HEALTH SYSTEMS DESIGN CORP, 10-K, 1998-12-23

HEALTH SYSTEMS DESIGN CORP
10-K, 1998-12-23
COMPUTER INTEGRATED SYSTEMS DESIGN

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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

FORM 10-K

/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 0-27502.

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HEALTH SYSTEMS DESIGN CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 94-3235734
(State or other Jurisdiction (I.R.S. Employer
of Identification
Incorporation or Number)
Organization)
</TABLE>

1330 BROADWAY, OAKLAND, CALIFORNIA 94612
(Address of principal executive offices) (Zip code)

(510) 763-2629
(Registrant's telephone number, including area code)

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

<TABLE>
<CAPTION>
Title of each Name of each exchange on which
Class registered
<S> <C>
NONE NONE
</TABLE>

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

COMMON STOCK
(Title of Class)

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 November 30, 1998, 6,673,307 shares of the registrant's common stock
were outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant on that date was approximately $13,566,600.

Portions of the definitive proxy statement for the Company's annual meeting
of stockholders, to be held on March 23, 1999, are incorporated by reference
into Part III of this Form 10-K.

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<PAGE>
PART I

ITEM 1. BUSINESS

OVERVIEW. Health Systems Design Corporation (HSD or the Company) is a
leading provider of managed care information systems software to payors and
providers of managed care products and services. The Company's principal product
line, DIAMOND-TM-, consists of DIAMOND-TM- 725 and DIAMOND-TM- 950C/S. The
DIAMOND-TM- products enable the Company's customers to manage information about
members, employer groups, providers, health plan and provider contracts,
referrals and authorizations and health care services for accurate provider
reimbursement, risk pool accounting and health care cost management. DIAMOND-TM-
950C/S is one of the first core administrative client/server products offered to
the managed care industry. HSD markets its products through its direct sales
force as well as through remarketing agreements.

The DIAMOND-TM- products are UNIX and NT-based and operate on a variety of
hardware platforms. While the products incorporate similar functionality, each
is designed to meet the requirements of different types of managed care
organizations. DIAMOND-TM- 725 provides a system for mid-size managed care
organizations, whereas DIAMOND-TM- 950C/S is designed for organizations seeking
advanced technology, particularly larger organizations with high transaction
requirements and more complex networks. HSD provides its customers with
implementation, training, modification, support and other services to ensure
that its customers maximize the benefits of the Company's DIAMOND-TM- products.
A significant portion of the Company's revenues is derived from providing these
services to its customers.

The Company was founded and incorporated in California in July 1988 to
provide managed care information systems to payors and providers of managed care
services. In February 1996, the Company was reorganized as a Delaware holding
company. Unless the context otherwise requires, references in this Form 10-K to
HSD and the Company include both Health Systems Design Corporation, a Delaware
corporation, and its wholly-owned subsidiary, Health Systems Design Corp., a
California corporation. The Company's principal executive offices are located at
1330 Broadway, Oakland, California 94612, and its telephone number is (510)
763-2629.

Substantially all of the Company's operations are in one industry
segment--developing and selling managed care information systems. Therefore, no
separate industry segment information is presented.

INDUSTRY BACKGROUND. As a result of the traditional fee-for-service model
of payment for medical services, health care delivery costs in the United States
have increased dramatically in recent years. Payors such as employers, health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
traditional indemnity insurers and third party administrators ("TPAs") are
responding to these escalating health care costs by shifting, generally under
capitated payment arrangements, a portion of the financial risk associated with
the delivery of health care to providers such as physicians, hospitals and
integrated health care delivery systems. This shift has caused providers to form
groups or networks and to affiliate with independent practice associations
("IPAs"), management service organizations ("MSOs") and physician hospital
organizations, and has provided an impetus for consolidation among hospitals and
resulted in the proliferation of integrated health care delivery systems. As a
result, providers are being required to manage financial risk and enhance their
understanding of treatment costs, variability of costs and cost control measures
while demonstrating their ability to provide quality care. Demand has
intensified for health care information systems for use by payors and providers
that have assumed financial risk as pressure to control health care costs has
increased.

Information systems software, which manages complex benefit and risk plans
and provides data to analyze cost-effective patterns of medical practice, has
become integral to the operation of managed care organizations. Many of the
existing payor and provider information systems were designed for a fee-for-
service model of medical practice and reimbursement and incorporate older
software and hardware technologies. These systems were focused on billing and
claim payments rather than healthcare utilization

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and financial risk management. Today, managed care providers require information
systems that are able to account for increasingly sophisticated capitation
schemes, coordinate multiple contracts between payors and providers, maintain
eligibility databases, incorporate electronic data interchange, use complex
algorithms for utilization management and provide greater efficiency and
improved service.

PRODUCTS. As mentioned above, DIAMOND-TM- 725 and DIAMOND-TM- 950C/S enable
customers to manage information about their members, employer groups, providers,
health plan and provider contracts, referrals and authorizations and health care
services for accurate provider reimbursement, risk pool accounting and health
care cost management. The product accomplishes each of these tasks through a
series of integrated modules. Because of the nature of information processing in
managed care companies, the modules are sold as an integrated product and
generally not sold separately. Optional modules and third party products are
made available to customers for an additional cost.

DIAMOND-TM- MODULES

<TABLE>
<CAPTION>
MODULE DESCRIPTION
- --------------------------------------------------------- ------------------------------------------------------
<S> <C>
Members and Groups....................................... Supports enrollment processes
Maintains eligibility, benefit and member-level
provider assignment information

Batch Processing......................................... Allows batch processing of enrollment and claims data

Provider Contracting and Network Management.............. Defines and manages multiple provider networks and
affiliations, and specific provider reimbursement
arrangements

Authorizations........................................... Processes referrals, authorizations and hospital
precertifications
Interfaces with claims so that adjudication results
can vary by authorization status

Claims Pricing and Adjudication.......................... Calculates price for services rendered
Applies benefits and eligibility information
Applies duplicate checking and other transaction logic
Interfaces with clinical editors

Capitation and Risk Pool Management...................... Calculates capitated reimbursement
Debits budgeted dollars or funds with utilization
Applies stoploss limits

Accounts Payable......................................... Supports claims and capitation payables

Premium Billing and Accounts Receivable.................. Supports premium billing and accounts receivable

Reporting................................................ Generates standard utilization and cost reporting
Includes correspondence generation
Supports AD HOC reporting

Customer Service......................................... Tracks communication and correspondence between a
health plan and its customers
</TABLE>

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<TABLE>
<CAPTION>
MODULE DESCRIPTION
- --------------------------------------------------------- ------------------------------------------------------
<S> <C>
Medicaid and Medicare Interfaces......................... Interfaces to federal and state governments for
eligibility information
Manages capitated reimbursement for providers with
Medicare contracts and Medicaid contracts (Medicaid
Interface available only for DIAMOND-TM- 725)
</TABLE>

DIAMOND-TM- 725 is the Company's initial internally developed managed care
information system. Introduced in 1992, DIAMOND-TM- 725 is designed to address
the needs of a wide spectrum of payor and provider organizations. The
functionality provided by DIAMOND-TM- 725 supports the critical operational
tasks of managed health care organizations ranging from start-up companies to
mid-sized mature companies seeking an established managed care information
system that is cost effective and easy to support.

DIAMOND-TM- 950C/S was released in 1995 as an information system for large
managed care organizations demanding advanced technologies. DIAMOND-TM-
950C/Semploys an open system architecture and incorporates the Oracle relational
database, PowerBuilder application development tools and a graphical user
interface. The advantages of DIAMOND-TM- 950C/S include broad scalability, a
high degree of information access using Structured Query Language ("SQL")
reporting tools, and a wide range of architectural options in deploying system
resources across geographically dispersed organizations, centralized processing,
and other topologies. The Company believes that DIAMOND-TM- 950C/S represents a
significant advantage for those organizations that are positioning themselves to
respond to a data-driven health care environment. DIAMOND-TM- 950C/S can be
integrated with other products in a two-tier architecture and incorporates SQL
accessibility and application program interfaces

License fee levels for the Company's direct customers are determined by the
number of users or number of members of the plan, with customers paying
additional license and support fees as the number of licensed users or members
increase.

IMPLEMENTATION, SERVICES AND SUPPORT. IMPLEMENTATION. HSD's implementation
services consist primarily of analysis of the hardware, software, interfaces,
networking, data conversion and personnel needs of its customers, installation
and testing of the software and detailed, customer-specific training at the
customers' sites. Implementation of DIAMOND-TM- 725 generally ranges from four
to six months. DIAMOND-TM- 950C/S implementations are usually nine to twelve
months in duration, but larger customers may require a more extended time
period.

TRAINING PROGRAM. HSD provides a comprehensive training program to its
customers. Training classes are offered primarily through in-house facilities in
Oakland, California and Atlanta, Georgia.

SUPPORT. To ensure the most effective use of its products, HSD initially
requires each of its direct customers to enter into a minimum 24-month support
contract with the Company. The Company's software support services include
rights to receive unspecified product updates, upgrades, telephone and dial-up
support and on-site reviews.

ENHANCEMENTS. Because systems requirements of managed care organizations
vary, some clients request specific enhancements to the standard DIAMOND-TM-
product. HSD provides these enhancement services to its customers for an
additional fee. Enhancements are typically, though not always, incorporated in
the core DIAMOND-TM- product.

SALES AND MARKETING. HSD markets its products through its direct sales
force as well as through remarketing agreements. As of September 30, 1998, the
Company's direct sales force consisted of 7 account executives and 2 regional
managers located in the Company's Oakland, California; Atlanta, Georgia; and
other satellite offices. In addition to this sales force, HSD employs a
14-person marketing,

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sales support and product specialist team. To increase market share in other
segments not fully addressed by HSD directly, the Company has entered into
strategic alliances with various third party hardware and software vendors, as
well as certain service organizations. The Company continues to seek additional
strategic relationships.

The sales cycle typically ranges from four to nine months and consists of
several steps which include initial contact and lead qualification, site visits,
response to requests for proposals, analysis of business requirements,
preparation of final bid and contract negotiations. Members of HSD's
engineering, implementation and customer support departments assist the
Company's direct sales force in making presentations to, and preparing
comprehensive proposals for, potential customers. To support the Company's sales
efforts, HSD conducts a variety of programs intended to market and position its
product line and services. These programs include trade journal advertising,
direct mailings, public relations activities and trade show participation.

RELATIONSHIP WITH SHARED MEDICAL SYSTEMS. In January 1994, the Company and
Shared Medical Systems ("SMS") entered into the "SMS Agreement", under which SMS
markets, implements and supports the Company's products to the SMS customer
base. SMS has the worldwide, exclusive right to market and license the
DIAMOND-TM- products to its customers, other than provider organizations and
certain payor organizations. SMS also has the worldwide, non-exclusive right to
market and license the DIAMOND-TM- products to provider organizations. The SMS
Agreement has an initial term of five years and provides for automatic renewal
for successive two year periods unless either party provides prior written
notice of termination not less than one year prior to the end of the
then-current term. The initial period expires in January 1999 and neither party
has provided notice of termination.

During the term of the SMS Agreement, (i) HSD has agreed not to enter into a
marketing agreement for the DIAMOND-TM- products with any SMS competitor and
(ii) SMS has agreed not to develop a managed care application, or license any
managed care software from any third-party, that has the same or substantially
similar functionality as the DIAMOND-TM- products.

Pursuant to the SMS Agreement, SMS was granted 30 software licenses at a
stated price for resale. For these 30 licenses, the Company recognizes
DIAMOND-TM- 725 license fees when a DIAMOND-TM- 725 contract between SMS and the
end-user is executed, and recognizes DIAMOND-TM- 950C/S license fees upon
successful implementation of the system at the site of an SMS end-user. For term
license agreements, the Company recognizes revenues ratably over the term of the
license agreement between SMS and the end-user, which term typically extends
five to seven years. For those licenses after the first 30 licenses under the
original agreement, SMS pays the Company a percentage of the license fee charged
to the end-user. SMS must also pay HSD a percentage of all support fees paid to
SMS by its end-users. The SMS relationship accounted for less then 1%, 2%, and
11% of total revenues in fiscal 1998, 1997 and 1996, respectively.

In December 1997, the Company entered into an amendment to the SMS Agreement
for the purpose of resolving certain disagreements between the parties and
jointly pursuing opportunities in the European payor organization markets,
amongst other matters. The amendment provides for a $4 million credit pool
against which SMS may charge billings for services rendered by the Company, as
well as future royalties payable by SMS to license the DIAMOND-TM- products in
Europe. As of September 30, 1998, the credit pool had been reduced to
approximately $3.5 million. Due to the establishment of the credit pool, the
Company has not generated significant revenues from SMS and is not expected to
in the near future. In addition, the Company has agreed to provide certain
services and enhancements to the DIAMOND-TM- products for SMS's payor markets.
Subsequent to September 30, 1998, some of these enhancements were delivered as
specified under the amendment. The remainder of these enhancements are expected
to be delivered by the end of fiscal 1999. In return, SMS will undertake
significant investments in the European payor organization markets and has
agreed not to initiate litigation for certain matters, provided the Company
satisfies specified obligations. As a result of this amendment, the Company
accrued approximately $900,000 as of

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September 30, 1997 to cover anticipated costs related to performance
disagreements under the original SMS Agreement.

CUSTOMERS. The Company's customers include HMOs, PPOs, integrated delivery
systems, health insurance companies, TPAs and managed Medicaid and Medicare risk
plans.

The following chart, showing when each of the Company's current customers
was added (either directly or through the Company's remarketers) in each of the
last six fiscal years, illustrates the growing diversity of the current
customers for the Company's DIAMOND-TM- products:

<TABLE>
<CAPTION>
FISCAL 1993 FISCAL FISCAL FISCAL FISCAL FISCAL
CUSTOMER AND PRIOR 1994 1995 1996 1997 1998 TOTAL
- -------------------------------------------------- ----------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
HMOs.............................................. 2 6 -- 7 10 11 36
Provider organizations............................ 1 1 8 13 8 -- 31
PPOs.............................................. 1 2 4 2 -- -- 9
TPAs.............................................. 5 2 4 -- -- 2 13
Managed Medicaid and Medicare risk plans.......... 3 6 10 5 1 -- 25
----------- ------ ------ ------ ------ ------ ------
Total systems................................... 12 17 26 27 19 13 114
</TABLE>

CUSTOMER CONCENTRATION. During the fiscal year ended September 30, 1998,
two customers, individually, exceeded 10% of total revenues. Kaiser Permanente
represented 20% of total revenues while Covation Health Services represented 11%
of total revenues. Subsequent to September 30, 1998, Blue Cross/Blue Shield of
North Carolina ceased implementation of the DIAMOND-TM- 950C/S product. This
customer accounted for 8% of the Company's total revenues for the fiscal year
ended September 30, 1998.

PRODUCT DEVELOPMENT. To date, the Company has concentrated its product
development efforts on the DIAMOND-TM- products. The Company has used other
technologies that simplify the development, maintenance and customization of its
products. At September 30, 1998, the Company had 55 employees in the engineering
department, which is responsible for product development and technical services.
During fiscal 1998, 1997 and 1996, the Company's product development expenses,
net of capitalized development expenses, were approximately $8,290,000,
$5,656,000 and $4,082,000, respectively. In most cases, customer product
enhancements are subsequently incorporated into the Company's products. To the
extent that customers continue to request complex custom enhancements, it may
become increasingly difficult to meet these requests and maintain standardized
product releases. Although to date the Company has been successful in
accommodating customer requests for enhancements while maintaining a standard
product line, there can be no assurance that it will be able to do so in the
future.

The Company intends to continue to invest in product development and expects
that its product development expenses will continue to increase. The Company's
product development plans include (i) enhancing system reporting capabilities
with additional pre-programmed reports and new AD HOC reporting packages,
including an executive information system and a supporting data warehouse, (ii)
exploring the application of new technologies, such as image processing,
multi-dimensional databases for executive information systems and high speed
communication capabilities (iii) increasing the functionality of the DIAMOND-TM-
products and developing additional interfaces with third-party software to
target specific market segments and (iv) creating a main frame solution for the
DIAMOND-TM- product. There can be no assurance that any product development
efforts will be successfully completed or that future products will be available
on a timely basis or achieve market acceptance.

COMPETITION. The market for managed care information systems is highly
competitive, and the Company expects competition to intensify in the future. The
Company faces direct competition from a number of companies that offer similar
systems or solutions, such as AMISYS Managed Care Systems,

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(now part of HBOC Inc.), Computer Science Corporation, Erisco (a division of the
Cognizant Corporation, formerly The Dun & Bradstreet Corporation), Resource
Information Management Systems, Electronic Data Systems, Inc. HSD also faces
competition from companies offering products with less advanced functionality to
the lower-end of the market, such as Quadromed (formally Fred Rothenberg &
Associates), Mariner, Physmark, QMACS and Sunquest. In addition, the Company
competes with in-house systems developed by large managed care organizations.
Several of the Company's competitors have significantly greater financial,
technical, product development and marketing resources than the Company. HSD
competes on the basis of functionality, technology, product quality, product
features (scalability, flexibility, performance and ease of use), price,
customer service and support. In the future, additional competitors could enter
the market, including providers of information systems to other segments of the
health care industry, and compete with the Company. Most of the Company's sales
are derived from competitive procurement processes managed directly by
sophisticated customers or consultants that require specific, highly detailed
presentations from several qualified vendors. There can be no assurance that the
Company will be able to compete successfully with existing or new competitors.
The failure of the Company to compete successfully would have a material adverse
effect on the Company's business, operating results and financial condition.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS. The Company currently
relies on a combination of trade secret and copyright laws, software security
measures, license agreements and nondisclosure agreements to establish and
protect its proprietary rights. The Company currently has no domestic or foreign
patents or patent applications pending. Despite the Company's precautions, it
may be possible for unauthorized third parties to copy aspects of, or otherwise
obtain and use, the Company's software products and technology without
authorization. The Company's practice of providing its customers with the source
code to the Company's software may increase this risk. In addition, the Company
cannot be certain that others will not develop substantially equivalent or
superior proprietary technology, or that equivalent products will not be
marketed in competition with the Company's products, thereby substantially
reducing the value of the Company's proprietary rights. Furthermore, there can
be no assurance that any confidentiality agreements between the Company and its
employees and consultants or any license agreements with its customers will
provide meaningful protection for the Company's proprietary information in the
event of any unauthorized use or disclosure of such proprietary information.

The Company is not aware that any of its products infringe on the
proprietary rights of third parties. Nonetheless, there can be no full assurance
that the Company will not become the subject of infringement claims or legal
proceedings by third parties with respect to current or future products and that
such claims or proceedings (if successful and significant) will not have a
material adverse effect on the Company's business, financial condition or
results of operations. Moreover, an adverse outcome in litigation or similar
adversarial proceedings could subject the Company to significant liabilities to
third parties, require expenditure of significant resources to develop
non-infringing technology, require disputed rights to be licensed from others or
require the Company to cease the marketing or use of certain products, any of
which events could have a material adverse effect on the Company's business,
operating results and financial condition. As the number of software products in
the industry increases and the functionality of these products further overlaps,
the Company believes that software developers may become increasingly subject to
infringement claims. To the extent the Company wishes or is required to obtain
licenses to patents or proprietary rights of others, there can be no assurance
that any such licenses will be made available on terms acceptable to the
Company, if at all.

EMPLOYEES. As of September 30, 1998, the Company employed 161 people on a
full-time basis, including 55 in engineering, 23 in sales and marketing, 12 in
customer support, 46 in client services and 25 in administration and finance.
Competition for highly skilled employees with technical, management, marketing,
sales, product development and other specialized training is intense, and there
can be no assurance that the Company will be successful in attracting and
retaining such personnel. The employees

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and the Company are not parties to any collective bargaining agreements, and the
Company believes that its relations with its employees are good.

In addition to employees, HSD utilizes the services of independent
contractors. As of September 30, 1998, the Company had 42 consultants who worked
on a full or part time basis, including 30 in engineering and 12 in customer
services.

EXECUTIVE OFFICERS OF THE COMPANY. The executive officers of the Company
and their ages as of September 30, 1998, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Richard C. Auger...................... 54 Chairman of the Board

Russell J. Harrison................... 53 President and Chief Executive Officer

Steven L. Moore....................... 44 Executive Vice President--Chief Financial
Officer

Robert D. Archibald, Ph.D............. 60 Executive Vice President--Operations

Lauryn L. Jones....................... 45 Executive Vice President--Sales and Marketing

Steven J. Correia..................... 34 Vice President--Controller
</TABLE>

Richard C. Auger, a co-founder of the Company, has been Chairman of the
Board of the Company since August 1988. In addition, Mr. Auger served as
President of the Company from August 1988 to January 1996 and Chief Executive
Officer until August 1997. Prior to joining the Company, Mr. Auger was founder
and president of Worth, Auger & Associates, one of the first managed care
systems companies. Mr. Auger holds a B.A. and an M.A. degree in Economics from
the University of California, Davis.

Russell J. Harrison has served as President and Chief Executive Officer
since August 1997. Mr. Harrison was Vice President and Chief Information Officer
at Paris-based SITA Globetel Company S.C. from March 1996 to August 1997. Prior
to his time at SITA Globetel, Mr. Harrison served as Chief Executive Officer of
3Net Systems, a provider of client/server solutions to the healthcare industry,
from August 1993 to September 1995, and as Chairman from August 1993 until
November 1995. Mr. Harrison also served as Chief Information Officer of McKesson
Corporation from September 1991 to August 1993, was the founding President of
AMR Information Systems, Inc., a wholly owned subsidiary of AMR Corporation,
parent of American Airlines from 1986 to 1991 and served at Bank of America
NT&SA from 1975 to 1986, ending that term as Senior Vice President.

Steven L. Moore has served as Executive Vice President--Chief Financial
Officer since April, 1998. Mr. Moore provided financial and management
consulting services to a variety of large and small clients from January 1992 to
March 1998. Prior to his becoming a consultant he served in senior management
positions with companies such as Levolor Corp., Diasonics Inc., and Baker Hughes
Inc. Mr. Moore holds a B.A. in Economics and History from the University of
Colorado.

Robert D. Archibald, Ph.D. has served as Executive Vice
President--Operations since April 1998. Dr. Archibald was founder, President and
Chief Executive Officer of Alta Associates, Inc., a management consulting
company, from 1986 to 1998. He was also the founder, President and Chief
Executive Officer of Alta Analytics, Inc., a developer of data analysis and data
visualization software, from 1991 to 1996. Dr. Archibald holds a Ph.D. from the
University of Utah.

Lauryn L. Jones has served as Executive Vice President--Sales and Marketing
since December 1997. Ms. Jones was Chief Operating Officer for Medical Data
International from June 1993 to November 1997. Ms. Jones holds an M.B.A. from
Pepperdine.

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Steven J. Correia has served as Vice President--Controller since March 1998
and was Acting Chief Financial Officer of the Company from April 1997 until
March 1998. From August 1994 to April 1997, Mr. Correia was Accounting Manager
of the Company. Mr. Correia worked as manager for a regional public accounting
firm from August 1986 to August 1994. Mr. Correia holds a B.S. degree in
Business Administration from California State University at Hayward and is a
Certified Public Accountant in the state of California.

ITEM 2. PROPERTIES

The Company's principal administrative, sales, marketing, customer support
and research and development facility is located in approximately 60,000 square
feet of office space in Oakland, California. This facility at 1330 Broadway is
leased to the Company under a lease that expires in October 1999. Since the
current lease expires next year, the Company executed another lease on October
28, 1998 for approximately the same amount of square footage at 1111 Broadway,
Oakland, California. The new lease will begin in March 1999 and will expire in
February 2009. The company will utilize both leased spaces until the termination
of the 1330 Broadway lease. The minimum future lease payments for the above
leases are included in Footnote 5, which are part of the financial statements in
Item 8.

The Company also has a branch office in Atlanta, Georgia and satellite
offices in the United States. The Company believes its facilities are adequate
for its current operations.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any litigation.

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

Inapplicable

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PART II

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

The Company's common stock commenced trading on the Nasdaq National Market
on March 5, 1996 under the symbol HSDC. The following table presents the high
and low closing sale prices during the last two fiscal years for the Company's
common stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
- -------------------------------------------------------------------------------- ------- -------
<S> <C> <C>
First Quarter................................................................... 12 7 3/4
Second Quarter.................................................................. 9 5/8 6
Third Quarter................................................................... 7 3/8 3 7/8
Fourth Quarter.................................................................. 15 5 7/8

FISCAL 1998 HIGH LOW
- -------------------------------------------------------------------------------- ------- -------
<S> <C> <C>
First Quarter................................................................... 14 7
Second Quarter.................................................................. 9 1/2 7 1/8
Third Quarter................................................................... 8 7/8 6 1/4
Fourth Quarter.................................................................. 7 3/4 4 1/2
</TABLE>

As of November 30, 1998, there were 42 registered holders of record of the
Company's common stock.

The Company has never paid cash dividends, currently intends to retain any
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.

Upon the closing of its initial public offering on March 8, 1996
(Registration Statement No. 333-00094), the Company received $21,723,000, net of
expenses. The proceeds to date have been used to pay off approximately
$3,120,000 of short and long-term debt and to purchase approximately $4,558,000
of furniture and equipment. Approximately $4,604,000 has been used as working
capital.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
Company's Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein. The selected financial data presented below has been derived
from the Company's financial statements.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
System sales.................................. $ 22,329 $ 14,269 $ 10,639 $ 5,560 $ 4,513
Services and other............................ 3,525 2,497 1,813 1,217 520
--------- --------- --------- --------- ---------
Total revenues.............................. 25,854 16,766 12,452 6,777 5,033
Cost of revenues................................ 7,054 6,172 3,061 2,179 1,270
--------- --------- --------- --------- ---------
Gross margin.................................... 18,800 10,594 9,391 4,598 3,763
--------- --------- --------- --------- ---------
Operating expenses:
General and administrative.................... 7,482 5,646 3,806 2,147 1,575
Sales and marketing........................... 4,200 3,821 2,750 1,059 706
Product development........................... 8,290 5,655 4,082 2,170 1,271
--------- --------- --------- --------- ---------
Total operating expenses.................... 19,972 15,122 10,638 5,376 3,552
--------- --------- --------- --------- ---------
Income (loss) from operations............... (1,172) (4,528) (1,247) (778) 211
Interest, net................................... 453 673 40 (72) (42)
--------- --------- --------- --------- ---------
Income (loss) before benefit (provision) for
income taxes.............................. (719) (3,855) (1,207) (850) 169
Benefit (provision) for income taxes............ (120) (1) (1) 97 (4)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting for income taxes..... (839) (3,856) (1,208) (753) 165
Cumulative effect of change in accounting for
income taxes.................................. -- -- -- -- (32)
--------- --------- --------- --------- ---------
Net income (loss)............................... $ (839) $ (3,856) $ (1,208) $ (753) $ 133
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share:
Basic......................................... $ (0.13) $ (0.60) $ (0.22) $ (0.16) $ 0.03
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted....................................... $ (0.13) $ (0.60) $ (0.22) $ (0.16) $ 0.03
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares outstanding:
Basic......................................... 6,589 6,479 5,656 4,760 4,756
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted....................................... 6,589 6,479 5,656 4,760 4,756
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....................... $ 11,840 $ 13,347 $ 18,168 $ (1,145) $ (101)
Total assets.................................... 23,628 22,077 23,757 3,652 2,686
Short-term borrowings........................... -- -- 4 954 627
Long-term borrowings............................ -- -- -- 520 147
Total stockholders' equity (deficit)............ 17,592 17,459 21,112 (273) 477
</TABLE>

11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company was founded in July 1988 to provide managed care information
systems software to health care organizations that use managed care techniques
to deliver services, manage financial risk and control costs. Since inception,
the Company has invested substantially all of its operating cash flow in product
and business development. The Company introduced its first internally developed
product, DIAMOND-TM- 725 in fiscal 1992, followed by DIAMOND-TM- 950C/S in
fiscal 1995.

The Company's revenues to date have been derived from licensing the
DIAMOND-TM- products, fees from customers for enhancements to the DIAMOND-TM-
products, providing the associated implementation, support and consulting
services, and, to a lesser extent, reselling third-party software and hardware.
Software licenses have been granted on a perpetual basis and multi-year, term
basis. License fees are determined according to the number of users licensed or
the number of members processed by the customer. HSD requires each of its direct
customers to enter into a minimum 24-month support contract with the Company.
From time to time, customers request that the Company provide third-party
hardware in connection with system sales. Such sales of third-party hardware
accounted for 0.7%, 7%, and 0.3% of the Company's total revenues in fiscal 1998,
1997 and 1996, respectively.

The Company expects that license fee and service revenues associated with
DIAMOND-TM- 725 and DIAMOND-TM- 950C/S will account for substantially all of the
Company's revenues for the foreseeable future. As a result, the Company's
financial performance will depend largely on the continued growth in demand for
operational managed care information systems and the tools to implement such
systems.

Effective October 1, 1997, the Company generally recognizes DIAMOND-TM- 725
license revenue upon shipment of the software to end users, as no significant
production or customization of this software is required, and the installation
period is relatively short. The Company generally recognizes DIAMOND-TM- 950C/S
license revenue on a percentage-of-completion basis based on the labor hours
required to implement the system, as this software generally requires an
extended installation period and can require significant enhancements. If the
software license agreement provides for acceptance criteria that extend beyond
the published specifications of the applicable product, then revenues are
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period. The length of the implementation process depends on factors
outside of the Company's control, including customers' ability to allocate
internal resources to the installation process and, with respect to certain
customers, the need to obtain necessary governmental approvals. Implementation
and support fees are billed either on an hourly or monthly basis and are
recognized as services are rendered. Third-party software and hardware fees are
typically billed and recognized as revenues when delivered to the customer.

The revenue on a particular DIAMOND-TM-950C/S system sale will be recognized
over the implementation period which may be over a year. Thus, the Company's
ability to make individual system sales in a particular period will
significantly impact its financial performance in future periods. As the Company
has pursued larger DIAMOND-TM- 950C/S system sales, it has seen and expects to
continue to see variability in the recognition of system sales revenue.
Significant portions of system revenues in the last two quarters of fiscal 1998
resulted from license sales executed in prior periods.

Substantially all of the Company's license agreements may be terminated
under certain circumstances. The termination of license agreements could have a
material adverse effect on the Company's business, financial condition and
results of operations. Therefore, the Company is unable to predict accurately
the amount of revenues it expects to recognize from license fees in any
particular period. Subsequent to September 30, 1998, Blue Cross/Blue Shield of
North Carolina ceased implementation of the DIAMOND-TM- 950C/S product. This
contract accounted for 8% of the Company's total revenues for the fiscal year
ended

12
<PAGE>
September 30, 1998. The cessation of implementation did not have an impact on
the Company's financial statements for the fiscal year ended September 30, 1998.

In fiscal 1994, the Company entered into a marketing agreement with SMS.
Pursuant to this agreement, SMS was granted 30 software licenses for resale at a
stated price. For these 30 licenses, the Company recognizes DIAMOND-TM- 725
license fees when a DIAMOND-TM- 725 contract between SMS and the end-user is
executed, and recognizes DIAMOND-TM- 950C/S license fees upon successful
implementation of the system at the site of an SMS end-user. For term license
agreements, the Company recognizes revenues ratably over the term of the license
agreement between SMS and the end-user, which term typically extends five to
seven years. For those licenses after the first 30 licenses under the original
agreement, SMS pays the Company a percentage of the license fee charged to its
end-users. SMS must also pay HSD a percentage of all support fees paid to SMS by
its end-users. The SMS relationship accounted for less then 1%, 2%, and 11% of
total revenues in fiscal 1998, 1997 and 1996, respectively. Because of the
amendment to the SMS Agreement, as described in Item 1--RELATIONSHIP WITH SHARED
MEDICAL SYSTEMS, revenues from SMS are expected to be negligible in the near
future, until the credit pool is exhausted.

The Company capitalizes software costs for internally developed software.
These costs relate primarily to the development of either new products or
significant enhancements to existing products which enable the products to
penetrate new markets. Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model or, in the case of major releases, detailed
program design. The capitalized costs are amortized on a straight-line basis
over the estimated useful lives (not exceeding three years), commencing when
each product or significant enhancement is available to the market.

RESULTS OF OPERATIONS

The following table sets forth, for the fiscal periods indicated, certain
statement of operations data expressed as a percentage of total revenues:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER
30,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
System sales.......................... 86.4% 85.1% 85.4%
Services and other.................... 13.6 14.9 14.6
-------- -------- --------
Total revenues...................... 100.0 100.0 100.0
Cost of revenues........................ 27.3 36.8 24.6
-------- -------- --------
Gross margin............................ 72.7 63.2 75.4
-------- -------- --------
Operating expenses:
General and administrative............ 28.9 33.7 30.5
Sales and marketing................... 16.2 22.8 22.1
Product development................... 32.1 33.7 32.8
-------- -------- --------
Total operating expenses............ 77.2 90.2 85.4
Loss from operations................ (4.5) (27.0) (10.0)
Interest, net........................... 1.7 4.0 0.3
-------- -------- --------
Loss before provision for income
taxes............................. (2.8) (23.0) (9.7)
Provision for income taxes.............. (0.4) -- --
-------- -------- --------
Net loss................................ (3.2)% (23.0)% (9.7)%
-------- -------- --------
-------- -------- --------
</TABLE>

13
<PAGE>
REVENUES

Total revenues were $25,855,000, $16,766,000, and $12,452,000 in fiscal
1998, 1997 and 1996, respectively, representing increases of 54% from fiscal
1997 to fiscal 1998 and 35% from fiscal 1996 to fiscal 1997. The growth in total
revenues is attributable primarily to increases in system sales revenues for
DIAMOND-TM- 950C/S and DIAMOND-TM- 725. License fees per customer continued to
increase as the Company expanded product functionality and licensed its products
to customers with a greater number of end-users. Approximately 52% of total
revenues were from five customers for the year ended September 30, 1998. Two
customers, individually, exceeded 10% of the Company's total revenues. Kaiser
Permanente represented 20% of total revenues while Covation Health Services
represented 11% of total revenues.

SYSTEM SALES. System sales revenues consist of license fees for the
Company's products, implementation and enhancement fees, and revenues associated
with reselling third-party software and hardware. System sales revenues were
$22,329,000, $14,269,000, and $10,639,000 in fiscal 1998, 1997 and 1996,
respectively, representing increases of 56% from fiscal 1997 to fiscal 1998 and
34% from fiscal 1996 to fiscal 1997 due to increases in license fees. Revenues
associated with reselling third-party software and hardware represented 0.03%,
13%, and 5% of total revenues in fiscal 1998, 1997 and 1996, respectively, of
which revenues associated with sales of third-party hardware represented 0.7%,
7%, and 0.3% in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998,
DIAMOND-TM- 950C/S accounted for a significant portion of system sales revenues.
The Company expects that DIAMOND-TM- 950C/S will continue to represent a
significant portion of systems sales revenues over the next several years due to
the higher systems sales revenues per customer associated with sales of
DIAMOND-TM- 950C/S. As a result, the Company's financial performance will depend
largely on the market acceptance of DIAMOND-TM- 950C/S.

