MODACAD INC
10QSB, 1998-08-05
PREPACKAGED SOFTWARE
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<PAGE>




                                      




                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-QSB

[ X ]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
       ACT OF 1934

       For the quarterly period ended June 30, 1998

                                        OR

[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
       ACT OF 1934

Commission file number 0-28088


                                 MODACAD, INC.
       -----------------------------------------------------------------
       (Exact name of small business issuer as specified in its charter)

            California                                  95-4145930
 -------------------------------          ------------------------------------
 (State or other jurisdiction of          (IRS Employer Identification Number)
 incorporation or organization)

    3861 Sepulveda Blvd., Culver City                       90230
- ----------------------------------------                 ----------
(Address of principal executive offices)                 (Zip Code)

                                  (310) 751-2100
                           ---------------------------
                           (Issuer's telephone number)

Check  whether  the  registrant  (1) filed all  reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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 
                                                                       ---   ---

The number of outstanding shares of the registrant's  common stock, as of August
5, 1998, was 6,109,374.

Transitional Small Business Disclosure Format: Yes    No  X
                                                  ---    ---           


<PAGE>






                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                                  ModaCAD, Inc.
                                  BALANCE SHEET
                                  June 30, 1998
                                   (Unaudited)

<TABLE>
<CAPTION>
                                     ASSETS
<S>                                                               <C>
Current assets:
   Cash and cash equivalents                                      $ 10,857,824
   Accounts receivable, 
      net of allowance for doubtful accounts of $493,575             3,075,520
   Inventories                                                          12,000
   Prepaid expenses and other current assets                           351,319
                                                                  -------------
                 Total current assets                               14,296,663

Capitalized computer software development costs,
   net of accumulated amortization of $1,957,860                     4,537,613
Furniture and equipment, net (Note 2)                                1,712,745
Investment in and advances to unconsolidated subsidiary                 55,324
Other assets                                                            94,648
                                                                  -------------
                                                                  $ 20,696,993
                                                                  =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses                          $    748,788
   Deferred income                                                     360,551
                                                                  -------------
                 Total current liabilities                           1,109,339
                                                                  -------------

Commitment (Note 3)

Stockholders' equity:
   Common stock. no par value; authorized 15,000,000 shares;
      issued and outstanding 6,098,374 (Note 4)                     25,988,315
   Accumulated deficit                                              (6,400,661)
                                                                  -------------
                 Total stockholders' equity                         19,587,654
                                                                  -------------
                                                                  $ 20,696,993
                                                                  =============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       1
<PAGE>



                                  ModaCAD, Inc.
                            STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                      Three Months            Six Months
                                     Ended June 30,         Ended June 30,
                                     1998       1997       1998       1997
                                 ----------- ----------- ---------- -----------
<S>                              <C>         <C>         <C>         <C>
Net sales                        $3,630,487  $1,132,522  $ 4,594,740 $1,728,412
                                 ----------- ----------- ----------- -----------

Cost of sales                         9,553      35,452       17,499     55,763     
Selling, general & administrative 1,822,523     890,072    3,367,995  1,474,938   
Research and development          1,259,851      22,198    2,475,145     47,076
Amortization of capitalized 
    software development costs      564,215     167,953      808,742    335,906 
                                 ----------- ----------- ----------- -----------
                 Total expenses   3,656,142   1,115,675    6,669,381  1,913,683
                                 ----------- ----------- ----------- -----------
Income (loss) from operations       (25,655)     16,847   (2,074,641)  (185,271) 
Investment income                   129,394      20,012      252,277     39,537
                                 ----------- ----------- ----------- -----------
Net income (loss)                $  103,739  $   36,859  $(1,822,364)$ (145,734)   
                                 =========== =========== =========== ===========
Basic income (loss) 
    per share (Note 5)           $     0.02  $     0.01  $     (0.30)$    (0.04)
                                 =========== =========== =========== ===========

Diluted income (loss) 
    per share (Note 5)           $     0.02  $     0.01  $     (0.30)$    (0.04)
                                 =========== =========== =========== ===========
Weighted average 
    common shares outstanding     6,076,361   5,065,435    6,062,798  4,735,222
                                 =========== =========== =========== ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       2
<PAGE>



                                  ModaCAD, Inc.
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                      Six Months Ended June 30,
                                                         1998           1997
                                                     ------------   ------------ 
<S>                                                  <C>            <C>
Cash flows from operating activities:
  Net loss                                           $(1,822,364)    $ (145,734)
  Adjustments to reconcile net loss to net cash 
     provided by (used in) operating activities:
        Depreciation                                     171,735         23,328
        Amortization of capitalized software 
           development costs                             808,742        335,906   
        Provision for loss an accounts receivable        412,075         12,000
        Issuance of warrants for services rendered         5,000          6,000
        (Increase) decrease in:
           Accounts receivable                        (1,326,443)       242,217
           Inventories                                     3,563          5,475
           Prepaid expenses and other current assets     380,894        (47,790)
           Other assets                                   (3,000)       (12,237)
        Increase (decrease) in:
           Accounts payable and accrued expenses         388,068         84,542
           Deferred income                               256,270         20,891
                                                     ------------   ------------
   Net cash provided by (used in) operating activities  (725,460)       524,598
                                                     ------------   ------------

Cash flows from investing activities:
   Purchase of furniture and equipment                  (827,047)      (258,711)
   Capitalized computer software development cost       (475,624)    (1,288,580)
                                                     ------------   ------------
   Net cash used in investing activities              (1,302,671)    (1,547,291)
                                                     ------------   ------------

Cash flows from financing activities:
   Repayment of borrowings from officers/stockholders          0        (75,000)
   Proceeds from issuance of common stock and warrants   465,963        968,513 
                                                     ------------   ------------
   Net cash provided by financing activities             465,963        893,513  
                                                     ------------   ------------

Net decrease in cash                                  (1,562,168)      (129,180)
Cash, beginning of period                             12,419,992      2,138,963
                                                     ------------   ------------
Cash, end of period                                  $10,857,824     $2,009,783
                                                     ============   ============

                       Supplemental Cash Flow Information

Interest paid                                        $        0     $        0 
                                                     ===========    ===========
Income taxes paid                                    $   13,263     $      800
                                                     ===========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       3

<PAGE>


                                  ModaCAD, Inc.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1: GENERAL

As contemplated by the Securities and Exchange  Commission  under Item 310(b) of
Regulation S-B, the  accompanying  financial  statements and footnotes have been
condensed  and  therefore do not contain all  disclosures  required by generally
accepted  accounting  principles.  The  interim  financial  data are  unaudited;
however,  in the opinion of ModaCAD,  Inc.  (the  "Company" or  "ModaCAD"),  the
interim  data  include  all  adjustments,  consisting  only of normal  recurring
adjustments,  necessary  for a fair  statement  of the  results  for the interim
periods.  Results for interim periods are not necessarily indicative of those to
be expected for the full year.

Note 2: FURNITURE AND EQUIPMENT

Furniture and equipment consist of the following:

<TABLE>
<S>                                    <C>        
     Furniture and fixtures            $   245,919
     Office equipment                      174,544
     Computer equipment and software     1,742,786
     Leasehold improvements                360,606
                                       ------------                 
                                       $ 2,523,855
     Less: Accumulated depreciation        811,110
                                       ------------
                                       $ 1,712,745
                                       ============
</TABLE>

Note 3: COMMITMENT

Employment Agreements

In April 1998,  the Company  entered into new  employment  agreements  effective
January 1, 1998 with Ms. Freedman,  as Chairman of the Board and Chief Executive
Officer, and Mr. Vecchione, as President and Chief Operating Officer, which have
terms expiring December 31, 2005. The employment  agreements each provide for an
annual salary of $200,000,  a signing bonus of $100,000 and a monthly automobile
allowance of $600.  Each  employment  agreement  further  provides for an annual
performance  bonus  payable  for  each  calendar  year  during  the  term of the
agreement,  in an amount to be determined by the  Compensation  Committee of the
Board.  In addition,  in  connection  with the new  employment  agreements,  the
Company  granted to Ms.  Freedman and Mr.  Vecchione each a five-year  option to
purchase  up to  200,000  shares of Common  Stock,  subject to  approval  by the
Company's  shareholders at the 1998 annual meeting. Such options vest and become
exercisable as follows:  if the closing sale price of the Company's Common Stock
is greater than $10 per share for a period of 20 consecutive trading days in any
fiscal year during the term of the employment agreement,  options to purchase 50
shares of Common  Stock for each  $1,000 of net income  (before  deductions  for
taxes and  executive  bonuses)  of the  Company in such  calendar  year vest and
become  exercisable  at an exercise price equal to the market value per share on
the grant date.

                                       4
<PAGE>


                                  ModaCAD, Inc.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 4: STOCKHOLDERS' EQUITY

Warrants

In connection  with the IPO, the Company issued to the principal  underwriter in
the IPO, for $1,400, a warrant to purchase 140,000 units, at a per unit exercise
price of $6.00,  each  unit  consisting  of one  share of  common  stock and one
redeemable  warrant  exercisable  to  purchase  one share of common  stock at an
exercise price of $9.10 per share. Such warrants are exercisable for a four-year
period which began March 27,  1997.  As of June 30, 1998,  the  underwriter  (or
assignees of the underwriter) exercised a portion of the warrants to purchase an
aggregate of 114,700 shares of the Company's common stock and 114,700 redeemable
common  stock  purchase  warrants.  Additionally,  30,800 of 114,700  redeemable
common stock purchase  warrants were further exercised to purchase 30,800 shares
of the Company's common stock.

In December  1996,  the Company  issued to an outside  consultant,  for services
provided to the Company,  250,000  common stock purchase  warrants,  expiring in
December  1999,  at an exercise  price of $5.00 per share.  As of June 30, 1998,
these warrants have not been exercised.

In November 1997, the Company issued to its project  co-developer,  for services
to be provided to the Company, 126,316 common stock purchase warrants,  expiring
in November 2002, at an exercise price of $19.00 per share. As of June 30, 1998,
these warrants have not been exercised.
 
Stock Option Plan

In 1995,  the Company  adopted the 1995 Stock  Option  Plan (the  "Plan")  which
expires in 2006. In June 1997, the Plan was amended, upon receipt of shareholder
approval,  to  increase  the  number of shares of common  stock  authorized  for
issuance  pursuant to the exercise of stock options  granted under the Plan from
300,000  to  750,000  shares.  In April  1998,  the Plan  was  further  amended,
contingent upon receipt of shareholder approval which was received in June 1998,
to  increase  the  number  of shares of common  stock  authorized  for  issuance
pursuant to the exercise of stock options granted under the Plan from 750,000 to
1,650,000  shares.  As of June 30, 1998,  78,000 shares had been issued upon the
exercise of options granted under the Plan,  1,535,454 shares were issuable upon
the exercise of outstanding options with exercise prices ranging from $4.6875 to
$20.0625 per share and 36,546 shares  remained  available for additional  option
grants under the Plan.

Note 5: NET INCOME (LOSS) PER SHARE

The Company adopted SFAS No. 128,  "Earnings per Share." Basic income (loss) per
share is computed by dividing  income  available to common  stockholders  by the
weighted average number of common shares outstanding.  Diluted income (loss) per
share is computed  similarly to basic income  (loss) per share,  except that the
denominator is increased to include the number of additional  common shares that
would have been  outstanding if the potential  common shares had been issued and
if the additional  common shares were  dilutive.  Income per share for the first
quarter  of 1997 and loss per share  for the first six  months of 1997 have been
restated using the methodologies of SFAS No. 128.

                                       5
<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

The  following  discussion  should  be read in  conjunction  with the  financial
statements and the notes thereto appearing elsewhere in this Form 10-QSB.

General

The Company is in the business of developing,  marketing and supporting software
products based on its proprietary  modeling and rendering  technology for use in
industrial  design  applications   including  the  apparel,   textile  and  home
furnishings  industries and as used in consumer software products. The Company's
products utilize the Company's  proprietary  modeling and rendering  technology,
operate on standard  personal  computers  running Macintosh or Windows operating
systems and are grouped into two principal product groups:  commercial (computer
aided design or "CAD" and electronic merchandising products) and consumer.

The Company's CAD software products are used principally by industrial designers
to model three-dimensional  synthetic objects from two-dimensional images and to
render such  objects in real time with  photorealistic  imagery.  The  Company's
electronic  merchandising products combine the Company's technology with digital
product catalogs produced by the Company or by product  manufacturers  using the
Company's CAD software.

To develop a consumer  product line,  the Company signed an agreement with Intel
Corporation  in  November  1997  for  the  co-development  and  distribution  of
interactive  software  to be used in  connection  with  Intel's  Pentium  (R) II
processor. The companies agreed to co-develop an e-commerce solution for fashion
retailers  and  manufacturers   using  advanced  Internet  push  technology  and
multimedia  enhancements  which are  intended to enable a rich and  personalized
end-user shopping experience.

Results Of Operations

COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997

The following  table sets forth selected items from the Company's  statements of
operations (in thousands) and the percentages that such items bear to net sales:


<TABLE>
<CAPTION>
                                                Three  Months Ended June 30,
                                             ----------------------------------
                                                  1998                1997
                                             ---------------    --------------- 
<S>                                          <C>      <C>       <C>      <C>   
Net sales                                    $3,631   100.0%    $1,133   100.0%
Cost of sales                                    10     0.3         36     3.2 
Selling, general and administrative           1,823    50.2        890    78.6 
Research and development                      1,259    34.7         22     1.9 
Amortization of software development costs      564    15.5        168    14.8 
                                             -------  ------    -------  ------
 Total expenses                               3,656   100.7      1,116    98.5 
                                             -------  ------    -------  ------
Income (Loss) from operations                   (25)   (0.7)        17     1.5 
Investment income                               129     3.6         20     1.8 
                                             -------  ------    -------  ------
 Net income                                  $  104     2.9%    $   37     3.3%
                                             =======  ======    =======  ======
</TABLE>

                                       6
<PAGE>


Net Sales

Net sales increased $2,498,000,  or 220%, to $3,631,000 in the second quarter of
1998 from  $1,133,000 in the second  quarter of 1997 primarily due to $2,978,000
revenue  increases from the Company's  consumer  products and  maintenance  fees
offset  by a  $480,000  sales  decrease  in the  Company's  commercial  products
(electronic   merchandising   and  CAD  products)  and  revenue  decreases  from
consulting and training services.

