior to such date, minus (b) the sum of such Participant's share of all Lease Reduction Payments applied to the Outstanding Lease Amount or any Portion thereof on or prior to such date. "Outstanding Tranche A Participation Amount" shall mean, with respect to any Tranche A Participant on any date, the remainder of (a) such Participant's Tranche A Portion of all Advances made by Lessor on or prior to such date, minus (b) such Participant's share of all Lease Reduction Payments applied to the Tranche A Portion of the Advances on or prior to such date. "Outstanding Tranche B Participation Amount" shall mean, with respect to any Tranche B Participant on any date, the remainder of (a) such Participant's Tranche B Portion of all Advances made by Lessor on or prior to such date, minus (b) such Participant's share of all Lease Reduction Payments applied to the Tranche B Portion of the Advances on or prior to such date. "Outstanding Tranche C Participation Amount" shall mean, with respect to any Tranche C Participant on any date, the remainder of (a) such Participant's Tranche C Portion of all Advances made by Lessor on or prior to such date, minus (b) such Participant's share of all Lease Reduction Payments applied to the Tranche C Portion of the Advances on or prior to such date. "Participants" shall mean the financial institutions from time to time listed in Schedule I to the Participation Agreement (as amended from time to time pursuant to Subparagraph 7.05(b) of the Participation Agreement or otherwise), acting in their capacities as Participants under the Operative Documents. "Participation Agreement" shall mean the Participation Agreement, dated as of May __, 1998 among Lessee and the Lessor Parties. "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Improvement Costs" shall mean all reasonable costs and expenses necessary for the construction of the New Improvements to the Land (not including the costs of the Land, the Existing Improvements and the other Property to be acquired for the Acquisition Price paid by Lessor for the Land and the other initial Property on the Closing Date), including: (a) All reasonable costs and expenses of building supplies and materials necessary for the construction of the New Improvements; (b) All reasonable costs and expenses of architects, engineers, contractors and other Persons providing labor and services necessary for the construction of the New Improvements; (c) All reasonable costs and expenses of performance and other bonds and other insurance necessary for the construction of the New Improvements; and (d) All Base Rent accruing during the Commitment Period. 1.01-20 "Permitted Indebtedness" shall have the meaning given to that term in Subparagraph 5.02(a) of the Participation Agreement. "Permitted Liens" shall have the meaning given to that term in Subparagraph 5.02(b) of the Participation Agreement. "Permitted Property Liens" shall have the meaning given to that term in Subparagraph 3.07(a) of the Lease Agreement. "Permitted Transaction Expenses" shall mean the following costs and expenses to the extent payable by Lessee in connection with and directly related to the preparation, execution and delivery of the Operative Documents and the transactions contemplated thereby: (a) The reasonable fees and expenses of counsel for Lessee incurred in connection with the preparation, negotiation, execution and delivery of the Operative Documents; (b) The reasonable fees and expenses of counsel for each of Lessor and Agent incurred in connection with the preparation, negotiation, execution and delivery of the Operative Documents; (c) The reasonable fees and expenses incurred in recording, registering or filing any of the Operative Documents; (d) The title fees, premiums and escrow costs and other expenses relating to title insurance and the closing of the transactions contemplated by the Operative Documents; (e) The reasonable fees and expenses of required environmental audits and appraisals; (f) The reasonable fees and expenses of consultants and accountants for Lessee; (g) The reasonable fees and expenses for surveys; and (h) Other related reasonable fees and expenses. "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, an unincorporated association, a limited liability company, a joint venture, a trust or other entity or a Governmental Authority. "Personal Property Collateral" shall have the meaning given to that term in Subparagraph 2.07(b) of the Lease Agreement. "PG&E" shall mean Pacific Gas and Electric Company, a California corporation. 