SERVICES AND OTHER. Services and other revenues are comprised of system
support, consulting and training revenues. Services and other revenues were
$3,525,000, $2,497,000, and $1,813,000 in fiscal 1998, 1997 and 1996,
respectively, representing increases of 41% from fiscal 1997 to fiscal 1998 and
38% from fiscal 1996 to fiscal 1997. Support fees continued to account for the
majority of services and other revenues. The majority of the increase in
services and other revenues was due to an increase in support and group training
fees.

COST OF REVENUES. The cost of revenues was $7,055,000, $6,172,000, and
$3,061,000 in fiscal 1998, 1997 and 1996, respectively, representing increases
of 14% from fiscal 1997 to fiscal 1998 and 102% from fiscal 1996 to fiscal 1997.
Cost of revenues increased in absolute terms primarily as a result of the
increased number of personnel, both HSD employees and independent contractors,
required to implement and support the larger customer base. Cost of revenues as
a percentage of total revenues was 27%, 37% and 25% for the years ended
September 30, 1998, 1997 and 1996, respectively. The cost of revenues as a
percentage of total revenues is dependent upon the mix of license, service and
third-party software and hardware revenues and may fluctuate over time. During
fiscal 1997, cost of revenues as a percentage of revenues was higher due to
costs related to the SMS amendment. During the fourth quarter of fiscal 1998
management decided to revise its expense classifications to be more consistent
with industry standards. This decision resulted in certain product engineering
costs being included in product development instead of costs of revenues. Costs
associated with implementation, customer support, amortization of capitalized
software and third party hardware and software continue to be classified as cost
of revenues. All prior periods in this filing have been reclassified on the same
basis.

OPERATING EXPENSES

GENERAL AND ADMINISTRATIVE. General and administrative expenditures were
$7,482,000, $5,646,000, and $3,806,000 in fiscal 1998, 1997 and 1996,
respectively, representing increases of 33% from fiscal 1997 to fiscal 1998 and
48% from fiscal 1996 to fiscal 1997. The increase in general and administrative

14
<PAGE>
expenditures was due primarily to staff additions and infrastructure to support
the Company's expanded operations, as well as additional reserves booked during
the fiscal year for doubtful accounts and impaired assets. The Company believes
that the level of general and administrative expenses will continue to increase,
although at a slower rate as the Company expands its staff to support a larger
customer base. General and administrative expenses include the salaries and
benefits associated with general management, finance and administration, as well
as costs associated with recruiting and facilities. General and administrative
expenditures as a percentage of revenues for the fiscal years ended September
30, 1998, 1997 and 1996 were 29%, 34% and 31%, respectively.

SALES AND MARKETING. Sales and marketing expenditures were $4,200,000,
$3,821,000, and $2,750,000 in fiscal 1998, 1997 and 1996, respectively,
representing increases of 10% from fiscal 1997 to fiscal 1998 and 39% from
fiscal 1996 to fiscal 1997. The increase in sales and marketing expenses in
fiscal 1998 was primarily attributable to additional marketing activities and
commissions. During fiscal 1997 and 1996, HSD aggressively expanded its direct
sales force. Sales and marketing expenses primarily include the salaries,
commissions and benefits of the Company's direct sales force and the cost of
product marketing, advertising, product literature and travel. Sales and
marketing expenditures as a percentage of revenues for the fiscal years ended
September 30, 1998, 1997 and 1996 were 16%, 23% and 22%, respectively. While the
sales and marketing expenses continued to grow in absolute dollars, these
expenses in 1998 decreased as a percentage of revenues due to the larger size of
contracts.

PRODUCT DEVELOPMENT. Product development expenditures, net of software
capitalization costs, were $8,290,000, $5,656,000, and $4,082,000 in fiscal
1998, 1997 and 1996, respectively, representing an increase of 47% from fiscal
1997 to fiscal 1998 and 39% increase from fiscal 1996 to fiscal 1997. The
increase in product development expenditures, net of software capitalization
costs, was attributable to significant costs associated with the DIAMOND-TM-
950C/S and development efforts for a main frame product, including increased
staffing and the hiring of independent technical consultants to assist such
efforts. The Company believes that research and development expenditures are
essential to maintaining its competitive position and expects these costs to
continue to constitute a significant percentage of total revenues in the near
future. The Company capitalized $2,332,000, $685,000, and $277,000 in product
development costs in fiscal 1998, 1997 and 1996, respectively. Product
development expenses primarily include the salaries and benefits associated with
the product development staff as well as an allocation of indirect costs. As
mentioned above, during the fourth quarter of fiscal 1998 management decided to
revise its expense classifications to be more consistent with industry
standards. This decision resulted in certain product engineering costs being
included in product development instead of cost of revenues. Costs associated
with implementation, customer support, amortization of capitalized software and
third party hardware and software continue to be classified as cost of revenues.
All prior periods in this filing have been reclassified on the same basis.
Product development expenditures as a percentage of revenues for the fiscal
years ended September 30, 1998, 1997 and 1996 were 32%, 34% and 33%,
respectively.

INTEREST, NET

Interest income, net of interest expense, was $453,000, $673,000, and
$40,000 in fiscal 1998, 1997 and 1996, respectively. Interest income was the
result of the cash proceeds from the initial public offering completed in March
1996. The decrease in interest income, net of expense, was primarily due to a
decrease in cash reserves invested. Interest income represents interest earned
on the Company's excess cash balances, which are generally placed in short term
investments, money market funds, and government securities.

INCOME TAXES

The Company's provision for income taxes was $120,000, $1,000, and $1,000 in
fiscal 1998, 1997 and 1996, respectively. Effective October 1, 1993, the Company
adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes," whereby income taxes are

15
<PAGE>
accounted for under the liability method. The tax provision for fiscal 1998 was
mainly the result of taxes withheld by foreign authorities for income the
Company earned in their jurisdiction. For financial reporting purposes, a 100%
valuation allowance has been recorded to offset the deferred tax assets
recognized under SFAS No. 109 because the Company has historically not achieved
significant levels of profitability, and there is inherent uncertainty as to
when the Company will achieve sustained profitability.

ADOPTION OF ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share". The
adoption of this pronouncement did not have a material impact on the financial
statements of the Company taken as a whole.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is required to be adopted for fiscal years beginning after
December 15, 1997. The Statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Adoption of this pronouncement is not expected to
have a material impact on the Company's financial statements taken as a whole.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is required to be adopted for
fiscal years beginning after December 15, 1997. The Statement changes the way
public companies report segment information in financial statements and also
requires those companies to report selected segment information in interim
financial reports to stockholders. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial statements taken
as a whole.

In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pension Plans and Other Postretirement Benefits", which is required to be
adopted for fiscal years beginning after December 15, 1997. Adoption of this
pronouncement is not expected to have a material impact on the Company's
financial statements taken as a whole.

In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted for fiscal
quarters beginning after June 15, 1999. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial statements taken
as a whole.

LIQUIDITY AND CAPITAL RESOURCES

In March 1996, the Company completed an initial public offering of its
common stock, raising $21,723,000 net of expenses. Net cash provided by (used
in) operating activities was $646,000, ($2,030,000), and ($3,472,000) in fiscal
1998, 1997, and 1996, respectively. Net cash used in operating activities in
fiscal 1996 consisted primarily of the net loss for the year and an increase in
accounts receivable, unbilled revenues and prepaid expenses, partially offset by
an increase in accrued liabilities. Net cash used in operations in fiscal 1997
consisted primarily of a net loss and an increase in accounts receivable offset
by an increase in accounts payable and accruals and depreciation and
amortization. In fiscal 1998, cash provided by operating activities resulted
primarily from the reduced operating loss as compared to prior periods, as well
as by an increase in unearned revenue. Depreciation and amortization and the
increase in unbilled revenue in 1998 effectively offset each other.

Net cash used in investing activities was $3,356,000, $2,214,000, and
$2,180,000 in fiscal 1998, 1997, and 1996, respectively, and consisted primarily
of acquisitions of computer equipment and furniture, as well as the
capitalization of software development costs. The investment in computer
equipment and furniture was directly related to the increase in the number of
employees and the acquisition of computers for software development. Cash used
for capitalized software development costs increased from $685,000

16
<PAGE>
in fiscal 1997 to $2,333,000 in fiscal 1998 as a result of an increase in
overall development activities associated with major releases.

Net cash provided by financing activities was $957,000, $184,000, and
$20,756,000 in fiscal 1998, 1997 and 1996, respectively. Financing activities
consisted primarily of $2,000,000 in notes and an initial public offering of the
Company's common stock in fiscal 1996, and proceeds from exercise of common
stock options by employees in fiscal 1997 and 1998.

As of September 30, 1998, 1997 and 1996, the Company had cash and cash
equivalents in the amount of $9,441,000, $11,195,000, and $15,254,000,
respectively.

The Company believes that available funds and cash flow from operations will
be adequate to fund its presently anticipated working capital requirements for
at least the next 12 months.

YEAR 2000 ISSUES

STATE OF READINESS--Because many computer programs and embedded computer
chips are unable to distinguish between the year 1900 and the year 2000, the
Company has executed a plan to analyze, and if necessary, correct problems which
may occur as a result of the Year 2000 date change. The Year 2000 Project (The
Project) began by categorizing potential issues into four groups: the Company's
software developed for sale (DIAMOND-TM- 950C/S and DIAMOND-TM- 725); the
Company's internal systems and networks; third party software and hardware sold
by the Company; and customer systems and equipment, other than that sold and/or
licensed by the Company.

The Project for DIAMOND-TM- 950C/S and DIAMOND-TM- 725 began early in fiscal
1997. As a result of the Company's analysis and testing, the Company believes
the most current releases of DIAMOND-TM- software products are Year 2000
Compliant. The Company defines the term "Year 2000 Compliant" to mean that the
software will not: (a) cease to perform due solely to a change in date to or
after January 1, 2000, nor (b) generate incorrect or ambiguous data or results
with respect to same-century and/or multi-century formulas, functions, date
values, and date data interfaces. The Company continues to further validate
current products, new releases for such products, as well as new products, and
releases through testing and code reviews. The Company offers new releases at no
charge to customers who are under current support agreements. Other customers
may request and pay a fee for new releases.

The Company's internal systems and networks have been inventoried and
inquiries were made of each vendor. Substantially all systems, including
hardware, development tools, and software used in the company's information
systems are Year 2000 compliant. For the products that are not currently Year
2000 compliant the vendors have put plans into effect to correct their product
before the end of calendar year 1999.

Third party software and hardware which is sold by the Company has been
inventoried and inquiries were made of each vendor. With a few exceptions, all
third party software and hardware are Year 2000 compliant. For the products that
are not currently Year 2000 compliant the vendors have put plans into effect to
correct their product before the end of calendar year 1999.

During the current fiscal year, the Company communicated its state of
readiness to address Year 2000 issues to its clients. Clients were also notified
of the Company's ability to correct any issues associated with a Year 2000
problem in the Company's software. Clients were also informed that their other
hardware and software systems may have unresolved issues relating to the Year
2000 problem which may adversely affect the operation of the Company's
DIAMOND-TM- software, even though the Company has resolved its own problems.

COSTS TO ADDRESS THE ISSUES--As of September 30, 1998, the Company had not
separately tracked costs related to the Year 2000 problem, since the analysis
phase for the Company's DIAMOND-TM- software coincided with the testing and
quality assurance phase of the Company's general releases. However, based

17
<PAGE>
on an estimate of the amount of time incurred by the Company's analysis team,
costs related to the Year 2000 problem have, to date, not been material and have
not been capitalized by the Company.

Although the Company believes that its products are Year 2000 compliant, it
is continuing its testing and analysis program. Any remaining costs related to
the Year 2000 problem are not expected to be material for the DIAMOND-TM-
software. Projected costs for the Company's internal systems and networks; third
party software and hardware sold by the Company; and customer systems and
equipment, other than that sold and/or licensed by the Company are also not
expected to be material.

RISKS OF THE COMPANY'S YEAR 2000 ISSUES--The Company's Year 2000 project is
ongoing. The Company's and its client's normal business activities and
operations could be adversely affected by the Year 2000 problem. However, due to
the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of its clients, the Company is
unable to determine at this time whether the consequences of the potential Year
2000 failure(s) would have a material adverse impact on the Company's results of
operations, liquidity or financial condition. If the Company's DIAMOND-TM-
products, its internal systems or its clients systems fail or experience
significant difficulties related to the Year 2000 problem then the Company's
results of operations, liquidity or financial condition could be materially
adversely affected.

CONTINGENCY PLAN--The Company does not currently have a contingency plan in
place. Should there be Year 2000 problems still remaining in the Company's
software developed for sale (DIAMOND-TM- 950C/S and DIAMOND-TM- 725); the
Company's internal systems and networks; third party software and hardware sold
by the Company; and customer systems and equipment, other than that sold and/or
licensed by the Company, the Company intends to prioritize requests, based on
severity, and correct the related problem.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements in this report concerning the future results of operations,
financial condition and business of the Company are "forward-looking" statements
as defined in the Securities Act of 1933 and the Securities Exchange Act of
1934. Investors are cautioned that information contained in these forward-
looking statements is inherently uncertain, and that actual performance and
results may differ materially due to numerous risk factors, including but not
limited to the following, as well as other risks which are described herein and
in the Company's other filings with the Securities and Exchange Commission:

RISK FACTORS

MANAGEMENT OF GROWTH. The Company is currently experiencing a period of
rapid growth and expansion which has placed, and will continue to place, a
significant strain on the Company's managerial, technical, financial and other
resources. The Company's growth has resulted in an increase in the level of
responsibility for both existing and new management personnel. The Company has
sought to manage its current and anticipated growth through the recruitment of
additional management, sales and marketing and technical personnel, and through
continued enhancement of internal systems and controls. The failure to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.

VARIABILITY OF OPERATING RESULTS; LENGTH OF SALES CYCLES. The Company's
revenues and operating results may vary significantly from quarter to quarter as
a result of a number of factors, including the number and timing of systems
sales, the relatively large dollar amounts of customer contracts, the length of
the sales cycles and delays in the implementation process. The Company has
typically experienced sales cycles of four to nine months. As a result, the
Company's results of operations are subject to significant fluctuations and its
results of operations for any particular quarter or fiscal year may not be
indicative of results of operations for future periods. A significant portion of
the Company's operating expenses are fixed, and

18
<PAGE>
planned expenditures are based primarily on sales forecasts. Any inability of
the Company to reduce spending or to compensate for any failure to meet sales
forecasts or earn anticipated revenues could magnify the adverse impact of such
events on the Company's operating results. Further, the commencement of one or
more major implementations could generate a large increase in revenues and net
income for any given quarter or fiscal year, which increase may prove anomalous
when compared to changes in revenues and net income in other periods. The
Company's ability to complete implementation of its systems and recognize
revenues is dependent on certain factors outside the control of the Company,
including its customers' ability to allocate internal resources to the
implementation process and, with respect to certain customers, the need to
obtain necessary governmental approvals. In addition, substantially all of the
Company's license agreements may be terminated under certain circumstances upon
30 to 120 days notice. The Company has experienced termination of license
agreements in the past. The termination of license agreements could result in
the refund of license fees and could have a material adverse effect on the
Company's business, financial condition and results of operations. See also
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 8 to the Consolidated Financial Statements.

DEPENDENCE UPON SINGLE PRODUCT LINE. The Company derives substantially all
of its revenues from licensing its DIAMOND-TM- software products, particularly
its DIAMOND-TM- 950C/S product, fees for enhancing the DIAMOND-TM- products and
providing the associated implementation, support and consulting services to its
customers. The Company intends to broaden its product line through the
development and introduction of new products and through product acquisitions.
However, there can be no assurance that the Company will be able to broaden its
product line successfully, and any factor adversely affecting the market for any
of the Company's current products, particularly its DIAMOND-TM- 950C/S product,
could have a material adverse effect on the Company's business, financial
condition and results of operations.

DEPENDENCE ON MANAGED CARE INDUSTRY. Substantially all of the Company's
revenues in fiscal 1998, 1997 and 1996 were derived from the sale of software
products and services to payors and providers that offer managed care products
and services. The Company's success is dependent on continued demand for
software and related services in that industry. The Company's growth is
therefore dependent on the growth of that industry. Consolidation in the managed
care industry could have a material adverse effect on the Company, due to the
decrease in the number of potential purchasers of the Company's products and
services or the acquisition of one or more of the Company's customers by an
acquirer that uses a different managed care information system. The Company
believes that the commercial value and appeal of its products may be adversely
affected if the current health care financing and reimbursement system were to
be materially changed. Legislative or market-driven reforms could have
unpredictable effects on the Company's business, financial condition and results
of operations.

PRODUCT DEVELOPMENT AND ENHANCEMENT. The market for the Company's products
is characterized by frequent new product introductions and enhancements, rapid
technological advances and rapid changes in customer requirements and
preferences. Accordingly, the Company's future success will depend on its
ability to enhance its existing products and to develop and market new products
on a timely basis that respond to evolving customer requirements, achieve market
acceptance and keep pace with technological developments. There can be no
assurance that the Company will be successful in developing, introducing on a
timely basis and marketing such products or enhancements, that its software will
not contain errors that would delay product introduction, shipment or
implementation, or that any such new products or enhancements will be accepted
by the market. Because the Company's products are important to the successful
operation of its customers' managed care organizations, errors or delays in
product development and enhancement may have a material adverse effect on the
continued market acceptance of the Company's products and may expose the Company
to claims from customers and third parties.

ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. The Company's future
performance will depend on its ability to attract, retain and motivate highly
skilled managerial, sales and marketing, and technical

19
<PAGE>
personnel, including project managers, software programmers and systems
architects skilled in the environments in which the Company's products operate.
Competition for such personnel in the software and information services
industries is intense and is likely to remain so for the foreseeable future. The
inability to attract, retain and motivate qualified personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations.

RELATIONSHIP WITH SHARED MEDICAL SYSTEMS. In January 1994, the Company
entered into an agreement under which SMS markets, implements and supports the
Company's DIAMOND-TM- products to the SMS customer base (the "SMS Agreement").
During fiscal 1998 and 1997, less than 1% and approximately 2%, respectively, of
the Company's total revenues were generated by SMS. There can be no assurance
that SMS will continue to sell the DIAMOND-TM- products successfully, or that
SMS will be able to provide the level of service and support required to
maintain its customer base. The initial term of the SMS Agreement will continue
through January 1999 with automatic renewals for successive two year periods
unless either party provides prior written notice of termination not less than
one year prior to the end of the then-current term. SMS has the right to
terminate the SMS Agreement prior to its expiration in the event of a material
breach of the SMS Agreement by the Company or under certain other circumstances.
The initial period expires in January 1999 and neither party has provided notice
of termination.

COMPETITION. The market for managed care information systems is highly
competitive. The Company's competitors vary in the size, scope and breadth of
the products and services they offer. There can be no assurance that competitors
will not develop or offer products with superior functionality, including
client/server technology, or that other features of competitive products will
not be preferred by the Company's customers. Several of the Company's
competitors have significantly greater financial, technical, product development
and marketing resources than the Company. In the future, additional competitors
could enter the market, including providers of information systems to other
segments of the health care industry, and compete with the Company. Most of the
Company's sales are derived from competitive procurement processes managed
directly by sophisticated customers or consultants that require specific, highly
detailed presentations from several qualified vendors. There can be no assurance
that future competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.

PROPRIETARY RIGHTS. The Company's success is dependent to a significant
extent on its ability to maintain the confidentiality of proprietary and
confidential software incorporated in its products and distributed under license
agreements. The Company currently relies on a combination of trade secret and
copyright laws, software security measures, license agreements and nondisclosure
agreements to establish

20
<PAGE>
and protect its proprietary rights. However, there can be no complete assurance
that the legal protections and the precautions taken by the Company will be
adequate to prevent misappropriation of the Company's technology. In addition,
these protections and precautions do not prevent independent third-party
development of competitive technology or products. The Company's practice of
providing its customers with the source code to the Company's software may
increase the risk of unauthorized use of such software. Any infringement or
misappropriation of the Company's proprietary software could adversely affect
the Company's ability to retain and attract new customers in a highly
competitive market and could cause the Company to lose revenues or incur
substantial litigation expense to enforce the Company's proprietary rights.

The Company is not aware that any of its products infringes the proprietary
rights of third parties. Nonetheless, there can be no complete assurance that
the Company will not become the subject of infringement claims or legal
proceedings by third parties with respect to current or future products and that
such claims or proceedings (if successful and significant) will not have a
material adverse effect on the Company's business, financial condition or
results of operations. Moreover, an adverse outcome in litigation or similar
adversarial proceedings could subject the Company to significant liabilities to
third parties, require expenditure of significant resources to develop
non-infringing technology, require disputed rights to be licensed from others or
require the Company to cease the marketing or use of certain products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. As the number of software products in the
industry increases and the functionality of these products further overlaps, the
Company believes that software developers may become increasingly subject to
infringement claims. To the extent the Company wishes or is required to obtain
licenses to patents or proprietary rights of others, there can be no assurance
that any such licenses will be made available on terms acceptable to the
Company, if at all.

RECENT LOSSES; ACCUMULATED DEFICIT. The Company incurred net losses of
$839,000, $3,856,000 and $1,208,000 for the fiscal years ended September 30,
1998, 1997, and 1996, respectively. As of September 30, 1998, the Company had an
accumulated deficit of $6,344,000. The Company has yet to achieve significant
levels of profitability and there can be no assurance that the Company will be
profitable in the future.

CONTRACT LIABILITY. While the Company's software primarily provides
operational functions, it also provides applications that relate to patient
medical information. Any failure by the Company's software to provide accurate
information which would result in material damage to a customer, could result in
liability claims against the Company. A successful liability claim brought
against the Company could result in expensive litigation and could have a
material adverse effect on the Company's business, financial condition and
results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE. Prior to March 5, 1996, there was no
public market for the Common Stock, and there can be no assurance that an active
trading market will be sustained or that the market price of the Common Stock
will not decline below its current price. The stock market historically has
experienced volatility which has affected the market price of securities of many
companies and which has sometimes been unrelated to the operating performance of
such companies. The trading price of the Common Stock could also be subject to
significant fluctuations in response to variations in quarterly results of
operations, announcements of new products or acquisitions by the Company or its
competitors, governmental regulatory action, other developments or disputes with
respect to proprietary rights, general trends in the industry and overall market
conditions, and other factors. The market price of the Common Stock may be
significantly affected by factors such as announcements of new products by the
Company's competitors, as well as variations in the market conditions in the
medical cost containment or software industries in general. The market price may
also be affected by movements in prices of equity securities in general.

21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Financial Statements:
Report of Independent Public Accountants................................................................. 23
Consolidated Balance Sheets as of September 30, 1998 and 1997............................................ 24
Consolidated Statements of Operations for the fiscal years ended September 30, 1998, 1997 and 1996....... 25
Consolidated Statements of Stockholders' Equity for the fiscal years ended September 30, 1998, 1997 and
1996................................................................................................... 26
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 1998, 1997 and 1996....... 27
Notes to Consolidated Financial Statements............................................................... 28
</TABLE>

22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Health Systems Design Corporation:

We have audited the accompanying consolidated balance sheets of Health
Systems Design Corporation (a Delaware corporation) and subsidiary as of
September 30, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1998. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Health Systems Design
Corporation and subsidiary as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 of Form
10-K is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

San Francisco, California
November 13, 1998

23
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS

Current Assets:
Cash and cash equivalents........................................ $9,441,381 $11,194,757
Accounts receivable, net of allowance for doubtful accounts of
$525,000 and $193,000 at September 30, 1998 and 1997,
respectively................................................... 5,645,547 5,208,056
Unbilled revenue................................................. 2,404,886 994,421
Prepaid expenses................................................. 384,213 568,266
---------- ----------
Total current assets........................................... 17,876,027 17,965,500
---------- ----------
Property and equipment:
Computer equipment............................................... 3,739,706 3,636,153
Office furniture and other....................................... 1,407,333 1,149,701
---------- ----------
Total property and equipment................................... 5,147,039 4,785,854
Less: Accumulated depreciation................................. (2,299,527) (1,599,767)
---------- ----------
Net property and equipment..................................... 2,847,512 3,186,087
Deposits and other assets.......................................... 117,895 127,000
Software development costs, net of accumulated amortization of
$927,261 and $582,752 at September 30, 1998 and 1997,
respectively..................................................... 2,786,701 798,540
---------- ----------
Total assets................................................... $23,628,135 $22,077,127
---------- ----------
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable................................................. $1,136,908 $1,202,204
Accrued liabilities.............................................. 2,170,854 1,740,674
Unearned revenue................................................. 2,728,022 1,675,265
---------- ----------
Total current liabilities...................................... 6,035,784 4,618,143

Stockholders' equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized,
none outstanding............................................... -- --
Common stock, $.001 par value, 20,000,000 shares authorized,
6,673,307 shares and 6,533,406 shares issued and outstanding at
September 30, 1998 and 1997, respectively...................... 6,673 6,533
Additional paid-in capital....................................... 23,986,104 23,029,552
Treasury stock, 2,054 shares..................................... (28,500) (28,500)
Deferred compensation............................................ (27,519) (43,279)
Retained deficit................................................. (6,344,407) (5,505,322)
---------- ----------
Total stockholders' equity..................................... 17,592,351 17,458,984
---------- ----------
Total liabilities and stockholders' equity..................... $23,628,135 $22,077,127
---------- ----------
---------- ----------
</TABLE>

The accompanying notes are an integral part of these statements

24
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
System sales........................................ $22,329,345 $14,268,604 $10,639,298
Services and other.................................. 3,525,363 2,496,921 1,812,528
---------- ---------- ----------
Total revenues.................................... 25,854,708 16,765,525 12,451,826
Cost of revenues...................................... 7,055,200 6,171,683 3,060,615
---------- ---------- ----------
Gross margin...................................... 18,799,508 10,593,842 9,391,211
---------- ---------- ----------
Operating expenses:
General and administrative.......................... 7,481,926 5,646,031 3,805,863
Sales and marketing................................. 4,200,037 3,820,733 2,749,946
Product development................................. 8,289,814 5,655,583 4,082,002
---------- ---------- ----------
Total operating expenses.......................... 19,971,777 15,122,347 10,637,811
---------- ---------- ----------
Loss from operations.............................. (1,172,269) (4,528,505) (1,246,600)
Interest, net......................................... 453,633 673,251 39,454
---------- ---------- ----------
Loss before provision for income taxes............ (718,636) (3,855,254) (1,207,146)
Provision for income taxes............................ (120,449) (1,050) (800)
---------- ---------- ----------
Net loss.............................................. $ (839,085) $(3,856,304) $(1,207,946)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share:
Basic............................................... $ (0.13) $ (0.60) $ (0.22)
---------- ---------- ----------
---------- ---------- ----------
Diluted............................................. $ (0.13) $ (0.60) $ (0.22)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding:
Basic............................................... 6,588,842 6,478,789 5,656,418
---------- ---------- ----------
---------- ---------- ----------
Diluted............................................. 6,588,842 6,478,789 5,656,418
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The accompanying notes are an integral part of these statements

25
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN TREASURY DEFERRED RETAINED STOCKHOLDERS'
SHARES STOCK CAPITAL STOCK COMPENSATION DEFICIT EQUITY
--------- --------- ----------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995... 4,442,600 $ 247,165 $ -- $ -- $(78,795) $ (441,072) $ (272,702)
Issuance of warrants to
purchase common stock....... -- -- 350,000 -- -- -- 350,000
Exercise of warrants to
purchase common stock....... 95,000 95 474,905 -- -- -- 475,000
Exercise of common stock
options..................... 43,220 43 57,387 -- -- -- 57,430
Amortization of deferred
compensation................ -- -- (3,996) -- 19,756 -- 15,760
Initial public offering, net
of issuance costs........... 1,855,000 1,855 21,721,110 -- -- -- 21,722,965
Transfer of par value upon
reincorporation............. -- (242,724) 242,724 -- -- -- --
Purchase of treasury stock.... (2,054) -- -- (28,500) -- -- (28,500)
Net loss...................... -- -- -- -- -- (1,207,946) (1,207,946)
--------- --------- ----------- -------- ------------ ----------- -------------
Balance, September 30, 1996... 6,433,766 6,434 22,842,130 (28,500) (59,039) (1,649,018) 21,112,007
Exercise of options to
purchase common stock....... 99,640 99 187,422 -- -- -- 187,521
Amortization of deferred
compensation................ -- -- -- -- 15,760 -- 15,760
Net loss...................... -- -- -- -- -- (3,856,304) (3,856,304)
--------- --------- ----------- -------- ------------ ----------- -------------
Balance, September 30, 1997... 6,533,406 6,533 23,029,552 (28,500) (43,279) (5,505,322) 17,458,984
Exercise of options to
purchase common stock....... 132,702 133 912,147 -- -- -- 912,280
Issuance of shares under
employee stock purchase
plan........................ 7,199 7 44,405 -- -- -- 44,412
Amortization of deferred
compensation................ -- -- -- -- 15,760 -- 15,760
Net loss...................... -- -- -- -- -- (839,085) (839,085)
--------- --------- ----------- -------- ------------ ----------- -------------
Balance, September 30, 1998... 6,673,307 $ 6,673 $23,986,104 $(28,500) $(27,519) $(6,344,407) $17,592,351
--------- --------- ----------- -------- ------------ ----------- -------------
--------- --------- ----------- -------- ------------ ----------- -------------
</TABLE>

The accompanying notes are an integral part of these statements

26
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss...................................................... $ (839,085) $(3,856,304) $(1,207,946)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Allowance for doubtful accounts............................. 332,000 93,000 50,000
Depreciation and amortization............................... 1,535,632 1,036,032 630,085
(Gain) loss on sale of assets............................... 179,576 9,809 (2,975)
Amortization of deferred compensation....................... 15,760 15,760 15,760
Write off of debt discount.................................. -- -- 350,000
Changes in current assets and liabilities:
Accounts receivable....................................... (769,491) (1,639,072) (2,292,675)
Unbilled revenue.......................................... (1,410,465) 475,112 (819,329)
Prepaid expenses.......................................... 184,053 (140,680) (386,170)
Accounts payable.......................................... (65,296) 508,935 22,084
Accrued liabilities....................................... 430,180 994,316 531,769
Unearned revenue.......................................... 1,052,757 473,352 (362,592)
---------- ---------- ----------
Net cash provided by (used in) operating activities..... 645,621 (2,029,740) (3,471,989)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment........................... (1,051,714) (1,487,458) (2,019,119)
Proceeds from sale of property and equipment.................. 19,590 2,500 33,301
Capitalization of software development costs.................. (2,332,670) (684,814) (276,812)
Deposits and other assets..................................... 9,105 (43,789) 82,975
---------- ---------- ----------
Net cash used in investing activities................... (3,355,689) (2,213,561) (2,179,655)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings from line of credit................................ -- -- 450,000
Payments under line of credit................................. -- -- (958,427)
Borrowings from notes payable................................. -- -- 1,500,000
Payments under notes payable and capital lease obligations.... -- (3,505) (2,162,000)
Proceeds from issuance of common stock to employees........... 44,412 -- --
Proceeds from issuance of common stock, net of issuance
costs....................................................... -- -- 21,722,965
Advances from stockholder..................................... -- -- 175,000
Purchase of treasury stock.................................... -- -- (28,500)
Proceeds from exercise of common stock options and warrants... 912,280 187,521 57,430
---------- ---------- ----------
Net cash provided by financing activities............... 956,692 184,016 20,756,468
---------- ---------- ----------
Net increase (decrease) in cash......................... (1,753,376) (4,059,285) 15,104,824
Cash and cash equivalents at beginning of year 11,194,757 15,254,042 149,218
---------- ---------- ----------
Cash and cash equivalents at end of year........................ $9,441,381 $11,194,757 $15,254,042
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Interest paid................................................. $ -- $ -- $ 105,968
Taxes paid.................................................... $ 116,916 $ 1,050 $ 800
Supplemental disclosure of noncash transactions:
Warrants exercised in exchange for cancellation of note
payable..................................................... $ -- $ -- $ 475,000
Cancellation of deferred compensation related to stock option
cancellations............................................... $ -- $ -- $ 3,996
</TABLE>

The accompanying notes are an integral part of these statements

27
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION:

Health Systems Design Corp. was incorporated in the State of California on
July 1, 1988. In February 1996, the Company was reorganized as Health Systems
Design Corporation (the "Company"), a Delaware holding corporation which owns
100% of the stock of Health System Design Corp., the California corporation. The
Company is a provider of managed care information systems software to payors and
providers of managed care services. The Company introduced its first internally
developed product, DIAMOND-TM- 725, in fiscal 1992 followed by DIAMOND-TM-
950C/S in fiscal 1995.

Substantially all of the Company's operations are in one industry segment:
developing and selling managed care information systems. Therefore, no industry
segment information is presented.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The Consolidated financial statements include the accounts of Health Systems
Design Corporation and its subsidiary. All intercompany accounts and
transactions have been eliminated.

CASH AND CASH EQUIVALENTS

The Company considers cash and cash equivalents to be all highly liquid
investments with an original maturity of less three months or less from the date
of purchase.

CONCENTRATION OF BUSINESS RISKS

The market for the Company's products and services is characterized by
intense competition, rapid technological developments, frequent new product
introductions, and evolving industry standards. Accordingly, the Company is
required to continually improve the performance, features and reliability of its
products and develop and maintain strategic relationships with distributors and
with other service organizations. In addition, substantially all of the
Company's revenue is derived from its two principal products.

The Company operates primarily in the United States, but has contracts in
other countries. These contracts could be impacted by particular economic and
political situations overseas.

See Note 8 for discussion of sales to major customers.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of accounts receivable. The Company believes
it has addressed this risk through its contract approval process.

ADOPTION OF ACCOUNTING PRONOUNCEMENTS

For the year ending September 30, 1999, the Company will report
Comprehensive Income based upon the recently issued Statement of Financial
Accounting Standards No. 130 (SFAS No. 130), "Comprehensive Income". The pro
forma effect of this accounting change has no impact on the net loss as reported
for the year ended September 30, 1998.

28
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is required to be adopted for
fiscal years beginning after December 15, 1997. The Statement changes the way
public companies report segment information in financial statements and also
requires those companies to report selected segment information in interim
financial reports to stockholders. Adoption of this pronouncement is not
expected to have a material impact on the Company's financial statements taken
as a whole.

MANAGEMENT'S USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These assumptions effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Significant estimates made by management include: revenue recognition
under the percentage-of-completion method for its license contracts which
require extended installation periods, determination of technological
feasibility of software under development and related research and development
cost capitalization, product life amortization periods for capitalized software
costs, and allowance for doubtful accounts receivable, and certain other
reserves, including a reserve required under the SMS amendment.

REVENUE RECOGNITION

The Company licenses its internally developed software products and other
software products to health care organizations under the terms of product
license contracts. Individual sales may include, among others, a combination of
software license, implementation, program enhancements, training, and support.
Contracts with customers could be terminated under certain circumstances and
revenues recognized could be refundable upon termination in certain cases,
including breach of contract. The termination of significant customer contracts
could have a material adverse effect on the Company's business, financial
condition, or results of operations.