Sales of  commercial  products  decreased  $442,000,  or 43%, to $588,000 in the
second  quarter of 1998 from  $1,030,000 in the second quarter of 1997 primarily
due to  $400,000  foreign  sales  generated  from  two of  the  Company's  major
customers in Europe in the second quarter of 1997.  Such sales were not repeated
in the second quarter of 1998.

Revenue generated from consumer  products  increased  $2,943,000 or 42,043%,  to
$2,950,000  in the second  quarter of 1998 from $7,000 in the second  quarter of
1997  primarily  due to  $1,980,000  of revenue  generated  from  license of the
Company's  3-D Home  Interiors  product to its publisher and $970,000 of revenue
generated in connection with the Company's newly developing  e-commerce  project
in the second quarter of 1998.

Consulting  services decreased $25,000 in second quarter of 1998 from the second
quarter  of 1997 due to the fact that the  Company  received  $25,000 in revenue
generated from consulting  services in the second quarter of 1997 compared to no
revenue from consulting services in the second quarter of 1998.

Training services decreased by $13,000,  or 65%, to $7,000 in the second quarter
of 1998 from $20,000 in the second quarter of 1997. This decrease  reflected the
sales decrease in the Company's  commercial  products.  Net sales resulting from
product  maintenance  fees increased  $35,000 in the second quarter of 1998 from
the second quarter of 1997.

Cost of Sales

Cost of sales  decreased  $26,000,  or 72%, to $10,000 in the second  quarter of
1998 from $36,000 in the second  quarter of 1997.  This  decrease  reflected the
sales  decrease in commercial  products as no cost of sales was incurred for the
consumer products.

Selling, General and Administrative Expenses

Selling,  general and administrative  expenses increased  $933,000,  or 105%, to
$1,823,000 in the second  quarter of 1998 from $890,000 in the second quarter of
1997.  Personnel  costs  increased  $349,000,  or 97%, to $710,000 in the second
quarter of 1998 from  $361,000 in the second  quarter of 1997.  The  increase in
personnel costs resulted from the hiring of additional personnel in late 1997 to
support the Company's  increased  operating  activities.  Additionally,  certain
related  costs  including  travel,  marketing,  telephone  and  office  supplies
expenses  increased  $62,000,  or 19%, to $392,000 in the second quarter of 1998
from  $330,000  in the  second  quarter  of 1997.  Also,  professional  services
including  accounting,  legal and consulting services increased $54,000, or 36%,
to $203,000 in the second quarter of 1998 from $149,000 in the second quarter of
1997. The increase in  professional  services was primarily due to the Company's
increased requirements for these services in the second quarter of 1998 compared
to the second quarter of 1997 resulting from the Company's  increased  operating
activities.  Further,  rent and lease  expense  increased  $45,000,  or 264%, to
$62,000 in the second quarter of 1998 from $17,000 in the second quarter of 1997
resulting from the Company's  relocation to a larger facility building in March,
1998. Finally,  bad debt expense increased  $400,000,  or 6,667%, to $406,000 in
the second  quarter of 1998 from $6,000 in the second  quarter of 1997 resulting
from additional bad debt reserve of $402,000 made in the second quarter of 1998.
This additional  reserve was made due to the Company's  increasing  sales volume
and accounts receivable and its review of certain specific accounts.

                                       7
<PAGE>


Research and Development

The Company  incurred  $1,481,000 of research and  development  costs during the
second  quarter  of  1998,  of  which  $222,000  was   capitalized  as  software
development  costs and  $1,259,000  was  expensed,  compared to $682,000 for the
second  quarter of 1997,  of which  $660,000  was  capitalized  and  $22,000 was
expensed.  The 117% increase in research and development  expenditures  from the
second  quarter of 1997 to the second  quarter of 1998 was  primarily due to the
hiring of additional personnel in connection with the further development of the
Company's  commercial and consumer products.  A lower percentage of research and
development  expenditures  was  capitalized  in the  second  quarter  of 1998 as
compared to the second  quarter of 1997 due primarily to the Company  completing
two of its major projects at the beginning of 1998. A significant portion of the
research and development  expenses incurred prior to the completion of these two
major projects was capitalized as software development costs.

Amortization of Software Development Costs

The amortization of software  development costs increased $396,000,  or 236%, to
$564,000 in the second  quarter of 1998 from  $168,000 in the second  quarter of
1997 as the Company began marketing (and amortizing development costs associated
with) several new versions of software products in 1997 and a $341,000 write-off
of the Company's 3-D Home Interiors product  development cost in connection with
the sale of the  product's  license  to the  Company's  publisher  in the second
quarter of 1998.

Investment Income

Investment income increased $109,000, or 545%, to $129,000 in the second quarter
of 1998 from $20,000 in the second quarter of 1997 due to the increase in income
generated  from a money market  account in which the proceeds  received upon the
exercise by warrant  holders of the Company's  public  warrants  after notice of
redemption was given in June 1997 are maintained.

Income Taxes

The Company  recorded no provision for income taxes in either the second quarter
of 1998 or the second  quarter of 1997 due to the  utilization  of net operating
loss carryforwards.

                                       8
<PAGE>


COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997

The following  table sets forth selected items from the Company's  statements of
operations (in thousands) and the percentages that such items bear to net sales:


<TABLE>
<CAPTION>
                                                  Six  Months Ended June 30,
                                             ----------------------------------
                                                  1998                1997
                                             ---------------    --------------- 
<S>                                         <C>       <C>       <C>      <C>   
Net sales                                   $ 4,595    100.0%    $1,729   100.0%
Cost of sales                                    17      0.4         56     3.2
Selling, general and administrative           3,368     73.3      1,475    85.4
Research and development                      2,475     53.9         47     2.7
Amortization of software development costs      809     17.6        336    19.4
                                            -------   ------    -------  ------
 Total expenses                               6,669    145.2      1,914   110.7
                                            -------   ------    -------  ------
Loss from operations                         (2,074)   (45.2)      (185)  (10.7)
Investment income                               252      5.5         40     2.3
                                            -------   ------    -------  ------
 Net loss                                   $(1,822)  (39.7%)   $ (145)   (8.4%)
                                            =======   ======    =======  ======
</TABLE>

Net Sales

Net sales increased  $2,866,000,  or 166%, to $4,595,000 in the first six months
of 1998 from  $1,729,000  in the  comparable  period  of 1997 due to  $3,574,000
revenue  increases from the Company's  consumer  products and  maintenance  fees
offset  by a  $708,000  sales  decrease  in the  Company's  commercial  products
(electronic   merchandising   and  CAD  products)  and  revenue  decreases  from
consulting and training services.

Sales of  commercial  products  decreased  $638,000,  or 42%, to $894,000 in the
first  six  months  of 1998 from  $1,532,000  in the  first  six  months of 1997
primarily  due to the  fact  that the  Company's  sales  force  was  focused  on
developing a new commercial  product market channel and no revenue was generated
from this new commercial  product market as it was in the launching stage in the
first quarter of 1998.  Also,  $400,000  foreign sales generated from two of the
Company's  major  customers in Europe in the second quarter of 1997.  Such sales
were not repeated in the second quarter of 1998.

Revenue generated from consumer  products  increased  $3,535,000 or 50,500%,  to
$3,542,000  in the first six months of 1998 from  $7,000 in the first six months
of 1997  primarily due to $1,980,000  of revenue  generated  from license of the
Company's 3-D Home Interiors  product to its publisher and $1,562,000 of revenue
generated in connection with the Company's newly developing  e-commerce  project
in the first six months of 1998.  No such revenue was generated in the first six
months of 1998.

Consulting  services  decreased $64,000 in the first six months of 1998 from the
first six months of 1997 due to the fact that the  Company  received  $65,000 in
revenue generated from consulting services customers in connection with sales of
its  commercial  product in the first six months of 1997.  No such  revenue  was
generated in the first six months of 1998.

Training  services  decreased  by  $7,000,  or 20%,  to $28,000 in the first six
months of 1998 from  $35,000  in the first  six  months of 1997.  This  decrease
reflected the sales  decrease in the Company's  commercial  products.  Net sales
resulting  from  product  maintenance  fees  increased  $40,000 in the first six
months of 1998 from the first six months of 1997.

                                       9
<PAGE>


Cost Of Sales

Cost of sales decreased  $39,000,  or 70%, to $17,000 in the first six months of
1998 from $56,000 in the first six months of 1997.  This decrease  reflected the
sales  decrease in commercial  products as no cost of sales was incurred for the
consumer products.

Selling, General And Administrative Expenses

Selling,  general and administrative expenses increased $1,893,000,  or 128%, to
$3,368,000  in the first six  months  of 1998 from  $1,475,000  in the first six
months of 1997.  Personnel costs increased  $931,000,  or 145%, to $1,572,000 in
the first six months of 1998 from $641,000 in the first six months of 1997.  The
increase in personnel costs resulted from the hiring of additional  personnel in
late 1997 to support the Company's increased operating activities. Additionally,
certain related costs including travel, marketing, telephone and office supplies
expenses increased $297,000, or 56%, to $832,000 in the first six months of 1998
from  $535,000  in the first six  months of 1997.  Also,  professional  services
including accounting,  legal and consulting services increased $148,000, or 70%,
to  $358,000  in the first six  months  of 1998 from  $210,000  in the first six
months of 1997. The increase in  professional  services was primarily due to the
Company's  increased  requirements for these services in the first six months of
1998  compared  to the first six  months of 1997  resulting  from the  Company's
increased  operating  activities.  Further,  rent and  lease  expense  increased
$64,000, or 229%, to $92,000 in the first six months of 1998 from $28,000 in the
first six months of 1997  resulting  from the  Company's  relocation to a larger
facility building in March, 1998. Finally,  bad debt expense increased $400,000,
or 3,333%, to $412,000 in the first six months of 1998 from $12,000 in the first
six months of 1997 resulting  from  additional bad debt reserve of $402,000 made
in the first six months of 1998.  This  additional  reserve  was made due to the
Company's  increasing  sales  volume and accounts  receivable  and its review of
certain specific accounts.

Research And Development

The Company  incurred  $2,967,000 of research and  development  costs during the
first  six  months  of 1998,  of which  $492,000  was  capitalized  as  software
development  costs and $2,475,000  was expensed,  compared to $1,402,000 for the
first six months of 1997, of which  $1,355,000 was  capitalized  and $47,000 was
expensed.  The 112% increase in research and development  expenditures  from the
first six  months of 1997 to the first six months of 1998 was  primarily  due to
the hiring of additional personnel in connection with the further development of
the Company's  commercial and consumer products.  A lower percentage of research
and development  expenditures was capitalized in the first six months of 1998 as
compared to the first six months of 1997 due primarily to the Company completing
two of its major projects at the beginning of 1998. A significant portion of the
research and development  expenses incurred prior to the completion of these two
major projects was capitalized as software development costs.

Amortization Of Software Development Costs

The amortization of software  development costs increased $473,000,  or 141%, to
$809,000  in the first six months of 1998 from  $336,000 in the first six months
of 1997  as the  Company  began  marketing  (and  amortizing  development  costs
associated  with)  several  new  versions  of  software  products  in 1997 and a
$341,000 write-off of the Company's 3-D Home Interiors product  development cost
in connection with the sale of the product's license to the Company's  publisher
in the first six months of 1998.

                                       10
<PAGE>


Investment Income

Investment  income  increased  $212,000,  or 530%,  to $252,000 in the first six
months of 1998 from  $40,000 in the first six months of 1997 due to the increase
in income  generated from a money market account in which the proceeds  received
upon the exercise by warrant  holders of the  Company's  public  warrants  after
notice of redemption was given in June 1997 are maintained.

Income Taxes

The  Company  recorded  no  provision  for income  taxes in either the first six
months  of 1998 or the first six  months of 1997 due to the  utilization  of net
operating loss carryforwards.


LIQUIDITY AND CAPITAL RESOURCES

The Company's  accounts  receivable  balance  increased  $1,326,000,  or 59%, to
$3,569,000 at June 30, 1998 from  $2,243,000 at December 31, 1997. This increase
was primarily due to a total receivable  balance of $1,524,000 at June 30, 1998,
related to the revenues generated from the Company's  e-commerce products in the
first six months of 1998  ($500,000  of the balance was  collected in July 1998)
and  $428,000  receivable  balance  at June 30,  1998,  related  to the  revenue
generated from the Company's new commercial  product in June 1998. Also,  during
the first six months of 1998, a $750,000 receivable balance at December 31, 1997
attributable to an agreement between the Company and Intel was collected.

During the first six months of 1998, five of the Company's  employees  exercised
their stock options to purchase a total of 49,000 shares of the Company's common
stock for $308,000.

During the first six months of 1998,  the Company's  IPO  principal  underwriter
exercised a portion of the warrants to purchase an aggregate of 26,400 shares of
the Company's common stock and 26,400  redeemable common stock purchase warrants
for $158,400.

The Company  anticipates  continuing  to use its capital  primarily  to fund the
activities related to the design,  development,  marketing, sales and support of
the Company's  products.  Together with its existing  capital  received from the
exercise of warrants as a result of the Company's  notice of warrant  redemption
in June 1997 and anticipated  funds from  operations,  the Company believes that
its capital  resources will be sufficient to provide its anticipated  cash needs
for  working  capital and  capital  expenditure  for at least the next 15 months
although the Company may seek to raise additional capital before then, depending
on various considerations and developments.  Thereafter,  if cash generated from
operations is insufficient to satisfy the Company's  capital  requirements,  the
Company may have to sell  additional  equity or debt securities or obtain credit
facilities, assuming the Company can do so on acceptable terms.

                                       11
<PAGE>


                           PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

           None.

Item 2.    Changes in Securities

           None.

Item 3.    Defaults Upon Senior Securities

           None.

Item 4.    Submission of Matters to a Vote of Security Holders

           On  June  5,  1998,  the  Company  held  its  Annual  Meeting  of
           Shareholders at which the shareholders approved:

          (1)  The election of Joyce Freedman, Maurizio Vecchione, Lee Freedman,
               Andrea Vecchione, Stephen Wyle, Peter Frank and Leslie Saleson to
               the Board of Directors to serve until the next annual  meeting or
               until their  successors are elected and qualified.  The following
               directors  received  the  number  of  votes  set  opposite  their
               respective names.