1.01-21 "PG&E Agreements" shall mean each of (i) the Acquisition Agreement relating to the Tract 1 Land, (ii) Grant Deed between PG&E, as grantor, and Lessor, as grantee, conveying fee title to the Tract 1 Land, (iii) the Amended and Restated Environmental Agreement between PG&E and Lessor, which also shall be executed by Lessee, (iv) the License Agreement between PG&E and Lessor; and (v) the Agreement Regarding Development Within Nonexclusive Easements between PG&E and Lessor and any other agreements relating to such agreements or delivered in connection with such agreements.. "Plans and Specifications" shall mean the final architectural, engineering and construction plans, specifications and drawings for the New Improvements to be constructed on the Land delivered to Lessor pursuant to Subparagraph 5.01(h) of the Participation Agreement, including, if applicable, all civil plans, landscaping plans, and plans for the exterior and interior of structures, as such plans, specifications and drawings may thereafter be revised, amended, supplemented or modified pursuant to Paragraph 3.01 of the Construction Agency Agreement. "Portion" shall mean a portion of the Outstanding Lease Amount. If, at any time, Lessee has not elected to divide the Outstanding Lease Amount into two or more portions, any reference to a Portion shall mean the total Outstanding Lease Amount at such time. "Pricing Grid" shall mean the Pricing Grid as set forth on Schedule II to the Participation Agreement. "Prime Rate" shall mean the per annum rate publicly announced by ABN AMRO from time to time at its Chicago Office. The Prime Rate is determined by ABN AMRO from time to time as a means of pricing credit extensions to some customers and is neither directly tied to any external rate of interest or index nor necessarily the lowest rate of interest charged by ABN AMRO at any given time for any particular class of customers or credit extensions. Any change in the Base Rate resulting from a change in the Prime Rate shall become effective on the Business Day on which each change in the Prime Rate occurs. "Property" shall have the meaning given to that term in Paragraph 2.01 of the Lease Agreement. "Property Collateral" shall have the meaning given to that term in Subparagraph 2.11(a) of the Participation Agreement. "Proportionate Share" shall mean, with respect to each Participant, the percentage set forth under the caption "Proportionate Share" opposite such Participant's name on Part A of Schedule I, or, if changed, such percentage as may be set forth for such Participant in the Register. The Proportionate Share of each Participant shall equal the sum of such Participant's Tranche A Proportionate Share, Tranche B Proportionate Share and Tranche C Proportionate Share. "Purchase Agreement" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. "Purchase Documents" shall have the meaning given to that term in Subparagraph 4.01(a) of the Purchase Agreement. 1.01-22 "Purchaser" shall have the meaning given to that term in Subparagraph 4.01(a) of the Purchase Agreement. "Quick Ratio" shall mean, with respect to Lessee at any time, the ratio, determined on a consolidated basis in accordance with GAAP, of: (a) The remainder of (i) the sum (without duplication) of all cash, Cash Equivalents and net accounts receivable of Lessee and its Subsidiaries at such time, minus (ii) the sum (without duplication) of all such cash, Cash Equivalents and net accounts receivable that are subject to a Lien or are otherwise restricted, provided that unless an Event of Default has occurred and is continuing, Cash Equivalents held pursuant to the Cash Collateral Agreement shall not be deemed to be subject to a Lien or otherwise restricted; to (b) Current liabilities of Lessee and its Subsidiaries, determined in accordance with GAAP, plus to the extent not included in current liabilities, the principal amount of all Indebtedness outstanding under revolving credit facilities and 20% of all synthetic lease obligations and other off balance sheet obligations due within one year. "Rate Contracts" shall mean swap agreements (as that term is defined in Section 101 of the Federal Bankruptcy Reform Act of 1978, as amended) and any other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates. "Real Property Collateral" shall have the meaning given to that term in Subparagraph 2.07(a) of the Lease Agreement. "Register" shall have the meaning given to that term in Subparagraph 7.05(b) of the Participation Agreement. "Related Agreements" shall mean all chattel paper, accounts, instruments, documents, investment property and general intangibles relating to any of the Land, Improvements or Appurtenant Rights or to the present or future development, construction, operation or use of any of the Land, Improvements or Appurtenant Rights, including (a) all plans, specifications, construction agreements, maps, surveys, studies, books of account, records, files, insurance policies, guarantees and warranties relating to such Land or Improvements or to the present or future development, construction, operation or use of such Land, Improvements or Appurtenant Rights (including the Construction Agreements and the Plans and Specifications); (b) all architectural, engineering, construction and management contracts, all supply and service contracts for water, sanitary and storm sewer, drainage, electricity, steam, gas, telephone and other utilities relating to such Land, Improvements or Appurtenant Rights or to the present or future development, construction, operation or use of such Land, Improvements or Appurtenant Rights; and (c) all computer software and intellectual property, guaranties and warranties, letters of credit, and documents relating to such Land, Improvements or Appurtenant Rights or to the present or future development, construction, operation or use of such Land, Improvements or Appurtenant Rights. 