In October, 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which the Company was required to adopt as of October 1, 1999. SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and supercedes the guidance contained in SOP
91-1. The Company elected to adopt the provisions of the statement effective
October 1, 1997.

The Company generates revenues from licensing the rights to use its software
products directly to end-users and indirectly through distributors. The Company
also generates revenues from sales of post-

29
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
contract support, implementation services, fees for product enhancements, and
training services performed for customers who license the Company's products.

If the contract does not require significant production or customization of
software, revenue is recognized when all the following conditions are met: a
signed contract is obtained, delivery has occurred, the fee is fixed and
determinable, and collection is probable. Effective October 1, 1997, the Company
generally recognizes DIAMOND-TM- 725 license revenue upon shipment of the
software to end users, as no significant production or customization of this
software is required, and the installation period is relatively short. The
Company generally recognizes DIAMOND-TM- 950C/S license revenue on a
percentage-of-completion basis based on the labor hours required to implement
the system, as this software generally requires an extended installation period
and can require significant enhancements. If the software license agreement
provides for acceptance criteria that extend beyond the published specifications
of the applicable product, then revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period.

Implementation and training fees are billed either on an hourly or a monthly
basis and are recognized as services are rendered. Third party software and
hardware are typically billed and recognized as revenue when delivered to the
end user.

Post-contract support services are billed on a monthly basis. Customers who
purchase post-contract support services under maintenance agreements have the
right to receive unspecified product updates and upgrades. Customers that do not
purchase post-contract support must purchase product updates and upgrades under
separate agreements that are subject to the criteria of the Company's revenue
recognition policy. Revenues from post-contract support services are recognized
ratably over the term of the support period. If post-contract support services
are included free or at a discount in a license agreement, such amounts are
recorded at their fair market value based on the value established by
independent sale of such post-contract support services to customers.

In January 1994, the Company entered into a marketing agreement with another
company (remarketer), whereby the remarketer sells certain of the Company's
products to its customer base. License fees under this agreement are recognized
when a contract between the other company and the end-user is executed for
DIAMOND-TM- 725 and are recognized for DIAMOND-TM- 950C/S upon successful
implementation of the system at the remarketer's end-user site. Revenues under
term license agreements are recognized ratably over the customer's contract
term. Fees for support and other services are recognized as services are
rendered. In December 1997, the Company entered into an amendment to the above
agreement for the purpose of resolving certain disagreements between the
parties, amongst other matters. The amendment provides for a $4 million credit
pool against which the remarketer may charge billings for services rendered by
the Company, as well as future royalties payable by the remarketer to license
the DIAMOND-TM- products. As of September 30, 1998, the credit pool had been
reduced to approximately $3.5 million. Due to the establishment of the credit
pool, the Company has not generated significant revenues from this remarketer
and is not expected to in the near future.

Revenue recognized in excess of billings is recorded as an asset (unbilled
revenue). Billings in excess of recognized revenue are recorded as a liability
(unearned revenue).

30
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS

The Company accounts for capitalized software development costs in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed." The Company begins capitalizing software
development costs upon the establishment of technological feasibility, which is
established upon the completion of a working model or, in the case of major
releases, detailed program design. Costs incurred prior to technological
feasibility are charged to expense as incurred. Capitalization ceases when the
product is considered available for general release to customers. Capitalized
software development costs are amortized to direct costs over the estimated
economic lives of the software products based on actual sales experience and
product life expectancy. Generally, estimated economic lives of the software
products do not exceed 3 years. Capitalized software development cost
amortization was $345,000, $192,244 and $235,001 in fiscal 1998, 1997 and 1996,
respectively.

PROPERTY AND EQUIPMENT

Computer equipment and office furniture are recorded at cost and are
depreciated using the straight-line method over their estimated useful lives of
three and seven years, respectively. The cost of assets retired or otherwise
disposed of and the related accumulated depreciation are removed from the
accounts, and any gain or loss is included in the results of operations.
Maintenance and repairs that do not improve or extend the life of assets are
expensed as incurred.

INCOME TAXES

The Company provides for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," issued in
February 1992. Under the liability method specified by SFAS No. 109, deferred
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the effective
tax rate. A valuation allowance is placed on the deferred tax assets to reduce
them to their net realizable value. The Company was on the cash basis of
accounting for tax reporting purposes during the fiscal years ended September
30, 1996 and 1995 and changed to the accrual basis of accounting as of October
1, 1996.

NET INCOME (LOSS) PER SHARE

During 1998, the Company adopted SFAS No. 128, "Earnings per Share". Net
income (loss) per share is computed using the weighted average number of shares
outstanding. Stock options and warrants are excluded from the computation as
their effect is antidilutive in fiscal 1998, 1997 and 1996. The change in the
Company's previously reported net income (loss) per share for fiscal 1996 is due
to the adoption of SFAS No. 128 and subsequently, Staff Accounting Bulletin No.
98 on "Computations of Earnings per Share," which became effective in February
1998.

RECLASSIFICATIONS

During the fourth quarter Company management decided to revise its expense
classifications to be more consistent with industry standards. This decision
resulted in certain product engineering costs being included in product
development instead of cost of revenues. All prior periods presented have been
reclassified accordingly.

31
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. LINE OF CREDIT:

In May 1995, the Company entered into a line of credit agreement with a
bank. Under the terms of the agreement, as amended, the outstanding balance
could not exceed $750,000, and interest was calculated at the bank's reference
rate plus 1.5 percent (10.25 percent at September 30, 1995). Borrowings were
limited to 70 percent of eligible accounts receivable, as defined. The
outstanding balance under the line of credit was $508,427 at September 30, 1995.
The line of credit agreement also contained restrictions on the Company's
ability to pay dividends. Repayments under the line of credit were guaranteed by
three stockholders of the Company, and were secured by substantially all the
assets of the Company. The agreement expired May 30, 1996, by which time all
outstanding balances had been repaid.

4. RELATED PARTY TRANSACTIONS:

During fiscal 1996 and 1995, a stockholder of the Company made advances to
the Company totaling $175,000 and $325,000, respectively. All advances were due
upon demand, but no later than one year from the date of the advance and bore
interest at rates ranging from 5.9 to 6.1 percent. The impact of imputing
interest at the market rate was not material. The advance was repaid with the
proceeds of the March 5, 1996 initial public offering (See Note 11).

The Company paid approximately $90,000 in consulting fees to a director
during the years ended September 30, 1998 and 1997. The Company paid
approximately $36,000 for consulting to a company operated by an officer during
the year ended September 30, 1998.

5. LEASE COMMITMENTS:

The Company is obligated under certain operating leases for office space and
certain equipment. Future minimum lease payments for fiscal years ending
September 30, are as follows:

Rent expense under these operating leases was $1,253,638, $1,140,330 and
$665,999 in fiscal 1998, 1997, 1996, respectively.

32
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. ACCRUED EXPENSES

Accrued expenses consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Accrued royalties.................................... $ -- $ 169,452
Accrued vacation..................................... 363,141 215,629
Accrued commissions.................................. 100,465 30,412
Accrued professional and consulting fees............. 169,034 206,060
Accrual under SMS amendment.......................... 823,542 908,542
Accrued bonuses...................................... 241,926 --
Other accrued expenses............................... 472,746 210,579
--------- ---------
$2,170,854 $1,740,674
--------- ---------
--------- ---------
</TABLE>

7. INCOME TAXES:

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal................................ $ -- $ -- $ --
State.................................. 5,933 1,050 800
Foreign................................ 114,516 -- --
Deferred:
Federal................................ (790,600) (1,462,456) (398,899)
State.................................. (253,166) (244,722) (11,467)
Valuation allowance...................... 1,043,766 1,707,178 410,366
---------- ---------- ---------
Total................................ $ 120,449 $ 1,050 $ 800
---------- ---------- ---------
---------- ---------- ---------
</TABLE>

33
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES: (CONTINUED)
Deferred tax liabilities and assets under SFAS 109, which result from
temporary differences in the recognition of certain revenues and expenses for
financial and income tax reporting purposes, consisted of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash to accrual basis differences.................. $ 581,032 $ 871,549
Capitalized software costs......................... 1,109,943 318,058
Depreciation....................................... 256,675 265,279
---------- ----------
Gross deferred tax liabilities................... 1,947,650 1,454,886
---------- ----------
Research and development credit carryforward....... 1,562,144 770,650
Net operating loss carryforward.................... 3,210,625 2,859,723
Reserves not deductible for tax in the current
year............................................. 732,520 338,646
---------- ----------
Gross deferred tax assets........................ 5,505,289 3,969,019
Valuation allowance................................ (3,557,639) (2,514,133)
---------- ----------
Net deferred tax asset (liability)............... $ -- $ --
---------- ----------
---------- ----------
</TABLE>

The provision for income taxes differed from the amount computed using the
statutory federal income tax rate of 34 percent as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory U.S. tax rate................. (34)% (34)% (34)%
State taxes............................. (6) (6) (6)
Research and development credit
carryforward.......................... (77) (9) (15)
Foreign tax credit carryforward......... (16) -- --
Other................................... 4 5 21
Valuation allowance..................... 145 44 34
-- --
------
16% -- % -- %
-- --
-- --
------
------
</TABLE>

For financial reporting purposes, a 100% valuation allowance has been
recorded at September 30, 1998 to offset the deferred tax assets recognized
under SFAS No. 109 as the Company has historically not achieved significant
levels of profitability, and there is inherent uncertainty as to when the
Company will achieve future profitability.

At September 30, 1998, the Company has approximately $8,793,000 and
$1,009,000 of federal tax net operating loss carryforward and tax credit
carryforward, respectively, which are available to reduce future taxable income
of the Company, if any. These carryforwards begin to expire in fiscal 2007.

Provisions under the Tax Reform Act of 1986 may limit the federal net
operating loss carryforward and credits available to be used in any given year
in the event of a significant change in ownership, including the March 5, 1996
initial public offering.

34
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES: (CONTINUED)
The Company has approximately $3,792,000 and $553,000 of California tax net
operating loss carryforward and research and development tax credit
carryforward, respectively, which are available to reduce future taxable income
of the Company, if any. The carryforwards begin to expire in fiscal 2000.

8. SALES TO MAJOR CUSTOMERS:

During the fiscal year ended September 30, 1998, five customers accounted
for approximately 52% of the Company's revenues. Of those customers, two
accounted for over 10% of revenues. One customer represented 20% of total
revenues, while the other customer represented 11% of total revenues. Subsequent
to September 30, 1998, Blue Cross/Blue Shield of North Carolina ceased
implementation of the DIAMOND-TM- 950C/S product. This customer accounted for 8%
of the Company's total revenues for the fiscal year ended September 30, 1998.

9. RETIREMENT PLAN:

The Company maintains a 401(k) retirement plan (the "Plan") for full-time
employees. The plan year is from January 1 to December 31, and the discretionary
employer contribution is established at the end of the plan year. Participants
become fully vested after four years of service, although they vest
incrementally on an annual basis until the four-year period is completed. No
contributions were made during the fiscal years ended September 30, 1998 and
1997.

10. STOCK OPTION PLAN AND WARRANTS:

Effective August 5, 1994, the Company implemented the 1994 Stock Option Plan
(1994 Plan) and reserved 500,000 shares of stock for grants. However, since the
inception of the 1996 Omnibus Equity Incentive Plan the Company no longer issues
stock options on the 1994 Plan.

On January 2, 1996, the Board of Directors authorized the 1996 Omnibus
Equity Incentive Plan (1996 Plan), under which the Company is authorized to
grant up to 500,000 shares of common stock to employees and consultants of the
Company. The number of authorized shares increased from 500,000 to 900,000
during fiscal 1997 and from 900,000 to 1,400,000 during fiscal 1998. The plan
allows incentive stock options to be granted to employees only, while
nonstatutory stock options may be granted to both employees and consultants.
Under the terms of the 1996 plan, incentive stock options to purchase shares of
the Company's common stock must be granted at a price equal to the market price
of the stock at the date of grant, except for employees who, prior to the grant,
own more than 10 percent of the voting power of all stock. The exercise price
for such employees must be no less than 110 percent of the market price. For
nonstatutory stock options, the exercise price for both employees and
consultants will be no less than 85 percent of the market price. Both incentive
stock options and nonstatutory stock options may be exercised within ten years
from the date of grant, except for employees and consultants who own more than
10 percent of the voting power of all classes of stock. In this case, the
options may be exercised within a five-year period. Options generally vest over
a five-year period.

In October 1996, the Company's Board of Directors approved the issuance of
300,000 shares under the Health Systems Design Corporation Employee Stock
Purchase Plan (ESP Plan). The Plan allows for employees to purchase the
Company's common stock at a 15% discount off the stock's market value as defined
under the Plan. Employees began participating in the ESP Plan on January 1,
1998. As of September 30, 1998, the Company had issued 7199 shares under the ESP
plan.

35
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCK OPTION PLAN AND WARRANTS: (CONTINUED)
In March 1997, the Company's stockholders approved the Nonemployee Director
Stock Option Plan (Director Plan), which is authorized to grant up to 60,000
shares to nonemployee directors of the Company. Members of the Board of
Directors are generally granted 5,000 options on the date of each annual meeting
which vest on the first anniversary of that meeting.

The Company accounts for the above plans under APB Opinion No. 25, under
which $78,795 was charged to deferred compensation in the year ended September
30, 1995 because certain options were granted at below the then fair market
value of the common stock. This deferred compensation is being amortized over
the vesting period of the related options. Amortization of deferred compensation
was $15,760 for each of the years ended September 30, 1998, 1997 and 1996 and no
other compensation cost has been recognized under APB Opinion No. 25 as all
other options have been granted at an option exercise price equal to the market
value of common stock on the date of grant. Had compensation cost for these
plans been determined consistent with SFAS No. 123, the Company's net loss in
total and per share would have been changed to the following pro forma amounts:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Loss:......................................... As Reported $ (839,085) $(3,856,304) $(1,207,946)
Pro Forma $(1,688,639) $(4,180,109) $(1,376,354)

Basic EPS:........................................ As Reported $ (0.13) $ (0.60) $ (0.22)
Pro Forma $ (0.26) $ (0.65) $ (0.24)

Diluted EPS:...................................... As Reported $ (0.13) $ (0.60) $ (0.22)
Pro Forma $ (0.26) $ (0.65) $ (0.24)
</TABLE>

Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

36
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCK OPTION PLAN AND WARRANTS: (CONTINUED)
The stock option activity under the Stock Option and Equity Incentive Plans
during the fiscal years ended September 30, 1998, 1997, and 1996, was as
follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES WEIGHTED AVERAGE
-------------------------------------------- AVERAGE FAIR VALUE EXERCISABLE
DIRECTOR EXERCISE OF OPTIONS AT END
1996 PLAN 1994 PLAN PLAN TOTAL PRICE GRANTED OF PERIOD
--------- --------- -------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding, September 30, 1995.... -- 487,500 -- 487,500 $2.95 26,760
Granted............................ 200,250 12,000 5,000 217,250 $14.85 $11.70
Exercised.......................... (43,220) -- (43,220) $1.42
Canceled........................... (3,500) (23,680) -- (27,180) $6.11
--------- --------- -------- ---------
Outstanding, September 30, 1996.... 196,750 432,600 5,000 634,350 $6.99 111,040
Granted............................ 805,250 4,200 10,000 819,450 $7.05 $5.55
Exercised.......................... -- (99,640) -- (99,640) $1.85
Canceled........................... (279,450) (140,940) -- (420,390) $9.63
--------- --------- -------- ---------
Outstanding, September 30, 1997.... 722,550 196,220 15,000 933,770 $6.39 268,780
Granted............................ 208,502 -- 10,000 218,502 $7.57 $5.77
Exercised.......................... (110,400) (22,000) -- (132,400) $7.04
Canceled........................... (73,500) (15,450) -- 88,950 $8.04
--------- --------- -------- ---------
Outstanding, September 30, 1998.... 747,152 158,770 25,000 930,922 $6.41 284,462
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>

At September 30, 1998, 1997 and 1996, the following shares were reserved and
unissued under the Plans.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
1996 Omnibus Equity Incentive Plan............... 542,448 177,450 303,250
1994 Stock Option Plan........................... 176,370 160,920 24,180
Nonemployee Director Stock Option Plan........... 35,000 45,000 55,000
</TABLE>

As mentioned above, the options available in the 1994 plan are no longer
reissued, since the inception of the 1996 Plan.

Options outstanding at September 30, 1998 consist of the following:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE REMAINING
OPTION EXERCISE EXERCISE AVERAGE VESTED
SHARES PRICE RANGE PRICE CONTRACTUAL LIFE SHARES
- --------- -------------- ------------- ------------------- ---------
<S> <C> <C> <C> <C>
11,200 $ 0.00-1.78 $ .30 6.0 11,200
51,220 $ 1.78-3.55 $ 1.80 6.4 29,360
96,350 $ 3.55-5.33 $ 5.00 6.8 58,150
368,002 $ 5.33-7.10 $ 5.95 8.6 146,602
395,650 $ 7.10-8.88 $ 7.75 8.9 35,750
3,500 $ 14.20-15.98 $ 14.75 7.7 1,400
5,000 $ 15.98-17.75 $ 17.75 3.6 2,000
- --------- ---------
930,922 284,462
</TABLE>

37
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCK OPTION PLAN AND WARRANTS: (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996: risk-free weighted average
interest rate of 5.15, 6.11 and 6.55 percent, respectively, expected dividend
yields of 0 percent, expected lives of 5 years from the date of grant and
expected volatility of 103.0 percent for fiscal years 1996 and 1997 and 98.6
percent for fiscal 1998.

In a December 1995 private placement, the Company issued $2,000,000 in notes
with warrants to purchase 200,000 shares of the Company's common stock at $5.00
per share. Upon repayment of the notes, the note holders executed warrants to
purchase 95,000 shares of the Company's common stock. At September 30, 1998 and
1997, warrants to purchase 95,000 and 105,000 shares, respectively, of the
Company's common stock were outstanding.

11. PUBLIC OFFERING

On March 5, 1996, the Company sold 1,855,000 shares of its common stock
through an initial public offering. As a result, the Company received net
proceeds of $21,722,965. A portion of the proceeds was immediately used to
retire short-term and long-term indebtedness to banks and other creditors. In
connection with the repayment of the private placement notes payable of
$2,000,000 of which $600,000 was paid to a stockholder, the Company recorded a
one-time, non-cash charge to interest expense of approximately $350,000 in
fiscal 1996 to reflect the write-off of deferred interest.

38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE

None.

39
<PAGE>
HEALTH SYSTEMS DESIGN CORPORATION
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information required by this item is incorporated by reference from the
information set forth under the captions, "Election of Directors" and "Section
16(a) Information" of the Company's definitive Proxy Statement relating to the
Annual Meeting of Stockholders to be held on March 23, 1999. See also Item 1
above for disclosure regarding the Company's executive officers.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the
information set forth under the caption, "Compensation of Executive Officers,"
of the Company's definitive Proxy Statement relating to the Annual Meeting of
Stockholders to be held on March 23, 1999.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
information set forth under the caption, "Ownership of Management and Principal
Stockholders," of the Company's definitive Proxy Statement relating to the
Annual Meeting of Stockholders to be held on March 23, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
information set forth under the captions, "Compensation of Directors",
"Compensation Committee Interlocks and Insider Participation" and "Transactions
with the Company," of the Company's definitive Proxy Statement relating to the
Annual Meeting of Stockholders to be held on March 23, 1999.

40
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) See Index to Consolidated Financial Statements at Item 8. of this
report.

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of the Registrant, as amended (Incorporated by reference from Exhibit 3.1 to
Registration Statement No. 333-0094)

3.2 By-laws of the Registrant (Incorporated by reference from Exhibit 3.2 to Registration Statement No.
333-0094)

4.1 Specimen Common Stock Certificate (Incorporated by reference from Exhibit 4.1 to Registration Statement
No. 333-0094)

10.1 Office building lease, dated February 24, 1994, as amended, for the Registrant's principal executive
offices (Incorporated by reference from Exhibit 10.1 to Registration Statement No. 333-0094)

10.1.1 Office building lease, dated October 28, 1998, for the Registrant's principal executive offices

10.2 1994 Equity Incentive Plan (Incorporated by reference from Exhibit 3.1 to Registration Statement No.
333-0094)*

10.3 1996 Omnibus Equity Incentive Plan (Incorporated by reference from Exhibit 10.3 to Registration Statement
No. 333-0094)*

10.4 Marketing Agreement dated January 31, 1994 between the Registrant and Shared Medical Systems Corporation
(Incorporated by reference from Exhibit 10.4 to Registration Statement No. 333-0094)+

10.4.1 Amendment to HSD/SMS Marketing Agreement, dated December 19, 1997+

10.6 Promissory Note, dated May 31, 1995, issued by the Registrant to SVB (Incorporated by reference from
Exhibit 10.6 to Registration Statement No. 333-0094)

10.7 Commercial Security Agreement, dated May 31, 1995, between the Registrant and SVB (Incorporated by
reference from Exhibit 10.7 to Registration Statement No. 333-0094)

10.12 Business Loan Agreement, effective August 22, 1995, between the Registrant and SVB (Incorporated by
reference from Exhibit 10.12 to Registration Statement No. 333-0094)

10.14 Commercial Security Agreement, dated August 15, 1995, between the Registrant and SVB (Incorporated by
reference from Exhibit 10.14 to Registration Statement No. 333-0094)

10.15 Loan Modification Agreement, dated January 4, 1996, to SVB Business Loan Agreement (Incorporated by
reference from Exhibit 10.15 to Registration Statement No. 333-0094)

10.16 Promissory Note, dated May 6, 1994, issued by the Registrant to Wells Fargo Bank, National Association
(Incorporated by reference from Exhibit 10.16 to Registration Statement No. 333-0094)

10.17 Note and Warrant Purchase Agreement dated December 14, 1995 between the Registrant and the Purchasers
listed on Exhibit A thereto (Incorporated by reference from Exhibit 10.17 to Registration Statement No.
333-0094)

10.23 Advisory Agreement dated July 18, 1995 between the Registrant and Mackowski & Shepler (Incorporated by
reference from Exhibit 10.23 to Registration Statement No. 333-0094)

10.24 Form of Indemnification Agreement between the Registrant and its directors and executive officers
(Incorporated by reference from Exhibit 10.24 to Registration Statement No. 333-0094)
</TABLE>

41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.25 Registrant's 401(k) Plan, as amended (Incorporated by reference from Exhibit 10.25 to Registration
Statement No. 333-0094)

10.26 License Agreement, dated March 25, 1996 between the Registrant and Blue Cross/Blue Shield of Florida
(Incorporated by reference from Exhibit 10.26 to Registration Statement No. 333-0094)+

10.27 Master Agreement, dated January 24, 1997 between Registrant and Blue Cross/Blue Shield of North Carolina+

10.28 License Agreement, dated October 20, 1997 between the Registrant and Kaiser Permanente+

10.29 Management Contract, dated July 23, 1998 between the Registrant and Russell J. Harrison*

11.1 Computation of net loss per share

21.1 List of Subsidiaries

23.1 Consent of Arthur Andersen LLP

27 Financial Data Schedule
</TABLE>

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

+ Confidential treatment has been granted with respect to portions of this
exhibit.

* Indicates, as required by Item 14(a)(3), a management contract or
compensation plan required to be filed as an exhibit to this Form 10-K.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter of fiscal 1997.

(d) The following financial statement schedules are filed as part of this
report on page 42.

SCHEDULE II--VALUATION OF QUALIFYING ACCOUNTS

All other schedules required by Form 10-K Annual Report have been omitted
because they were not applicable, were included in the notes to the consolidated
financial statements, or were otherwise not required under the instructions
contained in Regulation S-X.

42
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<C> <S> <C>
HEALTH SYSTEMS DESIGN CORPORATION

By: /s/ RUSSELL J. HARRISON
----------------------------------------
Russell J. Harrison,
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Date: December 23, 1998
</TABLE>

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

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

<C> <S> <C>
President and Chief
/s/ RUSSELL J. HARRISON Executive Officer
- ------------------------------ (principal executive December 23, 1998
Russell J. Harrison officer)

/s/ RICHARD C. AUGER Chairman of the Board of
- ------------------------------ Directors December 23, 1998
Richard C. Auger

/s/ STEVEN L. MOORE Chief Financial Officer
- ------------------------------ (principal financial December 23, 1998
Steven L. Moore officer)

/s/ STEVEN J. CORREIA Vice President-Controller
- ------------------------------ (principal accounting December 23, 1998
Steven J. Correia officer)

/s/ CATHERINE C. ROTH Director
- ------------------------------ December 23, 1998
Catherine C. Roth

/s/ J. MATHEW MACKOWSKI Director
- ------------------------------ December 23, 1998
J. Mathew Mackowski

/s/ ARTHUR M. SOUTHAM M.D. Director
- ------------------------------ December 23, 1998
Arthur M. Southam M.D.

/s/ CHRISTOPHER HERRON Director
- ------------------------------ December 23, 1998
Christopher Herron
</TABLE>

43
<PAGE>
SCHEDULE II

HEALTH SYSTEMS DESIGN CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- --------------------------------------------------------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
For year ended September 30, 1998:
Allowance for doubtful accounts.............................. $ 193,000 619,406 287,406 $ 525,000
------------ ----------- ----------- ----------
For year ended September 30, 1997:
Allowance for doubtful accounts.............................. $ 100,000 306,673 213,673 $ 193,000
------------ ----------- ----------- ----------
For year ended September 30, 1996:
Allowance for doubtful accounts.............................. $ 50,000 $ 63,767 $ 13,767 $ 100,000
------------ ----------- ----------- ----------
</TABLE>

<PAGE>

1111 BROADWAY

OFFICE LEASE

SHORENSTEIN REALTY INVESTORS THREE, L.P.,
a California limited partnership,
Landlord

and

HEALTH SYSTEMS DESIGN CORP.,
Tenant

DATED AS OF: October ___, 1998

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Page
- ---------
<S> <C> <C>
1. Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Certain Basic Lease Terms. . . . . . . . . . . . . . . . . . . . 1
3. Term; Delivery of Possession of Premises . . . . . . . . . . . . 2
4. Condition of Premises. . . . . . . . . . . . . . . . . . . . . . 4
5. Monthly Rent . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6. Security Deposit . . . . . . . . . . . . . . . . . . . . . . . . 7
7. Additional Rent: Increases in Operating Expenses and Tax
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8. Use of Premises; Compliance with Law . . . . . . . . . . . . . . 10
9. Alterations and Restoration. . . . . . . . . . . . . . . . . . . 12
10. Repair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
11. Abandonment. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
12. Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
13. Assignment and Subletting. . . . . . . . . . . . . . . . . . . . 14
14. Indemnification of Landlord. . . . . . . . . . . . . . . . . . . 16
15. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
16. Mutual Waiver of Subrogation Rights. . . . . . . . . . . . . . . 18
17. Utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
18. Personal Property and Other Taxes. . . . . . . . . . . . . . . . 20
19. Rules and Regulations. . . . . . . . . . . . . . . . . . . . . . 20
20. Surrender; Holding Over. . . . . . . . . . . . . . . . . . . . . 20
21. Subordination and Attornment . . . . . . . . . . . . . . . . . . 21
22. Financing Condition. . . . . . . . . . . . . . . . . . . . . . . 21
23. Entry by Landlord. . . . . . . . . . . . . . . . . . . . . . . . 21
24. Insolvency or Bankruptcy . . . . . . . . . . . . . . . . . . . . 21
25. Default and Remedies . . . . . . . . . . . . . . . . . . . . . . 22
26. Damage or Destruction. . . . . . . . . . . . . . . . . . . . . . 24
27. Eminent Domain . . . . . . . . . . . . . . . . . . . . . . . . . 25
28. Landlord's Liability; Sale of Building . . . . . . . . . . . . . 25
29. Estoppel Certificates. . . . . . . . . . . . . . . . . . . . . . 26
30. Right of Landlord to Perform . . . . . . . . . . . . . . . . . . 26
31. Late Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
32. Attorneys' Fees; Waiver of Jury Trial. . . . . . . . . . . . . . 26
33. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
34. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
35. Notice of Surrender. . . . . . . . . . . . . . . . . . . . . . . 27
36. Defined Terms and Marginal Headings. . . . . . . . . . . . . . . 27
37. Time and Applicable Law. . . . . . . . . . . . . . . . . . . . . 28
38. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
39. Entire Agreement; Modifications. . . . . . . . . . . . . . . . . 28
40. Light and Air. . . . . . . . . . . . . . . . . . . . . . . . . . 28
41. Name of Building . . . . . . . . . . . . . . . . . . . . . . . . 28
42. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 28
43. Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
44. No Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
45. Real Estate Brokers. . . . . . . . . . . . . . . . . . . . . . . 28
46. Consents and Approvals . . . . . . . . . . . . . . . . . . . . . 28
47. Reserved Rights. . . . . . . . . . . . . . . . . . . . . . . . . 29
48. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 29
49. Deleted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
50. Nondisclosure of Lease Terms . . . . . . . . . . . . . . . . . . 29
51. Hazardous Substance Disclosure . . . . . . . . . . . . . . . . . 29
52. Option to Renew. . . . . . . . . . . . . . . . . . . . . . . . . 30
53. Parking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>

EXHIBITS:
A - Outline of Premises
B - Rules and Regulations
C - Description of Plans
D - Appraisal Procedure

<PAGE>

LEASE

THIS LEASE is made as of the ______ day of October, 1998, between
SHORENSTEIN REALTY INVESTORS THREE, L.P., a California limited partnership
("Landlord"), and HEALTH SYSTEMS DESIGN CORP., a California corporation
("Tenant").

1. PREMISES. Landlord hereby leases to Tenant, and Tenant hereby
leases from Landlord, on the terms and conditions set forth herein, the space
outlined on the attached EXHIBIT A (the "Premises"). The Premises are located
on the floor(s) specified in Paragraph 2 below of the building (the "Building")
located at 1111 Broadway, Oakland, California. The Building is a part of the
office, retail and service complex located in the area bounded by Broadway,
Fourteenth, Clay and Eleventh Streets, which complex, including its associated
garages, the parcel(s) of land on which the complex is located and the other
improvements on such land, is referred to herein as "City Center." The
Building, the associated garage, the parcel(s) of land (the "Land") on which the
Building and garage are located and the other improvements on the Land
(including the walkways and landscaping) are referred to herein as the "Real
Property."

Tenant's lease of the Premises shall include the right to use, in
common with others and subject to the other provisions of this Lease, the public
lobbies, entrances, stairs, elevators and other public portions of the Building.
All of the windows and outside walls of the Premises and any space in the
Premises used for shafts, stacks, pipes, conduits, ducts, electrical equipment
or other utilities or Building facilities are reserved solely to Landlord and
Landlord shall have rights of access through the Premises for the purpose of
operating, maintaining and repairing the same.

2. CERTAIN BASIC LEASE TERMS. As used herein, the following terms
shall have the meaning specified below:

a. Floor(s) on which the Premises are located: Sixteenth
(16th), seventeenth (17th) and eighteenth (18th). Landlord
and Tenant agree that for the purpose of this Lease, the
portion of the Premises located on the 16th floor of the
Building (the "16th Floor Increment") is deemed to contain
6,111 rentable square feet of space, the portion of the
Premises located on the 17th floor of the Building (the
"17th Floor Increment") is deemed to contain 24,182 rentable
square feet of space, and the portion of the Premises
located on the 18th floor of the Building (the "18th Floor
Increment") is deemed to contain 24,134 rentable square feet
of space.

b. Lease term: Approximately ten (10) years and seven (7)
months, commencing on the later of (i) March 1, 1999, or
(ii) Substantial Completion (as defined in Paragraph 4.b.
below) of the Tenant Improvements to be constructed in the
17th Floor Increment as provided in Paragraph 4 (the
"Commencement Date"), and ending on the last day of the one
hundred twentieth (120th) full calendar month after the 18th
Floor Commencement Date (as defined in Paragraph 3.b. below)
(the "Expiration Date").

c. Monthly Rent: The respective sums set forth as follows:

<TABLE>
<CAPTION>
Period Monthly Rent
------ ------------
<S> <C>
From the Commencement Date
through the date immediately
preceding the 18th Floor
Commencement Date (as defined
in Paragraph 3.b. below): $62,470.00

From the 18th Floor Commencement
Date through the last day of the
Third Lease Year:

16th Floor Increment: $15,787.00
17th Floor Increment: $62,470.00
18th Floor Increment: $62,346.00
----------
Total: $140,603.00
</TABLE>

1
<PAGE>

<TABLE>
<CAPTION>
Period Monthly Rent
------ ------------
<S> <C>
Fourth through Sixth
Lease Years:

16th Floor Increment: $16,805.00
17th Floor Increment: $66,501.00
18th Floor Increment: $66,369.00
----------
Total: $149,675.00

Seventh through Eleventh
Lease Years:

16th Floor Increment: $18,333.00
17th Floor Increment: $72,546.00
18th Floor Increment: $72,402.00
----------
Total: $163,281.00
</TABLE>

The "First Lease Year" shall be the period commencing on the
Commencement Date and ending on the last day of the twelfth
(12th) full calendar month thereafter. Each twelve (12)
calendar month period thereafter shall constitute a "Lease
Year", except that the final Lease Year shall end on the day
this Lease expires or otherwise terminates.

d. Security Deposit: Three Hundred Eighty-eight Thousand Three
Hundred Twenty-one Dollars ($388,321.00).

e. Tenant's Share:

Commencing on the Commencement Date and ending at midnight
on the day before the 18th Floor Commencement Date: 4.49%.

Commencing on the 18th Floor Commencement Date and
continuing through expiration or sooner termination of the
Lease:

<TABLE>
<S> <C>
16th Floor Increment: 1.14%
17th Floor Increment: 4.50%
18th Floor Increment: 4.49%
-----
Total: 10.23%
</TABLE>

f. Base Year: The calendar year 1999.

Base Tax Year: The fiscal tax year ending June 30, 2000.

g. Business of Tenant: Provider of managed care information
systems software to payers and providers of health care
services.

h. Real estate broker(s): Shorenstein Management, Inc., Grubb
& Ellis Company, and KLP Properties, Inc..