                                      For Election        Withheld
                                      ------------       ----------     
               Joyce Freedman           5,515,334          23,100
               Maurizio Vecchione       5,515,534          22,900
               Lee Freedman             5,510,034          28,400
               Andrea Vecchione         5,514,134          24,300
               Stephen Wyle             5,515,834          22,600
               Peter Frank              5,515,634          22,800
               Leslie Saleson           5,515,834          22,600

          (2)  The approval of an amendment to the  Company's  1995 Stock Option
               Plan to  increase  the total  number  of shares of the  Company's
               Common Stock  authorized for issuance  thereunder from 750,000 to
               1,650,000  shares.  Such proposal  received  2,563,750  votes for
               approval,  234,740  votes  against  the  approval,  11,390  votes
               abstained, and there were 2,728,554 broker non-votes.

          (3)  The  ratification  of the Company's  appointment  of Singer Lewak
               Greenbaum & Goldstein LLP as the Company's  independent certified
               public  accountants  for the  1998  fiscal  year.  Such  proposal
               received  5,516,884  votes  for  the  ratification,  6,350  votes
               against the ratification and 15,200 votes abstained.


Item 5.    Other Information

           None.

                                       12
<PAGE>


Item 6.    Exhibits and Reports on Form 8-K

           (a)    Exhibits:

                    4.1  Amendment No. 3 to 1995 Stock Option Plan

                  *10.1  Software  Publishing  Agreement  between the Registrant
                         and Cendant Software Corporation dated June 17, 1998.1

                   10.2  Broderbund/ModaCAD  Amendment to Agreement of March 15,
                         1996 and Amended  Agreement of October 11, 1996 between
                         the Registrant and Broderbund Software, Inc. dated June
                         29, 1998.1


                   27.1  Financial Data Schedule.1

           (b)    Reports on Form 8-K
 
                  None.


*  Confidential  treatment is being  requested  with respect to portions of this
exhibit,  and such confidential  portions have been deleted and separately filed
with the Securities Exchange Commission pursuant to Rule 24b-2 promulgated under
the Exchange Act of 1934.


- --------
1 This exhibit is being filed electronically in the electronic format specified 
by EDGAR.

                                       13
<PAGE>


                                    SIGNATURE

In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.


                                                ModaCAD, INC.


Date: August 5, 1998                            By:   /s/  LEE FREEDMAN
                                                     ---------------------------
                                                     Lee Freedman
                                                     Vice President, Finance and
                                                     Chief Financial Officer

                                       14
<PAGE>


                                  EXHIBIT INDEX


     
<TABLE>
<CAPTION>
   Exhibit Number                                                  Sequentially
                              Description                          Numbered Page

        <S>         <C>                              
        4.1         Amendment No. 3 to 1995 Stock Option Plan

        *10.1       Software  Publishing  Agreement  between the  Registrant and
                    Cendant Software Corporation dated June 17, 1998.1

        10.2        Broderbund/ModaCAD  Amendment to Agreement of March 15, 1996
                    and  Amended  Agreement  of October  11,  1996  between  the
                    Registrant  and  Broderbund  Software,  Inc.  dated June 29,
                    1998.1

        27.1        Financial Data Schedule.1
</TABLE>


*  Confidential  treatment is being  requested  with respect to portions of this
exhibit,  and such confidential  portions have been deleted and separately filed
with the Securities Exchange Commission pursuant to Rule 24b-2 promulgated under
the Exchange Act of 1934.


- --------
1 This exhibit is being filed electronically in the electronic format specified
by EDGAR.


                                       15
                                  


                               AMENDMENT NO. 3 TO
                                  MODACAD, INC.
                             1995 STOCK OPTION PLAN



     The first sentence of Section 3 of the ModaCAD, Inc. 1995 Stock Option Plan
shall be amended to read in its entirety as follows:


          (b) Stock Subject to the Plan. Subject to the provisions of Section 10
     of the Plan, the maximum  aggregate  number of Shares which may be optioned
     and sold  pursuant to the  exercise of Options  under the Plan is 1,650,000
     Shares.



Dated:   April 8, 1998

                          SOFTWARE PUBLISHING AGREEMENT

     This Software Publishing Agreement (this "Agreement"), dated as of June 17,
1998,  is  made  by  and  between  Cendant  Software  Corporation,   a  Delaware
corporation,  together with its affiliates,  subsidiaries  and related  entities
("Cendant"), doing business through its subsidiary Sierra On-Line, Inc., at 3380
- - 146th Place S.E.,  Suite 300,  Bellevue,  WA 98007,  and ModaCAD,  Inc., doing
business at 3861 Sepulveda Boulevard, Culver City, California 90230 ("ModaCAD").
Cendant and ModaCAD agree as follows:


                                    RECITALS

     A. ModaCAD is co-developing  with Intel Corporation an interactive  fashion
lifestyle  content  manager that will consist of a CD-ROM  composed of digitized
images of clothing, footwear,  accessories and other fashion influences aimed at
young women  between the ages of fifteen and twenty eight.  This  product,  code
named "Project New York," will enable users to have a rich visual  experience by
allowing users to interact with digital fashion objects, connect to the Internet
to receive  updates via push  technology,  visit other web sites and communicate
electronically  with other  users.  Project  New York is  scheduled  for release
during the 1998 back-to-school season.

     B. ModaCAD is also  developing  an ** code named  "Project  Paris" which is
currently  scheduled  for  release  as set forth in  Appendix  C. Paris is being
developed as **. A detailed product  specification will be delivered pursuant to
a milestone schedule set forth in Appendix C of this Agreement.  ModaCAD is also
pursuing a co-development partner for this product.

     C.  Cendant and ModaCAD are  entering  into an  Agreement  to publish  both
Project New York and Project Paris pursuant to the schedules and terms set forth
in this Software Publishing Agreement.

     D.  Cendant  wishes to  develop an  ongoing,  long-term  relationship  with
ModaCAD for the purpose of publishing and distributing  future consumer software
products  and  supporting  ModaCAD  in its  creative  and  technical  growth and
development of products.

     E.  Cendant  acknowledges  that  ModaCAD is and  expects to  continue to be
engaged in the development, design, marketing, licensing and support of software
applications using ModaCAD's Core Technology (as defined below) for inclusion in
ModaCAD's  proprietary  content managers which include digital content creations
and interactive user interfaces which are components  thereof,  and any existing
or future  enhancements  to or  replacements  of such software or its components
(all subject to this Agreement and the noncompetition provisions hereof). Except
as otherwise  specifically provided in this Agreement,  Cendant will not have or
acquire any rights to ModaCAD's Core Technology under this Agreement.


                                    AGREEMENT

Section 1. Definitions

     Whenever  used  herein,  the  following  terms  shall  have  the  following
specified meanings:


     "Add-On  Product"  means  any  software  program  designed  only to work in
conjunction  with a Retail  Version and which will not  include any  application
designed  to  operate as a  stand-alone  product,  along  with any  corrections,
enhancements,  modifications  and/or  updates  to  any  such  program  developed
hereunder.


     "Alternative Channel Revenue" means **.


     "Alternative  Channel Version" means **.  Additional  details which outline
proposed  delivery  schedules and basic program  functionality  are set forth in
Appendix A and Appendix C of this Agreement.


     "Cendant  Content"  means the Cendant  Set-Up (if  utilized)  and all other
Cendant provided content and technology incorporated into any Product.


     "Cendant Set-Up" means an installation set-up to be provided by Cendant for
use in Products free of charge (as the same may be modified by Cendant from time
to time).


     "Core Technology" means ModaCAD's proprietary rendering and content manager
technologies,  including, without limitation, features such as lighting, texture
mapping, UV mapping and modeling as well as database cataloging features such as
rule-based  validation  and search and  retrieval,  used in  ModaCAD's  existing
software  applications  which is the base technology for ModaCAD's  existing and
future content managers.


     "Delivery  Schedule"  means the  delivery  schedule set forth in Appendix A
hereto,  as the  same  may be  amended  from  time to time by  agreement  of the
parties.


     "Derivative  Work"  means a consumer  software  product  which  extends the
fashion  lifestyle  experience  to be  delivered  in Project New York and has an
overall look and feel  substantially  similar to the Retail, OEM and Alternative
Channel Versions of Project New York.


     "Errors" means any bug, error or defect in Project New York,  Project Paris
or any other product  delivered by ModaCAD to Cendant hereunder which (a) causes
Project  New York , Project  Paris or such other  product  not to conform to its
specifications,  (b) causes incorrect results, (c) causes incorrect functions to
occur, or (d) renders the Project New York,  Project Paris or such other product
inoperable. Errors shall not include any defects caused by the Cendant Content.


     "Foreign Translation" means any partial or complete translation of a Retail
Version  to  a  language  other  than  English,   along  with  any  corrections,
enhancements,  modifications  and/or updates to any such  translation  developed
hereunder.

     "Intellectual  Property  Rights" means,  collectively,  worldwide  Patents,
Trade Secrets,  Copyrights,  moral rights,  trade names,  Trademarks,  rights in
trade dress and all other intellectual  property rights and proprietary  rights,
whether arising under the laws of the United States or any other state,  country
or  jurisdiction,  including all rights or causes of action for  infringement or
misappropriation of any of the foregoing.  "Patents" means all patent rights and
all right,  title and interest in all letters  patent or  equivalent  rights and
applications   for  letters  patent  or  rights  and  any  reissuing   division,
continuation or continuation in part  application  throughout the world.  "Trade
Secrets"  means all right,  title and  interest  in all trade  secrets and trade
secret rights arising under the common law, state law, U.S.  federal law or laws
of foreign countries.  "Copyrights" means all copyright rights,  neighboring and
derivative  rights,  and all other  literary  property and author rights and all
right,   title  and  interest  in  all  copyrights,   copyright   registrations,
certificates  of  copyright  and  copyrighted  interests  throughout  the world.
"Trademarks"  means all  trademark  and service  mark rights  arising  under the
common law,  state law, U.S.  federal law and laws of foreign  countries and all
right,  title and  interest in all  trademarks,  service  marks,  trademark  and
service mark  applications  and  registrations  and  trademark  and service mark
interests throughout the world.

     "ModaCAD  Technology"  means all  Intellectual  Property  Rights  contained
within  Project  New York,  Project  Paris and any other  product  delivered  by
ModaCAD to Cendant hereunder, excluding the Cendant Content.


     "Net  Revenue"  means  **.  "Net  Revenue"  excludes  revenue  earned  from
distribution of products other than a Retail  Version.  If Cendant earns revenue
from  distribution  of a Retail  Version in  combination  with one or more other
products,  such revenue will be  allocated  between the Retail  Version and such
other products on the basis of the current or most recent ** of a compilation or
bundle.  For purposes of calculating gross revenue the following shall apply: if
Cendant  distributes a Retail Version directly to an end user, the gross revenue
earned by Cendant from such end user shall be deemed to be Cendant's ** for such
unit of such Retail Version.

     "OEM Revenue" means the **, whereby Cendant or ModaCAD (as the case may be)
authorizes  such third parties to market,  reproduce and distribute  physical or
electronic copies of such OEM Version(s) as permitted under this Agreement.

     "OEM Version" means a version of the Retail  Version that contains  limited
functionality and is in the nature of a playable demo of the Retail Version, the
specifications  for which are set forth on Appendix A and C  concerning  Project
New York and Project Paris (and for future Retail  Versions,  as may be mutually
agreed in writing).

     "Platform  Extension" means any adaptation of a Retail Version to any other
electronic  platform or operating  system (e.g.,  Sony PSX, N64,  Sega,  set top
boxes, etc.) not described in Appendix A.

     "Project  New York" means the fashion  e-commerce  content  manager that is
being  co-developed  by ModaCAD and Intel  Corporation  and which is targeted at
young women consumers.

     "Project  Paris"  means **  which is to be  developed  or  co-developed  by
ModaCAD under this Agreement.

     "Retail  Version" means the fully featured  version of Project New York and
Project  Paris  identified  in Appendix A for  delivery to and  distribution  by
Cendant under this  Agreement.  The term "Retail  Version"  will include  Sequel
Products,   Add-On  Products,   Platform  Extensions  and  Foreign  Translations
developed directly or indirectly by ModaCAD pursuant to Section 2.

     "Sequel  Product"  means  any  software  program  for  traditional   retail
distribution  which  extends  or  continues  the  fashion  lifestyle  experience
setting, environment,  structure, theme, storyline, name or similar elements, is
a Derivative  Work,  or is a  subsequent  version of Project New York or Project
Paris,  and  includes   significant   enhancements,   additional   features  and
improvements  to any such  product,  along with any  corrections,  enhancements,
modifications and/or updates to any such program developed hereunder.

Section 2.  Development  and  Delivery of Project  New York and Project  Paris ;
License; Rights

     2.1 Development and Delivery of Project New York and Project Paris. ModaCAD
will  develop,  make and deliver to Cendant  the Retail  Versions of Project New
York and Project Paris in accordance with this Agreement  (including  Appendix A
and Appendix C). Cendant will provide and ModaCAD will implement  design and art
input on the Retail Version interface.  The Delivery Schedules may be amended in
writing  from time to time by mutual  written  agreement  signed by ModaCAD  and
Cendant.

     ModaCAD  shall use its best  efforts to ensure that Cendant has a completed
gold  master  of the  first  Retail  Version  for  Project  New York  ready  for
duplication  on or before ** and the first Retail Version of Project Paris on or
before  **.  If the  U.S.  Retail  Version  of each  respective  product  is not
completed and ready for duplication on or before ** (for Project New York) or **
(for  Project  Paris),  ModaCAD  shall be in material  breach of this  Agreement
(without  any cure  period)  and  Cendant  shall  be  entitled  to all  remedies
available to it under this Agreement (as outlined in Section 5).

     ModaCAD  shall  perform  initial  quality  assurance  and  other  error/bug
testing,  but not configuration  testing, on Retail Version, OEM and Alternative
Channel  Versions  prior to delivery to Cendant.  Cendant  shall  conduct  final
quality  assurance  and  other  error/bug  testing  on Retail  Version,  OEM and
Alternative  Channel Versions from time to time prior to the commercial  release
thereof, and shall conduct configuration testing on such products after the beta
version milestone for each product.

     ModaCAD  will  prepare  and  deliver to Cendant  within ** of signing  this
Agreement a product  overview and development  budget  regarding  Project Paris.
Pursuant  to the  milestone  schedule  set forth in  Appendix C ,  ModaCAD  will
deliver a detailed  product  specification  by **. If ModaCAD  does not meet the
milestones  set forth in Appendix C for the delivery of Project  Paris,  ModaCAD
shall be in material  breach of this  Agreement  (without  any cure  period) and
Cendant shall be entitled to all remedies  available to it under this  Agreement
only as it relates to Project Paris (as outlined in Section 5).