1.01-23 "Related Goods" shall mean: (a) All machinery, furniture, equipment, fixtures and other goods and tangible personal property (including construction materials and supplies) financed by any Advance, including all such property described in Exhibit B to the Lease Agreement and in each Exhibit B Supplement delivered by Lessee; and (b) All machinery, equipment, fixtures and other goods and tangible personal property (including construction materials and supplies) now or hereafter intended for the construction, reconstruction, repair, replacement, alteration, addition or improvement of or to any of the Improvements or any other Related Goods. "Related Permits" shall mean all licenses, authorizations, certificates, variances, consents, approvals and other permits, now or hereafter pertaining to any of the Land, Improvements or Appurtenant Rights and all tradenames or business names relating to any of the Land, Improvements or Appurtenant Rights or the present or future development, construction, operation or use of any of the Land, Improvements or Appurtenant Rights. "Rent" shall mean collectively Base Rent and Supplemental Rent. "Rental Period" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Rental Rate" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Repair and Restoration Account" shall have the meaning given to that term in Subparagraph 3.04(c) of the Lease Agreement. "Reportable Event" shall have the meaning given to that term in ERISA and applicable regulations thereunder. "Required Participants" shall mean (a) at any time the aggregate Outstanding Lease Amount or any Portion thereof is greater than $0, Participants whose aggregate Outstanding Participation Amounts equal or exceed sixty-six and two-thirds percent (66-2/3%) or more of the aggregate Outstanding Lease Amount or any Portion thereof at such time and (b) at any time the aggregate Outstanding Lease Amount or any Portion thereof is $0, Participants whose Proportionate Shares equal or exceed sixty-six and two-thirds percent (66-2/3%). "Requirement of Law" applicable to any Person shall mean (a) the Articles or Certificate of Incorporation and By-laws, Partnership Agreement or other organizational or governing documents of such Person, (b) any Governmental Rule applicable to such Person, (c) any license, permit, approval or other authorization granted by any Governmental Authority to or for the benefit of such Person or (d) any judgment, decision or determination of any Governmental Authority or arbitrator, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. 1.01-24 "Reserve Requirement" shall mean, with respect to any day in any Rental Period, the aggregate of the reserve requirement rates (expressed as a decimal) in effect on such day for eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of the Federal Reserve Board) maintained by a member bank of the Federal Reserve System. As used herein, the term "reserve requirement" shall include, without limitation, any basic, supplemental or emergency reserve requirements imposed on any Participant by any Governmental Authority. "Residual Value Guaranty Amount" shall have the meaning given to that term in Subparagraph 3.02(g) of the Purchase Agreement. "Scheduled Expiration Date" shall have the meaning given to that term in Subparagraph 2.02(a) of the Lease Agreement. "Scheduled Rent Payment Date" shall have the meaning given to that term in Subparagraph 2.03(a) of the Lease Agreement. "Secondary Marketing Period" shall have the meaning given to that term in Subparagraph 3.02(b) of the Purchase Agreement. "Seller" shall mean, respect to the Tract 1 Land, PG&E, and with respect to the Tract 2 Land, the City of San Rafael, California. "Solvent" shall mean, with respect to any Person on any date, that on such date (a) the fair value of the property of such Person is greater than the fair value of the liabilities (including, without limitation, contingent liabilities) of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. "Subleases" shall mean all leases and subleases of any of the Land, Improvements and/or Appurtenant Rights by Lessee as lessor or sublessor, now or hereafter in effect, whether or not of record, including all guaranties and security therefor and the right to bring actions and proceedings thereunder or for the enforcement thereof and to do anything which Lessee is or may become entitled to do thereunder. "Subordinated Indebtedness" shall mean Indebtedness which is unsecured and subordinated to the Lessee Obligations on terms acceptable to Lessor and the Required Participants. "Subparticipants" shall have the meaning given to that term in Subparagraph 7.05(c) of the Participation Agreement. "Subsidiary" of any Person shall mean (a) any corporation of which more than 50% of the issued and outstanding Equity Securities having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of 1.01-25 any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries, (b) any partnership, joint venture, or other Person of which more than 50% of the equity interest having the power to vote, direct or control the management of such partnership, joint venture, business trust or other Person is at the time owned and