3. TERM; DELIVERY OF POSSESSION OF PREMISES.

a. TERM. The term of this Lease shall commence on the
Commencement Date (as defined in Paragraph 2.b.) and, unless sooner terminated
pursuant to the terms hereof or at law, shall expire on the Expiration Date (as
defined in Paragraph 2.b.). The Commencement Date, the 18th Floor Commencement
Date (as defined in Paragraph 3.b. below) and the Expiration Date shall be
confirmed by the parties in writing following Substantial Completion of the
Tenant Improvements, as provided in Paragraph 4.

b. DELIVERY OF PREMISES. Tenant acknowledges that the Premises
are currently leased by a third party tenant (the "Existing Tenant") pursuant to
a lease (the "Existing Lease") which is currently scheduled to expire on October
31, 2002, and that the Existing Tenant currently subleases the Premises to
another party (the "Existing Subtenant") pursuant to a sublease (the "Existing
Sublease"), which is scheduled to expire on October 30, 2002. The Existing
Subtenant has expressed its intention to exercise its right under the Existing
Sublease to terminate such sublease effective during the first quarter of 1999
and to vacate the Premises on or before the effective early termination date of
the Existing Sublease. Landlord is currently negotiating with the Existing
Tenant for the early termination of the Existing Lease. Landlord shall deliver
the 17th Floor Increment to Tenant on the Commencement Date, and Landlord shall

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<PAGE>

deliver the 16th and 18th Floor Increments to Tenant on the later of (i) October
1, 1999, or (ii) Substantial Completion (as defined in Paragraph 4.b. below) of
the Tenant Improvements to be constructed in the 16th and 18th Floor Increments
as provided in Paragraph 4 below (the "18th Floor Commencement Date"). Except
as expressly otherwise provided in subparagraphs i, ii and iii below, no delay
in Substantial Completion or delivery of possession of the Premises to Tenant
shall operate to extend the term of this Lease, amend Tenant's obligations under
this Lease, or render this Lease void or voidable, and Landlord shall not be
liable to Tenant for any delay in completion of the Tenant Improvements caused
or occasioned by strikes, lockout, labor disputes, shortages of material or
labor, fire or other casualty, acts of God or any other any other cause beyond
Landlord's reasonable control or by Tenant Delays (as defined in Paragraph 4.d.
below):

i. Landlord and Tenant shall each have the option to
terminate this Lease after December 31, 1998, by giving written notice to
the other during the period commencing on January 1, 1999, and expiring at
close of business on January 29, 1999, if at the time such notice is given
either (A) Landlord and the Existing Tenant have failed to execute a
written amendment or agreement providing for the termination of the
Existing Lease with respect to the 17th and 18th Floor Increments, or
(B) the Existing Subtenant has failed to give written notice exercising its
right under the Existing Sublease to terminate the Existing Sublease or to
otherwise agree in writing to terminate the Existing Sublease. If, however,
Landlord timely delivers such termination notice, Tenant shall have the
right to suspend the termination of the Lease for a period of thirty (30)
days by delivering notice of such suspension to Landlord within five (5)
business days after receipt of Landlord's termination notice (such
suspension period to expire thirty (30) days after Landlord's receipt of
Tenant's suspension notice). During that 30-day suspension period Landlord
shall make diligent efforts to effect the completion of an executed
amendment or agreement with the Existing Tenant as described in (A) above
and shall use diligent efforts to facilitate notice from or other agreement
by the Existing Subtenant to terminate the Existing Sublease, as applicable
(provided that such efforts by Landlord shall not require Landlord to
expend any material sum or to agree to terms or obligations which are not
acceptable to Landlord). If, however, Landlord fails to bring about the
completion of such items within the 30-day suspension period, this Lease
shall terminate at the end of the 30-day suspension period.

In recognition of the fact that Tenant is not a party to Landlord's
early termination negotiations with the Existing Tenant or any discussions
or communications Landlord may have or receive concerning the Existing
Subtenant's plans regarding early termination of the Existing Sublease and
vacating of the Premises, Landlord acknowledges that Tenant must rely on
information provided by Landlord to evaluate its options and make critical
business decisions under this Paragraph 3. As a result, Landlord agrees to
respond promptly and to the best of Landlord's then current knowledge, to
Tenant's reasonable inquiries concerning the Landlord's progress toward
obtaining the early termination of the Existing Lease and the Existing
Subtenant's plans for early termination of the Existing Sublease and
vacating the Premises.

ii. If this Lease is not terminated pursuant to
subparagraph i above, Tenant shall have the further option to terminate
this Lease by giving notice to Landlord during the period commencing on
April 1, 1999, and expiring at close of business on April 7, 1999, if at
the time the notice is given, the Existing Subtenant remains in occupancy
of any portion of either the 17th Floor Increment or the 18th Floor
Increment ("Retained Premises"); provided, however, that if Tenant timely
delivers such termination notice, Landlord shall have the right to suspend
the termination of the Lease for a period of thirty (30) days, by
delivering notice of such suspension to Tenant within five (5) business
days after receipt of Tenant's termination notice (such suspension period
to expire thirty days after Tenant's receipt of Landlord's suspension
notice). If Landlord provides such notice and, within that 30-day
suspension period, recovers possession of the Retained Premises from the
Existing Subtenant, Tenant's termination notice shall be of no further
force or effect. If, however, Landlord fails to recover possession of the
Retained Premises within that 30-day suspension period, this Lease shall
terminate at the end of the 30-day suspension period.

iii. If this Lease is not terminated pursuant to
subparagraph i or ii above, and Landlord has delivered neither the 17th
Floor Increment nor the 18th Floor Increment to Tenant with the Tenant
Improvements Substantially Completed by November 1, 1999 (the "Completion
Trigger Date"), as such date shall be extended by the length of any delays
resulting from a Tenant Delay, then Tenant's sole remedy shall be to give
written notice (the "Termination Notice") to Landlord within five (5) days
after the Trigger Date, electing to terminate this Lease effective on the
date which is five (5) days after Landlord's receipt of the Termination
Notice (the "Termination Date"). Notwithstanding the foregoing, if Tenant
delivers such Termination Notice, Landlord shall have the right to suspend
the termination of the Lease for a period ending thirty (30) days after the
Termination Date, by delivering notice of such suspension to Tenant, within
five (5) business days after receipt of Tenant's termination notice. If
Landlord provides such notice and, within that 30-day suspension period,
delivers possession of the 17th Floor Increment or the 18th Floor
Increment, or both, to Tenant with the Tenant Improvements Substantially
Completed, Tenant's Termination Notice

3
<PAGE>

shall be of no further force or effect. If, however, Landlord delivers
possession of neither increment to Tenant within that 30-day suspension
period, this Lease shall terminate at the end of the 30-day suspension
period.

Notwithstanding the foregoing, if before the Termination Date (as such
Termination Date may be suspended pursuant to the foregoing) Landlord
determines that Substantial Completion of the Tenant Improvements will not
occur by the Termination Date, Landlord shall have the right to deliver a
written notice to Tenant stating Landlord's reasonable, good-faith estimate
of the date by which Substantial Completion of the Tenant Improvements will
occur. Tenant shall be required, within five (5) business days after
receipt of such notice, to either deliver the Termination Notice (which
will mean that this Lease shall terminate) or agree to extend the
Termination Date to the date stated in Landlord's notice. If the
Termination Date is so extended, Landlord's right to request Tenant to
elect either to terminate or to further extend the Termination Date shall
remain and continue to remain, with each of the notice periods and response
periods set forth above, until the Tenant Improvements in the 17th Floor
Increment or the 18th Floor Increment are Substantially Completed or until
this Lease is terminated.

c. EARLY OCCUPANCY. If, at Tenant's request, Landlord permits
Tenant to take occupancy of the 17th Floor Increment prior to the Commencement
Date provided for in Paragraph 2.b. above, then the Commencement Date shall be
the date of such early occupancy by Tenant, and if, at Tenant's request;
provided, however, that the Expiration Date shall not be affected by such early
occupancy.

4. CONDITION OF PREMISES.

a. TENANT IMPROVEMENTS. Landlord shall have no obligation to
make or pay for any improvements or renovations in or to the Premises or
otherwise prepare the Premises for Tenant's occupancy, except as specifically
provided in this Paragraph 4. Tenant has submitted for Landlord's review and
approval the layout plans described in the attached EXHIBIT C. Within thirty
(30) days after the date hereof (which date has been inserted by Landlord in the
preamble above to indicate the date on which this Lease has been executed by
Landlord and Tenant), Landlord shall provide Tenant with Landlord's written
approval (which may be subject to conditions) or Landlord's reasonable
objections to such layout plans. Tenant shall respond promptly to any objections
of Landlord to such layout plans and shall resubmit appropriately revised layout
plans within five (5) days of Tenant's receipt of Landlord's objections. The
layout plans as approved by Landlord shall be referred to herein as the "Plans."
After recovering possession of the Premises from the Existing Tenant and
Existing Subtenant, Landlord shall cause to be performed those improvements (the
"Tenant Improvements") to the Premises which are specifically described in the
Plans; provided, however, that Landlord shall not be required to commence
construction prior to Tenant's waiver of the termination rights set forth in
subparagraphs i and ii of Paragraph 3.b. above. Notwithstanding the foregoing,
if Landlord determines that additional working drawings and specifications are
required for the construction of the Tenant Improvements, Tenant shall prepare
and submit to Tenant for Landlord's reasonable approval such Working Drawings.
The Working Drawings shall show improvements that conform to the approved Plans,
Landlord's base building requirements, applicable building codes and other Legal
Requirements (as defined in Paragraph 7.a.(16) below) and shall be in sufficient
detail as to enable Landlord's Contractor (as defined below) to obtain all
necessary governmental permits for construction of all of the improvements and
to secure complete bids from qualified subcontractors to perform the work. The
Working Drawings and all improvements shown thereon shall also comply with the
"Tenant Construction Standards" and "Conditions for Construction" applicable to
the Building, receipt of a copy of which is hereby acknowledged by Tennt. To
the extent that the improvements shown in the Working Drawings do not conform to
the approved Plans, such deviation shall be considered a Change, as defined in
Paragraph 4.c. below. Tenant shall submit the Working Drawings to Landlord
within ten (10) days of Landlord's written request. Landlord shall respond to
the Working Drawings (and to any resubmittal of the Working Drawings) within ten
(10) days of Landlord's receipt thereof. Tenant shall respond promptly to any
objections of Landlord to the Working Drawings and shall resubmit appropriately
revised Working Drawings within five (5) days of Tenant's receipt of Landlord's
objections. If Working Drawings are so required and prepared, then all
references hereinafter to the "Plans" shall include the Working Drawings so
approved by Landlord and Tenant. Where reference is made in this Lease to
construction by Landlord, Tenant acknowledges that such construction shall be
performed by Landlord through Shorenstein Company, L.P., or an affiliate thereof
("Landlord's Contractor"), as general contractor.

b. CONSTRUCTION. Landlord shall cause the work described in
the Plans to be commenced as soon as is reasonably possible after the execution
of this Lease. Landlord shall provide and cause to be installed only those wall
terminal boxes and/or floor monuments required for Tenant's telephone or
computer systems as are shown on the Plans. Landlord will provide ordinary
power wiring to locations shown on the Plans and shall provide and cause to be
installed conduits and pull strings in partition walls, if shown on the Plans,
as required for Tenant's telephone and computer systems, but shall in no event
provide, install, pull or hook up any other conduits or wires, supply jacks or
plugs, or provide wiring necessary for special conditioned power to the
Premises. Further, notwithstanding anything to the contrary herein, Landlord
and Tenant shall cooperate with each other to resolve any space plan issues
raised by applicable

4
<PAGE>

local building codes. The Tenant Improvements shall be deemed to be
"Substantially Completed" when (i) they have, in Landlord's reasonable judgment,
been completed in accordance with the Plans, subject only to correction or
completion of "Punch List" items, which items shall be limited to minor items of
incomplete or defective work or materials or mechanical maladjustments that are
of such a nature that they do not materially interfere with or impair Tenant's
use of the Premises for Tenant's business, and (ii) any governmental approvals
(which may be oral approvals by inspectors or other officials, and may be
temporary or conditional in accordance with local practice) required for the
initial occupancy of the Premises by Tenant have been obtained, subject to final
inspection and "sign off" as to isolated or incidental items of construction
(provided that if the failure to obtain such approval results from construction
of Tenant Improvements in accordance with Final Plans which do not comply with
building codes or other Legal Requirements, then this item (ii) shall not be a
condition to the occurrence of Substanial Completion). The definition of
"Substantially Completed" shall also apply to the terms "Substantial Completion"
and "Substantially Complete." Landlord's Contractor shall prepare the Punch
List for the 19th Floor Increment and the 18th Floor Increment, respectively, on
a walkthrough of each increment with Tenant upon Substantial Completion of the
Tenant Improvements for such increment. Landlord shall cause the Punch List
items to be completed as soon as reasonably possible but in no event later than
thirty (30) days from preparation of the list of Punch List items. Tenant shall
cooperate with and accommodate Landlord's Contractor and its workers in
connection with completion of the Punch List items and Landlord shall use
commercially reasonable efforts to minimize noise and disruption to Tenant's
business during the performance of such work, provided that such efforts do not
result in a material increase in the cost of performing the relevant work and do
not diminish the quality of work performed.

c. CHANGES. If Tenant desires any change in or to the Plans (a
"Change"), Tenant shall submit to Landlord for Landlord's review and written
approval revised Working Drawings prepared by Tenant's architect incorporating
the requested change and clearly identifying the same as such on the revised
Working Drawings. Landlord shall not unreasonably withhold or delay its
approval of the revised Working Drawings, provided, however, that Landlord shall
have at least ten (10) business days after receipt of the revised Working
Drawings to review any proposed change. If Landlord approves any proposed
Change, then together with such approval, if practicable, and if not practicable
as soon thereafter as is practicable, Landlord shall give Tenant Landlord's
estimate of the increase or decrease in the cost of the Tenant Improvements
which would result from incorporating such Change and Landlord's estimate of the
delay, if any, in the commencement or completion of the Tenant Improvements
which would result from incorporating such Change. If the Change increases the
cost of the Tenant Improvements and the funds from Landlord's Allowance (as
defined in Paragraph 4.e. below) are not sufficient to pay for the Change, then
Tenant shall be liable for the additional cost, which cost shall be payable
within fifteen (15) days after Tenants' receipt of Landlord's invoice therefor.
Landlord will use reasonable care in preparing the estimates, but they shall be
good faith estimates only and will not limit Tenant's obligation to pay for the
actual increase in the cost of the Tenant Improvements or Tenant's
responsibility for the actual construction delay resulting from the change.
Within three (3) business days after receipt of such cost and delay estimates,
Tenant shall notify Landlord in writing whether Tenant approves the Change. If
Tenant fails to approve the Change within such three (3) business day period,
construction of the Tenant Improvements shall proceed as provided in accordance
with the Plans as they existed prior to the requestedChange. If, following
Tenant's review of the estimated costs and delays, Tenant desires Landlord to
incorporate the Change into the Tenant Improvements, then Tenant and Landlord
shall execute a change order for such Change on Landlord's Contractor's standard
form therefor, and the term "Plans" shall thereafter be deemed to refer to the
Working Drawings as so revised and approved.

d. TENANT DELAYS. Tenant shall be responsible for, and shall
pay to Landlord (which payment may be funded by Landlord's Allowance, as defined
in Paragraph 4.e. below, to the extent funds are available therefrom), any and
all costs and expenses incurred by Landlord in connection with any delay in the
commencement or completion of any Tenant Improvements and any increase in the
cost of Tenant Improvements caused by (i) any Changes requested by Tenant in the
Tenant Improvements shown on the Plans (including any cost or delay resulting
from proposed Changes that are not ultimately made), (ii) any failure by Tenant
to timely pay any amounts due from Tenant hereunder, including any additional
costs resulting from any Change (it being acknowledged that if Tenant fails to
make or otherwise delays making such payments, Landlord may stop work on the
Tenant Improvements rather than incur costs which Tenant is obligated to fund
but has not yet funded and any delay from such a work stoppage will be a Tenant
Delay), (iii) the inclusion in the Tenant Improvements of any so-called "long
lead" materials (such as fabrics, panellings, carpeting or other items that must
be imported or are of unusual character or limited availability), (iv) any delay
by Tenant in responding to inquiries regarding the construction of the Tenant
Improvements or in granting Tenant's approval of materials or finishes for the
Tenant Improvements, (v) Tenant's failure to pay when due any installment of the
Security Deposit as provided in Paragraph 6 below (it being acknowledged that
Landlord, at Landlord's sole election, may refuse to respond to plans or
drawings or to perform any of Landlord's other obligations under this Paragraph
4 until such sum is received, and any delay resulting therefrom shall be a
Tenant Delay) or (vi) any other delay requested or caused by Tenant. Each of
the foregoing is referred to herein as a "Tenant Delay."

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e. COST OF CONSTRUCTION OF TENANT IMPROVEMENTS. Landlord shall
construct the Tenant Improvements as shown on the Plans in compliance with this
Paragraph 4 on a cost basis plus (i) a charge for overhead and profit equal to
fifteen percent (15%) of the first One Hundred Thousand Dollars ($100,000.00) of
construction costs, plus twelve percent (12%) of the next Four Hundred Thousand
Dollars ($400,000.00) of such costs, plus ten percent (10%) of the next Five
Hundred Thousand Dollars ($500,000.00) of such costs, plus nine percent (9%) of
the next One Million Dollars ($1,000,000.00) of such costs, and (ii) Five
Hundred Dollars ($500.00) per week for supervision (collectively, "Landlord's
Contractor's Charge"). Landlord shall bear the cost of the construction of the
Tenant Improvements, limited however to a maximum expenditure by Landlord
therefor of One Million One Hundred Forty-two Thousand Nine Hundred Sixty-seven
Dollars ($1,142,967.00) ("Landlord's Allowance"). Tenant shall pay to Landlord
immediately upon written demand the cost of the construction of the Tenant
Improvements (including architectural costs and Landlord's Contractor's Charge)
that exceeds Landlord's Allowance, which demand may be for payment in advance or
in course-of-construction installments.

In no event may any portions of Landlord's Allowance be applied
towards the costs of Tenant's personal property or movable furniture, signage,
moving expenses or rental obligations.

If Landlord reasonably determines that, upon Substantial Completion of
the Tenant Improvements, Landlord's Allowance would not be exhausted by
construction of the Tenant Improvements, and the remaining balance of Landlord's
Allowance will exceed the amount needed to fully pay for all outstanding
anticipated costs relating to the Tenant Improvements, then up to One Hundred
Eight Thousand Eight Hundred Fifty-four Dollars ($108,854.00) (the "Soft Cost
Cap") of such excess of Landlord's Allowance, at Tenant's election, may be
applied to reimburse Tenant for the reasonable costs expended by Tenant for its
architectural, engineering, design and space planning fees incurred in
connection with the Tenant Improvements (such costs, up to the Soft Cost Cap,
being referred to herein as the "Reimbursable Costs"). Landlord shall reimburse
Tenant for such fees and costs upon Landlord's receipt of copies of receipted
invoices covering the same. Not more than Ten Thousand Eight Hundred Eighty-six
Dollars ($10,886.00) of the Soft Cost Cap may be applied to reimburse Tenant for
amounts expended by Tenant for its space planning fees. No portion of
Landlord's Allowance may be applied to other consultant fees or the purchase of
equipment, trade fixtures, furnishings, signage, moving expenses, free rent or
any other costs other than construction costs due under the terms of this Lease
and the Reimbursable Costs.

5. MONTHLY RENT.

a. On or before the first day of each calendar month during the
term hereof, Tenant shall pay to Landlord, as monthly rent for the Premises, the
Monthly Rent specified in Paragraph 2 above. Notwithstanding the anything in the
foregoing or Paragraph 2.c. above to the contrary, if, at Tenant's request,
Landlord permits Tenant to take occupancy of the 16th Floor Increment or the
18th Floor Increment prior to the 18th Floor Commencement Date, as defined in
Paragraph 3.b. above, then Tenant shall commence paying Monthly Rent for such
portion of the Premises commencing on the date of such early occupancy. If the
term of this Lease commences on a day other than the first day of a calendar
month, or terminates on a day other than the last day of a calendar month, then
the Monthly Rent payable for such partial month shall be appropriately prorated
on the basis of a thirty (30)-day month. Monthly Rent and the Additional Rent
specified in Paragraph 7 shall be paid by Tenant to Landlord, in advance,
without deduction, offset, prior notice or demand, in immediately available
funds of lawful money of the United States of America, or by good check as
described below, at the office of Shorenstein Company, L.P., at 555 California
Street, 14th floor, San Francisco, California 94104, or to such other person or
at such other place as Landlord may from time to time designate in writing.
Payments made by check must be drawn either on a California financial
institution or on a financial institution that is a member of the federal
reserve system.

b. All amounts payable by Tenant to Landlord under this Lease,
or otherwise payable in connection with Tenant's occupancy of the Premises, in
addition to the Monthly Rent hereunder and Additional Rent under Paragraph 7,
shall constitute rent owed by Tenant to Landlord hereunder.

c. Any rent not paid by Tenant to Landlord within three (3)
days of the date due shall bear interest from the date due to the date of
payment by Tenant at an annual rate of interest (the "Interest Rate") equal to
the lesser of (i) the maximum annual interest rate allowed by law on such due
date for business loans (not primarily for personal, family or household
purposes) not exempt from the usury law, or (ii) a rate equal to the sum of four
(4) percentage points over the six-month United States Treasury bill rate (the
"Treasury Rate") in effect from time to time during such delinquency (or if
there is no such publicly announced rate, the rate quoted by the San Francisco
Main Office of Bank of America, NT&SA, or any successor bank thereto, in pricing
ninety (90)-day commercial loans to substantial commercial borrowers). Failure
by Tenant to pay rent when due, including any interest accrued under this
subparagraph, shall constitute an Event of Default (as defined in Paragraph 25
below) giving rise to all the remedies afforded Landlord under this Lease and at
law for nonpayment of rent.

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d. No security or guaranty which may now or hereafter be
furnished to Landlord for the payment of rent due hereunder or for the
performance by Tenant of the other terms of this Lease shall in any way be a bar
or defense to any of Landlord's remedies under this Lease or at law.

6. SECURITY DEPOSIT. Tenant shall pay to Landlord the Security
Deposit specified in Paragraph 2.d. above, in installments as follows:
(i) Tenant shall pay to Landlord the initial installment of Fifty Thousand
Dollars ($50,000.00) with Tenant's execution of this Lease, (ii) Tenant shall
pay to Landlord a second installment of Fifty Thousand Dollars upon Landlord
providing Tenant with reasonable evidence that the Existing Subtenant (as
defined in Paragraph 3.b. above) has given written notice exercising its right
under the Existing Sublease to terminate the Existing Sublease (as defined in
Paragraph 3.b. above) or has otherwise agreed in writing to terminate the
Existing Sublease, and (iii) Tenant shall pay the balance of the Security
Deposit to Landlord upon Landlord's providing reasonable evidence to Tenant that
the Existing Subtenant has vacated the Premises. Tenant's failure to pay any
installment of the Security Deposit when due may be a Tenant Delay as provided
in Paragraph 4.d. above. The Security Deposit shall be security for Tenant's
performance of all of Tenant's covenants and obligations under this Lease;
provided, however, that the Security Deposit is not an advance rent deposit or
an advance payment of any other kind, nor a measure of Landlord's damages upon
Tenant's default. Landlord shall not be required to segregate the Security
Deposit from its other funds and no interest shall accrue or be payable to
Tenant with respect thereto. Landlord may (but shall not be required to) use
the Security Deposit or any portion thereof to cure any Event of Default or to
compensate Landlord for any damage Landlord incurs as a result of Tenant's
failure to perform any of its covenants or obligations hereunder, it being
understood that any use of the Security Deposit shall not constitute a bar or
defense to any of Landlord's remedies under this Lease or at law. In such event
and upon written notice from Landlord to Tenant specifying the amount of the
Security Deposit so utilized by Landlord and the particular purpose for which
such amount was applied, Tenant shall immediately deposit with Landlord an
amount sufficient to return the Security Deposit to an amount equal to one
hundred ten percent (110%) of the amount specified in Paragraph 2.d. as the same
may have been increased by prior applications of this Paragraph 6. Tenant's
failure to make such payment to Landlord within five (5) days of receipt of
Landlord's notice shall constitute an Event of Default (provided that for the
purposes of this sentence Tenant shall be deemed to have received Landlord's
notice on the date on which there is a refusal to accept delivery at the address
which Tenant has given Landlord for notices or on the date on wich attempted
delivery fails because the address designated under this Lease for such delivery
to Tenant is incorrect). If Tenant is not in default at the expiration or
termination of this Lease, Landlord shall return to Tenant the Security Deposit
or the balance thereof then held by Landlord; provided, however, that in no
event shall any such return be construed as an admission by Landlord that Tenant
has performed all of its covenants and obligations hereunder. No holder of a
Superior Interest (as defined in Paragraph 21 below), nor any purchaser at any
judicial or private foreclosure sale of the Real Property or any portion
thereof, shall be responsible to Tenant for the Security Deposit unless and only
to the extent such holder or purchaser shall have actually received the same.

Landlord and Tenant agree that (i) Landlord shall return Ninety
Thousand Dollars ($90,000.00) of the Security Deposit to Tenant within thirty
(30) days after receipt by Landlord of Tenant's written request given to
Landlord at any time after the expiration of the twenty-fourth (24th) full
calendar month of the Lease term; and (ii) Landlord shall return an additional
One Hundred Thirty-five Thousand Dollars ($135,000.00) of the Security Deposit
to Tenant within thirty (30) days after receipt by Landlord of Tenant's written
request given to Landlord at any time after the expiration of the thirty-sixth
(36th) full calendar month of the Lease term; provided, however, in each case
that Landlord shall be required to return the specified portion of the Security
Deposit to Tenant only if (A) Tenant is not then in default under the Lease, and
(B) Tenant has at no time during the Lease term been in default under any
provisions of the Lease beyond the applicable cure period.

7. ADDITIONAL RENT: INCREASES IN OPERATING EXPENSES AND TAX
EXPENSES.

a. OPERATING EXPENSES. Tenant shall pay to Landlord, at the
times hereinafter set forth, Tenant's Share, as specified in Paragraph 2.e.
above, of any increase in the Operating Expenses (as defined below) incurred by
Landlord in each calendar year subsequent to the Base Year specified in
Paragraph 2.f. above, over the Operating Expenses incurred by Landlord during
the Base Year. The amounts payable under this Paragraph 7.a. and Paragraph 7.b.
below are termed "Additional Rent" herein.

The term "Operating Expenses" shall mean the total costs and expenses
incurred by Landlord in connection with the management, operation, maintenance,
repair and ownership of the Real Property, including, without limitation, the
following costs: (1) salaries, wages, bonuses and other compensation (including
hospitalization, medical, surgical, retirement plan, pension plan, union dues,
life insurance, including group life insurance, welfare and other fringe
benefits, and vacation, holidays and other paid absence benefits) relating to
employees of Landlord or its agents engaged in the operation, repair, or
maintenance of the Real Property, allocated in proportion to the percentage of
such person's working time actually spent working in connection with the Real
Property; (2) payroll, social security, workers' compensation, unemployment and
similar taxes with respect to such

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employees of Landlord or its agents, and the cost of providing disability or
other benefits imposed by law or otherwise, with respect to such employees,
allocated in proportion to the percentage of such person's working time
actually spent working in connection with the Real Property; (3) the cost of
uniforms (including the cleaning, replacement and pressing thereof) provided to
such employees, allocated in proportion to the percentage of such person's
working time actually spent working in connection with the Real Property; (4)
premiums and other charges incurred by Landlord with respect to fire, other
casualty, rent and liability insurance, any other insurance as is deemed
necessary or advisable in the reasonable judgment of Landlord, or any insurance
required by the holder of any Superior Interest (as defined in Paragraph 21
below), and, after the Base Year, costs of repairing an insured casualty to the
extent of the deductible amount under the applicable insurance policy; (5) water
charges and sewer rents or fees; (6) license, permit and inspection fees; (7)
sales, use and excise taxes on goods and services purchased by Landlord in
connectin with the operation, maintenance or repair of the Real Property and
Building systems and equipment; (8) telephone, telegraph, postage, stationery
supplies and other expenses incurred in connection with the operation,
maintenance, or repair of the Real Property; (9) management fees and expenses;
(10) costs of repairs to and maintenance of the Real Property, including
building systems and appurtenances thereto and normal repair and replacement of
worn-out equipment, facilities and installations, but excluding the replacement
of major building systems (except to the extent provided in (16) and (17)
below); (11) fees and expenses for janitorial, window cleaning, guard,
extermination, water treatment, rubbish removal, plumbing and other services and
inspection or service contracts for elevator, electrical, mechanical and other
building equipment and systems or as may otherwise be necessary or proper for
the operation, repair or maintenance of the Real Property; (12) costs of
supplies, tools, materials, and equipment used in connection with the operation,
maintenance or repair of the Real Property; (13) accounting, legal and other
professional fees and expenses; (14) fees and expenses for painting the exterior
or the public or common areas of the Building and the cost of maintaining the
sidewalks, landscaping and other common areas of the Real Property; (15) costs
and expenses for electricity, chilled water, air conditioning, water for
heating, gas, fuel, steam, heat, lights, power and other energy related
utilities required in connection with the operation, maintenance and repair of
the Real Property; (16) the cost of any capital improvements made by Landlord to
the Real Property or capital assets acquired by Landlord after the Base Year in
order to comply with any local, state or federal law, ordinance, rule,
regulation, code or order of any governmental entity or insurance requirement
(collectively, "Legal Requirement") with which the Real Property was not
required to comply during the Base Year, or to comply with any amendment or
other change to the enactment or interpretation of any Legal Requirement from
its enactment or interpretation during the Base Year; (17) the cost of any
capital improvements made by Landlord to the Building or capital assets acquired
by Landlord after the Base Year for the protection of the health and safety of
the occupants of the Real Property or that are designed to reduce other
Operating Expenses (provided such costs are incurred with the reasonable
expectation that the amortized amount and related interest to be included in
Operating Expenses will not exceed the reduction in other Operatig Expenses
which will result therefrom); (18) the cost of furniture, draperies, carpeting,
landscaping and other customary and ordinary items of personal property
(excluding paintings, sculptures and other works of art) provided by Landlord
for use in common areas of the Building or in the Building office (to the extent
that such Building office is dedicated to the operation and management of the
Real Property); (19) any expenses and costs resulting from substitution of work,
labor, material or services in lieu of any of the above itemizations, or for any
additional work, labor, services or material resulting from compliance with any
Legal Requirement applicable to the Real Property or any parts thereof; (20) the
Real Property's allocable share of Building office rent or rental value; and
(21) the Real Property's allocable share of expenses, in the nature of the other
Operating Expenses described in this Paragraph 7.a., which are incurred with
respect to the common areas of City Center (including without limitation
pedestrian walkways, patios, landscaped areas, sidewalks, service corridors,
restrooms, stairways, escalators, decorative walls, plaza, fountains, malls,
throughways, loading areas and ramps and parking areas), which allocation shall
be determined by Landlord in its good faith business judgment. If the Real
Property becomes subject to any covenants, conditions or restrictions,
reciprocal easement agreement, common area declaration or similar agreement, the
foregoing common area expenses shall include all fees, costs or other expenses
allocated to the Real Property under such agreement. With respect to the costs
of items included in Operating Expenses under (16) and (17), such costs shall be
amortized over a reasonable period, as determined by Landlord (provided that
such period shall be within the range used to amortize such costs by landlords
of other first-class office buildings in San Francisco and Oakland in accordance
with generally accepted property management practices), together with interest
on the unamortized balance at a rate per annum equal to three (3) percentage
points over the Treasury Rate charged at the time such item is constructed or
acquired, or at such higher rate as may have been paid by Landlord on funds
borrowed for the purpose of constructing or acquiring such item, but in either
case not more than the maximum rate permitted by law at the time such item is
constructed or acquired. No particular item of expense shall be included in the
calculation of Operating Expenses more than once.

Operating Expenses shall not include the following: (i) depreciation
on the Building or equipment or systems therein; (ii) debt service; (iii) rental
under any ground or underlying lease; (iv) interest (except as expressly
provided in this Paragraph 7.a.); (v) Tax Expenses (as defined in Paragraph 7.b.
below); (vi) attorneys' fees and expenses incurred in connection with lease
negotiations or lease disputes with former, current or prospective Building
tenants; (vii) the cost (including any amortization thereof) of any improvements
or alterations which would be properly classified as capital expenditures
according to generally accepted property management practices (except to the
extent expressly included in Operating

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Expenses pursuant to this Paragraph 7.a.); (viii) the cost of decorating,
improving for tenant occupancy, painting or redecorating portions of the
Building to be demised to tenants; (ix) executive salaries; (x) advertising;
(xi) real estate broker's or other leasing commissions; (xii) all direct costs
of refinancing, selling or exchanging the Real Property, including broker
commissions, attorney's fees and closing costs; or (xiii) overhead and profit
increments paid to subsidiaries or affiliates of Landlord for management or
other services on or to the Building or for supplies or other materials to the
extent that the cost of the services, supplies or materials materially exceed
the amounts normally payable for similar goods and services under similar
circumstances (taking into account the market factors in effect on the date any
relevant contracts were negotiated) in comparable buildings in San Francisco and
Oakland; (xiv) wages, salaries or other compensation paid to any executive
employees of Landlord or of Landlord's agents above the function of director of
property management; (xv) penalties or other costs incurred due to a violation
by Landlord, as determined by written admission, stipulation, final judgment or
arbitration award, of any of the terms and conditions of this Lease or any other
lease relating to the Building except to the extent such costs reflect costs
that would have been incurred by Landlord absent such violation; (xvi) subject
to the provisions of item (4) above, repairs and other work occasioned by fire,
windstorm or other casualty, to the extent Landlord is reimbursed by insurance
proceeds, and other work paid from insurance or condemnation proceeds;
(xvii) costs, penalties or fines arising from Landlord's violation of any
applicable governmental rule or authority except to the extent such costs
reflect costs that would have been incurred by Landlord absent such violation;
(xviii) Landlord's general corporate office overhead and administrative expenses
(which shall not be deemed to include a management fee); (xix) rentals and other
related expenses incurred in leasing air conditioning systems, elevators or
other equipment ordinarily considered to be of a capital nature (except
equipment that is not affixed to the Building and is used in providing
janitorial services, and except to the extent such costs would otherwise be
includable pursuant to items (16) and (17) as set forth in the immediately
preceding paragraph); (xx) costs directly and solely attributable to the garage
in the Building, including, without limitation, payroll for clerks, attendants,
book-keeping, parking, insurance premiums, parking management fees, parking
tickets, janitorial services, striping and painting of surfaces (provided,
however, that the cost of providing utilities to the garage shall be included in
Operating Expenses); (xxi) any expense for which Landlord is actually directly
reimbursed by a tenant or other party; or (xxii) the cost of services made
available at no special cost to any tenant in the Building but not to Tenant.

b. TAX EXPENSES. Tenant shall pay to Landlord as Additional
Rent under this Lease, at the times hereinafter set forth, Tenant's Share, as
specified in Paragraph 2.e. above, of any increase in Tax Expenses (as defined
below) incurred by Landlord in each calendar year, over Tax Expenses incurred by
Landlord during the Base Tax Year. Notwithstanding the foregoing, if any
reassessment, reduction or recalculation of any item included in Tax Expenses
during the term results in a reduction of Tax Expenses, then for purposes of
calculating Tenant's Share of increases in Tax Expenses from and after the
calendar year in which such adjustment occurs, Tax Expenses for the Base Tax
Year shall be adjusted to reflect such reduction.