     2.2 Non-Compete. **.

     2.3 **

     2.4 **

     2.5 Development of OEM Version and  Alternative  Channel  Version.  ModaCAD
shall,  **,  develop the OEM Versions and  Alternative  Channel  Versions.  Such
products will not vary from the applicable  specifications set forth in Appendix
A and  Appendix C without  the mutual  consent of Cendant and  ModaCAD.  Cendant
shall  obtain  and  incorporate  any  required  encryption   technology  in  the
Alternative  Channel  Version to permit  unlocking  of the full  Retail  Version
within each  Alternative  Channel  Version.  The parties  will work  together to
ensure the appropriate  design continuity among the Retail Version,  OEM Version
and Alternative Channel Version.

     2.6 Development Costs for Foreign Translations. If Cendant requests ModaCAD
to develop Foreign Translations, ModaCAD shall develop such Foreign Translations
as promptly  as  reasonably  possible,  Cendant  shall ** and  ModaCAD  shall be
responsible for integrating these elements into the Products.  The parties shall
mutually agree upon  appropriate  participation  fee milestones and  development
schedule.  Cendant will pay participation  fees to ModaCAD to **. Specific terms
related to participation  fees,  milestones,  delivery  schedules,  etc. will be
negotiated  upon  Cendant's  request for a foreign  translation  and added as an
amendment to this Agreement.

     2.7  Third  Party  Software   Technology  and  Content.   ModaCAD  will  be
responsible  for  obtaining  ** any and  all  third  party  rights  and  content
necessary  in  connection  with  Cendant's  exercise  of its  rights  under this
Agreement,  unless otherwise agreed in writing by Cendant.  Cendant will provide
reasonable assistance, as necessary, in connection with ModaCAD's acquisition of
such third party rights and content.

     2.8  Ownership  of   Intellectual   Property   Rights.   Ownership  of  the
Intellectual Property Rights in and to each element of each product developed by
ModaCAD under this Agreement, excluding the Cendant Content associated with each
such product, will vest in ModaCAD,  subject to the terms and conditions of this
Agreement.  Cendant shall own and retain all Intellectual Property Rights in and
to each element of the Cendant Content.

     Cendant agrees not to copy or reverse engineer,  decompile,  disassemble or
otherwise  derive or attempt to derive  source  code or other  trade  secrets or
proprietary  information of ModaCAD from such tools and hardware.  The tools and
hardware that ModaCAD provides to Cendant under this Agreement  constitute trade
secrets and confidential information, and Cendant shall protect the same against
unauthorized dissemination,  reproduction and use. Cendant shall not disclose to
third parties  knowledge about ModaCAD's tools or hardware without prior written
consent from  ModaCAD.  Subject to the  nonexclusive,  nontransferable,  limited
license granted to Cendant in this Agreement,  ModaCAD retains  ownership rights
to all of ModaCAD's tools and hardware and all associated  Intellectual Property
Rights.

     2.9 Trade  Names and Other  Related  Materials.  ModaCAD  hereby  grants to
Cendant a perpetual,  worldwide,  royalty-free right to use the title of Project
New York and  Project  Paris and, if  applicable,  to any other  Retail  Version
delivered  hereunder  (which  license  shall be exclusive to Cendant  except for
ModaCAD's  rights to use such  title as set  forth in  Section  3.2),  the names
"ModaCAD,  Inc." and "ModaCAD"  (and  applicable  logos)(which  license shall be
nonexclusive  to Cendant).  Cendant may use Cendant's names and marks to promote
and identify the Products. Cendant shall at all times retain exclusive ownership
of all trademarks and trade names (other than the titles of Project New York and
Project Paris and, if applicable,  any Add-On Product,  and other than the names
"ModaCAD,  Inc.", "ModaCAD",  and "Moda" and related logos and third party owned
property) associated with any of the products.  If ModaCAD does not (or does not
intend to) utilize the title of Project New York or Project Paris (or any Retail
Version then in  distribution)  in commerce  within ** after the  termination or
expiration of this Agreement, then Cendant's perpetual, worldwide, royalty-free,
exclusive  license  to the  title of the  products  shall  continue  perpetually
thereafter  provided,  however,  the  Cendant  will  have no rights to the names
"ModaCAD, Inc.", "ModaCAD", and "Moda".

     ModaCAD  shall have the right to comment in advance on  Cendant's  proposed
use of  ModaCAD's  name  (including  "Moda") or any of ModaCAD's  trademarks  or
service marks on any marketing or promotional materials. Once ModaCAD has had an
opportunity  to comment  on a  particular  use,  future  similar  uses shall not
require  ModaCAD's  prior  comment,  and  Cendant  shall  immediately  cease any
disapproved  use of any ModaCAD name,  trademark or  servicemark  upon notice to
Cendant by ModaCAD of such  disapproval.  Upon expiration or termination of this
Agreement for any reason whatever, subject ot Cendant's sell-off rights, Cendant
will cease all display,  advertising and use of all of ModaCAD's  names,  marks,
logos and  designations  and will not thereafter  use,  advertise or display any
name,  mark or logo which is, or any part of which is,  similar to or  confusing
with any such  designation  associated  with  ModaCAD  or the  Retail  Versions,
subject only to the conditional  post-termination limited right of use set forth
in the immediately preceding paragraph. Cendant acknowledges that Cendant is not
paying,  and has  not  paid,  separate  consideration  for the use of  ModaCAD's
trademarks,  service marks, logos, copyrights, trade names or designations,  and
except as explicitly set forth in this Agreement  nothing contained herein shall
give  Cendant  any  interest  in any of the  same.  Cendant  shall not affix any
ModaCAD name, trademark,  logo or trade name to any non-ModaCAD product, nor use
any ModaCAD name,  trademark,  logo or trade name in connection  with any direct
marketing of any non-ModaCAD  product (except as may be incidental in connection
with  Cendant's  cross  marketing  programs  of  its  other  products,  both  on
in-product materials and web site marketing.

     Cendant and ModaCAD shall each own their  respective  materials  including,
but not limited to package designs,  logos,  slogans,  advertising materials and
promotional  materials,  and Cendant  and ModaCAD  shall not have or acquire any
rights thereto, except as specifically provided in this Agreement.

     2.10 Packaging; Branding. Cendant will manufacture the Project New York and
Project  Paris and, if  applicable,  other Retail  Version  packages for its use
(including the box, manuals,  registration cards, license agreements and media).
Cendant  will consult  with  ModaCAD  about such  designs and provide  ModaCAD a
reasonable  opportunity  to  comment  on such  designs.  The  final  design  and
manufacture  of all  packages  for Project  New York and  Project  Paris and, if
applicable,  other  Retail  Version  (after  consultation  with  ModaCAD  and as
required  to  maintain  the  product  release  dates)  shall be  under  the sole
discretion  and control of Cendant.  Cendant  shall  ensure that any  packaging,
manual or game copy of such  products  will  include  credit  to  ModaCAD  using
ModaCAD  branding **, with placement of such branding on the **,  documentation,
physical product media and related promotional  materials.  ModaCAD shall ensure
that Sierra Home branding appears ** on all OEM Versions and Alternative Channel
Versions,  on physical media,  packaging and marketing and promotional material.
Each party shall have the right to review and approve each use of its  branding.
The party using the other's  branding will provide details on each such proposed
use to the other  party and the other  party shall have ** of receipt to comment
on such use.  If the other  party  fails to  provide  comments,  within  such **
period,  the other party shall be deemed to have  approved such use. Once use of
its branding has been approved in a particular manner (e.g., use in a particular
marketing  campaign),  future uses of a  substantially  similar nature shall not
require additional approval from a party. The parties acknowledge and agree that
as  co-developer  of Project New York,  Intel  Corporation may also require some
form of brand presence on marketing  materials,  packaging and the like. ModaCAD
will manage all aspects of the Intel relationship  concerning Intel branding and
approval rights, with reasonable assistance from Cendant as required.

     2.11 Corrections; Updates. ModaCAD shall, **, and as promptly as reasonably
possible,  correct  all Errors of which  Cendant  notifies  ModaCAD  prior to or
within six months after the  commercial  release of the  applicable  product and
shall promptly  furnish such  corrections  to Cendant.  If ModaCAD makes any bug
fixes or minor updates to either  Project New York or Project Paris or any other
Retail, OEM or Alternative Channel Versions,ModaCAD shall promptly make all such
corrections  and/or updates  available to Cendant,  on such media as Cendant may
reasonably request.

     2.12 Design and Milestone Schedule Changes.  In the event Cendant wishes to
materially alter the design  specification or Delivery  Schedule for Project New
York or Project Paris (or any other Retail  Version to be delivered  hereunder),
Cendant  shall  give  ModaCAD  notice in writing of the  changes  required  (the
"Change  Request").  ModaCAD shall respond to a Change  Request within seven (7)
days of receipt by a notice (the "Change Proposal")  detailing in good faith the
impact of such changes on the milestone schedule and the costs of development if
the changes are implemented  immediately.  If the parties  mutually agree on the
Change  Proposal,  then the  Change  Proposal  will be  incorporated  into  this
Agreement as an amendment.

Section 3. Manufacturing, Promotion and Distribution; E-Commerce

     3.1 Cendant's  Manufacturing,  Promotion and Distribution Efforts.  ModaCAD
appoints Cendant as a worldwide,  nonexclusive (subject to Sections 2.2 and 2.3)
publisher under license (or  sublicense,  as the case may be) to use the ModaCAD
Technology  and Core  Technology,  in  object  code  form  only,  in order to do
everything necessary to aggressively manufacture, have manufactured, distribute,
market, promote, and sell Retail Versions under this Agreement.  The release and
distribution  of Retail  Versions shall be subject to Cendant's  final approval.
Subject to its marketing  commitment on the Retail  Versions of Project New York
and  Project  Paris  described  below,  Cendant  shall  determine  in  its  sole
discretion  the  nature  and  scope  of  any   manufacturing,   promotional  and
distribution  efforts undertaken by Cendant with respect to Project New York and
Project Paris and any other Retail Version.

     Cendant will commit to a marketing budget  concerning the Retail Version of
Project  New  York of no less  than ** in  order  to  stimulate  broad  end-user
distribution of the Retail Version.  Cendant will outline proposed  expenditures
for such marketing budget in Appendix E. Such marketing budget and commitment is
conditioned  upon timely  delivery of the Retail  Version,  such version to have
specifications  as set  forth  in  Appendix  A and  Appendix  C.  The  foregoing
marketing  commitment  may be modified by Cendant based on ** the Retail Version
of Project New York.  If Cendant  materialy  modifies its  marketing  budget for
Project New York, it will notify  ModaCAD in writing of the same and the reasons
supporting  the  change.  Cendant  will make ** with  respect to  Project  Paris
provided  Project New York meets  expectations  and Project  Paris is of similar
quality and supports similar sales forecasts.

     Cendant  shall  manufacture,  or  have  manufactured,  the  physical  media
versions of the Retail  Versions,  the OEM Versions and the Alternative  Channel
Versions.  Cendant will  provide  product  fulfillment  services to ModaCAD with
respect to the OEM Versions and Alternative  Channel Versions under its standard
order and fulfillment terms with reimbursement from ModaCAD due ** after invoice
for Cendant's **.

     Cendant will arrange for a call center  (which will be readily  availble to
consumers  of Project New York and Project  Paris during each  business  day) to
manage the full  Retail  Version  unlock  feature  expected  in the  Alternative
Channel Versions for the term of this Agreement.

     3.2 ModaCAD's Promotion and Distribution Efforts. **.

     3.3 Updated Content. **.

     3.4 Websites; Internet; E-Commerce. **.

     3.5 Electronic End User Registration; Cendant's Tools. ModaCAD will use the
Cendant provided  electronic end user  registration  interface and technology in
Project  New York and  Project  Paris and any  other  Retail  Version  delivered
hereunder.  Sierra shall, provide to ModaCAD in an acceptable electronic format,
on a quarterly  basis (within 45 days of the end of each quarter),  all end user
registration  information  on Project New York and  Project  Paris and any other
Retail Version delivered hereunder.  **. Upon ModaCAD's request, Cendant may, in
its sole discretion, provide ModaCAD other tools owned by Cendant free of charge
for the sole purpose of  developing  Project New York and Project  Paris and any
other Retail Version to be developed hereunder.  ModaCAD shall return all copies
of any tools  and any  hardware  provided  by  Cendant  upon  Cendant's  request
therefor,  or in any event upon the earlier of completion of Project New York or
Project  Paris  and any  other  Retail  Version  to be  developed  hereunder  or
termination  of this  Agreement,  and  ModaCAD  agrees  not to  copy or  reverse
engineer, decompile, disassemble or otherwise derive or attempt to derive source
code or other trade  secrets or  proprietary  information  of Cendant  from such
tools and  hardware.  The tools and hardware  that  Cendant  provides to ModaCAD
under this Section 3.5 constitute trade secret and confidential information, and
ModaCAD shall protect the same against unauthorized dissemination,  reproduction
and use.  ModaCAD shall not disclose to third parties  knowledge about Cendant's
tools or hardware  without  prior written  consent from Cendant.  Subject to the
nonexclusive,  nontransferable,  limited  license  granted  to  ModaCAD  in this
Section 3.5,  Cendant  retains  ownership  rights to all of Cendant's  tools and
hardware and all associated Intellectual Property Rights.

     3.6 ModaCAD Internal Use. Cendant shall provide,  at ModaCAD's request,  up
to one hundred  (100) copies of each Retail  Version at no charge for  ModaCAD's
internal  use.  Cendant  shall  not owe  ModaCAD  royalties  on copies of Retail
Versions provided to ModaCAD.

     3.7  Technical  Support  and  Customer  Service  .  Cendant  shall  provide
front-line  technical  support  to persons  acquiring  Retail  Versions  from or
through  Cendant.  Cendant  may,  in its  discretion,  charge  for  support on a
subscription or other basis.  ModaCAD shall provide  reasonable backup technical
support to Cendant's  engineering  personnel with respect to Retail Versions via
telephone,  facsimile,  e-mail  and  any  other  commercially  reasonable  means
requested by Cendant in order to enable Cendant to provide  adequate  front-line
technical support for Retail Versions.