controlled by such Person, by such Person and one or more of the other Subsidiaries or by one or more of such Person's other Subsidiaries or (c) any other Person included in the Financial Statements of such Person on a consolidated basis. "Sub-Tract Parcel" shall have the meaning set forth ine Paragraph 2.02 of the Purchase Agreement. "Supplemental Rent" shall have the meaning given to such term in Subparagraph 2.03(b) of the Lease Agreement. "Surety Instruments" shall mean all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Tangible Net Worth" shall mean, with respect to Lessee and its Subsidiaries at any time, the remainder at such time, determined on a consolidated basis in accordance with GAAP, of (a) the total assets of Lessee and its Subsidiaries minus (b) the sum (without limitation and without duplication of deductions) of (i) the total liabilities of Lessee and its Subsidiaries, (ii) all reserves established by Lessee and its Subsidiaries for anticipated losses and expenses (to the extent not deducted in calculating total assets in clause (a) above), and (iii) all intangible assets of Lessee and its Subsidiaries (to the extent included in calculating total assets in clause (a) above), including, without limitation, goodwill (including any amounts, however designated on the balance sheet, representing the cost of acquisition of businesses and investments in excess of underlying tangible assets), trademarks, trademark rights, trade name rights, copyrights, patents, patent rights, licenses, unamortized debt discount, marketing expenses, organizational expenses, non-compete agreements and deferred research and development. "Term" shall mean the period beginning on the Commencement Date of the Lease Agreement and ending on the Expiration Date of the Lease Agreement. "Termination Date" shall mean (a) the date set forth in a Notice of Term Purchase Option as the Scheduled Rent Payment Date on which the Lease Agreement will be terminated by Lessee pursuant to Paragraph 4.01 of the Lease Agreement and the Property will be purchased by Lessee pursuant to Section II of the Purchase Agreement or (b) the date set forth in a written notice delivered by Lessor to Lessee pursuant to Subparagraph 5.03(a) or 5.04(a) of the Lease Agreement after the occurrence of an Event of Default thereunder as the date on which the Lease Agreement will be terminated. "Term Purchase Option" shall have the meaning given to that term in Paragraph 2.01 of the Purchase Agreement. "Thirty-Month Commitment" shall have the meaning given to that term in Subparagraph 2.01(b) of the Participation Agreement. 1.01-26 "Total Commitment" shall mean the amount set forth as such in Subparagraph 2.01(b) of the Participation Agreement or, if such amount is reduced pursuant to Subparagraph 2.08(a) of the Participation Agreement, the amount to which so reduced. "Tract" shall mean: (a) With respect to any land, the lots, pieces, parcels and tracts of land described in each Part of Exhibit A to the Lease Agreement or Exhibit A to the Participation Agreement, as the case may be; and (b) With respect to any Property, a tract of land, together with all Property related to such tract of land. "Tract 1 Land" and "Tract 2 Land" shall mean the lots, pieces, parcels and tracts of land described in Part 1 and Part 2, respectively, of Exhibit A to the Participation Agreement. "Tract 2 Acquisition Advance" shall have the meaning given to that term in Subparagraph 2.03(a) of the Participation Agreement. "Tract 2 Acquisition Date" shall have the meaning given to that term in Subparagraph 2.01(a) of the Participation Agreement. "Tranche A Participant" shall mean, at any time, any Participant having an Outstanding Tranche A Participation Amount at such time. "Tranche A Percentage" shall mean (a) with respect to each Participant at any time prior to the Commitment Termination Date, the percentage set forth under the caption "Tranche A Percentage" opposite such Participant's name in Part A(1) of Schedule I and (b) with respect to each Participant at any time on or after the Commitment Termination Date, the percentage set forth under the caption "Tranche A Percentage" opposite such Participant's name in Part A(2) of Schedule I; or in the case of either such percentage, if changed, such percentage as may be set forth for such Participant in the Register. "Tranche A Portion" shall mean, (a) with respect to any Advance without reference to any Participant, the portion of such Advance equal to the Tranche A Proportionate Share of such Advance and (b) with respect to any Advance with reference to any Participant, the portion of such Advance equal to such Participant's Tranche A Percentage of such Advance. "Tranche A Proportionate Share" shall mean (a) at any time prior to the Commitment Termination Date, eighty-nine and nine-tenths percent (89.9%) and (b) at any time on or after the Commitment Termination Date, eighty-three and five tenths percent (83.5%). "Tranche B Participant" shall mean, at any time, any Participant having an Outstanding Tranche B Participation Amount at such time. "Tranche B Percentage" shall mean (a) with respect to each Participant at any time prior to the Commitment Termination