The term "Tax Expenses" shall mean all taxes, assessments (whether
general or special), excises, transit charges, housing fund assessments or other
housing charges, improvement districts, levies or fees, ordinary or
extraordinary, unforeseen as well as foreseen, of any kind, which are assessed,
levied, charged, confirmed or imposed on the Real Property, on Landlord with
respect to the Real Property, on the act of entering into leases of space in the
Real Property, on the use or occupancy of the Real Property or any part thereof,
with respect to services or utilities consumed in the use, occupancy or
operation of the Real Property, on any improvements, fixtures and equipment and
other personal property of Landlord located in the Real Property and used in
connection with the operation of the Real Property, or on or measured by the
rent payable under this Lease or in connection with the business of renting
space in the Real Property, including, without limitation, any gross income tax
or excise tax levied with respect to the receipt of such rent, by the United
States of America, the State of California, the City of Oakland, the County of
Alameda, any political subdivision, public corporation, district or other
political or public entity or public authority, and shall also include any other
tax, fee or other excise, however described, which may be levied or assessed in
lieu of, as a substitute (in whole or in part) for, or as an addition to, any
other Tax Expense. Tax Expenses shall include reasonable attorneys' fees, costs
and disbursements incurred in connection with proceedings to contest, determine
or reduce Tax Expenses. If it shall not be lawful for Tenant to reimburse
Landlord for any increase in Tax Expenses as defined herein, the Monthly Rent
payable to Landlord prior to the imposition of such increases in Tax Expenses
shall be increased to net Landlord the same net Monthly Rent after imposition of
such increases in Tax Expenses as would have been received by Landlord prior to
the imposition of such increaes in Tax Expenses.

Tax Expenses shall not include income, franchise, transfer,
inheritance or capital stock taxes, unless, due to a change in the method of
taxation, any of such taxes is levied or assessed against Landlord in lieu of,
as a substitute (in whole or in part) for, or as an addition to, any other
charge which would otherwise constitute a Tax Expense.

c. ADJUSTMENT FOR OCCUPANCY FACTOR. Notwithstanding any other
provision herein to the contrary, in the event the Building is not fully
occupied during any calendar year during the term after the Base Year, an
adjustment shall be made by Landlord in computing Operating Expenses for such
year so

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that the Operating Expenses shall be computed for such year as though the
Building had been fully occupied during such year. In addition, if any
particular work or service includable in Operating Expenses is not furnished to
a tenant who has undertaken to perform such work or service itself, Operating
Expenses shall be deemed to be increased by an amount equal to the additional
Operating Expenses which would have been incurred if Landlord had furnished such
work or service to such tenant. The parties agree that statements in this Lease
to the effect that Landlord is to perform certain of its obligations hereunder
at its own or sole cost and expense shall not be interpreted as excluding any
cost from Operating Expenses or Tax Expenses if such cost is an Operating
Expense or Tax Expense pursuant to the terms of this Lease.

d. INTENTION REGARDING EXPENSE PASS-THROUGH. It is the
intention of Landlord and Tenant that the Monthly Rent paid to Landlord
throughout the term of this Lease shall be absolutely net of all increases,
respectively, in Tax Expenses and Operating Expenses over, respectively, Tax
Expenses for the Base Tax Year and Operating Expenses for the Base Year, and the
foregoing provisions of this Paragraph 7 are intended to so provide.

e. NOTICE AND PAYMENT. On or before the first day of each
calendar year during the term hereof, or as soon as practicable thereafter,
Landlord shall give to Tenant notice of Landlord's estimate of the Additional
Rent, if any, payable by Tenant pursuant to Paragraphs 7.a. and 7.b. for such
calendar year. On or before the first day of each month during each such
calendar year, Tenant shall pay to Landlord one-twelfth (1/12th) of the
estimated Additional Rent; provided, however, that if Landlord's notice is not
given prior to the first day of any calendar year Tenant shall continue to pay
Additional Rent on the basis of the prior year's estimate until the month after
Landlord's notice is given. If at any time it appears to Landlord that the
Additional Rent payable under Paragraphs 7.a. and/or 7.b. will vary from
Landlord's estimate by more than five percent (5%), Landlord may, by written
notice to Tenant, revise its estimate for such year, and subsequent payments by
Tenant for such year shall be based upon the revised estimate. On the first
monthly payment date after any new estimate is delivered to Tenant, Tenant shall
also pay any accrued cost increases, based on such new estimate.

f. ANNUAL ACCOUNTING. Within ninety (90) days after the close
of each calendar year, or as soon after such ninety (90) day period as
practicable, Landlord shall deliver to Tenant a statement of the Additional Rent
payable under Paragraphs 7.a. and 7.b. for such year. The statement shall be
based on the results of an audit of the operations of the Building prepared for
the applicable year by a nationally recognized certified public accounting firm
selected by Landlord. Upon Tenant's request, Landlord shall promptly deliver to
Tenant a copy of the auditor's statement on which Landlord's annual statement is
based and such other information regarding the annual statement as may be
reasonably required by Tenant to ascertain Landlord's compliance with this
Paragraph 7. Landlord's annual statement shall be final and binding upon
Landlord and Tenant unless either party, within thirty (30) days after Tenant's
receipt thereof, shall contest any item therein by giving written notice to the
other, specifying each item contested and the reason therefor. Notwithstanding
the foregoing, the Tax Expenses included in such annual statement may be
modified by any subsequent adjustment or retroactive application of Tax Expenses
affecting the calculation of such Tax Expenses. If the annual statement shows
that Tenant's payments of Additional Rent for such calendar year pursuant to
Paragraph 7.e. above exceeded Tenant's obligations for the calendar year,
Landlord shall at its option either (1) credit the excess to the next succeeding
installments of estimated Additional Rent or (2) pay the excess to Tenant within
thirty (30) days after delivery of such statement. If the annual statement
shows that Tenant's payments of Additional Rent for such calendar year pursuant
to Paragraph 7.e. above were less than Tenant's obligation for the calendar
year, Tenant shall pay the deficiency to Landlord within thirty (30) days after
delivery of such statement.

g. PRORATION FOR PARTIAL LEASE YEAR. If this Lease commences
on a day other than the first day of a calendar year or terminates on a day
other than the last day of a calendar year, the Additional Rent payable by
Tenant pursuant to this Paragraph 7 applicable to such partial calendar year
shall be prorated on the basis that the number of days of such partial calendar
year bears to three hundred sixty-five (365).

h. EARLY OCCUPANCY. Notwithstanding anything to the contrary
in Paragraph 2.e. above, if, at Tenant's request, Landlord permits Tenant to
occupy the 16th Floor Increment or the 18th Floor Increment prior to the 18th
Floor Commencement Date (as defined in Paragraph 3.b. above), then commencing on
the date of such occupancy, Tenant's Share of Operating Expenses and Tax
Expenses shall increase to include the percentage specified for such space in
Paragraph 2.e. above.

8. USE OF PREMISES; COMPLIANCE WITH LAW.

a. USE OF PREMISES. The Premises shall be used solely for
general office purposes for the business of Tenant as described in Paragraph
2.g. above and for no other use or purpose.

Tenant shall not do or suffer or permit anything to be done in or
about the Premises or the Real Property, nor bring or keep anything therein,
which would in any way subject Landlord, Landlord's agents or the holder of any
Superior Interest (as defined in Paragraph 21) to any liability, increase the
premium rate of

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or affect any fire, casualty, liability, rent or other insurance relating to the
Real Property or any of the contents of the Building, or cause a cancellation
of, or give rise to any defense by the insurer to any claim under, or conflict
with, any policies for such insurance. If any act or omission of Tenant results
in any such increase in premium rates, Tenant shall pay to Landlord upon demand
the amount of such increase. Tenant shall not do or suffer or permit anything
to be done in or about the Premises or the Real Property 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 suffer or permit the Premises to be
used for any unlawful or other purpose not in keeping with the nature and image
of the Building as a first-class, downtown office building complex, nor shall
Tenant cause, maintain, suffer or permit any nuisance in, on or about the
Premises or the Real Property. Without limiting the foregoing, no loudspeakers
or other similar device which can be heard outside the Premises shall, without
the prior written approval of Landlord, be used in or about the Premises.
Tenant shall not commit or suffer to be committed any waste in, to or about the
Premises.

Tenant agrees not to employ any person, entity or contractor for any
work in the Premises (including moving Tenant's equipment and furnishings in,
out or around the Premises) whose presence may give rise to a labor or other
disturbance in the Building and, if necessary to prevent such a disturbance in a
particular situation, Landlord may require Tenant to employ union labor for the
work.

b. COMPLIANCE WITH LAW. Tenant shall not do or permit anything
to be done in or about the Premises which will in any way conflict with any
Legal Requirement (as defined in Paragraph 7.a.(16) above) now in force or which
may hereafter be enacted. Tenant, at its sole cost and expense, shall promptly
comply with all such present and future Legal Requirements relating to the
condition, use or occupancy of the Premises, and shall perform all work to the
Premises or other portions of the Real Property required to effect such
compliance (or, at Landlord's election, Landlord may perform such work at
Tenant's cost). Notwithstanding the foregoing, however, Tenant shall not be
required to perform any structural changes to the Premises or other portions of
the Real Property unless such changes are related to or affected or triggered by
(i) Tenant's Alterations (as defined in Paragraph 9 below), (ii) Tenant's
particular use of the Premises (as opposed to Tenant's use of the Premises for
general office purposes in a normal and customary manner), (iii) Tenant's
particular employees or employment practices, or (iv) the construction of
initial improvements to the Premises, if any. The judgment of any court of
competent jurisdiction or the admission of Tenant in an action against Tenant,
whether or not Landlord is a party thereto, that Tenant has violated any Legal
Requirement shall be conclusive of that fact as between Landlord and Tenant.
Tenant shall immediately furnish Landlord with any notices received from any
insurance company or governmental agency or inspection bureau regarding any
unsafe or unlawful conditions within the Premises or the violation of any Legal
Requirement.

c. HAZARDOUS MATERIALS. Tenant shall not cause or permit the
storage, use, generation, release, handling or disposal (collectively,
"Handling") of any Hazardous Materials (as defined below), in, on, or about the
Premises or the Real Property by Tenant or any agents, employees, contractors,
licensees, subtenants, customers, guests or invitees of Tenant (collectively
with Tenant, "Tenant Parties"), except that Tenant shall be permitted to use
normal quantities of office supplies or products (such as copier fluids or
cleaning supplies) customarily used in the conduct of general business office
activities ("Common Office Chemicals"), provided that the Handling of such
Common Office Chemicals shall comply at all times with all Legal Requirements,
including Hazardous Materials Laws (as defined below). Notwithstanding anything
to the contrary contained herein, however, in no event shall Tenant permit any
usage of Common Office Chemicals in a manner that may cause the Premises or the
Real Property to be contaminated by any Hazardous Materials or in violation of
any Hazardous Materials Laws. Tenant shall immediately advise Landlord in
writing of (a) any and all enforcement, cleanup, remedial, removal, or other
governmental or regulatory actions instituted, completed, or threatened pursuant
to any Hazardous Materials Laws relating to any Hazardous Materials affecting
the Premises; and (b) all claims made or threatened by any third party against
Tenant, Landlord, the Premises or the Real Property relating to damage,
contribution, cost recovery, compensation, loss, or injury resulting from any
Hazardous Materials on or about the Premises. Without Landlord's prior written
consent, Tenant shall not take any remedial action or enter into any agreements
or settlements in response to the presence of any Hazardous Materials in, on, or
about the Premises. Tenant shall be solely responsible for and shall indemnify,
defend and hold Landlord and all other Indemnitees (as defined in Paragraph
14.b. below), harmless from and against all Claims (as defind in Paragraph 14.b.
below), arising out of or in connection with, or otherwise relating to (i) any
Handling of Hazardous Materials by any Tenant Party or Tenant's breach of its
obligations hereunder, or (ii) any removal, cleanup, or restoration work and
materials necessary to return the Real Property or any other property of
whatever nature located on the Real Property to their condition existing prior
to such Handling of Hazardous Materials. Tenant's obligations under this
paragraph shall survive the expiration or other termination of this Lease. For
purposes of this Lease, "Hazardous Materials" means any explosive, radioactive
materials, hazardous wastes, or hazardous substances, including without
limitation asbestos containing materials, PCB's, CFC's, or substances defined as
"hazardous substances" in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, 42 U.S.C. Section 9601-9657; the
Hazardous Materials Transportation Act of 1975, 49 U.S.C. Section 1801-1812; the
Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901-6987; or
any other Legal Requirement regulating,

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relating to, or imposing liability or standards of conduct concerning any such
materials or substances now or at any time hereafter in effect (collectively,
"Hazardous Materials Laws").

d. APPLICABILITY OF PARAGRAPH. The provisions of this
Paragraph 8 are for the benefit of Landlord, the holder of any Superior Interest
(as defined in Paragraph 21 below), and the other Indemnitees only and are not
nor shall they be construed to be for the benefit of any tenant or occupant of
the Building.

9. ALTERATIONS AND RESTORATION.

a. Tenant shall not make or permit to be made any alterations,
modifications, additions, decorations or improvements to the Premises, or any
other work whatsoever that would directly or indirectly involve the penetration
or removal (whether permanent or temporary) of, or require access through, in,
under, or above any floor, wall or ceiling, or surface or covering thereof in
the Premises (collectively, "Alterations"), except as expressly provided in this
Paragraph 9. If Tenant desires any Alteration, Tenant must obtain Landlord's
prior written approval of such Alteration.

All Alterations shall be made at Tenant's sole cost and expense
(including the expense of complying with all present and future Legal
Requirements, including those regarding asbestos, if applicable, and any other
work required to be performed in other areas within or outside the Premises by
reason of the Alterations). Landlord may elect to cause its contractor to
perform the Alterations, in which case Landlord's contractor shall be entitled
to receive a fee for such work of fifteen percent (15%) of the first $100,000 of
the construction costs of such work, and the fee for any construction costs over
such amount shall be as negotiated by Tenant and Landlord. If Landlord does not
perform the work pursuant to the above, Tenant shall pay Landlord on demand
prior to or during the course of such construction an amount (the "Alteration
Operations Fee") equal to five percent (5%) of the total cost of the Alteration
(and for purposes of calculating the Alteration Operations Fee, such cost shall
include architectural and engineering fees, but shall not include permit fees)
as compensation to Landlord for electrical energy consumed in connection with
the work, freight elevator operation, additional cleaning expenses, additional
security services, and for other miscellaneous costs incurred by Landlord as
result of the work.

All such work shall be performed diligently and in a first-class
workmanlike manner and in accordance with plans and specifications approved by
Landlord, and shall comply with all Legal Requirements and Landlord's
construction procedures and requirements for the Building (including Landlord's
requirements relating to insurance and contractor qualifications). In no event
shall Tenant employ any person, entity or contractor to perform work in the
Premises whose presence may give rise to a labor or other disturbance in the
Building. Default by Tenant in the payment of any sums agreed to be paid by
Tenant for or in connection with an Alteration (regardless of whether such
agreement is pursuant to this Paragraph 9 or separate instrument) shall entitle
Landlord to all the same remedies as for non-payment of rent hereunder. Any
Alterations, including, without limitation, moveable partitions that are affixed
to the Premises (but excluding moveable, free standing partitions) and all
carpeting, shall at once become part of the Building and the property of
Landlord. Tenant shall give Landlord not less than five (5) days prior written
notice of the date the construction of the Alteration is to commence. Landlord
may post and record an appropriate notice of nonresponsibility with respect to
any Alteration and Tenant shall maintain any such notices posted by Landlord in
or on the Premises.

b. At Landlord's sole election any or all Alterations made for
or by Tenant shall be removed by Tenant from the Premises at the expiration or
sooner termination of this Lease and the Premises shall be restored by Tenant to
their condition prior to the making of the Alterations, ordinary wear and tear
excepted. If Tenant desires permission to leave a specific Alteration in the
Premises at the expiration or earlier termination of the Lease, Tenant shall
request such permission from Landlord in writing at the time Tenant requests
approval for such Alteration and Landlord shall advise Tenant in writing at the
time of Landlord's approval of the subject Alteration whether Landlord will
require the removal of the Alteration at the expiration or earlier termination
of this Lease. The removal of Alterations and the restoration of the Premises
shall be performed by a general contractor selected by Tenant and approved by
Landlord, in which event Tenant shall pay the general contractor's fees and
costs in connection with such work. Any separate work letter or other agreement
which is hereafter entered into between Landlord and Tenant pertaining to
Alterations shall be deemed to automatically incorporate the terms of this Lease
without the necessity for further reference thereto.

10. REPAIR.

a. Except as specifically provided in this Lease, Tenant agrees
that the Premises are in good condition and repair. Tenant, at Tenant's sole
cost and expense, shall keep the Premises and every part thereof (including the
interior walls and ceilings of the Premises, those portions of the Building
systems located within and exclusively serving the Premises, and improvements
and Alterations) in good condition and repair; provided that Tenant shall not be
responsible for repairs to the extent such repairs are (i) necessitated because
of fire, earthquake, act of God or the elements, (ii) necessitated by the
negligence or

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willful misconduct of Landlord or Landlord's agents, employees or contractors,
or (iii) Landlord's obligation pursuant to Paragraph 10.b. below. It is
specifically understood and agreed that, except as specifically set forth in
this Lease, Landlord has no obligation and has made no promises to alter,
remodel, improve, repair, decorate or paint the Premises or any part thereof,
and that no representations respecting the condition of the Premises or the
Building have been made by Landlord to Tenant. Tenant hereby waives the
provisions of California Civil Code Sections 1932(1), 1941 and 1942 and of any
similar Legal Requirement new or hereafter in effect.

b. Repairs to the Premises due to item (i) described in
Paragraph 10.a. above shall be governed by Paragraph 26 below. Landlord shall
repair the Premises if they are damaged due to item (ii) described in Paragraph
10.a. above. Further, (1) Landlord shall, at Landlord's sole cost and expense,
repair Punch List items in accordance with Paragraph 4.b. above, (2) Landlord
shall, at Landlord's sole cost and expense, repair any latent defect in the
construction of the Tenant Improvements (but not design defects) that exists in
the Premises as of the date Tenant takes possession of the Premises and is of a
nature which would not normally be discoverable by Tenant in the exercise of
reasonable diligence in inspecting the Premises at the commencement of the term
of this Lease, provided Tenant gives prompt notice of such matter to Landlord
promptly upon discovery and no later than ninety (90) days after the
Commencement Date, and (3) Landlord shall repair and maintain in good condition
and repair the structural portions of the Building and all Building systems,
including plumbing, air conditioning, heating, electrical, life safety and other
systems installed or furnished by Landlord (other than the portions of those
systems that are Tenant's responsibility to maintain and repair pursuant to
Paragraph 10.a. above), but excluding (i) non-Building standard lighting and
electrical wiring and (ii) extraordinary quantities of electrical, plumbing,
HVAC or other Building facilities or distribution thereof; provided, however,
that to the extent repairs which Landlord is required to make pursuant to this
item (2) are necessitated by the negligence or deliberate misconduct of Tenant
or Tenant's agents, employees or contractors, then Tenant shall reimburse
Landlord for the cost of such repair to the extent Landlord is not reimbursed
therefor by insurance. Landlord shall in no event be obligated to repair any
wear and tear to the Premises.

11. ABANDONMENT. Tenant shall not abandon the Premises or any
substantial part thereof at any time during the term hereof. Upon the
expiration or earlier termination of this Lease, or if Tenant abandons or
surrenders all or any substantial part of the Premises or is dispossessed of the
Premises by process of law, or otherwise, any movable furniture, equipment,
trade fixtures, or other personal property belonging to Tenant and left on the
Premises shall at the option of Landlord be deemed to be abandoned and, whether
or not the property is deemed abandoned, Landlord shall have the right to remove
such property from the Premises and charge Tenant for the removal and any
restoration of the Premises as provided in Paragraph 9. Landlord may charge
Tenant for the storage of Tenant's property left on the Premises at such rates
as Landlord may from time to time reasonably determine, or, Landlord may, at its
option, store Tenant's property in a public warehouse at Tenant's expense.
Notwithstanding the foregoing, neither the provisions of this Paragraph 11 nor
any other provision of this Lease shall impose upon Landlord any obligation to
care for or preserve any of Tenant's property left upon the Premises, and Tenant
hereby waives and releases Landlord from any claim or liability in connection
with the removal of such property from the Premises and the storage thereof and
specifically waives the provisions of California Civil Code Section 1542 with
respect to such release. Landlord's action or inaction with regard to the
provisions of this Paragraph 11 shall not be construed as a waiver of Landlord's
right to require Tenant to remove its property, restore any damage to the
Premises and the Building caused by such removal, and make any restoration
required pursuant to Paragraph 9 above. Tenant's mere vacancy of the Premises
during the term hereof shall not constitute an Event of Default (as defined in
Paragraph 25.a.) so long as Tenant continues to pay Monthly Rent, Additional
Rent and all other sums due Landlord under this Lease, mintains the insurance
coverage required pursuant to Paragraph 15 of this Lease and Tenant otherwise
continues to perform its obligations under this Lease, and so long as Tenant
provides Landlord with written notice of an alternate address for notices to
Tenant under this Lease (other than the Premises) if such vacancy exceeds sixty
(60) consecutive days.

12. LIENS. Tenant shall not permit any mechanic's, materialman's or
other liens arising out of work performed at the Premises by or on behalf of
Tenant to be filed against the fee of the Real Property nor against Tenant's
interest in the Premises. Landlord shall have the right to post and keep posted
on the Premises any notices which it deems necessary for protection from such
liens. If any such liens are filed, Landlord may, upon ten (10) days' written
notice to Tenant, without waiving its rights based on such breach by Tenant and
without releasing Tenant from any obligations hereunder, pay and satisfy the
same and in such event the sums so paid by Landlord shall be due and payable by
Tenant immediately without notice or demand, with interest from the date paid by
Landlord through the date Tenant pays Landlord, at the Interest Rate. Tenant
agrees to indemnify, defend and hold Landlord and the other Indemnitees (as
defined in Paragraph 14.b. below) harmless from and against any Claims (as
defined in Paragraph 14.b. below) for mechanics', materialmen's or other liens
in connection with any Alterations, repairs or any work performed, materials
furnished or obligations incurred by or for Tenant.

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13. ASSIGNMENT AND SUBLETTING.

a. LANDLORD'S CONSENT. Landlord's and Tenant's agreement with
regard to Tenant's right to transfer all or part of its interest in the Premises
is as expressly set forth in this Paragraph 13. Tenant agrees that, except upon
Landlord's prior written consent, which consent shall not (subject to Landlord's
rights under Paragraph 13.d. below) be unreasonably withheld, neither this Lease
nor all or any part of the leasehold interest created hereby shall, directly or
indirectly, voluntarily or involuntarily, by operation of law or otherwise, be
assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant or
Tenant's legal representatives or successors in interest (collectively an
"assignment") and neither the Premises nor any part thereof shall be sublet or
be used or occupied for any purpose by anyone other than Tenant (collectively, a
"sublease"). Any assignment or subletting without Landlord's prior written
consent shall, at Landlord's option, be void and shall constitute an Event of
Default entitling Landlord to terminate this Lease and to exercise all other
remedies available to Landlord under this Lease and at law.

The parties hereto agree and acknowledge that, among other
circumstances for which Landlord may reasonably withhold its consent to an
assignment or sublease, it shall be reasonable for Landlord to withhold its
consent where: (i) the assignment or subletting would increase the operating
costs for the Building or the burden on the Building services, or generate
additional foot traffic, elevator usage or security concerns in the Building, or
create an increased probability of the comfort and/or safety of Landlord and
other tenants in the Building being compromised or reduced, (ii) the space will
be used for a school or training facility, an entertainment, sports or
recreation facility, retail sales to the public (unless Tenant's permitted use
is retail sales), a personnel or employment agency, an office or facility of any
governmental or quasi-governmental agency or authority, a place of public
assembly (including without limitation a meeting center, theater or public
forum), any use by or affiliation with a foreign government (including without
limitation an embassy or consulate or similar office), or a facility for the
provision of social, welfare or clinical health services or sleeping
accommodations (whether temporary, daytime or overnight); (iii) the proposed
assignee or subtenant is a prospective tenant of the Building (and Landlord is
in written correspondence to them regarding space available) or the proposed
assignee or subtenant is a current tenant of the Building; (iv) Landlord
disapproves of the proposed assignee's or subtenant's reputation or
creditworthiness; (v) Landlord determines that the character of the business
that would be conducted by the proposed assignee or subtenant at the Premises,
or the manner of conducting such business, would be inconsistent with the
character of the Building as a first-class office building; (vi) the proposed
assignee or subtenant is an entity or related to an entity with whom Landlord or
any affiliate of Landlord has had adverse dealings; (vii) the assignment or
subletting may conflict with any exclusive uses granted to other tenants of the
Real Property, or with the terms of any easement, covenant, condition or
restriction, or other agreement affecting the Real Property; (viii) the
assignment or subletting would involve a change in use from that expressly
permitted under this Lease; or (ix) Landlord determines that the proposed
assignee may be unable to perform all of Tenant's obligations under this Lease
or the proposed subtenant may be unable to perform all of its obligations under
the proposed sublease. Landlord's foregoing rights and options shall continue
throughout the entire term of this Lease.

For purposes of this Paragraph 13, the following events shall be
deemed an assignment or sublease, as appropriate: (i) the issuance of equity
interests (whether stock, partnership interests or otherwise) in Tenant or any
subtenant or assignee, or any entity controlling any of them, to any person or
group of related persons, in a single transaction or a series of related or
unrelated transactions, such that, following such issuance, such person or group
shall have Control (as defined below) of Tenant or any subtenant or assignee;
(ii) a transfer of Control of Tenant or any subtenant or assignee, or any entity
controlling any of them, in a single transaction or a series of related or
unrelated transactions (including, without limitation, by consolidation, merger,
acquisition or reorganization), except that the transfer of outstanding capital
stock or other listed equity interests by persons or parties other than
"insiders" within the meaning of the Securities Exchange Act of 1934, as
amended, through the "over-the-counter" market or any recognized national or
international securities exchange, shall not be included in determining whether
Control has been transferred; (iii) a reduction of Tenant's assets to the point
that this Lease is substantially Tenant's only asset; (iv) a change or
conversion in the form of entity of Tenant, any subtenant or assignee, or any
entity controlling any of them, which has the effect of limiting the liability
of any of the partners, members or other owners of such entity; or (v) the
agreement by a third party to assume, take over, or reimburse Tenant for, any or
all of Tenant's obligations under this Lease, in order to induce Tenant to lease
space with such third party. "Control" shall mean direct or indirect ownership
of 50% or more of all of the voting stock of a corporation or 50% or more of the
legal or equitable interest in any other business entity, or the power to direct
the operations of any entity (by equity ownership, contract or otherwise).

If this Lease is assigned, whether or not in violation of the terms of
this Lease, Landlord may collect rent from the assignee. If the Premises or any
part thereof is sublet, Landlord may, upon an Event of Default by Tenant
hereunder, collect rent from the subtenant. In either event, Landlord shall
apply the amount collected from the assignee or subtenant to Tenant's monetary
obligations hereunder.

The consent by Landlord to an assignment or subletting hereunder shall
not relieve Tenant or any assignee or subtenant from obtaining Landlord's
express prior written consent to any other or further

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assignment or subletting. Neither an assignment or subletting nor the
collection of rent by Landlord from any person other than Tenant, nor the
application of any such rent as provided in this Paragraph 13.a. shall be deemed
a waiver of any of the provisions of this Paragraph 13.a. or release Tenant from
its obligation to comply with the provisions of this Lease and Tenant shall
remain fully and primarily liable for all of Tenant's obligations under this
Lease. If Landlord approves of an assignment or subletting hereunder and this
Lease contains any renewal options, expansion options, rights of first refusal,
rights of first negotiation or any other rights or options pertaining to
additional space in the Building, such rights and/or options shall not run to
the subtenant or assignee, it being agreed by the parties hereto that any such
rights and options are personal to the Tenant originally named herein and may
not be transferred.

b. PROCESSING EXPENSES. Tenant shall pay to Landlord, as
Landlord's cost of processing each proposed assignment or subletting, an amount
equal to the sum of (i) Landlord's reasonable attorneys' and other professional
fees, plus (ii) the sum of $750.00 for the cost of Landlord's administrative,
accounting and clerical time (collectively, "Processing Costs"), and the amount
of all direct and indirect costs and expenses incurred by Landlord arising from
the assignee or sublessee taking occupancy of the subject space (including,
without limitation, costs of freight elevator operation for moving of
furnishings and trade fixtures, security service, janitorial and cleaning
service, and rubbish removal service). Notwithstanding anything to the contrary
herein, Landlord shall not be required to process any request for Landlord's
consent to an assignment or subletting until Tenant has paid to Landlord the
amount of Landlord's estimate of the Processing Costs and all other direct and
indirect costs and expenses of Landlord and its agents arising from the assignee
or subtenant taking occupancy.

c. CONSIDERATION TO LANDLORD. In the event of any assignment or
sublease, whether or not requiring Landlord's consent, Landlord shall be
entitled to receive, as additional rent hereunder, seventy-five percent (75%) of
the value of any Consideration, as defined below, paid or given for the
assignment or sublease; except that Tenant may recapture, on an amortized basis
over the term of the sublease or assignment, any brokerage commissions paid by
Tenant in connection with the subletting or assignment (not to exceed
commissions typically paid in the market at the time of such subletting or
assignment) and any improvement allowance paid by Tenant to the subtenant or
assignee (collectively the "Assignment or Subletting Costs"), provided that, as
a condition to Tenant recapturing the Assignment or Subletting Costs, Tenant
shall provide to Landlord, within ninety (90) days of Landlord's execution of
Landlord's consent to the assignment or subletting, a detailed accounting of the
Assignment or Subletting Costs and supporting documents, such as receipts and
construction invoices. To effect the foregoing, Tenant shall deduct from the
monthly amounts received by Tenant from the subtenant or assignee as rent or
consideration (i) the Monthly Rent and Additional Rent payable by Tenant to
Landlord for the subject space and (ii) the incremental amount, on an amortized
basis, of the Assignment or Subletting Costs, and seventy-five percent (75%) of
the then remaining sum shall be paid promptly to Landlord. Upon Landlord's
request, Tenant shall assign to Landlord all amounts to be paid to Tenant by any
such subtenant or assignee and that belong to Landlord and shall direct such
subtenant or assignee to pay the same directly to Landlord. If there is more
than one sublease under this Lease, the amounts (if any) to be paid by Tenant to
Landlord pursuant to the preceding sentence shall be separately calculated for
each sublease and amounts due Landlord with regard to any one sublease may not
be offset against rental and other consideration pertaining to or due under any
other sublease.

For the purpose of this Paragraph 13.c., "Consideration" shall be all
consideration actually paid or given (whether in monetary or nonmonetary form)
for the assignment or sublease, including, without limitation, (A) payment for
leasehold improvements, (B) in the case of an assignment, any "Leasehold
Profit," as defined below, and (C) in the case of a sublease, the excess of the
amount of rent and other consideration paid or given for the sublet space by the
subtenant over the amount of Monthly Rent under Paragraph 5 above and Additional
Rent under Paragraph 7 above attributable to the sublet space for the
corresponding month. "Leasehold Profit" shall be the value allocated to the
leasehold between the parties to the assignment, but in no event less than the
excess of the present value of the fair market rent of the Premises for the
remaining term of this Lease after such assignment, over the present value of
the Monthly Rent payable hereunder for such remaining term, as reasonably
determined by Landlord. Nothing in the definition of "Leasehold Profit" shall be
construed to expand the definition of "Consideration" to include more than the
total consideration actually paid or given (whether in monetary or nonmonetary
form) in the assignment transaction in question.

d. PROCEDURES. If Tenant desires to assign this Lease or any
interest therein or sublet all or part of the Premises, Tenant shall give
Landlord written notice thereof and the terms proposed (the "Sublease Notice"),
which Sublease Notice, in the case of a proposed sublease, shall designate the
space proposed to be sublet. Landlord shall have the prior right and option (to
be exercised by written notice to Tenant given within thirty (30) days after
receipt of Tenant's notice) (i) to sublet from Tenant any portion of the
Premises proposed by Tenant to be sublet, for the term for which such portion is
proposed to be sublet, but at the lesser of the proposed sublease rent or the
same rent (including Additional Rent as provided for in Paragraph 7 above) as
Tenant is required to pay to Landlord under this Lease for the same space,
computed on a pro rata square footage basis, and during the term of such
sublease Tenant shall be released of its obligations under this Lease with
regard to the subject space, (ii) to terminate this Lease as it pertains to the

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portion of the Premises so proposed by Tenant to be sublet, or (iii) to approve
Tenant's proposal to sublet conditional upon Landlord's subsequent written
approval of the specific sublease obtained by Tenant and the specific subtenant
named therein. If Landlord exercises its option in (i) above, then Landlord
may, at Landlord's sole cost, construct improvements in the subject space and,
so long as the improvements are suitable for general office purposes, neither
Landlord nor Tenant shall be obligated to restore the subject space to its
original condition following the termination of the sublease. If Landlord
exercises its option described in (iii) above, then Tenant shall have three (3)
months thereafter to submit to Landlord, for Landlord's written approval,
Tenant's proposed sublease agreement (in which the proposed subtenant shall be
named, and which agreement shall otherwise meet the requirements of Paragraph
13.e. below), together with a current financial statement of suchproposed
subtenant and any other information reasonably requested by Landlord. If Tenant
fails to submit the specific sublease and other required information within such
time, or if the terms of the specific sublease submitted by Tenant vary from the
terms set forth in the Sublease Notice approved by Landlord pursuant to (iii)
above, then Tenant shall be required to submit a new Sublease Notice for
Landlord's evaluation pursuant to the procedures set forth in this paragraph.
If Landlord fails to exercise any such option to sublet or to terminate, this
shall not be construed as or constitute a waiver of any of the provisions of
Paragraphs 13.a., b., c. or d. herein. If Landlord exercises any option to
sublet or to terminate, any costs of demising the portion of the Premises
affected by such subleasing or termination shall be borne by Tenant. In
addition, Landlord shall have no liability for any real estate brokerage
commission(s) or with respect to any of the costs and expenses that Tenant may
have incurred in connection with its proposed subletting, and Tenant agrees to
indemnify, defend and hold Landlord and all other Indemnitees harmless from and
against any and all Claims (as defined in Paragraph 14.b. below), including,
without limitation, claims for commissions, arising from such proposed
subletting. Landlord's foregoing rights and options shall continue throughout
the entire term of this Lease. For purposes of this Paragraph 13.d., a proposed
assignment of this Lease in whole or in part shall be deemed a proposed
subletting of such space.

e. DOCUMENTATION. No permitted assignment or subletting by
Tenant shall be effective until there has been delivered to Landlord a fully
executed counterpart of the assignment or sublease which expressly provides that
(i) the assignee or subtenant may not further assign or sublet the assigned or
sublet space without Landlord's prior written consent (which, in the case of a
further assignment proposed by an assignee, shall not be unreasonably withheld,
subject to Landlord's rights under the provisions of this Paragraph 13), (ii)
the assignee or subtenant will comply with all of the provisions of this Lease,
and Landlord may enforce the Lease provisions directly against such assignee or
subtenant, (iii) in the case of an assignment, the assignee assumes all of
Tenant's obligations under this Lease arising on or after the date of the
assignment, and (iv) in the case of a sublease, the subtenant agrees to be and
remain jointly and severally liable with Tenant for the payment of rent
pertaining to the sublet space in the amount set forth in the sublease, and for
the performance of all of the terms and provisions of this Lease. In addition
to the foregoing, no sublease by Tenant shall be effective until there has been
delivered to Landlord a fully executed counterpart of Landlord's consent to
sublease form. The failure or refusal of a subtenant or assignee to execute any
such instrument shall not release or discharge the subtenant or assignee from
its liability as set forth above. Notwithstanding the foregoing, however, no
subtenant or assignee shall be permitted to occupy the Premises unless and until
such subtenant or assignee provides Landlord with certificates evidencing that
such subtenant or assignee is carrying all insurance coverage required of such
subtenant or assignee under this Lease.

f. NO MERGER. Without limiting any of the provisions of this
Paragraph 13, if Tenant has entered into any subleases of any portion of the
Premises, the voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation by Landlord and Tenant, shall not work a merger, and shall, at the
option of Landlord, terminate all or any existing subleases or subtenancies or,
at the option of Landlord, operate as an assignment to Landlord of any or all
such subleases or subtenancies. If Landlord does elect that such surrender or
cancellation operate as an assignment of such subleases or subtenancies,
Landlord shall in no way be liable for any previous act or omission by Tenant
under the subleases or for the return of any deposit(s) under the subleases that
have not been actually delivered to Landlord, nor shall Landlord be bound by any
sublease modification(s) executed without Landlord's consent or for any advance
rental payment by the subtenant in excess of one month's rent.