Section 4. Compensation

     4.1  Participation  Fees.  Cendant will make ** participation  fee payments
(subject to Section  5.3) in  accordance  with the  milestones  set forth in the
Delivery  Schedule for the Retail Versions of Project Paris and Project New York
as set forth in Appendix A and Appendix C,  provided,  that the payment for each
milestone on each Retail Version will be subject to Cendant's approval that each
such  milestone  has  been  satisfied.  Payment  will be made  within  ** of the
occurrence of the event requiring payment. Participation fees for any subsequent
Add-On and Sequel Products will be agreed upon at the time the Delivery Schedule
is  negotiated  for such Add-On and Sequel  Products.  In the event that Cendant
does not  believe a milestone  has been  achieved on Project New York or Project
Paris or any other Retail Version to be delivered hereunder, Cendant will notify
ModaCAD  of that fact  within  ** after  ModaCAD  has  submitted  the  pertinent
deliverable, together with reasonably detailed comments specifying the basis for
the  rejection.  ModaCAD will then resubmit  materials to Cendant  within thirty
(30) days of the rejection  notification.  This  procedure  will continue  until
Cendant is  satisfied  that the  milestone  has been  achieved or until  Cendant
terminates future development  efforts of such product in the manner provided in
this Agreement.

     4.2  Royalty Fee for  Project  New York and  Project  Paris.  If ** for the
period from the receipt of the first Net Revenues for the applicable product and
ending ** (for Project New York) and ** (for  Project  Paris),  then  commencing
once  Net  Revenue  for each  such  Retail  Version  (and  any  related  Foreign
Translation)  exceeds  **,  Cendant  will pay  ModaCAD a royalty on such  Retail
Version (and any related  Foreign  Translation) at the rate of ** of Net Revenue
and once Net Revenue for such Retail  Version  exceeds ** then  thereafter  at a
rate of ** of Net  Revenue.  If the Retail  Version gold master is not ready for
duplication  for  commercial  shipment  by ** (for  Project New York) or ** (for
Project Paris), the ** and ** royalty rates set forth in the preceeding sentence
of this  Section  4.2 for such  Retail  Version  shall be  reduced to ** and **,
respectively  and the ** break point shall be  increased  to **. If Net Revenues
are ** or greater for the period from the receipt of the first Net  Revenues for
the applicable  product and ending ** (for Project New York) and ** (for Project
Paris),  then  commencing  from the first  dollar of Net  Revenue  for each such
Retail Version (and any related Foreign Translation), Cendant will pay ModaCAD a
royalty on such Retail Version (and any related Foreign Translation) at the rate
of ** of Net Revenue  (with such payment for the time period  ending **, due and
payable along with the royalty report for such quarter) and once Net Revenue for
such Retail Version  exceeds ** then  thereafter at a rate of ** of Net Revenue.
If the Retail  Version gold master is not ready for  duplication  for commercial
shipment by ** (for Project New York) or ** (for Project  Paris),  the ** and **
royalty rates set forth in the preceeding  sentence of this Section 4.2 for such
Retail  Version  shall be  reduced to ** and **,  respectively  and the ** break
point shall be  increased  to **. For the first  twelve (12) months  after first
commercial shipment, the minimum per unit royalty for distribution of units, net
of returns,  of such Retail Version (and any related Foreign  Translation) shall
be ** per unit.  If such minimum per unit royalty  applies  during a time period
before the maximum  percentage  royalty  rate applies with respect to a product,
payment to ModaCAD of ** of such  minimum per unit  royalty will be dependent on
whether Net Revenues are at that time  subject to an actual  royalty  payment to
ModaCAD of either **.

     4.3 OEM and Alternative  Channel  Revenues . Cendant will pay ** of Cendant
generated OEM Revenues to ModaCAD on the payment terms described in Section 4.6.
Cendant will pay to ModaCAD ** of Alternative Channel Revenues and Cendant shall
be entitled to have and retain ** of Alternative Channel Revenues.  Cendant will
be responsible for the collection of OEM and Alternative  Channel Revenues.  The
minimum per unit royalty to Cendant for unlock of units, net of returns,  of the
Alternative Channel Version(s) (and any related Foreign Translation) shall be **
per unit.  ModaCAD shall pay to Cendant,  on the same terms and conditions under
which Cendant makes payments to ModaCAD  hereunder,  ** of all ModaCAD generated
OEM Revenues.

     4.4  Royalty Fee for Sequels  and Future  Add-On  Products.  As part of the
negotiations  required under Section 2.3 and 2.4, the parties shall negotiate in
good  faith and  mutually  agree  upon  appropriate  royalty  rates  for  Sequel
Products.  Add-On Products shall bear the ** as the Retail Version to which such
Add-On Product relates.

     4.5  Promotional  Copies.  Notwithstanding  any  other  provision  of  this
Agreement,  no royalties shall be payable with respect to copies of any products
distributed by Cendant  without charge for  demonstration,  promotional or other
purposes.

     4.6  Payment.  Within  forty-five  (45) days  following  the end of each of
Cendant's  fiscal  quarters  during  the  term of this  Agreement,  and for each
royalty payment of more than ** on each product,  Cendant will submit to ModaCAD
reports  specifying  the Net Revenue and the OEM  Revenue  occurring  during the
previous quarter for each product,  along with the royalties payable pursuant to
the terms of this  Agreement  for such  quarter.  Cendant  may adjust any future
royalty payment on any product for any past  overpayments that may have occurred
and/or any adjustments to the Net Revenue or OEM Revenue calculation. Each party
shall have the right to offset any amounts  owing to the other  party  hereunder
any past due amounts the other party owes hereunder.

     Notwithstanding any other provision of this Agreement,  in the event of any
breach or default of this Agreement by ModaCAD, Cendant shall have no obligation
to remit any royalties otherwise earned by ModaCAD pursuant to this Section 4 on
any  product,  except to the  extent  that the  aggregate  amount  of  royalties
otherwise  earned by ModaCAD under this  Agreement for all products  exceeds the
aggregate royalty advances paid or deemed paid pursuant to this Section 4 or the
Delivery Schedule for such products.

     4.7 Records;  Inspection.  Upon at least fifteen (15) days' advance written
notice to Cendant by  ModaCAD,  and not more than once in any ** (or as often as
every six (6) months after any such audit has revealed a material discrepancy in
royalties),  ModaCAD may have an independent  accounting firm gain access during
Cendant's normal business hours to all relevant  accounting  records in order to
verify the  accuracy  of  Cendant's  royalty  computations.  ModaCAD's  right to
inspect Cendant's records is limited to the most recent past ** from the date of
the written notice.  Cendant's right to adjust royalty payments made pursuant to
this  Section 4 is also  limited to the most  recent  **.  Such  information  is
confidential  and  proprietary  to Cendant and shall not be disclosed or used by
such accounting firm or ModaCAD,  except as required for  verification.  Cendant
shall promptly pay to ModaCAD any  underpayment  of royalty fees made to ModaCAD
under this  Agreement.  ModaCAD shall promptly refund to Cendant any overpayment
of royalty fees made to ModaCAD under this Agreement.  All expenses  incurred in
connection with any such audit shall be borne by ModaCAD;  provided, that in the
event  any audit  discloses  an  underpayment  by  Cendant  of more than ** with
respect to the royalty  fees  payable in any quarter,  Cendant  shall  reimburse
ModaCAD for any costs associated with such audit.

     4.8 Full  Compensation.  Payment of the amounts specified in this Section 4
shall   constitute  full   compensation  to  ModaCAD  for  the  rights  granted,
transferred  and assigned to Cendant herein and  performance of its  obligations
hereunder.  Cendant may withhold and apply any royalty or other amounts owing to
ModaCAD  under  this  Agreement  against  any refund or other  amounts  owing by
ModaCAD to  Cendant  under  this  Agreement  or  otherwise  (including,  without
limitation, any damages, costs or expenses incurred by Cendant on account of any
breach of ModaCAD's representations, warranties or obligations set forth in this
Agreement).

Section 5. Term

     5.1 Term.  Subject  to  termination  as  provided  below,  the term of this
Agreement shall be ** from first commercial shipment of the Retail Version.

     5.2  Termination  by  ModaCAD.   If  Cendant  materially  defaults  in  the
performance  of any of its  obligations  under this Agreement and the default is
not cured within ** after ModaCAD gives Cendant  written  notice of the default,
ModaCAD may  immediately  terminate this  Agreement.  A reasonable  dispute over
calculation  of  royalties,  as opposed  to  material  failure  to  account  for
royalties, is not considered a breach of the Agreement.

     5.3 Termination by Cendant.  If ModaCAD  defaults in the performance of any
of its material  obligations  under this  Agreement and the default is not cured
within ** after Cendant gives ModaCAD written notice of the default, Cendant may
immediately  terminate  this  Agreement  and  maintain  an action to recover its
damages from such breach.  In the event that Cendant  terminates  this Agreement
during the  development of Project New York,  Cendant will **. In the event that
Cendant has the right to terminate  this  Agreement  during the  development  of
Project Paris,  Cendant will have the right to cancel only Project Paris **, but
shall  continue this  Agreement in full force and effect with respect to Project
New York and other  Retail  Version(s).  In the  event  that  ModaCAD  obtains a
replacement  publisher  for  either  of  the  aforementioned  products  that  is
cancelled under this Section, ModaCAD shall pay ** of its net revenues generated
from  either  Project New York or Project  Paris,  as the case may be, but in no
event shall it **. Upon  termination  or  expiration  of this  Agreement for any
reason,  Cendant  shall have the  nonexclusive  right to sell-off its  remaining
unsold inventory for six (6) months thereafter subject to Cendant's  obligations
with respect to royalties payable on such sales.

     5.4  Survival.  Sections  2.8,  4.7,  5, 6 and 7  (together  with all other
provisions of this Agreement which may reasonably be interpreted or construed as
surviving  termination  of this  Agreement,  including  any  obligations  to pay
royalties as  specifically  provided  herein) shall survive  termination of this
Agreement.

Section 6. Representations; Indemnification; Limitation of Liability

     6.1  Representations  and  Warranties by ModaCAD.  ModaCAD  represents  and
warrants  to  Cendant  that:  (i)  ModaCAD  has all right,  power and  authority
necessary to perform its obligations under this Agreement;  (ii) ModaCAD has the
right to grant the rights,  sublicenses  and licenses  granted to Cendant  under
this  Agreement;  (iii) the  ModaCAD  Technology  and any other  portions of any
products  developed or licensed to Cendant by,  through or under  ModaCAD do not
and will not  infringe any  Intellectual  Property  Rights or other  proprietary
right of any third  party;  (iv) all products  developed  by ModaCAD  under this
Agreement will perform  substantially in accordance with Appendix A and Appendix
C (or such other  specifications  delivered pursuant thereto) and do not contain
any viruses or other harmful code;  (v) the medium on which Project New York and
Project  Paris are  furnished  to Cendant will be free from defects in materials
and workmanship; (vi) ModaCAD has not previously and will not grant to any third
party  any  rights  in any  products  that are  inconsistent  with or  otherwise
conflict  with the  rights  granted  to  Cendant  in this  Agreement;  (vii) all
products  developed by ModaCAD under this Agreement will be created by employees
of ModaCAD within the scope of their  employment and under  obligation to assign
inventions to ModaCAD,  or by independent  contractors under written obligations
to assign all rights in the same to ModaCAD  except for third party  licenses of
components of the same;  (viii) the name and  trademarks of Project New York and
Project Paris (and, if applicable, any Add-On Products, Foreign Translations and
Sequel  Products) and the names  "ModaCAD,  Inc." and "ModaCAD" (and  associated
logos),  and use thereof by Cendant as permitted under this Agreement do not and
will not infringe any Intellectual  Property Rights or other proprietary  rights
of any  third  party;  (ix)  ModaCAD  will  comply  with  all  applicable  laws,
regulations,   ordinances  and  statutes  in  performance  of  its   obligations
hereunder;  (x) this Agreement has been duly authorized,  executed and delivered
by ModaCAD  and  constitutes  a valid,  binding  and  enforceable  agreement  of
ModaCAD;  and (xi)  ModaCAD  shall have made or shall make any and all  payments
required to be made to all authors, licensors, participants in the production of
the content,  works,  performances or computer software embodied in all products
developed  by ModaCAD  under this  Agreement  or other  persons  having legal or
contractual  rights of any kind to  participate in any income arising in respect
of the  exploitation  of such content,  works or performances or the use of such
computer software.

     6.2  Representations  and  Warranties by Cendant.  Cendant  represents  and
warrants to ModaCAD that (i) this Agreement has been duly  authorized,  executed
and  delivered  by Cendant and  constitutes  a valid,  binding  and  enforceable
agreement of Cendant;  (ii) the name and trademarks within Cendant's content and
use thereof by ModaCAD as  permitted  under this  Agreement  do not and will not
infringe any  Intellectual  Property Rights or other  proprietary  rights of any
third party.

     6.3 Indemnity.  ModaCAD shall  indemnify,  defend and hold Cendant harmless
from and against any and all claims, costs, losses,  liabilities,  judgments and
expenses (including  reasonable  attorneys' fees) resulting from or attributable
to actual or alleged violation of any representations or warranties set forth in
Section  6.1.  Without  limiting  ModaCAD's   obligations  under  the  preceding
sentence,  in the event that Cendant's ability to rightfully use and exploit any
of the Products as permitted hereunder may be eliminated or impaired as a result
of any actual or alleged  breach of  ModaCAD's  representation  and warranty set
forth in Section  6.1(iii),  ModaCAD will,  at its sole  expense,  do one of the
following:  (a) procure for Cendant the right to continue to use the  infringing
items;   (b)  replace  the  infringing  items  with   non-infringing   items  of
substantially the same  functionality;  or (c) modify the infringing items so as
to not  infringe  any  Intellectual  Property  Rights of any third  party  while
retaining substantially the same functionality.  Cendant shall indemnify, defend
and  hold  ModaCAD  harmless  from  and  against  any  and all  claims,  losses,
liabilities,  judgments  and expenses  (including  reasonable  attorneys'  fees)
resulting  from  or  attributable   to  actual  or  alleged   violation  of  any
representations  or  warranties  set forth in paragraph  6.2. The party  seeking
indemnification  shall  promptly  notify the  indemnifying  party to control the
defense and  settlement  of any claim for which it seeks  indemnification  under
this Section 6.3, and shall provide  reasonable  cooperation to the indemnifying
party, at the  indemnifying  party's sole expense,  in the defense or settlement
thereof.  The indemnifying party shall control the defense and settlement of any
such claim;  provided,  that the  indemnifying  party shall in no event agree or
acquiesce   without   the  prior   written   consent   of  the   party   seeking
indemnification, to be given or withheld in its sole discretion, to any judgment
or settlement  involving any  acknowledgment,  admission or  stipulation  of any
guilt,  fault,  wrongdoing  or  liability  on  the  part  of the  party  seeking
indemnification.