Date, the percentage set forth under the caption "Tranche B Percentage" opposite such Participant's name in Part A(1) of Schedule I and (b) with respect to 1.01-27 each Participant at any time on or after the Commitment Termination Date, the percentage set forth under the caption "Tranche B Percentage" opposite such Participant's name in Part A(2) of Schedule I; or in the case of either such percentage, if changed, such percentage as may be set forth for such Participant in the Register. "Tranche B Portion" shall mean, (a) with respect to any Advance without reference to any Participant, the portion of such Advance equal to the Tranche B Proportionate Share of such Advance and (b) with respect to any Advance with reference to any Participant, the portion of such Advance equal to such Participant's Tranche B Percentage of such Advance. "Tranche B Proportionate Share" shall mean (a) at any time prior to the Commitment Termination Date, seven and one-tenth percent (7.1% and (b) at any time on or after the Commitment Termination Date, thirteen and five-tenths percent (13.5%). "Tranche C Participant" shall mean, at any time, any Participant having an Outstanding Tranche C Participation Amount at such time. "Tranche C Percentage" shall mean (a) with respect to each Participant at any time prior to the Commitment Termination Date, the percentage set forth under the caption "Tranche C Percentage" opposite such Participant's name in Part A(1) of Schedule I and (b) with respect to each Participant at any time on or after the Commitment Termination Date, the percentage set forth under the caption "Tranche C Percentage" opposite such Participant's name in Part A(2) of Schedule I; or in the case of either such percentage, if changed, such percentage as may be set forth for such Participant in the Register. "Tranche C Portion" shall mean, (a) with respect to any Advance without reference to any Participant, the portion of such Advance equal to the Tranche C Proportionate Share of such Advance and (b) with respect to any Advance with reference to any Participant, the portion of such Advance equal to such Participant's Tranche C Percentage of such Advance. "Tranche C Proportionate Share" shall mean, at all times (whether before, on or after the Commitment Termination Date), three percent (3.0%). "Trustee" shall have the meaning given to that term in the introductory paragraph of the Lease Agreement. "Unused" shall mean (a) with respect to the 364-Day Commitment at any time, the remainder of (i) the 364-Day Commitment at such time minus (ii) the aggregate amount of all Advances made prior to such time and allocated to the 364-Day Commitment; (b) with respect to the Thirty-Month Commitment at any time, the remainder of (i) the Thirty-Month Commitment at such time minus (ii) the aggregate amount of all Advances made prior to such time and allocated to the Thirty-Month Commitment; and (b) with respect to the Total Commitment at any time, the remainder of (i) the Total Commitment at such time minus (b) the aggregate amount of all Advances made prior to such time. 1.01-28 SCHEDULE 1.02 RULES OF CONSTRUCTION (a) GAAP. Unless otherwise indicated in any Operative Document, all accounting terms used in the Operative Documents shall be construed, and all accounting and financial computations thereunder shall be computed, in accordance with GAAP. If GAAP changes after the date of the Participation Agreement such that any covenants contained in the Operative Documents would then be calculated in a different manner or with different components, Lessee and the Lessor Parties agree to negotiate in good faith to amend the applicable Operative Documents in such respects as are necessary to conform those covenants as criteria for evaluating Lessee's financial condition to substantially the same criteria as were effective prior to such change in GAAP; provided, however, that, until Lessee and the Lessor Parities so amend the Operative Documents, all such covenants shall be calculated in accordance with GAAP as in effect immediately prior to such change. (b) Headings. Headings in each of the Operative Documents are for convenience of reference only and are not part of the substance thereof. (c) Plural Terms. All terms defined in any Operative Document in the singular form shall have comparable meanings when used in the plural form and vice versa. (d) Time. All references in each of the Operative Documents to a time of day shall mean San Francisco, California time, unless otherwise indicated. All references in each of the Operative Documents to a date (the "action date") which is one month prior to or after another date (the "reference date") shall mean the date in the immediately preceding or succeeding calendar month (as the case may be) which numerically corresponds to the reference date; provided, however, that (i) if such corresponding date in the immediately preceding or succeeding calendar month (as the case may be) is not a Business Day, the action date shall be the next succeeding Business Day after such corresponding date (unless, in the case of a Rental Period, such next Business Day falls in another calendar month, in which case the action date shall be the immediately