14. INDEMNIFICATION OF LANDLORD.

a. Landlord and the holders of any Superior Interests (as
defined in Paragraph 21 below) shall not be liable to Tenant and Tenant hereby
waives all claims against such parties for any loss, injury or other damage to
person or property in or about the Premises or the Real Property from any cause
whatsoever, including without limitation, water leakage of any character from
the roof, walls, basement, fire sprinklers, appliances, air conditioning,
plumbing or other portion of the Premises or the Real Property, or gas, fire,
explosion, falling plaster, steam, electricity, or any malfunction within the
Premises or the Real Property, or acts of other tenants of the Building;
provided, however, that the foregoing waiver shall be inapplicable to any loss,
injury or damage to the extent it results from Landlord's gross negligence or
willful misconduct. Tenant acknowledges that from time to time throughout the
term of this Lease, construction work may be performed in and about the Building
and the Real Property by Landlord, contractors of

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Landlord, or other tenants or their contractors, and that such construction work
may result in noise and disruption to Tenant's business. In addition to and
without limiting the foregoing waiver or any other provision of this Lease,
Tenant agrees that Landlord shall not be liable for, and Tenant expressly waives
and releases Landlord and the other Indemnitees (as defined in Paragraph 14.b.
below) from any Claims (as defined in Paragraph 14.b. below), including without
limitation, any and all consequential damages or interruption or loss of
business, income or profits, or claims of constructive eviction, arising or
alleged to be arising as a result of any such construction activity.

b. Tenant shall hold Landlord and the holders of any Superior
Interest, and the constituent shareholders, partners or other owners thereof,
and all of their agents, contractors, servants, officers, directors, employees
and licensees (collectively with Landlord, the "Indemnitees") harmless from and
indemnify the Indemnitees against any and all claims, liabilities, damages,
costs and expenses, including reasonable attorneys' fees and costs incurred in
defending against the same (collectively, "Claims"), to the extent arising from
(a) the acts or omissions of Tenant or any other Tenant Parties (as defined in
Paragraph 8.c. above) in, on or about the Real Property, or (b) any construction
or other work undertaken by or on behalf of Tenant in, on or about the Premises,
whether prior to or during the term of this Lease, or (c) any breach or Event of
Default under this Lease by Tenant, or (d) any accident, injury or damage,
howsoever and by whomsoever caused, to any person or property, occurring in, on
or about the Premises; except to the extent such Claims are caused by the
negligence or willful misconduct of Landlord or its authorized representatives.
In case any action or proceeding be brought against any of the Indemnitees by
reason of any such Claim, Tenant, upon notice from Landlord, covenants to resist
and defend at Tenant's sole expense such action or proceeding by counsel
reasonably satisfactory to Landlord. The provisions of this Paragraph 14.b.
shall survive the expiration or earlier termination of this Lease with respect
to any injury, illness, death or damage occurring prior to such expiration or
termination.

15. INSURANCE.

a. TENANT'S INSURANCE. Tenant shall, at Tenant's expense,
maintain during the term of this Lease (and, if Tenant occupies or conducts
activities in or about the Premises prior to or after the term hereof, then also
during such pre-term or post-term period): (i) commercial general liability
insurance including contractual liability coverage, with minimum coverages of
$1,000,000 per occurrence combined single limit for bodily injury and property
damage, $1,000,000 for products-completed operations coverage, $100,000 fire
legal liability, $1,000,000 for personal and advertising injury (which coverage
shall not be subject to the contractual liability exclusion), with a $2,000,000
general aggregate limit, for injuries to, or illness or death of, persons and
damage to property occurring in or about the Premises or otherwise resulting
from Tenant's operations in the Building, (ii) property insurance protecting
Tenant against loss or damage by fire and such other risks as are insurable
under then-available standard forms of "all risk" insurance policies (excluding
earthquake and flood but including water damage), covering Tenant's personal
property and trade fixtures in or about the Premises or the Real Property, and
any improvements and/or Alterations in the Premises, for the full replacement
value thereof without deduction for depreciation; (iii) workers' compensation
insurance in statutory limits; (iv) at least three months' coverage for loss of
business income and continuing expenses, providing protection against any peril
included within the classification "all risk," excluding earthquake and flood
but including water damage; and (v) if Tenant operates owned, leased or
non-owned vehicles on the Real Property, comprehensive automobile liability
insurance with a minimum coverage of $1,000,000 per occurrence, combined single
limit. The above described policies shall protect Tenant, as named insured, and
Landlord and all the other Indemnitees and any other parties designated by
Landlord, as additional insureds; shall specifically include all liability
assumed by Tenant under this Lease (provided, however, that such contractual
liability coverage shall not limit or be deemed to satisfy Tenant's indemnity
obligations under this Lease); and, if subject to deductibles, shall provide for
deductible amounts not in excess of those approved in advance in writing by
Landlord in its sole discretion. Landlord reserves the right to increase the
foregoing amount of liability coverage from time to time as Landlord determines
is required to adequately protect Landlord and the other parties designated by
Landlord from the matters insured thereby (provided, however, that Landlord
makes no representation that the limits of liability required hereunder from
time to time shall be adequate to protect Tenant), provided, however, such
increased amounts shall not materially exceed the greater of (a) those amounts
normally required for comparable buildings in the Oakland City Center or (b)
those amounts required to provide Landlord with the same relative protection as
the amounts set forth above as of the date of this Lease. Landlord further
reserves the right to require that Tenant cause any of its contractors, vendors,
movers or other parties conducting activities in or about or occupying the
Premises to obtain and maintain insurance as determined by Landlord and as to
which Landlord and such other parties designated by Landlord shall be additional
insureds.

b. POLICY FORM. Each insurance policy required pursuant to
Paragraph 15.a. above shall be issued by an insurance company licensed in the
State of California and with a general policyholders' rating of "A" or better
and a financial size ranking of "Class VIII" or higher in the most recent
edition of Best's Insurance Guide. Each insurance policy, other than Tenant's
workers' compensation insurance, shall (i) provide that it may not be materially
changed, cancelled or allowed to lapse unless thirty (30) days' prior written
notice to Landlord and any other insureds designated by Landlord is first given,
(ii) provide that no

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act or omission of Tenant shall affect or limit the obligations of the insurer
with respect to any other insured, (iii) include all waiver of subrogation
rights endorsements necessary to effect the provisions of Paragraph 16 below,
and (iv) provide that the policy and the coverage provided shall be primary,
that Landlord, although an additional insured, shall nevertheless be entitled to
recovery under such policy for any damage to Landlord or the other Indemnitees
by reason of acts or omissions of Tenant, and that any coverage carried by
Landlord shall be noncontributory with respect to policies carried by Tenant.
Each such insurance policy or a certificate thereof shall be delivered to
Landlord by Tenant on or before the effective date of such policy and thereafter
Tenant shall deliver to Landlord renewal policies or certificates at least
thirty (30) days prior to the expiration dates of expiring policies. If Tenant
fails to procure such insurance or to deliver such policies or certificates,
Landlord may, at its option, procure the same for Tenant's account, and the cost
thereof shall be paid to Landlord by Tenant upon demand. Landlord may at any
time, and from time to time, upon not less than five (5) days prior written
notice to Tenant, inspect and/or copy any and all insurance policies required by
this Lease, provided that Landlord shall not exercise this inspection right more
frequently than once a year unless Tenant's polices or coverage have changed or
unless Landlord has a reasonable belief that Tenant's coverage is not fully
compliant with the requirements of this Lease.

c. Nothing in this Paragraph 15 shall be construed as creating
or implying the existence of (i) any ownership by Tenant of any fixtures,
additions, Alterations, or improvements in or to the Premises or (ii) any right
on Tenant's part to make any addition, Alteration or improvement in or to the
Premises.

16. MUTUAL WAIVER OF SUBROGATION RIGHTS. Each party hereto hereby
releases the other respective party and, in the case of Tenant as the releasing
party, the other Indemnitees, and the respective partners, shareholders, agents,
employees, officers, directors and authorized representatives of such released
party, from any claims such releasing party may have for damage to the Building,
the Premises or any of such releasing party's fixtures, personal property,
improvements and alterations in or about the Premises, the Building or the Real
Property that is caused by or results from risks insured against under any fire
and extended coverage insurance policies actually carried by such releasing
party or deemed to be carried by such releasing party; provided, however, that
such waiver shall be limited to the extent of the net insurance proceeds payable
by the relevant insurance company with respect to such loss or damage (or in the
case of deemed coverage, the net proceeds that would have been payable). For
purposes of this Paragraph 16, Tenant shall be deemed to be carrying any of the
insurance policies required pursuant to Paragraph 15 but not actually carried by
Tenant, and Landlord shall be deemed to carry standard fire and extended
coverage policies on the Real Property. Each party hereto shall cause each such
fire and extended coverage insurance policy obtained by it to provide that the
insurance company waives all rights of recovery by way of subrogation against
the other respective party and the other released parties in connection with any
matter covered by such policy.

17. UTILITIES.

a. BASIC SERVICES. Landlord shall furnish the following
utilities and services ("Basic Services") for the Premises: (i) during the
hours of 8 A.M. to 6 P.M. ("Business Hours") Monday through Friday (except
public holidays) ("Business Days"), electricity for Building standard lighting
and power suitable for the use of the Premises for ordinary general office
purposes, (ii) during Business Hours on Business Days, heat and air conditioning
required in Landlord's judgment for the comfortable use and occupancy of the
Premises for ordinary general office purposes, (iii) unheated water for the
restroom(s) and drinking fountain(s) in the public areas serving the Premises,
(iv) elevator service to the floor(s) of the Premises by nonattended automatic
elevators for general office pedestrian usage, and (v) on Business Days,
janitorial services as required to maintain the Premises in a clean and orderly
condition consistent with other first-class office buildings in downtown
Oakland; and (vi) window washing at least two (2) times a year. Notwithstanding
the foregoing, however, Tenant may use water, heat, air conditioning, electric
current, elevator and janitorial service in excess of that provided in Basic
Services ("Excess Services," which shall include without limitation any power
usage other than through existing standard 110-volt AC outlets; electricity
and/or water consumed by Tenant in connection with any dedicated or supplemental
heating, ventilating and/or air conditioning, computer power, telecommunications
and/or other special units or systems of Tenant; chilled, heated or condenser
water; or water used for any purpose other than ordinary drinking and lavatory
purposes), provided that the Excess Services desired by Tenant are reasonably
available to Landlord and to the Premises (it being understood that in no event
shall Landlord be obligated to make available to the Premises more than the pro
rata share of the capacity of any Excess Service available to the Building or
the applicable floor of the Building, as the case may be), and provided further
that Tenant complies with the procedures established by Landlord from time to
time for requesting and paying for such Excess Services and with all other
provisions of this Paragraph 17. Landlord reserves the right to install in the
Premises or the Real Property electric current and/or water meters (including,
without limitation, any additional wiring, conduit or panel required therefor)
to measure the electric current or water consumed by Tenant or to cause the
usage to be measured by other reasonable methods (e.g. by temporary "check"
meters or by survey).

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b. PAYMENT FOR UTILITIES AND SERVICES. The cost of Basic
Services shall be included in Operating Expenses. In addition, Tenant shall pay
to Landlord within ten (10) days after receipt of Landlord's bill therefor
(provided that for the purposes of this sentence Tenant shall be deemed to have
received Landlord's bill on the date on which there is a refusal to accept
delivery at the address which Tenant has given Landlord for billing or on the
date on which attempted delivery fails because the address designated by Tenant
for such billing to Tenant is incorrect) (i) the cost, at Landlord's prevailing
rate, of any Excess Services used by Tenant, (ii) the cost of installing,
operating, maintaining or repairing any meter or other device used to measure
Tenant's consumption of utilities, (iii) the cost of installing, operating,
maintaining or repairing any Temperature Balance Equipment (as defined in
Paragraph 17.c. below) for the Premises and/or any equipment required in
connection with any Excess Services requested by Tenant, and (iv) any cost
otherwise incurred by Landlord in keeping account of or determining any Excess
Services used by Tenant. Landlord's failure to bill Tenant for any of the
foregoing shall not waive Landlord's right to bill Tenant for the same at a
later time.

c. TEMPERATURE BALANCE. If the temperature otherwise
maintained in any portion of the Premises by the heating, air conditioning or
ventilation system is affected as a result of (i) the type or quantity of any
lights, machines or equipment (including without limitation typical office
equipment) used by Tenant in the Premises, (ii) the occupancy of such portion of
the Premises by more than one person per two hundred (200) square feet of
rentable area therein, (iii) an electrical load for lighting or power in excess
of the limits specified in Paragraph 17.d. below, or (iv) any rearrangement of
partitioning or other improvements, then at Tenant's sole cost, Landlord may
install any equipment, or modify any existing equipment (including the standard
air conditioning equipment) Landlord deems necessary to restore the temperature
balance (such new equipment or modifications to existing equipment termed herein
"Temperature Balance Equipment"). Tenant agrees to keep closed, when necessary,
draperies which, because of the sun's position, must be closed to provide for
the efficient operation of the air conditioning system, and Tenant agrees to
cooperate with Landlord and to abide by the regulations and requirements which
Landlord may prescribe for the proper functioning and protection of the heating,
ventilating and air conditioning system. Landlord makes no representation to
Tenant regarding the adequacy or fitness of the heating, air conditioning or
ventilation equipment in the Building to maintain temperatures that may be
required for, or because of, any computer or communications rooms, machine
rooms, conference rooms or other areas of high concentration of personnel or
electrical usage, or any other uses other than or in excess of the fractional
horsepower normally required for office equipment, and Landlord shall have no
liability for loss or damage suffered by Tenant or others in connection
therewith.

d. UTILITY CONNECTIONS. Tenant shall not connect or use any
apparatus or device in the Premises (i) using current in excess of 110 volts, or
(ii) which would cause Tenant's electrical demand load to exceed 1.0 watts per
rentable square foot for overhead lighting or 2.0 watts per rentable square foot
for convenience outlets, or (iii) which would exceed the capacity of the
existing panel or transformer serving the Premises. Tenant shall not connect
with electric current (except through existing outlets in the Premises or such
additional outlets as may be installed in the Premises as part of initial
improvements or Alterations approved by Landlord), or water pipes, any apparatus
or device for the purpose of using electrical current or water.

Landlord will not permit additional coring of the floor of the
Premises in order to install new electric outlets in the Premises unless
Landlord is satisfied, on the basis of such information to be supplied by Tenant
at Tenant's expense, that coring of the floor in order to install such
additional outlets will not weaken the structure of the floor.

e. INTERRUPTION OF SERVICES. Landlord's obligation to provide
utilities and services for the Premises are subject to the Rules and Regulations
of the Building, applicable Legal Requirements (including the rules or actions
of the public utility company furnishing the utility or service), and shutdowns
for maintenance and repairs, for security purposes, or due to strikes, lockouts,
labor disputes, fire or other casualty, acts of God, or other causes beyond the
control of Landlord. In the event of an interruption in, or failure or
inability to provide any service or utility for the Premises for any reason,
such interruption, failure or inability shall not constitute an eviction of
Tenant, constructive or otherwise, or impose upon Landlord any liability
whatsoever, including, but not limited to, liability for consequential damages
or loss of business by Tenant. Notwithstanding the foregoing, if any
interruption in, or failure or inability to provide any of the services or
utilities described in Paragraph 17.a. is (i) within Landlord's reasonable
control and continues for fifteen (15) or more consecutive days, or (ii) outside
Landlord's reasonable control and continues for sixty (60) or more consecutive
days, and Tenant is unable to and does not use a material portion of the
Premises for Tenant's business purposes as a result thereof, then Tenant shall
be entitled to an abatement of Monthly Rent under Paragraph 5 hereof and
Additional Rent under Paragraph 7 hereof, which abatement shall be based on the
extent of Tenant's inability to use the Premises. Tenant hereby waives the
provisions of California Civil Code Section 1932(1) or any other applicable
existing or future Legal Requirement permitting the termination of this Lease
due to such interruption, failure or inability.

f. GOVERNMENTAL CONTROLS. In the event any governmental
authority having jurisdiction over the Real Property or the Building promulgates
or revises any Legal Requirement or

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building, fire or other code or imposes mandatory or voluntary controls or
guidelines on Landlord or the Real Property or the Building relating to the use
or conservation of energy or utilities or the reduction of automobile or other
emissions (collectively "Controls") or in the event Landlord is required or
elects to make alterations to the Real Property or the Building in order to
comply with such mandatory or voluntary Controls, Landlord may, in its sole
discretion, comply with such Controls or make such alterations to the Real
Property or the Building related thereto. Such compliance and the making of
such alterations shall not constitute an eviction of Tenant, constructive or
otherwise, or impose upon Landlord any liability whatsoever, including, but not
limited to, liability for consequential damages or loss of business by Tenant.

18. PERSONAL PROPERTY AND OTHER TAXES. Tenant shall pay, at least
ten (10) days before delinquency, any and all taxes, fees, charges or other
governmental impositions levied or assessed against Landlord or Tenant (a) upon
Tenant's equipment, furniture, fixtures, improvements and other personal
property (including carpeting installed by Tenant) located in the Premises, (b)
by virtue of any Alterations made by Tenant to the Premises, and (c) upon this
transaction or any document to which Tenant is a party creating or transferring
an interest or an estate in the Premises. If any such fee, charge or other
governmental imposition is paid by Landlord, Tenant shall reimburse Landlord for
Landlord's payment within thirty (30) days of Landlord's demand.

19. RULES AND REGULATIONS. Tenant shall comply with the rules and
regulations set forth on EXHIBIT B attached hereto, as such rules and
regulations may be modified or amended by Landlord from time to time (the "Rules
and Regulations"), provided such amendments or modifications shall be reasonable
and non-discriminatory. Landlord shall not be responsible to Tenant for the
nonperformance or noncompliance by any other tenant or occupant of the Building
of or with any of the Rules and Regulations, but Landlord shall use reasonable
efforts to encourage such compliance.

20. SURRENDER; HOLDING OVER.

a. SURRENDER. Upon the expiration or other termination of this
Lease, Tenant shall surrender the Premises to Landlord vacant and broom-clean,
with all improvements and Alterations (except as provided below) in their
original condition, except for reasonable wear and tear, damage from casualty or
condemnation and any changes resulting from approved Alterations; provided,
however, that prior to the expiration or termination of this Lease Tenant shall
remove from the Premises any Alterations that Tenant is required by Landlord to
remove under the provisions of this Lease, and all of Tenant's personal property
and trade fixtures, and, at Landlord's sole election, any other improvements,
whether installed by Landlord or Tenant, that are of a type or quantity that
would not be installed by or for a typical tenant using space for general office
purposes, or are otherwise nonstandard. If such removal is not completed at the
expiration or other termination of this Lease, Landlord may remove the same at
Tenant's expense. Any damage to the Premises or the Building caused by such
removal shall be repaired promptly by Tenant (including the patching or
repairing of ceilings and walls) or, if Tenant fails to do so, Landlord may do
so at Tenant's expense. The removal of Alterations from the Premises shall be
governed by Paragraph 9 above. Tenant's obligations under this paragraph shall
survive the expiration or other termination of this Lease. Upon expiration or
termination of this Lease or of Tenant's possession, Tenant shall surrender all
keys to the Premises or any other part of the Building and shall make known to
Landlord the combination of locks on all safes, cabinets and vaults that may be
located in the Premises.

b. HOLDING OVER. If Tenant remains in possession of the
Premises after the expiration or earlier termination of this Lease with the
express written consent of Landlord, Tenant's occupancy shall be a
month-to-month tenancy at a rent agreed upon by Landlord and Tenant, but in no
event less than the greater of (i) one hundred fifty percent (150%) of the
Monthly Rent and Additional Rent payable under this Lease during the last full
month prior to the date of the expiration of this Lease or (ii) the then fair
market rental (as reasonably determined by Landlord) for the Premises. Except
as provided in the preceding sentence, the month-to-month tenancy shall be on
the terms and conditions of this Lease, except that any renewal options,
expansion options, rights of first refusal, rights of first negotiation or any
other rights or options pertaining to additional space in the Building contained
in this Lease shall be deemed to have terminated and shall be inapplicable
thereto. Landlord's acceptance of rent after such holding over with Landlord's
written consent shall not result in any other tenancy or in a renewal of the
original term of this Lease. If Tenant remains in possession of the Premises
after the expiration or earlier termination of this Lease without Landlord's
consent, Tenant's continued possession shall be on the basis of a tenancy at
sufferance and Tenant shall pay as Monthly Rent during the holdover period an
amount equal to the greater of (i) one hundred fifty percent (150%) of the fair
market rental (as reasonably determined by Landlord) for the Premises or (ii)
two hundred percent (200%) of the Monthly Rent and Additional Rent payable under
this Lease for the last full month prior to the date of such expiration or
termination.

c. INDEMNIFICATION. Tenant shall indemnify, defend and hold
Landlord harmless from and against all Claims incurred by or asserted against
Landlord and arising directly or indirectly from Tenant's failure to timely
surrender the Premises, including but not limited to (i) any rent payable by or
any loss, cost, or damages, including lost profits, claimed by any prospective
tenant of the Premises or any portion thereof, and (ii) Landlord's damages as a
result of such prospective tenant rescinding or refusing to

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enter into the prospective lease of the Premises or any portion thereof by
reason of such failure to timely surrender the Premises.

21. SUBORDINATION AND ATTORNMENT.

a. This Lease is expressly made subject and subordinate to any
mortgage, deed of trust, ground lease, underlying lease or like encumbrance
affecting any part of the Real Property or any interest of Landlord therein
which is now existing or hereafter executed or recorded, any present or future
modification, amendment or supplement to any of the foregoing, and to any
advances made thereunder (any of the foregoing being a "Superior Interest")
without the necessity of any further documentation evidencing such
subordination. Notwithstanding the foregoing, Tenant shall, within ten (10)
days after Landlord's request, execute and deliver to Landlord a document
evidencing the subordination of this Lease to a particular Superior Interest.
If the interest of Landlord in the Real Property or the Building is transferred
to any person ("Purchaser") pursuant to or in lieu of proceedings for
enforcement of any Superior Interest, Tenant shall immediately and automatically
attorn to the Purchaser, and this Lease shall continue in full force and effect
as a direct lease between the Purchaser and Tenant on the terms and conditions
set forth herein.

b. At Tenant's written request, Landlord shall request that the
holder of any then existing Superior Interest execute a written "non-disturbance
agreement" in favor of Tenant providing that if Tenant is not in default under
this Lease beyond any applicable grace period, such party will recognize this
Lease and Tenant's rights hereunder and will not disturb Tenant's possession
hereunder, and if this Lease is by operation of law terminated in a foreclosure,
that a new lease will be entered into on the same terms as this Lease for the
remaining term hereof; provided that if, in order to obtain such non-disturbance
agreement Landlord is required to expend any sum, Landlord shall so notify
Tenant and Tenant may elect to pay such sum or to withdraw Tenant's request for
such non-disturbance agreement. In no event shall Landlord be required to
expend any sums in connection therewith. The failure of any such holder of a
Superior Interest to execute and deliver such a non-disturbance agreement upon
Landlord's request shall not constitute a default hereunder by Landlord, it
being understood that Landlord's sole obligation is to request in good faith the
execution and delivery of such agreement.

22. FINANCING CONDITION. If any lender or ground lessor that intends
to acquire an interest in, or holds a mortgage, ground lease or deed of trust
encumbering any portion of the Real Property should require either the execution
by Tenant of an agreement requiring Tenant to send such lender written notice of
any default by Landlord under this Lease, giving such lender the right to cure
such default until such lender has completed foreclosure, and preventing Tenant
from terminating this Lease unless such default remains uncured after
foreclosure has been completed, and/or any modification of the agreements,
covenants, conditions or provisions of this Lease, then Tenant agrees that it
shall, within ten (10) days after Landlord's request, execute and deliver such
agreement and modify this Lease as required by such lender or ground lessor;
provided, however, that no such modification shall affect the length of the term
or increase the rent payable by Tenant under Paragraphs 5 and 7 or otherwise
materially increase Tenant's obligations or diminish Tenants rights under this
Lease. Tenant acknowledges and agrees that if Tenant fails to execute any such
agreement required by such lender or ground lessor within the period described
above, and thereafter Tenant does not deliver such executed document within ten
(10) days of written notice from Landlord of such failure, such failure may
cause Landlord serious financial damage by causing the failure of a financing
transaction and giving Landlord all of its rights and remedies under Paragraph
25 below, including its right to damages caused by the loss of such financing,
to the extent Landlord proves such loss was caused thereby.

23. ENTRY BY LANDLORD. Landlord may, at any and all reasonable
times, and upon reasonable advance notice (provided that no advance notice need
be given if an emergency necessitates an immediate entry or prior to entry to
provide routine janitorial services), enter the Premises to (a) inspect the same
and to determine whether Tenant is in compliance with its obligations hereunder,
(b) supply janitorial and any other service Landlord is required to provide
hereunder, (c) show the Premises to prospective lenders, purchasers or tenants,
(d) post notices of nonresponsibility, and (e) alter, improve or repair the
Premises or any other portion of the Real Property. In connection with any such
alteration, improvement or repair, Landlord may erect in the Premises or
elsewhere in the Real Property scaffolding and other structures reasonably
required for the work to be performed. In no event shall such entry or work
entitle Tenant to an abatement of rent, constitute an eviction of Tenant,
constructive or otherwise, or impose upon Landlord any liability whatsoever,
including but not limited to liability for consequential damages or loss of
business or profits by Tenant; provided, however, that Landlord shall use good
faith efforts to cause all such work to be done in such a manner as to cause as
little interference to Tenant as reasonably possible without incurring
additional expense. Landlord shall at all times retain a key with which to
unlock all of the doors in the Premises, except Tenant's vaults and safes. If
an emergency necessitates immediate access to the Premises, Landlord may use
whatever force is necessary to enter the Premises and any such entry to the
Premises shall not constitute a forcible or unlawful entry into the Premises, a
detainer of the Premises, or an eviction of Tenant from the Premises, or any
portion thereof.

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24. INSOLVENCY OR BANKRUPTCY. The occurrence of any of the following
shall constitute an Event of Default under Paragraph 25 below:

1. Tenant ceases doing business as a going concern, makes an
assignment for the benefit of creditors, is adjudicated an insolvent, files a
petition (or files an answer admitting the material allegations of such
petition) seeking for Tenant any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar arrangement under any state or
federal bankruptcy or other law, or Tenant consents to or acquiesces in the
appointment, pursuant to any state or federal bankruptcy or other law, of a
trustee, receiver or liquidator for the Premises, for Tenant or for all or any
substantial part of Tenant's assets; or

2. Tenant fails within ninety (90) days after the commencement
of any proceedings against Tenant seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
state or federal bankruptcy or other Legal Requirement, to have such proceedings
dismissed, or Tenant fails, within ninety (90) days after an appointment
pursuant to any state or federal bankruptcy or other Legal Requirement without
Tenant's consent or acquiescence, of any trustee, receiver or liquidator for the
Premises, for Tenant or for all or any substantial part of Tenant's assets, to
have such appointment vacated; or

3. Tenant is unable, or admits in writing its inability, to pay
its debts as they mature; or

4. Tenant gives notice to any governmental body of its
insolvency or pending insolvency, or of its suspension or pending suspension of
operations.

In no event shall this Lease be assigned or assignable by reason of
any voluntary or involuntary bankruptcy, insolvency or reorganization
proceedings, nor shall any rights or privileges hereunder be an asset of Tenant,
the trustee, debtor-in-possession, or the debtor's estate in any bankruptcy,
insolvency or reorganization proceedings.

25. DEFAULT AND REMEDIES.

a. EVENTS OF DEFAULT. The occurrence of any of the following
shall constitute an "Event of Default" by Tenant:

1. Tenant fails to pay when due Monthly Rent, Additional
Rent or any other rent due hereunder (provided that the first two (2)
occurrences of such a delinquency in any twenty-four (24)-month period shall be
an Event of Default only if Tenant fails to cure such delinquency within three
(3) business days of written notice from Landlord thereof); or

2. Tenant abandons the Premises or Tenant vacates the
Premises for more than sixty (60) consecutive days without providing Landlord
with written notice of an alternate address for notices to Tenant under this
Lease (other than the Premises); or

3. Tenant fails to deliver any estoppel certificate
pursuant to Paragraph 29 below, subordination agreement pursuant to Paragraph 21
above, or document required pursuant to Paragraph 22 above, within the
applicable period set forth therein; or

4. Tenant violates the bankruptcy and insolvency
provisions of Paragraph 24 above; or

5. Tenant makes or has made or furnishes or has furnished
any warranty, representation or statement to Landlord in connection with this
Lease, or any other agreement made by Tenant for the benefit of Landlord, which
is or was false or misleading in any material respect when made or furnished; or

6. Tenant assigns this Lease or subleases any portion of
the Premises in violation of Paragraph 13 above; or

7. A default by Tenant occurs under any other lease
between Tenant and Landlord or any affiliate of Landlord, and Tenant fails to
cure such default within the applicable period set forth therein; or

8. Tenant fails to comply with any other provision of this
Lease in the manner and within the time required, or, with respect to matters
which do not violate any Legal Requirement, pose a health, safety or security
risk, or annoy other tenants, Tenant fails to comply within ten (10) business
days after written notice of such failure (or if the noncompliance can be cured
but cannot by its nature be cured

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within the 10-business-day period, if Tenant fails to promptly commence to cure
such noncompliance within the 10-business-day period and thereafter diligently
prosecute such cure to completion).

b. REMEDIES. Upon the occurrence of an Event of Default
Landlord shall have the following remedies, which shall not be exclusive but
shall be cumulative and shall be in addition to any other remedies now or
hereafter allowed by law:

1. Landlord may terminate Tenant's right to possession of
the Premises at any time by written notice to Tenant. Tenant expressly
acknowledges that in the absence of such written notice from Landlord, no other
act of Landlord, including, but not limited to, its re-entry into the Premises,
its efforts to relet the Premises, its reletting of the Premises for Tenant's
account, its storage of Tenant's personal property and trade fixtures, its
acceptance of keys to the Premises from Tenant, its appointment of a receiver,
or its exercise of any other rights and remedies under this Paragraph 25 or
otherwise at law, shall constitute an acceptance of Tenant's surrender of the
Premises or constitute a termination of this Lease or of Tenant's right to
possession of the Premises.

Upon such termination in writing of Tenant's right to possession of
the Premises, this Lease shall terminate and Landlord shall be entitled to
recover damages from Tenant as provided in California Civil Code Section 1951.2
or any other applicable existing or future Legal Requirement providing for
recovery of damages for such breach, including but not limited to the following:

(i) The reasonable cost of recovering the Premises;
plus

(ii) The reasonable cost of removing Tenant's
Alterations, trade fixtures and improvements; plus

(iii) All unpaid rent due or earned hereunder prior
to the date of termination, less the proceeds of any reletting or any rental
received from subtenants prior to the date of termination applied as provided in
Paragraph 25.b.2. below, together with interest at the Interest Rate, on such
sums from the date such rent is due and payable until the date of the award of
damages; plus

(iv) The amount by which the rent which would be
payable by Tenant hereunder, including Additional Rent under Paragraph 7 above,
as reasonably estimated by Landlord, from the date of termination until the date
of the award of damages, exceeds the amount of such rental loss as Tenant proves
could have been reasonably avoided, together with interest at the Interest Rate
on such sums from the date such rent is due and payable until the date of the
award of damages; plus

(v) The amount by which the rent which would be
payable by Tenant hereunder, including Additional Rent under Paragraph 7 above,
as reasonably estimated by Landlord, for the remainder of the then term, after
the date of the award of damages exceeds the amount such rental loss as Tenant
proves could have been reasonably avoided, discounted at the discount rate
published by the Federal Reserve Bank of San Francisco for member banks at the
time of the award plus one percent (1%); plus

(vi) Such other amounts in addition to or in lieu of
the foregoing as may be permitted from time to time by applicable law, including
without limitation any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom.

2. Landlord has the remedy described in California Civil
Code Section 1951.4 (a landlord may continue the lease in effect after the
tenant's breach and abandonment and recover rent as it becomes due, if the
tenant has the right to sublet and assign subject only to reasonable
limitations), and may continue this Lease in full force and effect and may
enforce all of its rights and remedies under this Lease, including, but not
limited to, the right to recover rent as it becomes due. After the occurrence
of an Event of Default, Landlord may enter the Premises without terminating this
Lease and sublet all or any part of the Premises for Tenant's account to any
person, for such term (which may be a period beyond the remaining term of this
Lease), at such rents and on such other terms and conditions as Landlord deems
advisable. In the event of any such subletting, rents received by Landlord from
such subletting shall be applied (i) first, to the payment of the costs of
maintaining, preserving, altering and preparing the Premises for subletting, the
other costs of subletting, including but not limited to brokers' commissions,
attorneys' fees and expenses of removal of Tenant's personal property, trade
fixtures and Alterations; (ii) second, to the payment of rent then due and
payable hereunder; (iii) third, to the payment of future rent as the same may
become due and payable hereunder; (iv) fourth, the balance, if any, shall be
paid to Tenant upon (but not before) expiration of the term of this Lease. If
the rents received by Landlord from such subletting, after application as
provided above, are insufficient in any month to pay the rent due and payable
hereunder for such month, Tenant shall pay such deficiency to Landlord monthly
upon demand. Notwithstanding any such subletting for Tenant's account without
termination, Landlord may at any time thereafter, by written notice to Tenant,
elect to terminate this Lease by virtue of a previous Event of Default.

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During the continuance of an Event of Default, for so long as Landlord
does not terminate Tenant's right to possession of the Premises and subject to
Paragraph 13, entitled Assignment and Subletting, and the options granted to
Landlord thereunder, Landlord shall not unreasonably withhold its consent to an
assignment or sublease of Tenant's interest in the Premises or in this Lease.