     6.4 Exclusion of Implied Warranties.  To the extent permitted by applicable
law,  Cendant  shall not,  and Cendant  shall ensure that no  subdistributor  or
dealer  of  Cendant  shall,   make  or  pass  on  any  warranty,   guarantee  or
representation,  whether  written or oral,  regarding or  concerning  the Retail
Versions or  otherwise on ModaCAD's  behalf,  except in strict  accord xwith the
provisions of this Agreement.

     TO THE EXTENT  PERMITTED BY APPLICABLE LAW, THE LIMITED  WARRANTY SET FORTH
IN OR IN CONNECTION  WITH THE RESPECTIVE  RETAIL  VERSIONS IS THE ONLY WARRANTY,
EITHER  EXPRESS,  IMPLIED OR STATUTORY,  THAT MODACAD MAKES TO ANY END USER WITH
RESPECT TO ANY PRODUCT DISTRIBUTED BY CENDANT, AND ALL IMPLIED WARRANTIES TO ANY
END USER, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY EXCLUDED.

     6.5 Consequential Damages.  EXCEPT AS PROVIDED IN SECTION 6.3 ABOVE NEITHER
ModaCAD  NOR  CENDANT  SHALL  BE  LIABLE  TO THE  OTHER  FOR ANY  INCIDENTAL  OR
CONSEQUENTIAL  DAMAGES  ARISING  OUT OF OR IN  CONNECTION  WITH THIS  AGREEMENT,
INCLUDING LOSS OF REVENUE OR PROFIT,  EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.

Section 7. Miscellaneous


     7.1 Conduct of Business. Each party shall conduct its business with respect
to the Products and the manufacture, promotion, distribution and support thereof
in a manner as to reflect  favorably  upon the reputation of the other party and
to not injure the goodwill of the other party.


     7.2 Notices. All notices,  demands, requests and other communications shall
be in writing or by written telecommunication, and shall be given when delivered
personally  to the  addressee or if mailed by  certified  mail,  return  receipt
requested, postage prepaid, or sent by written telecommunication, when delivered
to the addresses  specified below. Either party may from time to time change its
address, facsimile number or designated individual by notice to the other party.
The addresses for notices are as set forth below:


         To "Cendant":                      Sierra On-Line, Inc.
                                            3380 - 146th Place S.E., Suite 300
                                            Bellevue, WA 98007
                                            Attn:   General Counsel
                                            Phone: (425) 649-9800 
                                             Facsimile: (425) 641-7617

         With a copy at the same address attention:  Ron Stevens

         To "ModaCAD":                      ModaCAD, Inc.
                                            3861 Sepulveda Boulevard
                                            Culver City, CA 90230
                                            Attn:  Maurizio Vecchione
                                            Phone: (310) 751-2100 
                                            Facsimile: (310) 751-2120

     7.3  Successors.  ModaCAD  shall not assign  this  Agreement  or any of its
rights  hereunder,  or  delegate  any  of  its  obligations  hereunder  (whether
voluntarily,  involuntarily,  by  operation of law or  otherwise),  to any third
party without  Cendant's  prior written  consent which will not be  unreasonably
withheld. Cendant shall not have the right to assign this Agreement to any third
party without  ModaCAD's  prior written  consent which will not be  unreasonably
withheld.  Subject to the foregoing,  this Agreement will be fully binding upon,
inure to the benefit of and be enforceable  by the parties and their  respective
successors and assigns.

     7.4 Force  Majeure.  Neither party shall be liable for or in breach of this
Agreement  on account of any delay or failure to perform as required  under this
Agreement  as a result of any  cause,  condition  or  circumstance  beyond  such
party's  reasonable  control,  provided  that such  party  takes all  reasonable
measures to mitigate  any delay or harm to the other party  resulting  from such
cause,  condition  or  circumstance.  This  section  shall not apply to required
delivery dates and milestones under this Agreement.

     7.5 Attorneys' Fees. In the event of any legal,  arbitral or similar action
to enforce  this  Agreement,  the party that  prevails  in such  action  will be
entitled,  in addition to any other  relief  granted,  to recover from the other
party the costs and expenses of such enforcement, including, without limitation,
reasonable attorneys' fees and the fees and expenses of expert witnesses.

     7.6 Entire Understanding.  The terms set forth in this Agreement,  Appendix
A-Eand other written  specifications  describing  any of the Products  signed by
both parties  constitute the entire agreement of the parties with respect to the
subject   matter  and  supersede  and  cancel  all  prior  and   contemporaneous
understandings and oral agreements.

     7.7  Waiver.  A waiver by  either  party of any term or  condition  of this
Agreement  in any  instance  will not be deemed or construed as a waiver of such
term or condition for the future, or any subsequent breach thereof.

     7.8 Applicable Law; Forum.  This Agreement shall be interpreted,  construed
and enforced in  accordance  with the laws of the State of  California,  without
reference to its choice of law rules. The provisions of the 1980 U.N. Convention
on Contracts for the International Sale of Goods shall not apply.

     7.9  Nondisclosure;  Press  Releases.  Except  as may be  required  by law,
neither  party  shall  issue,  or permit to be  issued,  any  press  release  or
otherwise make any public  statement or disclosure to any third party  regarding
the financial or other confidential and/or competitively sensitive terms of this
Agreement  without the prior written  consent of the other party.  ModaCAD shall
provide to Cendant for its prior review and comment any  confidential  treatment
request  considering this Agreement to be filed with the Securities and Exchange
Commission or other third party (such as the NASDQ).  ModaCAD may provide,  upon
prior  notice to Cendant of its  intention  to do so,  periodic  press  releases
regarding the progress and/or success of the Retail  Version.  Cendant will have
two (2) business days to respond to any such requests  concerning periodic press
releases,  but shall only have approval rights over the portions of such release
that refer to Cendant or its  publication of the Product.  A joint press release
disclosing the publishing  relationship  between ModaCAD and Cendant is attached
to this  Agreement  as Appendix F.  ModaCAD and Cendant  agree to disclose  this
announcement upon execution of this Agreement.

     7.10 Compliance With Law. Cendant shall comply with all applicable laws and
regulations in performing  its duties  hereunder and in any of its dealings with
respect to the Retail  Versions,  and shall take reasonable steps to ensure that
each of its  subdistributors  and  dealers,  if any,  comply  with  all laws and
regulations  in any of its  dealings  with  respect to the Retail  Versions  and
ModaCAD's Intellectual Property.

     IN WITNESS WHEREOF, the parties have entered into and signed this Agreement
as of the date and year first above written.

                                                      
                                       
"Cendant:"                             "ModaCAD:"
Cendant Software Corporation           ModaCAD, Inc. 

By                                     By
    ------------------------------        ---------------------------------
Its                                    Its
    ------------------------------         --------------------------------
Date                                   Date
    ------------------------------         --------------------------------

                                   Appendix A

Project New York Retail  Version  Description:  Project New York is designed for
and will perform on the following minimum machine specifications:


- ---------------------------- ---------------------------------
                          
Working Title                        Project New York
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------

Target Computer              Minimum system requirements: **
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------

Operating System                            **
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------

RAM Requirements                        ** minimum

                                      ** Recommended

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

Modem                            ** for Internet features
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------

Media                                   CD-ROM/**
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------

Video HW Support                       Minimum: **
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------

Add. HW Support                        Optional: **
- ---------------------------- ---------------------------------
- ---------------------------- ---------------------------------

Required Gold Date                          **
- ---------------------------- ---------------------------------

Core Features

Project New York is a consumer  software title delivered on CD-ROM.  Project New
York is comprised  of a suite of  components  based on ModaCAD Core  Technology,
which  components  are: 

     1.   **.  Project  New  York  features  an  interactive  ** which is ** and
          wherein the user ** that they are  interested  **. The ** is comprised
          of **,  with each ** having a **.  There will be a  mechanism  for the
          user to ** of interest  from the **, such as  double-clicking  the **.
          When the user **,  the ** will be  replaced  by the **. In the **, the
          user can ** and **.

     2.   **. The ** enables the user to ** that they have selected from the **.
          The ** fits and  displays **  according to a set of rules that governs
          the behavior and relationships of the **. An example is **.

     3.   **.  Project  New York  will  have **  provided  by ** that  caters to
          Project New York's intended demographic  regarding **. ** will contain
          a minimum of ** as well as ** which  includes  ** from a minimum of **
          who don't fit into **. ** also  included in this  section will include
          at least **. At least ** will be posted ** to **.

     4.   **.  The user may wish to bypass the ** and ** and ** based on **. The
          ** provides this functionality.

     5.   **. ** will be  incorporated  in Project  New York to ensure  that the
          user has access to **. ModaCAD has established a ** and infrastructure
          for Project New York which  ensures ** as maintained by ModaCAD on its
          ** and the ** on the **.

     6.   **. Project New York will have  technology that enables ** Project New
          York users to ** while ** is **.

     7.   **. Project New York will have an **, which will include **, and other
          ** related to fashion. Content will include:

               Several  current **, at least **  current.  
               ** from some of the **. 
               ** that users can send in **. 
               Approximately ** updated **. 
               **. 
               **. 
               At least ** with an interesting ** updated **.

     8.   **.  Project New York will  target a minimum of ** at product  launch.
          There will be a minimum of ** in Project  New York at product  launch.
          The user's ability to access all of the ** shall not be restricted.


Project New York Retail Version Delivery Schedule:

Date due: **, Cendant pays ** to ModaCAD.
Milestone Description: **.

Delivery of Alpha Version
Date due: **
Cendant pays **  to ModaCAD upon acceptance of this milestone.
Milestone Description: **.

Beta Version
Date due: **
Cendant pays ** to ModaCAD upon acceptance of this milestone.
Milestone Description: **.

Golden Master, U.S.
Date due: **
Cendant pays ** to ModaCAD upon acceptance of this milestone (subject to 
Section 2.1). 
Milestone Description:  A stable build of the product with no serious or fatal 
bugs as determined by Cendant's quality assurance.

Project New York OEM Version Specification and Description: This product has the
same PC functionality as the Retail Version with these exceptions:

      The OEM Version will ** that is included to ** of **  or **.

      There will be no ** for **.

      The OEM Version can be ** if the user **, at which time  Cendant  will
      ** to the customer.

Project New York Alternative Channel Version Specifications and Description:  
This  product has the same PC functionality as the Retail Version with these 
exceptions:

     The  Alternative  Channel  Version  will be  distributed  **,  and  will be
     distributed  with **.  Access  to the ** will be  limited  ** as  described
     below.

     The  Alternative  Channel  Version will limit ** that is  accessible to the
     user to ** of the ** or **. The remaining ** will be **.

     There will be ** of the Alternative Channel Version, the ** being ** to the
     user.

     If a particular  Alternative  Channel  Version is **, then that  particular
     version will include ** for ** only.

     The Alternative Channel Version can be ** by **, **. **.



                                   Appendix B
                     Cendant's OEM Vendor Solicitation List


     ModaCAD will grant to Cendant the  exclusive  right to pursue the following
OEM  Vendors  for a period of ** from the date of  execution  of this  Agreement
afterwhich  Cendant will have the  nonexclusive  right to continue to pursue the
following  OEM Vendors and ModaCAD  will have the right to enlist the efforts of
third parties to solicit OEM Vendor  relationships  for  distribution of Project
New York.

**
  

                                   Appendix C
                            Project Paris Description


Project Paris Retail Version Description: Project Paris is designed for and will
perform on the following minimum machine specification:


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

Working Title                            Project Paris
- ---------------------------- ---------------------------------------
- ---------------------------- ---------------------------------------

Target Computer                 Minimum system requirements: **
- ---------------------------- ---------------------------------------
- ---------------------------- ---------------------------------------

Operating System                               **
- ---------------------------- ---------------------------------------
- ---------------------------- ---------------------------------------

RAM Requirements                           ** Minimum

                                         ** Recommended
- ---------------------------- ---------------------------------------
- ---------------------------- ---------------------------------------

Media                                          **
- ---------------------------- ---------------------------------------
- ---------------------------- ---------------------------------------

Video HW Support                          Minimum: **
- ---------------------------- ---------------------------------------
- ---------------------------- ---------------------------------------

Add. HW Support                         To Be Determined
- ---------------------------- ---------------------------------------
- ---------------------------- ---------------------------------------

Required Gold Date                             **
- ---------------------------- ---------------------------------------

Core Features

Project Paris is a consumer software title delivered on **. Project Paris is a 
**, and is intended to **. Project Paris will be comprised of a suite of 
components based on ModaCAD Core Technology, which components are:

     1.   **.  Project  Paris will  feature an ** wherein ** are  displayed  for
          selection.

     2.   **.  The ** will  enable the user to ** to an ** of their own or other
          person's  **. The ** will apply the ** to the ** according to a set of
          rules to be determined,  but which are expected to encompass ** in the
          application of **.

     3.   **.  Project  New York will  have a **  regarding  appropriate  ** for
          particular **.

     4.   **.  Project  Paris will have a ** to ** contained  in Project  Paris,
          based upon user parameters.

     5.   **. ** will be  incorporated  in  Project  Paris in order to ** to the
          user **.

     6.   **. Project Paris will have technology that ** while ** the program.

     7.   **.  Project  Paris will target a ** at **.  There will be  sufficient
          quantity of **.


Project Paris Retail Version Delivery Schedule

Delivery of Mutually Acceptable Product Specification
Date due: **
Cendant pays ** to ModaCAD upon acceptance of this milestone
Milestone Description:  Detailed product specification complete with proposed 
user interface and sketches. **.

Delivery of Mutually Acceptable Proof of Technology
Date due: **
Cendant pays ** to ModaCAD upon acceptance of this milestone
Milestone Description:  Demonstration of functional **

Delivery of Alpha Version
Date due: **
Cendant pays ** to ModaCAD upon acceptance of this milestone.
Milestone Description: **.

Beta Version
Date due: **
Cendant pays ** to ModaCAD upon acceptance of this milestone.
Milestone Description: **.

Golden Master, U.S.
Date due: **
Cendant pays ** to ModaCAD upon acceptance of this milestone 
(subject to Section 2.1).
Milestone Description:  A stable build of the product with no serious or fatal 
bugs as determined by Cendant's quality assurance.

Project Paris OEM Version  Specification  and Description:  This product has the
same PC functionality as the Retail Version with these exceptions:

      The OEM Version will ** that is included to ** or **.