preceding Business Day) and (ii) if the reference date is the last Business Day of a calendar month (or a day for which there is no numerically corresponding day in the immediately preceding calendar month) the action date shall be the last Business Day of the immediately preceding or succeeding calendar month (as the case may be). All references in each of the Operative Documents to an earlier date which is two or more months prior to a reference date or to a later date which is two or more months after a reference date shall be determined in a comparable manner. (e) Construction. The Operative Documents are the result of negotiations among, and have been reviewed by Lessee and each Lessor Party and their respective counsel. Accordingly, the Operative Documents shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Lessee or any Lessor Party. (f) Entire Agreement. The Operative Documents, taken together, constitute and contain the entire agreement of Lessee and the Lessor Parties and supersede any and all prior 1.02-1 agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter thereof. (g) Calculation of Base Rent, Interest and Fees. All calculations of Base Rent, interest and fees under the Operative Documents for any period (i) shall include the first day of such period and exclude the last day of such period and (ii) shall be calculated on the basis of a year of 360 days for actual days elapsed, except that during any period that Base Rent or any interest is to be calculated based upon the Base Rate, such Base Rent or interest shall be calculated on the basis of a year of 365 or 366 days, as appropriate, for actual days elapsed. (h) References. (i) References in any Operative Document to "Recitals," "Sections," "Paragraphs," "Subparagraphs," "Articles," "Exhibits" and "Schedules" are to recitals, sections, paragraphs, subparagraphs, articles, exhibits and schedules therein and thereto unless otherwise indicated. (ii) References in any Operative Document to any document, instrument or agreement (A) shall include all exhibits, schedules and other attachments thereto, (B) shall include all documents, instruments or agreements issued or executed in replacement thereof, and (C) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time. (iii) References in any Operative Document to any Governmental Rule (A) shall include any successor Governmental Rule, (B) shall include all rules and regulations promulgated under such Governmental Rule (or any successor Governmental Rule), and (C) shall mean such Governmental Rule (or successor Governmental Rule) and such rules and regulations, as amended, modified, codified or reenacted from time to time and in effect at any given time. (iv) References in any Operative Document to any Person in a particular capacity (A) shall include any permitted successors to and assigns of such Person in that capacity and (B) shall exclude such Person individually or in any other capacity. (i) Other Interpretive Provisions. The words "hereof," "herein" and "hereunder" and words of similar import when used in any Operative Document shall refer to such Operative Document as a whole and not to any particular provision of such Operative Document. The words "include" and "including" and words of similar import when used in any Operative Document shall not be construed to be limiting or exclusive. In the event of any inconsistency between the terms of the Participation Agreement and the terms of any other Operative Document, the terms of the Participation Agreement shall govern. (j) Governing Law. Unless otherwise provided in any Operative Document, each of the Operative Documents shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. 1.02-2 SCHEDULE 3.01 CONDITIONS PRECEDENT TO INITIAL ACQUISITION ADVANCE A. Principal Operative Documents. (1) The Participation Agreement, duly executed by Lessee, Lessor, each Participant and Agent; (2) The Lease Agreement, duly executed by Lessee and Lessor and appropriately notarized for recording; (3) The Purchase Agreement, duly executed by Lessee and Lessor; (4) The Construction Agency Agreement, duly executed by Lessee and Lessor; (5) The Assignment of Construction Agreements, duly executed by Lessee; (6) The Cash Collateral Agreement, duly executed by Lessee; (7) The Assignment of Lease, duly executed by Lessor and appropriately notarized for recording; (8) The Lessor Deed of Trust, duly executed by Lessor and appropriately notarized for recording; and (9) The Lessor Security Agreement, duly executed by Lessor. B. Lessee Corporate Documents. (1) The Certificate or Articles of Incorporation of Lessee, certified as of a recent date prior to the Closing Date by the Secretary of State (or comparable official) of its jurisdiction of incorporation; (2) A Certificate of Good Standing (or comparable certificate) for Lessee, certified as of a recent date prior to the Closing Date by the Secretary of State (or comparable official) of its jurisdiction of incorporation; (3) A certificate of the Secretary or an Assistant Secretary of Lessee, dated the Closing Date, certifying (a) that attached thereto is a true and correct copy of the Bylaws of Lessee as in effect on the Closing Date; (b) that attached