3. During the continuance of an Event of Default, Landlord
may enter the Premises without terminating this Lease and remove all Tenant's
personal property, Alterations and trade fixtures from the Premises and store
them at Tenant's risk and expense. If Landlord removes such property from the
Premises and stores it at Tenant's risk and expense, and if Tenant fails to pay
the cost of such removal and storage after written demand therefor and/or to pay
any rent then due, then after the property has been stored for a period of
thirty (30) days or more Landlord may sell such property at public or private
sale, in the manner and at such times and places as Landlord deems commercially
reasonable following reasonable notice to Tenant of the time and place of such
sale. The proceeds of any such sale shall be applied first to the payment of
the expenses for removal and storage of the property, the preparation for and
the conducting of such sale, and for attorneys' fees and other legal expenses
incurred by Landlord in connection therewith, and the balance shall be applied
as provided in Paragraph 25.b.2. above.

Tenant hereby waives all claims for damages that may be caused by
Landlord's reentering and taking possession of the Premises or removing and
storing Tenant's personal property pursuant to this Paragraph 25, and Tenant
shall indemnify, defend and hold Landlord harmless from and against any and all
Claims resulting from any such act. No reentry by Landlord shall constitute or
be construed as a forcible entry by Landlord.

4. Landlord may require Tenant to remove any and all
Alterations from the Premises or, if Tenant fails to do so within ten (10) days
after Landlord's request, Landlord may do so at Tenant's expense.

5. Landlord may cure the Event of Default at Tenant's
expense, it being understood that such performance shall not waive or cure the
subject Event of Default. If Landlord pays any sum or incurs any expense in
curing the Event of Default, Tenant shall reimburse Landlord upon demand for the
amount of such payment or expense with interest at the Interest Rate from the
date the sum is paid or the expense is incurred until Landlord is reimbursed by
Tenant. Any amount due Landlord under this subsection shall constitute
additional rent hereunder.

c. WAIVER OF REDEMPTION. Tenant hereby waives, for itself and
all persons claiming by and under Tenant, all rights and privileges which it
might have under any present or future Legal Requirement to redeem the Premises
or to continue this Lease after being dispossessed or ejected from the Premises.

26. DAMAGE OR DESTRUCTION. If all or a part of the Premises
are damaged by fire or other casualty, or if the Building is so damaged that
access to or use and occupancy of the Premises is materially impaired, Landlord
shall promptly give Tenant notice of Landlord's reasonable estimate of the time
required to make such repairs (the "Damage Estimate"). If the Damage Estimate
is one hundred twenty (120) days or less, then Landlord shall repair the damage
and this Lease shall remain in full force and effect. If the Damage Estimate is
more than one hundred twenty (120) days, Landlord, at its option exercised by
written notice to Tenant within sixty (60) days of the date of the damage, shall
either (a) repair the damage, in which event this Lease shall continue in full
force and effect, or (b) terminate this Lease as of the date specified by
Landlord in the notice, which date shall be not less than thirty (30) days nor
more than sixty (60) days after the date such notice is given, and this Lease
shall terminate on the date specified in the notice. If the Damage Estimate is
more than one hundred eighty (180) days, and Landlord does not give notice
terminating this Lease, then Tenant may give notice to Landlord, within thirty
(30) calendar days after Tenant receives the Damage Estimate, terminating this
Lease as of the date of such fire or casualty.

Notwithstanding anything to the contrary contained in this
Paragraph 26, if the initial Damage Estimate is more than ninety (90) days, and
the date on which Landlord reasonably anticipates the repairs of such damage
will be completed is during the last twelve (12) months of the Lease term,
Landlord and Tenant shall each have the option to terminate this Lease as of the
date of such damage by giving written notice to the other, in the case of
Landlord together with the Damage Estimate, or, in the case of Tenant, within
thirty (30) days of Tenant's receipt of the Damage Estimate.

Notwithstanding anything to the contrary in this Paragraph 26, if
damage which would otherwise lead to a right to terminate this Lease results
from the willful misconduct of Landlord or Tenant, the party from whose
misconduct such damage results shall have no right to terminate this Lease.

If the fire or other casualty damages the Premises or the common areas
of the Real Property necessary for Tenant's use and occupancy of the Premises,
Tenant ceases to use any portion of the Premises as a result of such damage, and
the damage does not result from the negligence or willful misconduct of

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Tenant or any other Tenant Parties, then during the period the Premises or
portion thereof are rendered unusable by such damage and repair, Tenant's
Monthly Rent and Additional Rent under Paragraphs 5 and 7 above shall be
proportionately reduced based upon the extent to which the damage and repair
prevents Tenant from conducting, and Tenant does not conduct, its business at
the Premises. Landlord shall not be obligated to repair or replace any of
Tenant's movable furniture, equipment, trade fixtures, and other personal
property, nor any Alterations installed in the Premises by Tenant, and no damage
to any of the foregoing shall entitle Tenant to any abatement, and Tenant shall,
at Tenant's sole cost and expense, repair and replace such items. All such
repair and replacement of Alterations shall be constructed in accordance with
Paragraph 9 above regarding Alterations.

A total destruction of the Building shall automatically terminate this
Lease. In no event shall Tenant be entitled to any compensation or damages from
Landlord for loss of use of the whole or any part of the Premises or for any
inconvenience occasioned by any such destruction, rebuilding or restoration of
the Premises, the Building or access thereto, except for the rent abatement
expressly provided above. Tenant hereby waives California Civil Code Sections
1932(2) and 1933(4), providing for termination of hiring upon destruction of the
thing hired and Sections 1941 and 1942, providing for repairs to and of
premises.

27. EMINENT DOMAIN.

a. If all or any part of the Premises are taken by any public
or quasi-public authority under the power of eminent domain, or any agreement in
lieu thereof (a "taking"), this Lease shall terminate as to the portion of the
Premises taken effective as of the date of taking. If only a portion of the
Premises is taken, Landlord or Tenant may terminate this Lease as to the
remainder of the Premises upon written notice to the other party within ninety
(90) days after the taking; provided, however, that Tenant's right to terminate
this Lease is conditioned upon the remaining portion of the Premises being of
such size or configuration that such remaining portion of the Premises is
unusable or uneconomical for Tenant's business. Landlord shall be entitled to
all compensation, damages, income, rent awards and interest thereon whatsoever
which may be paid or made in connection with any taking and Tenant shall have no
claim against Landlord or any governmental authority for the value of any
unexpired term of this Lease or of any of the improvements or Alterations in the
Premises; provided, however, that the foregoing shall not prohibit Tenant from
prosecuting a separate claim against the taking authority for an amount
separately designated for Tenant's relocation expenses or the interruption of or
damage to Tenant's business or as compensation for Tenant's personal property,
trade fixtures, Alterations or other improvements paid for by Tenant so long as
any award to Tenant will not reduce the award to Landlord.

In the event of a partial taking of the Premises which does not result
in a termination of this Lease, the Monthly Rent and Additional Rent under
Paragraphs 5 and 7 hereunder shall be equitably reduced. If all or any part of
the Real Property other than the Premises is taken, Landlord may terminate this
Lease upon written notice to Tenant given within ninety (90) days after the date
of taking.

b. Notwithstanding the foregoing, if all or any portion of
the Premises is taken for a period of time ending prior to the end of the term
of this Lease, this Lease shall remain in full force and effect and Tenant shall
continue to pay all rent and to perform all of its obligations under this Lease;
provided, however, that Tenant shall be entitled to all compensation, damages,
income, rent awards and interest thereon that is paid or made in connection with
such temporary taking of the Premises (or portion thereof), except that any such
compensation in excess of the rent or other amounts payable to Landlord
hereunder shall be promptly paid over to Landlord as received. Landlord and
Tenant each hereby waive the provisions of California Code of Civil Procedure
Section 1265.130 and any other applicable existing or future Legal Requirement
providing for, or allowing either party to petition the courts of the state in
which the Real Property is located for, a termination of this Lease upon a
partial taking of the Premises and/or the Building.

28. LANDLORD'S LIABILITY; SALE OF BUILDING. The term "Landlord," as
used in this Lease, shall mean only the owner or owners of the Real Property at
the time in question. Notwithstanding any other provision of this Lease, the
liability of Landlord for its obligations under this Lease is limited solely to
Landlord's interest in the Real Property as the same may from time to time be
encumbered, and no personal liability shall at any time be asserted or
enforceable against any other assets of Landlord or against the constituent
shareholders, partners or other owners of Landlord, or the directors, officers,
employees and agents of Landlord or such constituent shareholder, partner or
other owner, on account of any of Landlord's obligations or actions under this
Lease. In addition, in the event of any conveyance of title to the Real
Property, then the grantor or transferor shall be relieved of all liability with
respect to Landlord's obligations to be performed under this Lease after the
date of such conveyance. In no event shall Landlord be deemed to be in default
under this Lease unless Landlord fails to perform its obligations under this
Lease, Tenant delivers to Landlord written notice specifying the nature of
Landlord's alleged default, and Landlord fails to cure such default within
thirty (30) days following receipt of such notice (or, if the default cannot
reasonably be cured within such period, to commence action within such thirty
(30)-day period and proceed diligently thereafter to cure such default). Upon
any conveyance of title to the Real Property, the grantee or transferee shall be
deemed to have assumed Landlord's obligations to be performed under this Lease
from and after the

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date of such conveyance, subject to the limitations on liability set forth above
in this Paragraph 28. If Tenant provides Landlord with any security for
Tenant's performance of its obligations hereunder, and Landlord transfers such
security to the grantee or transferee of Landlord's interest in the Real
Property, Landlord shall be released from any further responsibility or
liability for such security. Any claim, defense or other right of Tenant
arising in connection with this Lease shall be barred unless Tenant files an
action or interposes a defense based thereon within one hundred eighty (180)
days after the date of the alleged event on which Tenant is basing its claim,
defense or right. Notwithstanding any other provision of this Lease, but not in
limitation of the provisions of Paragraph 14.a. above, Landlord shall not be
liable for any consequential damages or interruption or loss of business, income
or profits, or claims of constructive eviction, nor shall Landlord be liable for
loss of or damage to artwork, currency, jewelry, bullion, unique or valuable
documents, securities or other valuables, or for other property not in the
nature of ordinary fixtures, furnishings and equipment used in general
administrative and executive office activities and functions. Wherever in this
Lease Tenant (a) releases Landlord from any claim or liability, (b) waives or
limits any right of Tenant to assert any claim against Landlord or to seek
recourse against any property of Landlord or (c) agrees to indemnify Landlord
against any matters, the relevant release, waiver, limitation or indemnity shall
run in favor of and apply to Landlord, the constituent shareholders, partners or
other owners of Landlord, and the directors, officers, employees and agents of
Landlord and each such constituent shareholder, partner or other owner.

29. ESTOPPEL CERTIFICATES. At any time and from time to time,
upon not less than ten (10) days' prior notice from Landlord, Tenant shall
execute, acknowledge and deliver to Landlord a statement certifying the
commencement date of this Lease, stating that this Lease is unmodified and in
full force and effect (or if there have been modifications, that this Lease is
in full force and effect as modified and the date and nature of each such
modification), that Landlord is not in default under this Lease (or, if Landlord
is in default, specifying the nature of such default), that Tenant is not in
default under this Lease (or if Tenant is in default, specifying the nature of
such default), the current amounts of and the dates to which the Monthly Rent
and Additional Rent has been paid, and setting forth such other matters as may
be reasonably requested by Landlord. Any such statement may be conclusively
relied upon by a prospective purchaser of the Real Property or by a lender
obtaining a lien on the Real Property as security. If Tenant fails to deliver
such statement within the time required hereunder, such failure shall be
conclusive upon Tenant that (i) this Lease is in full force and effect, without
modification except as may be represented by Landlord, (ii) there are no uncured
defaults in Landlord's performance of its obligations hereunder, (iii) not more
than one month's installment of Monthly Rent has been paid in advance, and (iv)
any other statements of fact included by Landlord in such statement are correct.
Tenant acknowledges and agrees that its failure to execute such certificate may
cause Landlord serious financial damage by causing the failure of a sale or
financing transaction and giving Landlord all of its rights and remedies under
Paragraph 25 above, including its right to damages caused by the loss of such
sale or financing.

30. RIGHT OF LANDLORD TO PERFORM. If Tenant fails to make any
payment required hereunder (other than Monthly Rent and Additional Rent) or
fails to perform any other of its obligations hereunder, Landlord may, but shall
not be obliged to, and without waiving any default of Tenant or releasing Tenant
from any obligations to Landlord hereunder, make any such payment or perform any
other such obligation on Tenant's behalf. All sums so paid by Landlord and all
necessary incidental costs in connection with the performance by Landlord of an
obligation of Tenant (together with interest thereon from the date of such
payment by Landlord until paid at the Interest Rate) shall be payable by Tenant
to Landlord upon demand, and Tenant's failure to make such payment upon demand
shall entitle Landlord to the same rights and remedies provided Landlord in the
event of non-payment of rent, subject to any applicable cure period
specifically provided hereunder.

31. LATE CHARGE. Tenant acknowledges that late payment of any
installment of Monthly Rent or Additional Rent or any other amount required
under this Lease will cause Landlord to incur costs not contemplated by this
Lease and that the exact amount of such costs would be extremely difficult and
impracticable to fix. Such costs include, without limitation, processing and
accounting charges, late charges that may be imposed on Landlord by the terms of
any encumbrance or note secured by the Real Property and the loss of the use of
the delinquent funds. Therefore, if any installment of Monthly Rent or
Additional Rent or any other amount due from Tenant is not received when due,
Tenant shall pay to Landlord on demand, on account of the delinquent payment, an
additional sum equal to the greater of (i) five percent (5%) of the overdue
amount, or (ii) $100.00, which additional sum represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of late payment by
Tenant (provided that such charge shall be imposed with respect to the first two
occurrences of such a delinquency in any twenty-four (24)-month period only if
Tenant fails to cure such delinquency within five (5) days of written notice
from Landlord thereof). Acceptance of any late charge shall not constitute a
waiver of Tenant's default with respect to the overdue amount, nor prevent
Landlord from exercising its right to collect interest as provided above, rent,
or any other damages, or from exercising any of the other rights and remedies
available to Landlord.

32. ATTORNEYS' FEES; WAIVER OF JURY TRIAL. In the event of any
action or proceeding between Landlord and Tenant (including an action or
proceeding between Landlord and the trustee or debtor in possession while Tenant
is a debtor in a proceeding under any bankruptcy law) to enforce any provision

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of this Lease, the losing party shall pay to the prevailing party all costs and
expenses, including, without limitation, reasonable attorneys' fees and
expenses, incurred in such action and in any appeal in connection therewith by
such prevailing party. The "prevailing party" will be determined by the court
before whom the action was brought based upon an assessment of which party's
major arguments or positions taken in the suit or proceeding could fairly be
said to have prevailed over the other party's major arguments or positions on
major disputed issues in the court's decision. Notwithstanding the foregoing,
however, Landlord shall be deemed the prevailing party in any unlawful detainer
or other action or proceeding instituted by Landlord based upon any default or
alleged default of Tenant hereunder if (i) judgment is entered in favor of
Landlord, or (ii) prior to trial or judgment Tenant pays all or any portion of
the rent claimed by Landlord, vacates the Premises, or otherwise cures the
default claimed by Landlord.

If Landlord becomes involved in any litigation or dispute, threatened
or actual, by or against anyone not a party to this Lease, but arising by reason
of or related to any act or omission of Tenant or any Tenant Party, Tenant
agrees to pay Landlord's reasonable attorneys' fees and other costs incurred in
connection with the litigation or dispute, regardless of whether a lawsuit is
actually filed.

IF ANY ACTION OR PROCEEDING BETWEEN LANDLORD AND TENANT TO ENFORCE THE
PROVISIONS OF THIS LEASE (INCLUDING AN ACTION OR PROCEEDING BETWEEN LANDLORD AND
THE TRUSTEE OR DEBTOR IN POSSESSION WHILE TENANT IS A DEBTOR IN A PROCEEDING
UNDER ANY BANKRUPTCY LAW) PROCEEDS TO TRIAL, LANDLORD AND TENANT HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY IN SUCH TRIAL. Landlord and Tenant agree that
this paragraph constitutes a written consent to waiver of trial by jury within
the meaning of California Code of Civil Procedure Section 631(a)(2), and Tenant
does hereby authorize and empower Landlord to file this paragraph and/or this
Lease, as required, with the clerk or judge of any court of competent
jurisdiction as a written consent to waiver of jury trial.

33. WAIVER. No provisions of this Lease shall be deemed waived by
Landlord or Tenant unless such waiver is in a writing signed by the party giving
such waiver. The waiver by either party of any breach of any provision of this
Lease by the other party shall not be deemed a waiver of any subsequent breach
of the same or any other provision of this Lease. No delay or omission in the
exercise of any right or remedy of Landlord upon any default by Tenant, or of
Tenant upon any default of Landlord, shall impair such right or remedy or be
construed as a waiver. Landlord's acceptance of any payments of rent due under
this Lease shall not be deemed a waiver of any default by Tenant under this
Lease (including Tenant's recurrent failure to timely pay rent) other than
Tenant's nonpayment of the accepted sums, and no endorsement or statement on any
check or accompanying any check or payment shall be deemed an accord and
satisfaction. Tenant's payment of rent due and Tenant's continuance in
possession shall not constitute a waiver by Tenant of any default of Landlord.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to waive or render unnecessary
Landlord's consent to or approval of any subsequent act by Tenant.

34. NOTICES. All notices and demands which may or are required to be
given by either party to the other hereunder shall be in writing. All notices
and demands by Landlord to Tenant shall be delivered personally or sent by
United States mail, postage prepaid, or by any reputable overnight or same-day
courier, addressed to Tenant at the Premises, or to such other place as Tenant
may from time to time designate by notice to Landlord hereunder. All notices
and demands by Tenant to Landlord shall be sent by United States mail, postage
prepaid, or by any reputable overnight or same-day courier, addressed to
Landlord in care of Shorenstein Company, L.P., 555 California Street, 49th
floor, San Francisco, California 94104, or to such other place as Landlord may
from time to time designate by notice to Tenant hereunder. Notices delivered
personally or sent same-day courier will be effective immediately upon delivery
to the addressee at the designated address; notices sent by overnight courier
will be effective one (1) Business Day after acceptance by the service for
delivery; notices sent by mail will be effective two (2) Business Days after
mailing. In the event Tenant requests multiple notices hereunder, Tenant will
be bound by such notice from the earlier of the effective times of the multiple
notices.

35. NOTICE OF SURRENDER. At least ninety (90) days before the last
day of the term hereof, Tenant shall give to Landlord a written notice of
intention to surrender the Premises on that date, but neither this paragraph nor
any failure by Landlord to protest the lack of such notice by Tenant shall be
construed as an extension of the term or as a consent by Landlord to any holding
over by Tenant.

36. DEFINED TERMS AND MARGINAL HEADINGS. When required by the
context of this Lease, the singular includes the plural. If more than one
person or entity signs this Lease as Tenant, the obligations hereunder imposed
upon Tenant shall be joint and several, and the act of, written notice to or
from, refund to, or signature of, any Tenant signatory to this Lease (including
without limitation modifications of this Lease made by fewer than all such
Tenant signatories) shall bind every other Tenant signatory as though every
other Tenant signatory had so acted, or received or given the written notice or
refund, or signed. The headings and titles to the paragraphs of this Lease are
for convenience only and are not to be used to interpret or construe this Lease.
Wherever the term "including" or "includes" is used in this Lease it shall be
construed as if followed by the phrase "without limitation." The language in
all parts of this Lease shall in

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<PAGE>

all cases be construed as a whole and in accordance with its fair meaning and
not construed for or against any party simply because one party was the drafter
thereof.

37. TIME AND APPLICABLE LAW. Time is of the essence of this Lease
and of each and all of its provisions, except as to the conditions relating to
the delivery of possession of the Premises to Tenant. This Lease shall be
governed by and construed in accordance with the laws of the State of
California, and the venue of any action or proceeding under this Lease shall be
the City and County of San Francisco, California.

38. SUCCESSORS. Subject to the provisions of Paragraphs 13 and 28
above, the covenants and conditions hereof shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, personal
representatives, successors, executors, administrators and assigns.

39. ENTIRE AGREEMENT; MODIFICATIONS. This Lease (including any
exhibit, rider or attachment hereto) constitutes the entire agreement between
Landlord and Tenant with respect to Tenant's lease of the Premises. No
provision of this Lease may be amended or otherwise modified except by an
agreement in writing signed by the parties hereto. Neither Landlord nor
Landlord's agents have made any representations or warranties with respect to
the Premises, the Building, the Real Property or this Lease except as expressly
set forth herein, including without limitation any representations or warranties
as to the suitability or fitness of the Premises for the conduct of Tenant's
business or for any other purpose, nor has Landlord or its agents agreed to
undertake any alterations or construct any improvements to the Premises except
those, if any, expressly provided in this Lease, and no rights, easements or
licenses shall be acquired by Tenant by implication or otherwise unless
expressly set forth herein. Neither this Lease nor any memorandum hereof shall
be recorded by Tenant.

40. LIGHT AND AIR. Tenant agrees that no diminution of light, air or
view by any structure which may hereafter be erected (whether or not by
Landlord) shall entitle Tenant to any reduction of rent hereunder, result in any
liability of Landlord to Tenant, or in any other way affect this Lease.

41. NAME OF BUILDING. Tenant shall not use the name of the Building
for any purpose other than as the address of the business conducted by Tenant in
the Premises without the written consent of Landlord. Landlord reserves the
right to change the name of the Building at any time in its sole discretion by
written notice to Tenant and Landlord shall not be liable to Tenant for any
loss, cost or expense on account of any such change of name.

42. SEVERABILITY. If any provision of this Lease or the application
thereof to any person or circumstance 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.

43. AUTHORITY. If Tenant is a corporation, partnership, trust,
association or other entity, Tenant and each person executing this Lease on
behalf of Tenant, hereby covenants and warrants that (a) Tenant is duly
incorporated or otherwise established or formed and validly existing under the
laws of its state of incorporation, establishment or formation, (b) Tenant has
and is duly qualified to do business in the state in which the Real Property is
located, (c) Tenant has full corporate, partnership, trust, association or other
appropriate power and authority to enter into this Lease and to perform all
Tenant's obligations hereunder, and (d) each person (and all of the persons if
more than one signs) signing this Lease on behalf of Tenant is duly and validly
authorized to do so.

44. NO OFFER. Submission of this instrument for examination and
signature by Tenant does not constitute an offer to lease or a reservation of or
option for lease, and is not effective as a lease or otherwise until execution
and delivery by both Landlord and Tenant.

45. REAL ESTATE BROKERS. Landlord and Tenant each represents and
warrants to the other that such party has negotiated this Lease directly with
the Real Estate Broker(s) identified in Paragraph 2 and has not authorized or
employed, or acted by implication to authorize or to employ, any other real
estate broker or salesperson to act for such party in connection with this
Lease. Each party shall hold the other harmless from and indemnify and defend
the other against any and all Claims by any real estate broker or salesperson
other than the Real Estate Broker(s) identified in Paragraph 2 for a commission,
finder's fee or other compensation as a result of the inaccuracy of such party's
representation above. Landlord shall pay any commission owing to Shorenstein
Management, Inc., and Grubb & Ellis pursuant to a separate agreement. Grubb &
Ellis shall pay any commission owing to KLP Properties, Inc., pursuant to a
separate agreement.

46. CONSENTS AND APPROVALS. Wherever the consent, approval, judgment
or determination of Landlord is required or permitted under this Lease, Landlord
may exercise its sole discretion in granting or withholding such consent or
approval or in making such judgment or determination without reference to any
extrinsic standard of reasonableness, unless the provision providing for such
consent, approval, judgment or determination specifies that Landlord's consent
or approval is not to be unreasonably withheld, or that the standard for such
consent, approval,

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judgment or determination is to be reasonable, or otherwise specifies the
standards under which Landlord may withhold its consent. Whenever Tenant
requests Landlord to take any action or give any consent or approval, Tenant
shall reimburse Landlord for all of Landlord's costs incurred in reviewing the
proposed action or consent (whether or not Landlord consents to any such
proposed action), including without limitation reasonable attorneys' or
consultants' fees and expenses, within ten (10) days after Landlord's delivery
to Tenant of a statement of such costs. If it is determined that Landlord
failed to give its consent or approval where it was required to do so under this
Lease, Tenant's sole remedy will be an order of specific performance or
mandatory injunction of the Landlord's agreement to give its consent or
approval. The review and/or approval by Landlord of any item shall not impose
upon Landlord any liability for accuracy or sufficiency of any such item or the
quality or suitability of such item for its intended use. Any such review or
approval is for the sole purpose of protecting Landlord's interest in the Real
Property, and neither Tenant nor any Tenant Party nor any person or entity
claiming by, through or under Tenant, nor any other third party shall have any
rights hereunder by virtue of such review and/or approval by Landlord.

47. RESERVED RIGHTS. Landlord retains and shall have the rights set
forth below, exercisable without notice and without liability to Tenant for
damage or injury to property, person or business and without effecting an
eviction, constructive or actual, or disturbance of Tenant's use or possession
of the Premises or giving rise to any claim for rent abatement:

(a) To grant to anyone the exclusive right to conduct any business or
render any service in or to the Building and its tenants, provided
that such exclusive right shall not operate to require Tenant to use
or patronize such business or service or to exclude Tenant from its
use of the Premises expressly permitted herein.

(b) To perform, or cause or permit to be performed, at any time and from
time to time, including during Business Hours, construction in the
common areas and facilities or other leased areas in the Real
Property.

(c) To reduce, increase, enclose or otherwise change at any time and from
time to time the size, number, location, lay-out and nature of the
common areas and facilities and other tenancies and premises in the
Real Property and to create additional rentable areas through use or
enclosure of common areas.

48. FINANCIAL STATEMENTS. At any time within thirty (30) days after
Landlord's request, Tenant shall furnish Landlord with a copy of Tenant's
current annual or quarterly report to stockholders. If this Lease is ever
assigned by Health Systems Design Corp. to any other party, then, at any time
thereafter within thirty (30) days after Landlord's request therefor, Tenant
shall furnish to Landlord copies of true and accurate financial statements
reflecting Tenant's then current financial situation (including without
limitation balance sheets, statements of profit and loss, and changes in
financial condition), Tenant's most recent audited or certified annual financial
statements, and Tenant's federal income tax returns pertaining to Tenant's
business, and in addition shall cause to be furnished to Landlord similar
financial statements and tax returns for any guarantor(s) of this Lease. Tenant
agrees to deliver to any lender, prospective lender, purchaser or prospective
purchaser designated by Landlord such financial statements of Tenant as may be
reasonably requested by such lender or purchaser.

49. DELETED.

50. NONDISCLOSURE OF LEASE TERMS. Tenant agrees that the terms of
this Lease are confidential and constitute proprietary information of Landlord,
and that disclosure of the terms hereof could adversely affect the ability of
Landlord to negotiate with other tenants. Tenant hereby agrees that Tenant and
its partners, officers, directors, employees, agents, real estate brokers and
sales persons and attorneys shall not disclose the terms of this Lease to any
other person without Landlord's prior written consent, except to any accountants
of Tenant in connection with the preparation of Tenant's financial statements or
tax returns, to an assignee of this Lease or sublessee of the Premises, or to an
entity or person to whom disclosure is required by applicable law and/or
regulation, by judicial process or in connection with any action brought to
enforce this Lease.

51. HAZARDOUS SUBSTANCE DISCLOSURE. California law requires
landlords to disclose to tenants the existence of certain hazardous substances.
Accordingly, the existence of gasoline and other automotive fluids, maintenance
fluids, copying fluids and other office supplies and equipment, certain
construction and finish materials, tobacco smoke, cosmetics and other personal
items, and asbestos-containing materials ("ACM") must be disclosed. Gasoline
and other automotive fluids are found in the garage area of the Building.
Cleaning, lubricating and hydraulic fluids used in the operation and maintenance
of the Building are found in the utility areas of the Building not generally
accessible to Building occupants or the public. Many Building occupants use
copy machines and printers with associated fluids and toners, and pens, markers,
inks, and office equipment that may contain hazardous substances.

29
<PAGE>

Certain adhesives, paints and other construction materials and finishes used in
portions of the Building may contain hazardous substances. Although smoking is
prohibited in the public areas of the Building, these areas may, from time to
time, be exposed to tobacco smoke. Building occupants and other persons
entering the Building from time-to-time may use or carry prescription and
non-prescription drugs, perfumes, cosmetics and other toiletries, and foods and
beverages, some of which may contain hazardous substances.

52. OPTION TO RENEW.

a. OPTION TO RENEW. Tenant shall have the option to renew this
Lease for one (1) additional term of five (5) years, commencing upon the
expiration of the initial term of the Lease. The renewal option must be
exercised, if at all, by written notice given by Tenant to Landlord not later
than twelve (12) months prior to expiration of the initial term of this Lease.
Notwithstanding the foregoing, this renewal option shall be null and void and
Tenant shall have no right to renew this Lease if (i) as of the date immediately
preceding the commencement of the renewal period Tenant is not in occupancy of
the entire Premises then demised hereunder or Tenant does not intend to continue
to occupy the Premises (but intends to assign this Lease or sublet the space in
whole or in part), or (ii) on the date Tenant exercises the option or on the
date immediately preceding the commencement date of the renewal period Tenant is
in default of any of its obligations under this Lease.

b. TERMS AND CONDITIONS. If Tenant exercises the renewal
option, then during the renewal period all of the terms and conditions set forth
in this Lease as applicable to the Premises during the initial term shall apply
during the renewal term, except that (i) Tenant shall have no further right to
renew this Lease, (ii) Tenant shall take the Premises in their then "as-is"
state and condition, and (iii) the Monthly Rent payable by Tenant for the
Premises shall be the then-fair market rent for the Premises based upon the
terms of this Lease, as renewed. Fair market rent shall include the periodic
rental increases, if any, that would be included for space leased for the period
the space will be covered by the Lease. For purposes of this Paragraph 52, the
term "fair market rent" shall mean the rental rate for comparable space under
primary lease (and not sublease) to new tenants, taking into consideration the
unique quality and prestige of the Building and such amenities as existing
improvements, view, floor on which the Premises are situated and the like,
situated in first-class, reputable, established high-rise office buildings in
comparable locations in downtown Oakland, in comparable physical and economic
condition, taking into consideration the then-prevailing ordinary rental market
practices with respect to tenant concessions (if any) (e.g. not offering
extraordinary rental, promotional deals and other concessions to tenants which
deviate from what is the then-prevailing ordinary practice in an effort to
alleviate cash flow problems, difficulties in meeting loan obligations or other
financial distress, or in response to a greater than average vacancy rate). The
fair market rent shall be mutually agreed upon by Landlord and Tenant in writing
within the thirty (30) calendar day period commencing six (6) months prior to
commencement of the renewal period. If Landlord and Tenant are unable to agree
upon the fair market monthly rent within said thirty (30)-day period, then the
fair market rent shall be established by appraisal in accordance with the
procedures set forth in EXHIBIT D attached hereto.

c. MINIMUM RENTAL. Notwithstanding anything in the foregoing or
EXHIBIT D attached hereto to the contrary, in no event shall the Monthly Rent
during the renewal period be less than the aggregate of the amounts of Monthly
Rent and Additional Rent payable by Tenant (for all of the Premises leased
hereunder) under Paragraphs 2.c., 5 and 7 hereof for the calendar month
immediately preceding the commencement of the renewal period.

53. PARKING.

a. Commencing upon the Commencement Date, Landlord shall
provide Tenant, on an unassigned, non-exclusive and unlabelled basis, thirty
(30) parking spaces, fifteen (15) of which shall be in the garage of the
Building (the "Building Spaces") and the balance of which shall be in the
parking facility presently known as the City Center Garage, located at 525 14th
Street, Oakland (the "City Center Garage Spaces"), and Tenant shall pay Landlord
or the operator of the subject garage, as directed by Landlord, for such parking
at the rate or charge in effect from time to time for parking in the garage.
Tenant acknowledges that the monthly and hourly rates or charges in effect may
vary from time to time based on, among other things, the time of day, type of
parking (e.g., valet, self-park, or tandem) and general rate increases.

b. Tenant shall provide Landlord with advance written notice of
the names of each individual to whom Tenant from time to time distributes
Tenant's parking rights hereunder, and shall cause each such individual to
execute Landlord's standard waiver form for garage users. If the parking charge
is not paid when due, and such failure continues for ten (10) days after written
notice to Tenant of such failure, then in addition to any other remedies
afforded Landlord under this Lease by reason of nonpayment of rent, Landlord may
terminate Tenant's rights under this Paragraph 52. Further, if at any time
Tenant releases to Landlord any parking space provided for in this Paragraph 52,
then Tenant's right under this Paragraph 52 to use such released parking space
shall automatically terminate.

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<PAGE>

c. The parking spaces to be made available to Tenant hereunder
may contain a reasonable mix of spaces for compact cars. Landlord shall take
reasonable actions to ensure the availability of the parking spaces leased by
Tenant, but Landlord does not guarantee the availability of those spaces at all
times against the actions of other tenants of the Building and users of the
parking facility. Without limiting the foregoing, in no event shall this Lease
be void or voidable, nor shall Landlord be liable to Tenant for any loss or
damage, nor shall there be any abatement of rent hereunder (other than the
parking charge paid hereunder for any parking space no longer made available),
by reason of any reduction in Tenant's parking rights hereunder by reason of
strikes, lock-outs, labor disputes, shortages of material or labor, fire, flood
or other casualty, acts of God or any other cause beyond the control of
Landlord. Access to the parking spaces to be made available to Tenant shall, at
Landlord's option, be by card, pass, bumper sticker, decal or other appropriate
identification issued by Landlord, and Tenant's right to use the parking
facility is conditioned on Tenant's abiding by and shall otherwise be subject to
such rules and regulations as may be promulgated by Landlord from time to time
for the parking facility.

d. With respect to the Building Spaces, the parking rights set
forth in this Paragraph 52 are non-transferrable, are personal to the Tenant
originally named herein, and shall not inure to the benefit of any successor,
assignee or subtenant of Tenant. In connection with an assignment or sublease
which is permitted under Paragraph 13 above, Tenant shall have the right, upon
written notice to Landlord, to assign the City Center Garage Spaces to the
permitted assignee of the Lease or subtenant of Tenant. In the event of any
assignment or sublease of parking space rights which is permitted under the
foregoing provisions of this Paragraph 53.d., or which is otherwise approved by
Landlord (provided, however, that such approval may be granted or withheld by
Landlord in its sole and absolute discretion), Landlord shall be entitled to
receive one hundred percent (100%) of any profit received by Tenant in
connection with such assignment or sublease.

THIS LEASE IS EXECUTED by Landlord and Tenant as of the date set forth
at the top of page 1 hereof.

SHORENSTEIN REALTY INVESTORS THREE, L.P., HEALTH SYSTEMS DESIGN CORP.,
a California limited partnership a California corporation

By Shorenstein Company, L.P.,
a California limited partnership,
Manager

By Shorenstein Management, Inc.,
a California corporation,
its Agent

By By:
------------------------------- -----------------------
Douglas W. Shorenstein
President Name:
---------------------

Landlord Title:
--------------------

Tenant

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<PAGE>

EXHIBIT B

RULES AND REGULATIONS

1111 BROADWAY

1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside or
inside of the Building or any part of the Premises visible from the exterior of
the Premises without the prior written consent of Landlord, which consent may be
withheld in Landlord's sole discretion. Landlord shall have the right to
remove, at Tenant's expense and without notice to Tenant, any such sign,
placard, picture, advertisement, name or notice that has not been approved by
Landlord.