      There will be no **.

      The OEM Version ** if **, at which time Cendant will **.


Project Paris Alternative Channel Version  Specifications and Description:  This
product  has  the  same  PC  functionality  as the  Retail  Version  with  these
exceptions:

     The  Alternative  Channel  Version  will be  distributed  **,  and  will be
     distributed with the **. Access to ** will be ** as described below.

     The  Alternative  Channel  Version will ** to ** of ** or **. The remaining
     content will be **.

     There will be ** of the Alternative Channel Version, the ** being the ** to
     the user.

     If a particular  Alternative  Channel  Version is **, then that  particular
     version will include ** only.

The  Alternative  Channel  Version ** to the Retail Version by ** on the product
**. Should the user desire **, they contact  Cendant,  **, at which time Cendant
**.



                                   Appendix D
                                Product Websites


**


                                   Appendix E
                            Marketing Budget Outline


Cendant will commit to allocating a minimum of **  of its present **  marketing 
budget for Project New York to discretionary spending, with no more than **  of 
the budget allocated to salaries, wages, bonuses, and employee benefits.  
Discretionary spending includes package design, production and film, 
advertising design, production, and film, point-of-sale materials, 
merchandising dollars, media, promotion, and other items that directly impact 
Project New York or the marketing and selling of Project New York.  
Non-discretionary spending includes such items as salaries, wages, employee 
benefits, travel, office supplies, facilities charges and other items that 
affect the overall ability to execute the marketing and sales plans.



                                   Appendix F
                                  Press Release


     MODACAD AND CENDANT SOFTWARE ANNOUNCE STRATEGIC PARTNERSHIP TO PUBLISH
                     E-COMMERCE FASHION LIFESTYLE PRODUCTS

                 Sierra Home to Provide Retail Distribution For
          E-Commerce Fashion Solutions and Product Fulfillment Services


     LOS ANGELES,  CALIFORNIA, June 18, 1998...ModaCAD,  Inc. (NASDAQ NMS: MODA)
today  announced  it  has  entered  into  an  agreement  with  Cendant  Software
Corporation, a subsdiary of Cendant Corporation, to publish retail-based fashion
software.  This innovative software is based upon ModaCAD's previously announced
e-commerce fashion solution, which is being co-developed with Intel Corporation.
The Sierra Home division of Sierra On-Line, Inc. -- a Cendant subsidiary -- will
manage the publication and distribution of these software titles.  Additionally,
Sierra  Home has agreed to act as  ModaCAD's  product  fulfillment  partner  for
alternative distribution channels.  Specific program functionality,  alternative
distribution details and complete pricing information have not been disclosed.

     ModaCAD  and Sierra Home have  agreed to jointly  publish a 3D  interactive
e-commerce  shopping  program.   Through  the  use  of  advanced  Internet  push
technology, multimedia enhancements and peer-to-peer communication capabilities,
fashion  lifestyle titles are designed to deliver a rich  personalized  shopping
experience.   The  first  fashion  lifestyle  solution  that  Sierra  Home  will
distribute is focused on young female consumers between the ages of 15 - 28.

     Joyce Freedman, ModaCAD's chief executive officer said, "We are thrilled to
be announcing this relationship with Sierra Home. This partnership has strategic
implications  that will add  significant  value to both  companies  for years to
come. This agreement with Cendant, as well as our relationship with Sierra Home,
signifies a major step towards our goal of developing a complete product line of
e-commerce  fashion  titles as well as other  applications  that are intended to
service the broader e-commerce market."

     According to Ron Stevens, Sierra Home's vice president and general manager,
"ModaCAD  and  Sierra  Home  share  synergistic  goals in  introducing  visually
compelling  software not only into traditional  retail  channels,  but also into
emerging  Internet-based  channels  specifically  related to e-commerce.  We are
strongly  dedicated to expanding our presence within the e-commerce  marketplace
and based upon ModaCAD's unique visualization  technology, we are confident that
our consumers will greatly benefit from this alliance."

     As ModaCAD's  product  fulfillment arm, Sierra Home will be responsible for
distribution to all users of the fashion  software.  Sierra will also assume the
responsibilities of technical support and customer service.  Maurizio Vecchione,
president  and chief  operating  officer of ModaCAD went on to say,  "The Sierra
brand  symbolizes  quality and years of expertise in developing and distributing
home productivity  software.  This endorsement will be extremely  valuable as we
prepare to release our first  fashion  program this year.  Sierra has one of the
best  reputations  in  providing  product  fulfillment,  technical  support  and
customer  service to  consumers  which are  essential  ingredients  to  ensuring
customer  satisfaction.  We could  not have  picked  a better  partner  for this
initiative."

     Sierra On-Line(R),  Inc is part of Cendant Software,  one of the largest PC
consumer  software  groups  in the  world,  and a leader  in  entertainment  and
educational software.  Cendant Software  consolidates the sales,  manufacturing,
finance,  accounting and management of Cendant Corporation's software divisions,
including Sierra On-Line(R) Inc., Knowledge Adventure(R), Davidson & Associates,
Inc. and Blizzard  Entertainment(R).  Cendant  Corporation  is the result of the
December 1997 merger between CUC International and HFS Incorporated,  creating a
business  and  consumer  services  company  focused on real  estate,  travel and
membership.

     ModaCAD is rapidly  becoming a premier  developer  and  supplier of digital
content  management  technology  enabling  advanced  product  visualization  for
electronic  commerce.  For the past 10 years it has leveraged its core, patented
rendering  technology  into  a  variety  of  electronic  merchandising  products
primarily targeted at the home design, home furnishings,  apparel and industrial
design industries.

                                      # # #


     This press release contains forward-looking statements including statements
regarding the timing and composition of revenues,  future operating  results and
the  timing of  product  introductions,  among  others.  Except  for  historical
information, the matters discussed in this report are forward-looking statements
that are subject to certain risks and uncertainties  that could cause the actual
results to differ  materially  from those  projected.  Factors  that could cause
actual  results  to differ  materially  include  the  following:  (i) the timely
completion of the  development  of the Company's  software  products,  including
ModaCAD's  e-commerce and consumer  software and enhanced or updated versions of
the  Company's  electronic   merchandising  and  CAD  software  products;   (ii)
unforeseen technical or other obstacles in the development or production of such
software;  (iii) acceptance of ModaCAD's e-commerce and consumer software by the
publisher/distributors  of such software and the release and marketing  plans of
the publisher/distributor;  (iv) customer acceptance of ModaCAD's e-commerce and
consumer  software  products  and updated or revised  versions of the  Company's
electronic  merchandising  and CAD  software  products;  (v) the Company and its
publisher/distributor's  ability to produce its products on a cost-effective and
timely  basis;  and (vi)  factors not directly  related to the Company,  such as
competitive  pressures on pricing,  market  conditions in general,  competition,
technological  progression,  product  obsolescence  and the  changing  needs  of
potential customers as well as the software,  textile, apparel, home furnishings
and home design industries in general.




                              SECOND AMENDMENT TO
                 SOFTWARE DEVELOPMENT AND PUBLISHING AGREEMENT

This  SECOND  AMENDMENT  TO  SOFTWARE   DEVELOPMENT  AND  PUBLISHING   AGREEMENT
("Amendment")  is entered  into as of June 29, 1998,  by and between  Broderbund
Software,  Inc., a Delaware  corporation  ("Publisher"),  and  ModaCAD,  Inc., a
California corporation("Author").

                               R E C I T A L S :

A. WHEREAS,  the parties have  previously  executed and  delivered  that certain
Software Development and Publishing Agreement,  dated March 15, 1996, as amended
on October 11, 1996 (the "Agreement").

B. WHEREAS,  the parties desire to further amend the Agreement in the manner set
forth in this Amendment.

C. WHEREAS,  except as expressly  defined herein,  capitalized terms used herein
shall have the meanings ascribed to them in the Agreement.

NOW, THEREFORE, the parties agree to amend the Agreement as follows:

1. Definitions:

(a) The following  definitions  shall be added to the Agreement as if originally
set forth therein:

"Additional Catalog Components means Catalog Components that are developed by or
on behalf of Author after the date hereof,  containing  digital product catalogs
of home  furnishings  and fixtures and interior  design  elements and  materials
offered by vendors  other than the vendors of the  furnishings  and fixtures and
interior  design  elements and  materials  contained  in the Catalog  Components
existing as of the date hereof."

"Author  Enhanced  Core  Technology  means  future   enhancements  to  the  Core
Technology, or replacements thereof,  developed by or on behalf of Author solely
for use in or in  connection  with the  Works,  Derivative  Works,  Conversions,
Derivative   On-line   Programs  and  Foreign   Language   Adaptations  and  all
intellectual properties (including,  without limitation, patents and copyrights,
but excluding all trademarks and service marks) associated therewith."

"Publisher  Enhanced  Core  Technology  means  future  enhancements  to the Core
Technology, or replacements thereof,  developed by or on behalf of Publisher and
all  intellectual  properties  (including,   without  limitation,   patents  and
copyrights,   but  excluding  all  trademarks  and  service  marks)   associated
therewith."

(b) Section 1.01 of the Agreement shall be deleted and restated as follows as if
originally set forth therein:

"1.01 Catalog Components means components containing digital product catalogs of
home  furnishings and fixtures and interior  design  elements and materials,  in
existence  on the date  hereof  and  used in or in  connection  with the  Works,
Derivative Works, Conversions,  Derivative On-line Programs and Foreign Language
Adaptations, and including any future enhancements thereto acquired by Publisher
pursuant to Sections 3(c) and (d) hereof."

(c) Section 1.03 of the Agreement shall be deleted and restated as follows as if
originally set forth therein:

"1.03 Core Technology means Author's existing proprietary modeling and rendering
technology currently used in or in connection with the Works,  Derivative Works,
Conversions,  Derivative  On-line  Programs  and  Foreign  Language  Adaptations
including,  without limitation, its rendering features such as lighting, texture
mapping,  UV mapping and modeling and its database  cataloging  features such as
pricing,  rule-based  validation and search and retrieval,  and all intellectual
properties (including, without limitation, patents and copyrights, but excluding
all  trademarks and service marks)  associated  therewith,  excluding any Author
Enhanced Core Technology (as defined above)."

2. (a) Section 2 of the Agreement  shall be deleted in its  entirety,  provided,
however, that, notwithstanding the foregoing, Author shall still be obligated to
perform the obligations  described in Section 2(b) and Section 2(c) hereof as if
originally set forth therein.

(b) Section 2.02 of the Agreement shall be deleted and restated as follows as if
originally set forth therein:

"2.02 Author Enhanced Core  Technology.  In the event that Publisher  desires to
obtain any rights in and to any Author  Enhanced Core  Technology that may exist
from time to time after the date hereof,  Publisher  shall contact  Author,  and
Author and  Publisher  shall  commence good faith  negotiations  with respect to
whether,  and if so the terms upon which, the rights to any Author Enhanced Core
Technology  may be granted to  Publisher,  provided,  however,  that in no event
shall Author have any obligation  whatsoever to develop any Author Enhanced Core
technology. "

(c) Author  shall use  commercial  best  efforts to deliver the Product  Upgrade
described on Schedule 2(b) attached  hereto to Publisher as soon as  practicable
after the date hereof;  provided,  that following such delivery Author shall use
its commercial best efforts to repair any errors in content or technical defects
in  regards to the  program  code,  graphics  or sound  which  impair the proper
functioning  of the  Product  Upgrade,  by no later  than  July 31,  1998.  Such
commercial best efforts shall include, without limitation,  making the personnel
who  developed  the Product  Upgrade  available to perform such repair  services
until such time as Author's obligations under this Section 2(c) have terminated.

3. Section 3 of the Agreement shall be amended to provide: 

(a) That the "term of the Agreement" referenced in Section 3.01 of the Agreement
shall mean a perpetual term.

(b) That the fourth sentence of Section 3.01 of the Agreement shall be deleted.

(c) That,  in addition to the rights  granted to  Publisher  pursuant to Section
3.01 of the  Agreement,  Author  hereby  grants  Publisher  the  right to create
Publisher Enhanced Core Technology, and that Publisher shall have the perpetual,
exclusive (even as against Author), worldwide,  royalty-free license to publish,
manufacture,  reproduce,  market,  and  distribute  the Publisher  Enhanced Core
Technology  solely in connection with the exploitation of the Works,  Derivative
Works,   Conversions,   Derivative   On-line   Programs  and  Foreign   Language
Adaptations;  provided, however, that in the event that Author desires to obtain
any rights in and to any Publisher  Enhanced Core Technology that may exist from
time to time after the date hereof,  Author shall contact Publisher,  and Author
and Publisher  shall commence good faith  negotiations  with respect to whether,
and if so the  terms  upon  which  the  rights to any  Publisher  Enhanced  Core
Technology may be granted to Author;  provided,  however, that in no event shall
Publisher have any obligation  whatsoever to develop any Publisher Enhanced Core
Technology.

(d) That,  in addition to the rights  granted to  Publisher  pursuant to Section
3.01  of the  Agreement,  Author  hereby  grants  to  Publisher  the  perpetual,
exclusive (even as against Author),  worldwide,  royalty-free,  non-transferable
license to publish,  manufacture,  reproduce, market, and distribute the Catalog
Components  solely in connection with the exploitation of the Works,  Derivative
Works,   Conversions,   Derivative   On-line   Programs  and  Foreign   Language
Adaptations,  but (i) only for so long as  Author  shall  have the  rights so to
sublicense  Publisher,  and (ii) only in accordance  with Author's  rights so to
sublicense  Publisher;  provided,  however,  that the exclusive  license granted
herein  shall not limit or restrict in any way  Author's  rights to use and make
use of the Catalog  Components and Additional  Catalog  Components other than in
connection with the exploitation of the Works,  Derivative  Works,  Conversions,
Derivative On-line Programs and Foreign Language Adaptations.  In the event that
Author  enhances the digital product  catalogs of home  furnishings and fixtures
and interior design elements and materials  contained in such Catalog Components
,then Author  shall  promptly  make such  enhancements  available to  Publisher,
without charge,  to enable Publisher to exploit such  enhancements in the manner
described above in this Section 3(d), provided,  however, that in no event shall
Author have any  obligation  whatever to enhance any digital  product  catalogs.
Without  limiting  the  provisions  of this  Section  3(c),  in no  event  shall
Publisher be  obligated  to publish,  manufacture,  reproduce,  market,  modify,
enhance or distribute any Catalog Components in connection with the exploitation
of the Works,  Derivative  Works,  Conversions,  Derivative  On-line Programs or
Foreign Language Adaptations.