thereto are true and correct copies of resolutions duly adopted by the Board of Directors of Lessee and continuing in effect, which authorize the execution, delivery and performance by Lessee of the Operative Documents executed or to be executed by Lessee and the consummation of the 3.01-1 transactions contemplated thereby; and (c) that there are no proceedings for the dissolution or liquidation of Lessee; (4) A certificate of the Secretary or an Assistant Secretary of Lessee, dated the Closing Date, certifying the incumbency, signatures and authority of the officers of Lessee authorized to execute, deliver and perform the Operative Documents and all other documents, instruments or agreements related thereto executed or to be executed by Lessee; and (5) A Certificates of Good Standing (or comparable certificates) for Lessee, certified as of a recent date prior to the Closing Date by the Secretary of State of California. C. Financial Statements, Financial Condition, Etc. (1) A copy of the audited consolidated Financial Statements of Lessee for the fiscal year ended September 30, 1997, audited by KPMG Peat Marwick and a copy of the unqualified opinion delivered by such accountants in connection with such Financial Statements; (2) A copy of the 10-Q report filed by Lessee with the Securities and Exchange Commission for the quarter ended December 31, 1997; (3) A copy of the 10-K report filed by Lessee with the Securities and Exchange Commission for the fiscal year ended September 30, 1997; (4) A copy of the most recently completed annual report (Form 5500 Series) filed with the Internal Revenue Service with respect to each Employee Benefit Plan of Lessee and its Subsidiaries, certified by the Lessee; (5) The consolidated plan and forecast of Lessee and its Subsidiaries for the fiscal year to end September 30, 1998 including quarterly cash flow projections and quarterly projections of Lessee's compliance with each of the covenants set forth in Paragraph 5.03 of the Participation Agreement; and (6) Such other financial, business and other information regarding Lessee, or any of its Subsidiaries as Agent or any Participant may reasonably request, including information as to possible contingent liabilities, tax matters, environmental matters and obligations for employee benefits and compensation. D. Collateral Documents. (1) Evidence that the Lease Agreement, the Assignment of Lease, and the Lessor Deed of Trust, delivered pursuant to items A(2), A(7) and A(8) and the Memorandum of Purchase Agreement relating to the Purchase Agreement delivered 3.01-2 pursuant to item A(3) with respect to the Tract 1 Land have been properly recorded in the Official Records of Marin County; (2) An extended coverage owner's policy or binder of title insurance (or a commitment therefor) for the Property insuring Lessor's fee simple estate to the Tract 1 Land (subject to such exceptions as Agent may approve), in such amounts and with such endorsements as Agent may reasonably require, issued by a title insurer acceptable to Agent, together with such policies of co-insurance or re-insurance (or commitments therefor) as Agent may require; (3) An extended coverage lender's policy of title insurance (or a commitment therefor) for the Tract 1 Land insuring the validity and priority of the Lease Agreement (subject to such exceptions as Agent may approve), in such amounts and with such endorsements as Agent may reasonably require, issued by a title insurer acceptable to Agent, together with such policies of co-insurance or re-insurance (or commitments therefor) as Agent may require; (4) An extended coverage lender's policy of title insurance (or a commitment therefor) for the Tract 1 Land insuring the validity and priority of the Lessor Deed of Trust (subject to such exceptions as Agent may approve), in such amounts and with such endorsements as Agent may reasonably require, issued by a title insurer acceptable to Agent, together with such policies of co-insurance or re-insurance (or commitments therefor) as Agent may require; (5) Copies of all leases for the Tract 1 Land and all other documents, instruments and agreements recorded against or otherwise affecting the Property, including all amendments, extensions and other modifications thereof; (6) Subordination, non-disturbance and attornment agreements from the lessee under each of the leases for the Tract 1 Land; (7) Such consents and estoppels, with appropriate mortgagee protection language, as are requested by Agent, each duly executed by the appropriate Person; (8) Such Uniform Commercial Code financing statements and fixture filings (appropriately completed and executed) for filing in such jurisdictions as Agent may request to perfect the Liens granted to Lessor and Agent in the Lessee Security Documents, the Lessor Security Agreement and the other Operative Documents; (9) Such Uniform Commercial Code termination statements (appropriately completed and executed) for filing in such jurisdictions as Agent may request to terminate any financing statement evidencing Liens of other Persons in the Collateral which are prior to the Liens granted to Lessor and Agent in the Lessee Security Documents, the Lessor Security Agreement an