All approved signs or lettering on doors and walls shall be
printed, painted, affixed or inscribed at the expense of Tenant by a person
approved of by Landlord.

If Landlord notifies Tenant in writing that Landlord objects to
any curtains, blinds, shades or screens attached to or hung in or used in
connection with any window or door of the Premises, such use of such curtains,
blinds, shades or screens shall be removed immediately by Tenant. No awning
shall be permitted on any part of the Premises.

2. No ice, drinking water, towel, barbering or bootblacking,
shoeshining or repair services, or other similar services shall be provided to
the Premises, except from persons authorized by Landlord and at the hours and
under regulations fixed by Landlord.

3. The bulletin board or directory of the Building will be provided
exclusively for the display of the name and location of tenants only and
Landlord reserves the right to exclude any other names therefrom.

4. The sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by any of the Tenant Parties or used by Tenant
for any purpose other than for ingress to and egress from its Premises. The
halls, passages, exits, entrances, elevators, stairways, balconies and roof are
not for the use of the general public and Landlord shall in all cases retain the
right to control and prevent access thereto by all persons whose presence in the
judgment of Landlord shall be prejudicial to the safety, character, reputation
and interests of the Building and its tenants. No tenant and no employees or
invitees of any tenant shall go upon the roof of the Building.

5. Tenant shall not alter any lock or install any new or additional
locks or any bolts on any interior or exterior door of the Premises without the
prior written consent of Landlord.

6. The toilet rooms, toilets, urinals, wash bowls and other
apparatus shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein and the expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, shall have caused it.

7. Tenant shall not overload the floor of the Premises or mark,
drive nails, screw or drill into the partitions, woodwork or plaster or in any
way deface the Premises or any part thereof.

8. No furniture, freight or equipment of any kind shall be brought
into the Building without the consent of Landlord and all moving of the same
into or out of the Building shall be done at such time and in such manner as
Landlord shall designate. Landlord shall have the right to prescribe the
weight, size and position of all safes and other heavy equipment brought into
the Building and also the times and manner of moving the same in and out of the
Building. Safes or other heavy objects shall, if considered necessary by
Landlord, stand on a platform of such thickness as is necessary to properly
distribute the weight. Landlord will not be responsible for loss of or damage
to any such safe or property from any cause, and all damage done to the Building
by moving or maintaining any such safe or other property shall be repaired at
the expense of Tenant. The elevator designated for freight by Landlord shall be
available for use by all tenants in the Building during the hours and pursuant
to such procedures as Landlord may determine from time to time. The persons
employed to move Tenant's equipment, material, furniture or other property in or
out of the Building must be acceptable to Landlord. The moving company must be
a locally recognized professional mover, whose primary business is the
performing of relocation services, and must be bonded and fully insured. In no
event shall Tenant employ any person or company whose presence may give rise to
a labor or other disturbance in the Project. A certificate or other
verification of such insurance must be received and approved by Landlord prior
to the start of any moving operations. Insurance must be sufficient in
Landlord's sole opinion, to cover all personal liability, theft or damage to the
Project, including, but not limited to, floor coverings, doors, walls,
elevators, stairs, foliage and landscaping. Special care must be taken to
prevent damage to foliage and landscaping during adverse weather. All moving
operations shall be

B-1
<PAGE>

conducted at such times and in sucha manner as Landlord shall direct, and all
moving shall take place during non-business hours unless Landlord agrees in
writing otherwise.

9. Tenant shall not employ any person or persons other than the
janitor of Landlord for the purpose of cleaning the Premises, unless otherwise
agreed to by Landlord. Except with the written consent of Landlord, no person
or persons other than those approved by Landlord shall be permitted to enter the
Building for the purpose of cleaning the Building or the Premises. Tenant shall
not cause any unnecessary labor by reason of Tenant's carelessness or
indifference in the preservation of good order and cleanliness.

10. Tenant shall not use, keep or permit to be used or kept any foul
or noxious gas or substance in the Premises, or permit or suffer the Premises to
be occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors and/or vibrations, or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds be brought in or kept in or about the Premises or the
Building. In no event shall Tenant keep, use, or permit to be used in the
Premises or the Building any guns, firearm, explosive devices or ammunition.

11. No cooking shall be done or permitted by Tenant in the Premises,
nor shall the Premises be used for the storage of merchandise, for washing
clothes, for lodging, or for any improper, objectionable or other purpose not in
keeping with the nature and image of the Building as a first-class, downtown
office building complex.

12. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline, or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied by Landlord.

13. Landlord will direct electricians as to where and how telephone
and telegraph wires are to be introduced into the Premises and the Building. No
boring or cutting for wires will be allowed without the prior consent of
Landlord. The location of telephones, call boxes and other office equipment
affixed to the Premises shall be subject to the prior approval of Landlord.

14. Upon the expiration or earlier termination of the Lease, Tenant
shall deliver to Landlord the keys of offices, rooms and toilet rooms which have
been furnished by Landlord to Tenant and any copies of such keys which Tenant
has made. In the event Tenant has lost any keys furnished by Landlord, Tenant
shall pay Landlord for such keys.

15. Tenant shall not lay linoleum, tile, carpet or other similar
floor covering so that the same shall be affixed to the floor of the Premises,
except to the extent and in the manner approved in advance by Landlord. The
expense of repairing any damage resulting from a violation of this rule or
removal of any floor covering shall be borne by the tenant by whom, or by whose
contractors, employees or invitees, the damage shall have been caused.

16. No furniture, packages, supplies, equipment or merchandise will
be received in the Building or carried up or down in the elevators, except
between such hours and in such elevators as shall be designated by Landlord,
which elevator usage shall be subject to the Building's customary charge
therefor as established from time to time by Landlord.

17. On Saturdays, Sundays and legal holidays, and on other days
between the hours of 6:00 P.M. and 8:00 A.M., access to the Building, or to the
halls, corridors, elevators or stairways in the Building, or to the Premises may
be refused unless the person seeking access is known to the person or employee
of the Building in charge and has a pass or is properly identified. Landlord
shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In case of invasion,
mob, riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Building during the continuance of the same by closing the
doors or otherwise, for the safety of the tenants and protection of property in
the Building.

18. Tenant shall be responsible for insuring that the doors of the
Premises are closed and securely locked before leaving the Building and must
observe strict care and caution that all water faucets or water apparatus are
entirely shut off before Tenant or Tenant's employees leave the Building, and
that all electricity, gas or air shall likewise be carefully shut off, so as to
prevent waste or damage, and for any default or carelessness Tenant shall make
good all injuries sustained by other tenants or occupants of the Building or
Landlord. Landlord shall not be responsible to Tenant for loss of property on
the Premises, however occurring, or for any damage to the property of Tenant
caused by the employees or independent contractors of Landlord or by any other
person.

19. Landlord reserves the right to exclude or expel from the Building
any person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in violation
of any of the rules and regulations of the Building.

B-2
<PAGE>

20. The requirements of any tenant will be attended to only upon
application at the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of their regular duties unless under
special instructions from Landlord, and no employee will admit any person
(tenant or otherwise) to any office without specific instructions from Landlord.

21. No vending machine or machines of any description shall be
installed, maintained or operated upon the Premises without the prior written
consent of Landlord.

22. Subject to Tenant's right of access to the Premises in accordance
with Building security procedures, Landlord reserves the right to close and keep
locked all entrance and exit doors of the Building on Saturdays, Sundays and
legal holidays and on other days between the hours of 6:00 P.M. and 8:00 A.M.,
and during such further hours as Landlord may deem advisable for the adequate
protection of the Building and the property of its tenants.

B-3
<PAGE>

EXHIBIT C

DESCRIPTION OF PLANS

Plans prepared by Interform Designers of Commercial Interiors for
Health Systems Design Corporation's premises on the 16th, 17th and 18th floors
of the 1111 Broadway Building, which plans consist of the following:

16th floor premises: One sheet - Preliminary Plan dated 9/21/98, Job No. 8180D
(with no annotated notes or descriptions)

17th floor premises: Two sheets dated 10/1/98 - Preliminary Demo Plan and
Preliminary Pricing Plan, Job No. 8180D (with annotated general and sheet notes)

18th floor premises (four sheets):

Preliminary Demo Plan dated 6/17/98, rev 8/25/98;

Preliminary Pricing Plan dated 6/17/98, rev. 8/25/98;

Power and Signal Plan dated 8/25/98 (consisting of the Shorenstein/Huntsman as-
built drawing dated 6/14/94 for the State Department of Social
Services premises in the same space, overlaid and revised by
Interform); and

Reflected Ceiling Plan, undated (consisting of the Shorenstein/Huntsman as-built
drawing dated 6/14/94 for the State Department of Social Services
premises in the same space, overlaid and revised).

C-1
<PAGE>

EXHIBIT D

APPRAISAL PROCEDURE

Within fifteen (15) days after the expiration of the thirty
(30)-day period set forth in Paragraph 52 of the Lease for the mutual agreement
of Landlord and Tenant as to the fair market monthly rental, each party hereto,
at its cost, shall engage a real estate appraiser to act on its behalf in
determining the fair market monthly rental. The appraisers each shall have at
least ten (10) years' experience with leases in first-class high-rise office
buildings in downtown Oakland and shall submit to Landlord and Tenant in advance
for Landlord's and Tenant's reasonable approval the appraisal methods to be
used. If a party does not appoint an appraiser within such fifteen (15)-day
period but an appraiser is appointed by the other respective party, the single
appraiser appointed shall be the sole appraiser and shall set the fair market
monthly rental. If the two appraisers are appointed by the parties as stated in
this paragraph, such appraisers shall meet promptly and attempt to set the fair
market monthly rental. If such appraisers are unable to agree within thirty
(30) days after appointment of the second appraiser, the appraisers shall elect
a third appraiser meeting the qualifications stated in this paragraph within ten
(10) days after the last date the two appraisers are given to set the fair
market monthly rental. Each of the parties hereto shall bear one-half (1/2) the
cost of appointing the third appraiser and of the third appraiser's fee. The
third appraiser shall be a person who has not previously acted in any capacity
for either party.

The third appraiser shall conduct his own investigation of the
fair market monthly rent, and shall be instructed not to advise either party of
his determination of the fair market monthly rent except as follows: When the
third appraiser has made his determination, he shall so advise Landlord and
Tenant and shall establish a date, at least five (5) days after the giving of
notice by the third appraiser to Landlord and Tenant, on which he shall disclose
his determination of the fair market monthly rent. Such meeting shall take
place in the third appraiser's office unless otherwise agreed by the parties.
After having initialed a paper on which his determination of fair market monthly
rent is set forth, the third appraiser shall place his determination of the fair
market monthly rent in a sealed envelope. Landlord's appraiser and Tenant's
appraiser shall each set forth their determination of fair market monthly rent
on a paper, initial the same and place them in sealed envelopes. Each of the
three envelopes shall be marked with the name of the party whose determination
is inside the envelope.

In the presence of the third appraiser, the determination of the
fair market monthly rent by Landlord's appraiser and Tenant's appraiser shall be
opened and examined. If the higher of the two determinations is 105% or less of
the amount set forth in the lower determination, the average of the two
determinations shall be the fair market monthly rent, the envelope containing
the determination of the fair market monthly rent by the third appraiser shall
be destroyed and the third appraiser shall be instructed not to disclose his
determination. If either party's envelope is blank, or does not set forth a
determination of fair market monthly rent, the determination of the other party
shall prevail and be treated as the fair market monthly rent. If the higher of
the two determinations is more than 105% of the amount of the lower
determination, the envelope containing the third appraiser's determination shall
be opened. If the value determined by the third appraiser is the average of the
values proposed by Landlord's appraiser and Tenant's appraiser, the third
appraiser's determination of fair market monthly rent shall be the fair market
monthly rent. If such is not the case, fair market monthly rent shall be the
rent proposed by either Landlord's appraiser or Tenant's appraiser which is
closest to the determination of fair market monthly rent by the third appraiser.

D-1

<PAGE>

HEALTH SYSTEMS DESIGN CORPORATION
EMPLOYMENT AGREEMENT FOR RUSSELL J. HARRISON

This EMPLOYMENT AGREEMENT is effective this 4th day of August, 1997 (the
"Effective Date") between Health Systems Design Corp. a California corporation
(the "Company") and RUSSELL J. HARRISON (the "Executive").

WHEREAS, the Company desires to retain the employment of the Executive as
President and Chief Executive Officer and is empowered to do so, and the
Executive desires to serve the Company in such capacity; and,

WHEREAS, the Company and Executive desire to set forth their agreement
relating to the terms and conditions of such employment;

NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Agreement, and of other good and valuable consideration which the Company and
the Executive have received and accept as sufficient, the Company and Executive
agree as follows:

ARTICLE 1. POSITION AND RESPONSIBILITIES

During the term of this Agreement, the Executive agrees to serve as
President and Chief Executive Officer of the Company.

Executive will be invited to join the Board of Directors (the "Board") of
the Company. Board members who are also employed by the Company are not entitled
to Board compensation. The Company will further obtain and maintain in effect a
policy of directors and officers liability insurance during all times when
Executive serves on the Board of Directors of Company in an amount of not less
than $1,000,000 per occurrence, and a maximum liability of not less than
$3,000,000.

ARTICLE 2. TERM OF EMPLOYMENT

Unless earlier terminated as provided herein, the term (the "Term") of
Executive's employment under this Agreement shall be deemed to have commenced on
August 4, 1997, and shall continue until July 31, 2000, provided that commencing
August 1, 1999, and continuing thereafter, the Term of this Agreement shall
automatically be extended one day for each day that passes unless either party,
by written notice to the other, causes this Agreement to cease to extend
automatically by providing written notification to such effect. Upon such
written notification, the Term of this Agreement shall be one year following the
date of such notice (but in no event shall the Term expire earlier than July 31,
2000) and this Agreement shall terminate upon the expiration of such Term.

<PAGE>

ARTICLE 3. LOCATION OF WORK

The Executive shall be based at the Company's headquarters in Oakland,
California. However, the Executive agrees to undertake whatever domestic and
worldwide travel is required by the Company.

ARTICLE 4. STANDARD OF CARE

Throughout the term of this Agreement, the Executive agrees to devote his
full time and attention during normal business hours to the business and affairs
of the Company and its affiliates. Notwithstanding the foregoing, employee shall
be free to manage his personal investments and be engaged in such other
activities as are mutually agreed upon by the Executive and the Company.

ARTICLE 5. COMPENSATION AND BENEFITS

During the term of this Agreement, the Company shall provide the Executive
with compensation and benefits as follows:

5.1 BASE SALARY. The Company shall pay the Executive an annual base salary
of two hundred fifty thousand dollars (USD 250,000) during the Term of this
Agreement, or such higher salary as may be from time to time approved by the
Company (any such higher salary so approved to be thereafter the minimum salary
payable to Executive during the remainder of the Term thereof).

The Board of the Company, considering primarily the Executive's performance
since the preceding review date shall review this base salary prior to August 1
of each year. Any adjustment in base salary considered appropriate by the Board
shall be effective as of August 1.

5.2 ANNUAL BONUS. The company shall provide the Executive with the
opportunity to earn an annual cash incentive award for each fiscal year ending
during the term of this Agreement.

Executive's potential bonus compensation for the Company's five fiscal
quarters ending December 31, 1998 is $150,000.

The bonus will be paid annually upon the closing of the Company's financial
books for each fiscal year. The potential bonus level for each of the following
years will be established by the Compensation Committee of the Board, but in no
case will be less than $150,000. The performance goals governing distribution
of the bonus will be mutually agreed between Executive and the Compensation
Committee of the Board.

5.3 STOCK OPTION GRANT. Executive has been granted, 350,000 Health Systems
Design Corporation stock options with a five-year vesting period. The initial
vesting of one-fifth of the stock options will occur on Executive's first
anniversary of the stock

<PAGE>

option grant. From that point forward, vesting will occur on a monthly-prorated
basis. The exercise price of these options will be established as the average of
the high and low prices paid for the Company's common stock on the day that the
options are granted to Executive by the Compensation Committee of the Board.

5.4 RETIREMENT BENEFITS. The Executive shall participate in any qualified
retirement plans that are made generally available to other executive employees
of the Company, subject to the eligibility requirements and other provisions of
such plans. The Executive may also participate in any supplemental executive
retirement plans made available by the Company to similarly situated executives,
subject to the eligibility requirements and other provisions of such plans. At
Executive's request, the Company will establish a deferred compensation program
for the benefit of Executive that will comply with Internal Revenue Service
regulations for the tax deferral of income paid under such program.

5.5 EMPLOYEE BENEFITS. Executive will receive Company's standard employee
benefits, and will receive Company's maximum vacation allowance of four (4)
weeks each year, starting on a pro-rated basis in Executive's first year of
employment.

5.6 RELOCATION BENEFITS. The Company will reimburse Executive for
reasonable relocation expenses incurred by the Executive and not reimbursed by
Executive's prior employer in returning to the San Francisco area from Paris,
France.

5.7 RIGHT TO CHANGE PLANS. The Company may change or discontinue any
benefit plan during the Term of this Agreement, provided the change or
discontinuance applies generally to all executive employees of the Company, and
further provided that replacement or substitute benefits shall be provided of at
least a comparable value to Executive.

ARTICLE 6. EXPENSES

The Company shall pay, or reimburse the Executive, for all ordinary and
necessary expenses, in accordance with Company established guidelines, which the
Executive incurs in performing his duties under this Agreement. These expenses
include, but shall not be limited to, travel, entertainment, professional dues
and subscriptions, and all dues, fees, and expenses for membership in
professional, business, and civic associations and societies provided the
Company agrees that such membership is in the best interest of the Company.

ARTICLE 7. TERMINATION OF EMPLOYMENT

7.1 DEATH OR RETIREMENT. If the Executive dies during the Term of this
Agreement, any benefits payable to the Executive's beneficiaries shall

<PAGE>

be determined under the retirement, survivor's benefits, insurance, and other
applicable programs of

<PAGE>

the Company then in effect. The Company's obligations under sections 5.1 and 5.2
of this Agreement shall expire immediately upon the Executives death. However,
the Executive's beneficiaries shall receive all other rights and benefits that
the Executive is vested in pursuant to other plans and programs of the Company,
(subject, in the case of the stock options referred to in Section 5.3, to the
provision's of the Stock Option Plan and the Stock Option Agreement between
Company and Executive).

7.2 DISABILITY. If the Executive becomes totally and permanently disabled
during the term of this Agreement, the Company may terminate the Executive's
employment upon determination of such total and permanent disability. For the
purposes of this Agreement, the Executive shall be treated as "totally and
permanently disabled" under this Section 7.2 if he qualifies for benefits under
the Company's long-term disability plan. The Company's obligations under
Sections 5.1 and 5.2 shall expire immediately upon such termination. In this
event, the Executive shall be entitled to benefits under the Company's long-term
disability plan, and the Executive shall receive all other rights and benefits
that he is vested in pursuant to other plans and programs of the Company.

7.3 VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may terminate
this Agreement at any time by giving written notice to the Chairman of the Board
at least 60 days before the effective date of such termination. Upon the
effective date of such termination, the Company shall pay the Executive any
remaining base salary at the rate then in effect as provided under Section 5.1,
and all other rights and benefits provided for in Sections 5.2 through 5.8,
prorated to the effective date of termination.

7.4 TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive may
terminate his employment at any time during the term of this Agreement for "good
reason" by giving written notice to the Chairman of the Board of the Company at
least 60 days before the effective date of such termination. This notice must
set forth in reasonable detail the facts and circumstances that give rise to a
termination under this Section 7.4.

For purposes of this Section 7.4, Executive's termination of this Agreement
shall be for Good Reason if

(a) The Company reduces the Executive's base salary from that in effect on the
Effective Date (or from any higher base salary that was put in effect as of
any subsequent date); or

(b) The company reduces the Executive's performance bonus potential from that
in effect on the Effective Date (or from any higher bonus potential that
was put in effect as of any subsequent date) or discontinues the bonus
program referred to in Section 5.2 (or a reasonably equivalent bonus
program); or

<PAGE>

(c) The Company discontinues the other benefit plans and programs referred to
in Sections 5.3, 5.4, 5.5 and 5.6 and fails to provide Executive with
substitute benefits as contemplated by Section 5.7 hereof, in which the
Executive is eligible to participate as of the Effective Date; or

(d) A material change occurs in the function, duties, responsibilities,
reporting relationship, location of work, and/or title of Executive which
is not agreed to by Executive;

(e) Executive is required to perform any function or duty, the performance of
which would violate any statute or public policy, or

(f) Once elected to the Board of Directors, Executive is removed from or not
elected to the Board of Directors or is not put forward as a candidate for
the Board of Directors at the time the Board slate is finalized.

The Executive's right to terminate employment for Good Reason shall not be
affected by the Executive's incapacity due to physical or mental illness.

The Executive's continued employment shall not constitute a waiver of rights
with respect to any circumstances that constitute Good Reason under this Section
7.4., so long as Executive has notified the Company of the potential Good Reason
event within thirty (30) days of such event, with sufficient detail to give the
Company an opportunity to correct or cure this event so that it or its effects
no longer constitute Good Reason.

7.5 TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate the
Executive at any time during the term of this Agreement "for cause".

The Executive's termination will be "for cause" under this Section 7.5 if
the Board reasonably determines that the Executive:

(a) Has committed an act of fraud, embezzlement, theft, or other criminal act
constituting a felony under U.S. laws; or

(b) Has been intentionally and grossly negligent in the performance of any or
all material terms of this Agreement for reasons other than Executive's
death, disability, or retirement, and the Executive has been given the
written notice specified in this section and has failed to cure any defect
in performance as specified in such notice.

The Company shall give Executive written notice specifying the conduct alleged
to have constituted such cause and provide

<PAGE>

Executive the opportunity to cure such conduct, if curable, within ten (10) days
following receipt of such notice.

7.6 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate the
Executive's employment at any time during the term of this Agreement, for any
reason, by giving the Executive written notice at lease 60 days before the
effective date of such termination.

7.7 TERMINATION AS A RESULT OF A CHANGE IN CONTROL OF THE COMPANY. "Change
of Control" is defined as a sale of all or substantially all of the Company's
assets or more than fifty percent (50%) of the Company's outstanding stock, to a
purchaser which is unaffiliated with the Company, in a single transaction or a
series of related transactions; or a merger, of which the Company is not the
surviving Corporation, with any entity which is unaffiliated with the Company.
In the event a Change in Control of the Company takes place and Executive,
negotiating in good faith, is unable to come to an agreement with the surviving
company regarding an employment agreement, then Executive may terminate
employment under this Section 7.7.

ARTICLE 8. EFFECTS AND BENEFITS OF TERMINATION

8.1 EFFECTS OF DEATH OR RETIREMENT OF EXECUTIVE. The obligations of the
Company in the event of the Death or Retirement of the Executive are described
in Section 7.1 of this Agreement.

8.2 EFFECTS OF TOTAL DISABILITY of EXECUTIVE. The obligations of the
Company in the event of total disability of the Executive are described in
Section 7.2 of this Agreement.

8.3 EFFECTS OF VOLUNTARY TERMINATION BY EXECUTIVE. The obligations of the
Company in the event of voluntary termination by the Executive are described in
Section 7.3 of this Agreement.

8.4 EFFECTS OF TERMINATION BY THE EXECUTIVE FOR GOOD REASON. Upon the
effective date of Termination by the Executive for Good Reason under Section 7.4
of this Agreement, the Company shall make a lump sum payment to the Executive:

(a) Base salary earned for a period of eighteen (18) months following the date
of termination (Good Reason Termination Period)

(b) The pro-rated portion of any bonus that would have been earned in the year
of termination

For purposes of determining the number of vested stock options owed the
Executive, the Good Reason Termination Period shall be

<PAGE>

included, providing an additional 18 months of vesting on behalf of the
Executive following the date of termination. Such options must be exercised
according to the Stock Option Plan of the Company under which the options were
issued.

8.5 EFFECTS OF TERMINATION BY THE COMPANY FOR CAUSE. In the event of
Termination by the Company for Cause as defined in Section 7.5, the Company
shall pay the Executive any remaining base salary, at the rate then in effect
under Section 5.1, through the effective date of such termination, plus any
benefits under other plans or programs in which the Executive is vested at the
time of his termination.

At the request of the Executive, the Company shall submit its decision to
terminate under Section 7.5 to arbitration in accordance with the provisions of
Section 12 below. I f such arbitration is initiated, the Company shall continue
to pay Executive's then current compensation until the issuance of an
arbitration award affirming the Company's action. Such arbitration shall be held
in accordance with the provisions of Section 11 below. In the event the award
upholds the action of the Company, Executive shall repay to the Company any sums
received pursuant to this paragraph following termination of employment.

8.6 EFFECTS OF TERMINATION BY THE COMPANY WITHOUT CAUSE. In the event the
Executive is terminated by the Company without cause under Section 7.6 of this
Agreement, the Company shall pay the Executive:

(a) Base salary which would have been earned for a period of eighteen (18)
months following the date of termination (Without Cause Termination Period)

(b) The pro-rated portion of any bonus that would have been earned in the year
of termination

For purposes of determining the number of vested stock options owed the
Executive, the Without Cause Termination Period shall be included, providing an
additional eighteen (18) months of vesting on behalf of the Executive following
the date of termination.

Such options must be exercised according to the Stock Option Plan of the Company
under which the options were issued.

8.7 TERMINATION AS A RESULT of a Change in Control. In the event Executive
terminates employment as a result of a change in control of the Company under
the conditions in Section 7.7 of this Agreement, the Company shall pay the
Executive:

(a) Base salary which would have been earned for a period of eighteen (18)
months following the date of termination

(b) The pro-rated portion of the bonus that would have been earned in the year
of termination

<PAGE>

In addition, all stock options granted Executive up to the date of termination
under the conditions in Section 7.7 of this Agreement shall vest as of the date
of termination. Such options must be exercised according to the Stock Option
Plan of the Company under which the options were issued.

8.8 ADDITIONAL BENEFITS OF TERMINATION. In addition to the benefits
described in Sections 7.1, 7.2, 7.3, 8.4, 8.5, 8.6, 8.7 and 8.8 of this
Agreement, and for the same periods of time as the Executive's base salary
continues, respectively depending on the conditions of termination (Benefit
Terms), Executive shall receive the following:

(a) Health care benefits and group-term life insurance benefits until the end
of the relevant Benefit Term or the effective date of the Executive's
coverage under a subsequent employer's plan or policy;

(b) Continuation of, and accrual and vesting of, Executive's rights, benefits
and existing awards until the end of the relevant Benefit Term for purposes
of any qualified retirement plans, deferred compensation and any similar
plans.

(c) Continuation until the end of the relevant Benefit Term of all other
benefits in ACCORDANCE with other plans and programs of the Company.

ARTICLE 9. NONDISCLOSURE AND NONSOLICITATION

9.1 NONDISCLOSURE OF CONFIDENTIAL INFORMATION OR TRADE SECRETS AND
NON-SOLICITATION OF EMPLOYEES. Nothing herein contained shall in any way limit
the obligations of Executive under the Proprietary Information and Inventions
Agreement, dated August 4, 1997, between the Company and Executive.

This Article 9.1 shall not limit or otherwise interfere with the
Executive's legal obligation to disclose information pursuant to federal or
state law, provided the Executive gives the Company advance written notice of
the disclosure requirement and an opportunity to contest such requirement prior
to disclosure.

9.2 NON-SOLICITATION OF CUSTOMERS. Executive agrees not to solicit firms
that were HSD customers during his employment at the Company for a period of
eighteen (18) months following his termination of employment with the Company.
For purposes of this Agreement, "solicit" shall mean any attempt to sell
software products or services which compete with software products or services
provided by the Company and/or its subcontractors.

9.3 RETURN OF PROPERTY. Upon termination of the Executive's employment with
the Company, the Executive shall return immediately all confidential
information, trade secrets, and

<PAGE>

other property of the Company, including, without limitation, all handbooks,
training materials, reports, policy statements, software programs, and other
materials acquired by the Executive in connection with his employment with the
Company.

9.4 REMEDIES. Any breach of this Article 9 will entitle the Company to
injunctive relief in addition to the right to seek monetary damages and any
other remedy at law.

Failure or delay of either party in exercising any right under this Article
9 will not constitute a waiver of that right.

ARTICLE 10. INDEMNIFICATION

The Company hereby covenants and agrees to indemnify and hold harmless the
Executive fully, completely, and absolutely against any and all actions, suits,
proceedings, claims, demands, judgments, costs, expenses (including attorney's
fees), losses, and damages resulting from the Executive's good faith performance
of his duties and obligations under this Agreement.

ARTICLE 11. ASSIGNMENT

11.1 ASSIGNMENT BY THE COMPANY. Subject to the provisions of Sections 7.7
and 8.8, this Agreement shall be binding upon, and inure to the benefit of, any
successor to the Company. For purposes of this Section 11.1, a "successor" shall
mean any entity that acquires all or substantially all of the assets of the
business of the Company through a merger, purchase, consolidation, or other
similar transaction. Any "successor" entity shall be treated as the "Company"
for all purposes under this Agreement. However, notwithstanding the assignment
of this Agreement to a successor entity, the Company shall remain, with such
successor, jointly and severally liable for Company obligations under this
Agreement. Any such successor shall assume all of the obligations of the Company
under this Agreement and shall become liable for performance of all of the
benefits provided to Executive under this Agreement.

Except as specifically provided in this Section 11.1, this Agreement may
not be assigned by the Company.

11.2 ASSIGNMENT BY THE EXECUTIVE. The Executive may not assign his duties
under this Agreement to any other individual or entity. However, this Agreement
may be enforced by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees' devisees, and legatees. In the
event of the Executive's death before all benefits to which the Executive is
entitled to under this Agreement have been paid, the remaining benefits shall be
paid to the Executive's devisee, legatee, or other designee or, in the absence
of such designee, to the Executive's estate.

<PAGE>

ARTICLE 12. DISPUTE RESOLUTION AND NOTICE

12.1 DISPUTE RESOLUTION. Any controversy or claim arising out of this
Agreement shall be settled by arbitration in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
award of the arbitration in any court having competent jurisdiction.

The board of arbitrators shall consist of three arbitrators, one appointed
by the Company, one appointed by the Executive, and one appointed by the
arbitrators selected by the Company and the Executive. The arbitration shall be
held at the place of the then current residence of Executive, or such other
place as the parties may agree to prior to such arbitration. Discovery
proceedings shall be permitted in such arbitration in accordance with the
procedures then in effect forth in Part 4, Title 3, Chapter 3 of the California
Code of Civil Procedure, except that all discovery shall be completed not later
than 15 days prior to the date set for the arbitration, unless the arbitrators
selected shall otherwise allow. The costs of the arbitration shall be borne by
the parties in the manner determined by the arbitrators. However, if the
Executive's position is upheld, the Executive's expenses (including reasonable
attorney's fees), as determined by the arbitrators, shall be paid by the
Company.

12.2 NOTICE. Any notices, requests, demands, or other communications
required by this Agreement shall be in writing and sent by registered or
certified mail to the Executive at the last address he has filed in writing with
the Company or to the Company at the Company's principal office. Any such notice
shall be effective the fourth day after mailing. For purposes of this Agreement,
notices shall be sent to the following addresses, and any such address may be
changed by notification in compliance with the provisions of this Agreement.

If to the Company:

Health Systems Design Corporation 1330 Broadway, Suite 1200 Oakland, CA 94612

If to the Executive:

Russell J. Harrison
21 Golden Ridge Lane
Alamo, CA 94507

ARTICLE 13. MISCELLANEOUS

13.1 ENTIRE AGREEMENT. This Agreement supersedes any prior agreements or
understandings, oral or written, between the Company and the Executive with
respect to the subject matter addressed herein, and constitutes the entire
agreement between the parties on these matters.

<PAGE>

13.2 MODIFICATION. The Agreement shall not be canceled or amended in any
way except by mutual agreement of the parties evidenced by a written instrument
signed by both parties.

13.3 SEVERABILITY. If any provision or portion of this Agreement is
determined to be invalid or unenforceable, the remaining provisions or portions
of this Agreement shall remain in full force and effect to the fullest extent
permitted by law.

13.4 COUNTERPARTS. The Agreement may be executed in one (1) or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.

13.5 TAX WITHHOLDING. The Company may withhold from any benefits payable
under this Agreement all Federal, state, city, or other taxes as may be required
under any law or governmental regulation or ruling.

13.6 BENEFICIARIES. The Executive may designate one or more persons or
entities as the primary and/or contingent beneficiaries of any amounts to be
received under this Agreement. Such designation must be in the form of a signed
writing acceptable to the Board or its designee. The Executive may make or
change such designation at any time.

13.7 CONTINGENCIES. This Agreement is subject to proof of Executive's legal
right to work in the United States, and Executive's completion of the
Immigration and Naturalization Service Employment Eligibility Verification Form
1-9.

13.8 ATTORNEY'S FEES. In the event of any litigation or arbitration arising
out of or in connection with any matter set forth in this Agreement, or the
performance of Executive under this Agreement, the prevailing party in such
litigation or arbitration shall be entitled, in addition to any other relief, to
the recovery of reasonable attorney's fees.

ARTICLE 14. GOVERNING LAW

To the extent not preempted by Federal law, the provisions of this
Agreement shall be construed and enforced in accordance with the laws of the
State of California.

IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of ________________________, 1998.

Company: Executive:

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

<PAGE>
EXHIBIT 11.1

HEALTH SYSTEMS DESIGN CORPORATION
COMPUTATION OF NET LOSS PER SHARE

<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Net loss.............................................................. $ (839,085) $ (3,856,304) $ (1,207,946)
------------ ------------- -------------
------------ ------------- -------------
Weighted average common shares outstanding:
Basic............................................................... 6,588,842 6,478,789 5,656,418
------------ ------------- -------------
Diluted............................................................. 6,588,842 6,478,789 5,656,418
------------ ------------- -------------
Net loss per common share, basic and diluted.......................... $ (0.13) $ (0.60) $ (0.22)
------------ ------------- -------------
</TABLE>

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 9,441,381
<SECURITIES> 0
<RECEIVABLES> 6,170,547
<ALLOWANCES> 525,000
<INVENTORY> 0
<CURRENT-ASSETS> 17,876,027
<PP&E> 5,147,039
<DEPRECIATION> 2,299,527
<TOTAL-ASSETS> 23,628,135
<CURRENT-LIABILITIES> 6,035,784
<BONDS> 0
0
0
<COMMON> 6,673
<OTHER-SE> 17,585,678
<TOTAL-LIABILITY-AND-EQUITY> 23,628,135
<SALES> 0
<TOTAL-REVENUES> 25,854,708
<CGS> 0
<TOTAL-COSTS> 7,055,200
<OTHER-EXPENSES> 19,971,777
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (453,633)<F1>
<INCOME-PRETAX> (718,636)
<INCOME-TAX> 120,449
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (839,085)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
<FN>
<F1> INTEREST INCOME
</FN>

</TABLE>