(e) That, in the event that Author  develops,  or has developed,  any Additional
Catalog Components,  then upon Publisher's written request, Author and Publisher
shall commence good faith  negotiations  with respect to whether,  and if so the
terms upon which, the rights to any Additional Catalog Components may be granted
to  Publisher  ,  provided,  however,  that in no event  shall  Author  have any
obligation  whatever  to  develop  or  have  developed  any  Additional  Catalog
Components.  Without  limiting the  provisions of this Section 3(e), in no event
shall Publisher be obligated to publish, manufacture,  reproduce, market,modify,
enhance or distribute any Additional  Catalog  Components in connection with the
exploitation of the Works,  Derivative Works,  Conversions,  Derivative  On-line
Programs or Foreign Language Adaptations. In addition, nothing set forth in this
Amendment shall be construed to limit Publisher's  ability to incorporate in the
Works,  Derivative Works,  Conversions,  Derivative  On-line Programs or Foreign
Language Adaptations any components  containing digital product catalogs of home
furnishings and fixtures and interior design elements and materials which may be
developed by or on behalf of Publisher  without  using,  directly or indirectly,
the Core Technology or Author's  Enhanced Core Technology,  provided,  that such
components  may be developed by or on behalf of Publisher to be compatible  with
the Core Technology and/or Author's  Enhanced Core Technology (f) That,  without
limiting the rights granted to Publisher  under this Section 3, or under Section
3.01 of the Agreement (as amended  hereby),  Publisher  hereby (i)  acknowledges
that Author currently  engages,  and in the future will engage, in the provision
of product  cataloging  and  electronic  commerce  and  related  services on the
Internet (and on and through  other  interactive  products and media,  including
future successor media, now known or hereafter  developed),  including,  without
limitation  on world  wide web and  successor  sites  maintained  by one or more
product vendors,  (ii) covenants and agrees that the continued provision of such
services  shall not  constitute a conflict with the exclusive  rights granted to
Publisher  under this  Section 3, or under  Section  3.01 of the  Agreement  (as
amended  hereby);  and (iii)  Publisher  shall not use or permit  any use of any
rights or properties  whatever  licensed from Author in any way or on any medium
that competes with Author's services  described in (ii),  provided,  that Author
hereby acknowledges and agrees that the development,  maintenance and support by
or on behalf of Publisher of a site on the  Internet  (and on and through  other
interactive  products and media,  including future successor media, now known or
hereafter developed),  including, without limitation, on the world wide web, for
purposes of enabling  end-users  of the Works,  Derivative  Works,  Conversions,
Derivative  On-line  Programs  and/or  Foreign  Language  Adaptations  to access
Catalog  Components and Additional  Catalog  Components to be used in connection
with the Works, Derivative Works,  Conversions,  Derivative On-line Programs and
Foreign Language Adaptations,  shall not be deemed to be a conflict or breach of
the provisions of Section 3(f)(iii).

(g) Publisher acknowledges and agrees that nothing in the Agreement,  as amended
hereby,  shall limit or restrict in any way whatever  Author's right and ability
to use the Core  Technology  and Author  Enhanced Core  Technology,  and Catalog
Components  and  Additional  Catalog  Components  in and in the  development  of
products other than the Works, Derivative Works, Conversions, Derivative On-line
Programs or Foreign Language Adaptations.

4.  Section 4 of the  Agreement  shall be deleted and  restated as follows as if
originally set forth therein:

"4. Payments.  In consideration  for the execution of this Amendment,  Publisher
shall  pay  to  Author  One  Million  Nine  Hundred  Eighty   Thousand   Dollars
($1,980,000)  (the  "Consideration"),  which shall be paid concurrently with the
execution  hereof.  Without limiting any other provision of this Amendment,  the
parties  hereto  acknowledge  and agree that,  except as provided  herein,  each
party's respective  obligations to make payments, or to return any payments made
prior to the date  hereof,  under  the  Agreement  shall  terminate,  including,
without limitation, Publisher's obligation to pay to Author any amounts withheld
from  payment to Author as  reserves  for  product  returns  pursuant to Section
4.02(d) of the Agreement,  and Author's obligation to return any amounts paid to
Author by  Publisher  as an  advance  against  future  royalties.  In  addition,
Publisher shall be responsible for all Units returned by customers following the
date hereof.

5. Section 5 of the Agreement shall be deleted.

6. Section 6 of the Agreement shall be deleted.

7. Section 7 of the Agreement shall be deleted.

8. Section 8 of the Agreement shall be deleted.

9.  Section 9 of the  Agreement  shall be deleted and  restated as follows as if
originally set forth therein:

"9. Term. The term of this Agreement, as amended hereby shall be perpetual."

10. Section 10 of the Agreement shall be amended to provide that the obligations
of the Author  thereunder to repair defects  without charge shall (i) only apply
to the Works, Conversions and Foreign Language Adaptations,  including,  without
limitation, Core Technology, Author Enhanced Core Technology, Catalog Components
and  Additional  Catalog  Components,  except to the  extent,  and solely to the
extent,  any of the foregoing have been modified in any material  respect by the
Publisher and (ii) shall terminate one (1) year from the date of this Amendment.
In the event that Publisher  requests Author to repair any defects in the Works,
Conversions and Foreign Language  Adaptations,  including,  without  limitation,
Core  Technology,  Author  Enhanced  Core  Technology,  Catalog  Components  and
Additional  Catalog  Components  either (a)  following the date which is one (1)
year after the date of this  Amendment,  or (b) to the  extent any such  defects
result from any  modification of any of the foregoing in any material respect by
the Publisher,  then Publisher shall be obligated to compensate  Author for such
repair  services  upon terms to be mutually  agreed to between the parties after
good faith negotiations.

11. Section 11 of the Agreement  shall remain in full force and effect,  and the
representations  made by each party therein shall be deemed to have been made by
each party on the date hereof.

12. Section 12 of the Agreement shall be deleted.

13. Section 13 of the Agreement shall be amended to provide:

(a) Section 13.01 of the  Agreement  shall be deleted and restated as follows as
if originally  set forth  therein:"In  addition to any copyright  notices placed
thereon,  Publisher shall place a copyright notice on the packaging,  CD-ROM (or
other memory storage device used to distribute  the Works),  user  documentation
and user  interface  of the  software  for all Works and any  Derivative  Works,
Conversions and Foreign Language  Adaptations,  and in other appropriate  places
for  Derivative  On-line  Programs  and  Derivative  Products,  which shall read
(solely  with  respect  to  the  Core   Technology  and  Author   Enhanced  Core
Technology):"(C)199_ ModaCAD, Inc.'" (b) Section 13.03 of the Agreement shall be
deleted.

14. Section 14 of the Agreement shall be deleted.

15.  Section  15, of the  Agreement  shall be amended  to provide  that the last
sentence of Section 15 shall be deleted and replaced with the sentence set forth
below, as if originally set forth therein: "Notwithstanding any other provisions
of this  Agreement,  the rights and obligations of this Section 15 shall survive
for a period of ten (10)  years  from the date  hereof."  (b)  Section 15 of the
Agreement  shall  be  supplemented  by  adding  the  following  paragraph  as if
originally set forth therein:

"Publisher  covenants  and  agrees  that the  disclosure  and  license as herein
provided of Core  Technology  and Author  Enhanced  Core  Technology  (together,
"Proprietary Code") is made in strict confidence and Publisher acknowledges that
the  Proprietary  Code contains  valuable  trade  secrets and legally  protected
intellectual property of Author and Author's licensors,  and that,  accordingly,
Publisher  shall  maintain  all  Proprietary  Code  obtained as a result of this
Agreement in strict  confidence.  Without  limitation of any other  provision of
this Agreement,  Publisher shall not disclose any of the Proprietary Code to any
person or entity  without the prior  written  consent of Author;  and,  further,
Publisher shall take such actions as may be reasonably  necessary to prevent any
unauthorized  disclosure of the Proprietary  Code to others.  Such actions shall
include, but not necessarily be limited to (i) refraining from making any copies
of any of the Proprietary Code, or any portion thereof,  except for the purposes
contemplated by this Agreement;  and (ii) storing the Proprietary  Code, as well
as  Publisher's  notes,  writings  and/or data files  containing any of Author's
Proprietary  Code in a  secure  site  when  not in use.  As a  condition  to the
disclosure  of the  Proprietary  Code to one or more of  Publisher's  directors,
officers,   employees,   representatives,   agents  and  advisors  for  purposes
contemplated by this Agreement, Publisher shall (i) limit such disclosure to the
fewest number of such persons who have a reasonable  need to know the same; (ii)
inform  such  persons  of  the  confidential  and  proprietary   nature  of  the
Proprietary  Code and of the terms of this Agreement;  and (iii) inform him, her
or them, as the case may be, that upon such  disclosure,  they will become bound
by these terms.

16. Section 16 of the Agreement shall be deleted in its entirety and restated as
follows as if originally set forth therein:

"Except as expressly  provided in, the Agreement,  as amended hereby,  Publisher
acknowledges  that  Author has not made any  representation  or  warranty to the
Publisher  as to the  specifications,  capabilities,  implementations,  uses  or
functions of the  Proprietary  Code, nor has Author made any  representation  or
warranty as to the possible or expected  success of the Proprietary  Code in any
specific  use,  and Author  shall have no  liability  with respect to any of the
foregoing.  Except as expressly  provided in the Agreement,  as amended  hereby,
Author does not make by virtue of the Agreement, as amended hereby, or by virtue
of the transactions  contemplated  herein, and Author expressly  disclaims,  any
representation  or  warranty,  whether  express or implied,  with respect to the
Proprietary  Code or its  applications  or uses,  including  but not  limited to
implied  warranties  of  merchantability  and fitness for a particular  purpose.
Except for the indemnity  obligations of Author and Publisher expressly provided
in the  Agreement,  as amended  hereby,  neither  Author nor Publisher  shall be
liable to the other  for any  consequential,  incidental,  indirect  or  special
damages in connection with the  Proprietary  Code, or performance of obligations
under  the  Agreement,  as  amended  hereby,  even if the  other  party has been
apprised of the likelihood of such damages occurring."

17. The  Amendment to the  Agreement  dated October 11, 1996 shall be terminated
and shall be of no further force and effect.

18. Except for the obligations  and rights  conferred by, or arising under or in
connection  with,  the  Agreement,  as amended  hereby  (including,  any claims,
demands, costs, contracts,  liabilities,  objections, rights, damages, expenses,
compensation  and  actions  and  causes of action  arising  hereunder):  (i) the
Author,  on  behalf  of  itself,  hereby  waives  and  releases  and  discharges
Publisher,  as well as its  respective  officers,  directors,  shareholders  and
agents,  from  any and  all  claims,  demands,  costs,  contracts,  liabilities,
objections,  rights, damages,  expenses,  compensation and actions and causes of
action of every  nature,  whether  in law or in  equity,  known or  unknown,  or
suspected or  unsuspected,  which such parties ever had or now have against each
other of any type, nature and description;  and (ii) the Publisher, on behalf of
itself,  hereby  waives  and  releases  and  discharges  Author,  as well as its
officers, directors,  shareholders and agents, from any and all claims, demands,
costs,  contracts,   liabilities,   objections,   rights,   damages,   expenses,
compensation,  and actions and causes of action of every nature,  whether in law
or in equity, known or unknown, or suspected or unsuspected,  which such parties
ever had or now have  against  each other of any type,  nature and  description.
Subject always to the provisions of the  immediately  preceding  paragraph,  the
parties  expressly  waive and  relinquish any and all rights which they may have
under  the  provisions  of 1542 of the  California  Civil  Code  which  reads as
follows:

A GENERAL  RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF  EXECUTING  THE  RELEASE,  WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
 
19. Each party  hereto  shall  execute  and  deliver  after the date hereof such
instruments  and take  such  other  actions  as the other  party may  reasonably
request in order to carry out the intent of the Agreement, as amended hereby, or
to better evidence or effectuate the transactions contemplated in the Agreement,
as amended hereby.

20. Except as expressly  amended  hereby,  the provisions of the Agreement shall
remain in full force and effect.

IN WITNESS  WHEREOF,  the parties have executed this Amendment as of the day and
year first above written.

"Author"                                "Publisher"

MODACAD, INC                            BRODERBUND SOFTWARE, INC.

/S/ MAURIZIO VECCHIONE                  /S/ MARK HATTENDORF
- -----------------------                 --------------------
Maurizio Vecchione,                     Mark Hattendorf,
President and COO                       Group VP and CFO

<PAGE>

SCHEDULE 2(b)


Product Upgrade: Version 2 of "3D Home Interiors"

Delivery Schedule: Gold Master Version.


<TABLE> <S> <C>

<ARTICLE>                     5
<LEGEND>
THIS SCHEDULE  CONTAINS  SUMMARY  FINANCIAL  INFORMATION  EXTRACTED FROM BALANCE
SHEET AND  STATEMENT OF  OPERATIONS AS OF MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10-QSB FOR QUARTER ENDED MARCH 31,1997.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                              DEC-31-1998
<PERIOD-START>                                 JAN-01-1998
<PERIOD-END>                                   JUN-30-1998
<CASH>                                          10,857,824
<SECURITIES>                                             0
<RECEIVABLES>                                    3,569,095
<ALLOWANCES>                                       493,575
<INVENTORY>                                         12,000
<CURRENT-ASSETS>                                14,296,663
<PP&E>                                           2,523,855
<DEPRECIATION>                                     811,110
<TOTAL-ASSETS>                                  20,696,993
<CURRENT-LIABILITIES>                            1,109,339
<BONDS>                                                  0
                                    0
                                              0
<COMMON>                                        25,988,315
<OTHER-SE>                                               0
<TOTAL-LIABILITY-AND-EQUITY>                    20,696,993
<SALES>                                          4,594,740
<TOTAL-REVENUES>                                 4,594,740
<CGS>                                               17,499
<TOTAL-COSTS>                                       17,499
<OTHER-EXPENSES>                                 6,651,882
<LOSS-PROVISION>                                   412,075
<INTEREST-EXPENSE>                                       0
<INCOME-PRETAX>                                 (1,822,364)
<INCOME-TAX>                                             0
<INCOME-CONTINUING>                             (1,822,364)
<DISCONTINUED>                                           0
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                    (1,822,364)
<EPS-PRIMARY>                                       (0.301)
<EPS-DILUTED>                                       (0.301)
        

</TABLE>


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